<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CAPSTONE PHARMACY SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 37-0903482 11-2310352
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification
Incorporation or Organization) Classification Code Number) Number)
</TABLE>
9901 EAST VALLEY RANCH PARKWAY, SUITE 3001
IRVING, TEXAS 75063
(972) 401-1541
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
R. DIRK ALLISON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAPSTONE PHARMACY SERVICES, INC.
9901 EAST VALLEY RANCH PARKWAY, SUITE 3001
IRVING, TEXAS 75063
(972) 401-1541
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES TO:
<TABLE>
<S> <C>
MARK MANNER H. WATT GREGORY, III
HARWELL HOWARD HYNE GABBERT & MANNER, P.C. GIROIR, GREGORY, HOLMES & HOOVER, PLC
1800 FIRST AMERICAN CENTER SUITE 1900
315 DEADERICK STREET 111 CENTER STREET
NASHVILLE, TENNESSEE 37238 LITTLE ROCK, ARKANSAS 72201
(615) 256-0500 (501) 372-3000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective and all other
conditions to the merger (the "Merger") of Beverly Enterprises, Inc. ("Beverly")
with and into the Registrant pursuant to the Merger Agreement (as defined
herein) have been satisfied or are waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES BEING REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(3) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $.01 par value............ 50,000,000 shares $10.06 $503,000,000 $152,425
=======================================================================================================================
</TABLE>
(1) Based on the maximum number of shares of Capstone Common Stock issuable
pursuant to the Merger Agreement.
(2) Based on the average of the high and low sales prices of the Capstone Common
Stock as reported on The Nasdaq Stock Market on May 28, 1997.
(3) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
CAPSTONE PHARMACY SERVICES, INC.
CROSS-REFERENCE SHEET
CROSS REFERENCE SHEET BETWEEN ITEMS OF FORM S-4 AND JOINT PROXY
STATEMENT/PROSPECTUS
PURSUANT TO ITEM 501(B) OF REGULATION S-K.
<TABLE>
<CAPTION>
ITEM OF FORM S-4 CAPTION OR LOCATION IN PROSPECTUS
- ---------------- ---------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Facing Page, Cross Reference Table, and
Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Table of Contents, Available Information,
and Incorporation of Documents by Reference
3. Risk Factors, Ratio of Earnings to Fixed
Charges, and Other Information........... Summary, Risk Factors
4. Terms of the Transaction................... Summary, The Capstone Special Meeting, The
Beverly Special Meeting, Certain
Considerations Related to the
Transactions, The Distribution and Other
Pre-Merger Transactions, The Merger,
Post-Closing Arrangements, Effect of the
Transactions on Employees and Employee
Benefits, Certain Tax Considerations,
Information Concerning Capstone,
Relationship Between PCA and Beverly, and
Comparative Rights of Stockholders
5. Pro Forma Financial Information............ Summary and Unaudited Pro Forma Combined
Condensed Financial Statements
6. Material Contacts with the Company Being
Acquired................................. Certain Considerations Related to the
Transactions, The Distribution and Other
Pre-Merger Transactions, Post-Closing
Arrangements, Certain Tax Considerations,
and Relationship Between PCA and Beverly
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................... Not Applicable
8. Interests of Named Experts and Counsel..... Legal Matters and Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
10. Information with Respect to S-3
Registrants.............................. Incorporation of Documents by Reference and
Information Concerning Capstone
11. Incorporation of Certain Information by
Reference................................ Information Incorporated by Reference
12. Information with Respect to S-2 or S-3
Registrants.............................. Not Applicable
13. Incorporation of Certain Information by
Reference................................ Not Applicable
14. Information with Respect to Registrants
Other than S-2 or S-3 Registrants........ Not Applicable
15. Information with Respect to S-3
Companies................................ Incorporation of Documents by Reference,
Information Concerning PCA and
Information Concerning Beverly
16. Information with Respect to S-2 or S-3
Companies................................ Not Applicable
17. Information with Respect to Companies Other
than S-2 or S-3 Companies................ Not Applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM OF FORM S-4 CAPTION OR LOCATION IN PROSPECTUS
- ---------------- ---------------------------------
<C> <S> <C>
18. Information if Proxies, Consents or
Authorizations are to be Solicited....... Incorporation of Documents by Reference,
Summary, The Capstone Special Meeting,
The Beverly Special Meeting, Certain
Considerations Related to the
Transactions, Information Concerning
Capstone
19. Information if Proxies, Consents or
Authorizations are not to be Solicited,
or in an Exchange Offer.................. Not Applicable
</TABLE>
<PAGE> 4
[LOGO OF CAPSTONE APPEARS HERE]
, 1997
Dear Stockholder:
A special meeting of stockholders (the "Capstone Special Meeting") of
Capstone Pharmacy Services, Inc., a Delaware corporation ("Capstone") will be
held on Monday, September 15, 1997, at a.m., local time, at
.
At the Capstone Special Meeting, holders of Capstone common stock, par
value $.01 per share ("Capstone Common Stock") as of , 1997
(the "Capstone Special Meeting Record Date") will be asked to consider and vote
upon the following matters:
1. Approval and adoption of an Agreement and Plan of Merger, dated as
of April 15, 1997 (the "Merger Agreement"), by and between Beverly
Enterprises, Inc., a Delaware corporation ("Beverly"), and Capstone
pursuant to which, among other things: (i) following the transfer of its
healthcare businesses other than its Institutional Pharmacy Business (as
defined below) to New Beverly Holdings, Inc., a Delaware corporation ("New
Beverly") and the distribution of the capital stock of New Beverly to
Beverly's stockholders (the "Distribution"), Beverly, whose sole remaining
business following the completion of the Distribution will consist of the
institutional pharmacy business (the "Institutional Pharmacy Business")
conducted through its wholly-owned subsidiary Pharmacy Corporation of
America ("PCA"), will merge (the "Merger") with and into Capstone, with
Capstone as the surviving corporation; and (ii) Capstone will issue 50
million shares of Capstone Common Stock to Beverly stockholders, assume
approximately $275 million of PCA debt, and assume options and performance
stock covering an aggregate of approximately 750,000 shares (subject to
adjustment) of Beverly Common Stock (the "Merger Proposal");
2. Approval and adoption of an amendment to Capstone's Certificate of
Incorporation pursuant to which, (i) the shares of Capstone Common Stock
authorized for issuance will be increased from 50 million to 300 million;
(ii) the Board of Directors of Capstone will be divided into three classes
with one class standing for re-election in each successive year; (iii)
stockholders will be permitted to call special meetings only with the
consent of stockholders owning not less than 25% of the outstanding shares
of Capstone; and (iv) business conducted at any special meeting of
stockholders will be limited to the matters described in the notice of such
meeting (the "Amendment Proposal");
3. Approval and adoption of Capstone's 1997 Incentive Stock Plan,
pursuant to which three million shares of Capstone Common Stock will be
reserved for issuance as restricted stock, performance shares, and phantom
stock and pursuant to qualified and nonqualified stock options (the
"Capstone Plan Proposal"); and
4. Such other business as may properly come before the Capstone
Special Meeting or any adjournment or postponement thereof.
Stockholder approval of the Merger is being sought in accordance with the
terms of the Merger Agreement and to ensure that Capstone's Board of Directors
has identified and structured a transaction appropriate for Capstone and its
stockholders. The Merger is structured to be a tax-free reorganization in which
neither Capstone, Beverly nor their stockholders will recognize taxable gain
except to the extent cash is paid in lieu of fractional shares.
The Capstone Board of Directors has unanimously approved the Merger
Proposal, the Amendment Proposal, the Capstone Plan Proposal and the
transactions contemplated thereby, all as described in the attached material,
and has determined that the Merger and the related transactions are fair to and
in the best interests of Capstone and its stockholders. The Board of Directors
of Capstone recommends that the stockholders of Capstone vote in favor of the
Merger Proposal, the Amendment Proposal and the Capstone Plan Proposal. You are
urged to consider carefully all aspects of the proposed Merger discussed in the
attached Joint Proxy Statement/Prospectus.
<PAGE> 5
In the material accompanying this letter, you will find a Notice of Special
Meeting of Capstone Stockholders, a proxy card and a Joint Proxy
Statement/Prospectus relating to, among other things, the actions to be taken by
Capstone stockholders at the Capstone Special Meeting. The Joint Proxy
Statement/ Prospectus more fully describes the Merger Proposal, the Amendment
Proposal and the Capstone Plan Proposal. It also includes information about PCA
and Beverly and also serves as a Proxy Statement for Beverly with respect to the
Merger, the Distribution and certain other proposals and a Prospectus for
Capstone with respect to the shares of Capstone Common Stock to be issued to
Beverly stockholders upon the consummation of the Merger.
All Capstone stockholders as of the Capstone Special Meeting Record Date
are cordially invited to attend the Capstone Special Meeting in person. However,
whether or not you plan to attend the Capstone Special Meeting, please complete,
sign, date and return your proxy in the enclosed postage paid envelope. If you
attend the Capstone Special Meeting, you may vote in person if you wish, even
though you have previously returned your proxy. It is important that your shares
be represented and voted at the Capstone Special Meeting.
Sincerely,
--------------------------------------
R. Dirk Allison
President and Chief Executive Officer
2
<PAGE> 6
CAPSTONE PHARMACY SERVICES, INC.
9901 EAST VALLEY RANCH PARKWAY
SUITE 3001
IRVING, TEXAS 75063
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 15, 1997
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the
"Capstone Special Meeting") of Capstone Pharmacy Services, Inc., a Delaware
corporation ("Capstone"), will be held on September 15, 1997, at a.m.,
local time, at to consider and vote upon the following matters
more fully described in the accompanying Joint Proxy Statement/Prospectus:
1. Approval and adoption of an Agreement and Plan of Merger, dated as
of April 15, 1997 (the "Merger Agreement"), by and between Beverly
Enterprises, Inc., a Delaware corporation ("Beverly"), and Capstone
pursuant to which, among other things: (i) following the transfer of its
healthcare businesses other than its Institutional Pharmacy Business (as
defined below) to New Beverly Holdings, Inc. ("New Beverly") and the
distribution of the capital stock of New Beverly to Beverly's stockholders
(the "Distribution"), Beverly, whose sole remaining business following the
completion of the Distribution will consist of the institutional pharmacy
business (the "Institutional Pharmacy Business") conducted through its
wholly-owned subsidiary Pharmacy Corporation of America ("PCA"), will merge
(the "Merger") with and into Capstone, with Capstone as the surviving
corporation (the "Surviving Corporation"); and (ii) Capstone will issue 50
million shares of Capstone common stock, par value $.01 per share
("Capstone Common Stock") to Beverly stockholders, assume approximately
$275 million of PCA debt, and assume options and performance stock covering
an aggregate of approximately 750,000 shares (subject to adjustment) of
Beverly Common Stock (the "Merger Proposal");
2. Approval and adoption of an amendment to Capstone's Certificate of
Incorporation pursuant to which: (i) the shares of Capstone Common Stock
authorized for issuance will be increased from 50 million to 300 million;
(ii) the Board of Directors of Capstone will be divided into three classes
with one class standing for re-election in each successive year; (iii)
stockholders will be permitted to call special meetings only with the
consent of stockholders owning not less than 25% of the outstanding shares
of Capstone; and (iv) business conducted at any special meeting of
stockholders will be limited to the matters described in the notice of such
meeting (the "Amendment Proposal");
3. Approval and adoption of Capstone's 1997 Incentive Stock Plan,
pursuant to which three million shares of Capstone Common Stock will be
reserved for issuance as restricted stock, performance shares, and phantom
stock and pursuant to qualified and nonqualified stock options (the
"Capstone Plan Proposal"); and
4. Such other business as may properly come before the Capstone
Special Meeting or any adjournment or postponement thereof.
Only Capstone stockholders of record at the close of business on
, 1997 are entitled to notice of, and to vote at, the Capstone Special
Meeting, or at any adjournment or postponement thereof.
By order of the Capstone Board of
Directors,
--------------------------------------
James D. Shelton
Executive Vice President, Chief
Financial Officer and Secretary
<PAGE> 7
THE MERGER PROPOSAL AND AMENDMENT PROPOSAL REQUIRE THE AFFIRMATIVE VOTE OF
A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF CAPSTONE COMMON STOCK. THE
CAPSTONE PLAN PROPOSAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES
PRESENT AND ENTITLED TO VOTE THEREON AT A MEETING WHERE A QUORUM IS PRESENT. THE
AMENDMENT AND THE CAPSTONE PLAN WILL NOT TAKE EFFECT EVEN IF THE AMENDMENT
PROPOSAL AND CAPSTONE PLAN PROPOSAL ARE ADOPTED UNLESS THE MERGER PROPOSAL IS
APPROVED AND THE MERGER IS CONSUMMATED.
WHETHER OR NOT YOU PLAN TO ATTEND THE CAPSTONE SPECIAL MEETING, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED RETURN ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU ATTEND THE CAPSTONE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF
YOU WISH TO DO SO EVEN IF YOU HAVE PREVIOUSLY SENT IN YOUR PROXY.
<PAGE> 8
[LOGO OF BEVERLY APPEARS HERE]
, 1997
Dear Stockholder:
A special meeting of stockholders (the "Beverly Special Meeting") of
Beverly Enterprises, Inc., ("Beverly") will be held on , 1997,
at a.m., local time, at located at Fort
Smith, Arkansas.
At the Beverly Special Meeting, holders of Beverly common stock, par value
$.10 per share ("Beverly Common Stock") as of , 1997 (the
"Beverly Special Meeting Record Date") will be asked to consider and vote upon
the following matters:
1. Approval and adoption of an Agreement and Plan of Distribution,
dated as of April 15, 1997 (the "Distribution Agreement"), by and among
Beverly, New Beverly Holdings, Inc., a Delaware corporation, and a
wholly-owned subsidiary of Beverly ("New Beverly") and Capstone Pharmacy
Services, Inc., a Delaware corporation ("Capstone"), pursuant to which,
among other things: (i) Beverly's nursing facilities, acute long-term
transitional hospitals, rehabilitation therapy services, outpatient therapy
clinics, assisted living centers, hospices, home healthcare centers and
other healthcare and related services and businesses other than its
institutional pharmacy business (collectively, the "Remaining Healthcare
Business") will be transferred to New Beverly or one or more direct or
indirect subsidiaries of New Beverly and (ii) all of the issued and
outstanding capital stock of New Beverly, par value $0.10 per share ("New
Beverly Common Stock") shall be distributed to the stockholders of Beverly
(the "Distribution"), such that each Beverly stockholder will receive one
share of New Beverly Common Stock per share of Beverly Common Stock held by
such stockholder as of the record date set by the Beverly Board of
Directors for the determination of Beverly stockholders entitled to receive
New Beverly Common Stock in the Distribution (the "Distribution Record
Date");
2. Approval and adoption of an Agreement and Plan of Merger, dated as
of April 15, 1997 (the "Merger Agreement"), by and between Beverly and
Capstone, pursuant to which, among other things: (i) following the
Distribution, Beverly, whose sole remaining business following the
completion of the Distribution will consist of the institutional pharmacy
business (the "Institutional Pharmacy Business") conducted through its
wholly-owned subsidiary Pharmacy Corporation of America, a California
corporation ("PCA"), shall merge with and into Capstone, with Capstone as
the surviving corporation (the "Merger"); and (ii) each share of Beverly
Common Stock and the associated Rights (as defined in the Merger Agreement)
shall be converted into the right to receive, and become exchangeable for,
the number of shares of the common stock of Capstone, $0.01 par value per
share ("Capstone Common Stock") equal to the quotient of 50,000,000 divided
by the number of shares of Beverly Common Stock outstanding immediately
prior to the Effective Time of the Merger (the "Conversion Number");
3. Approval and adoption of the New Beverly 1997 Long-Term Incentive
Plan (the "New Beverly 1997 Incentive Plan");
4. Approval and adoption of the New Beverly Non-Employee Directors
Stock Option Plan (the "New Beverly Directors Option Plan" and together
with proposal (3), the "New Beverly Plan Proposals");
5. Approval of the possible adjournment of the Beverly Special Meeting
for the purpose of soliciting additional votes in favor of proposals (1)
through (4) above; and
6. Such other business as may properly come before the Beverly Special
Meeting or any adjournment or postponement thereof.
Stockholder approval of the Distribution is being sought in accordance with
the terms of the Merger Agreement and to ensure that the objectives of Beverly's
stockholders are consistent with the objectives sought to be accomplished by the
Beverly Board of Directors pursuant to the Distribution and the Merger. The
<PAGE> 9
Distribution is being undertaken by Beverly in contemplation of the Merger.
Accordingly, the Distribution will not occur unless both the Distribution and
Merger (collectively, the "Transactions") are approved by Beverly's stockholders
and all of the conditions precedent to the Merger (other than the completion of
the Distribution) have been satisfied, including, without limitation the
approval of the Distribution and the Merger by Beverly's stockholders, the
receipt of all necessary consents and approvals required from any governmental
authorities and third parties, including the expiration of the required waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the receipt of certain tax opinions or, at Beverly's election, a
private letter ruling from the Internal Revenue Service with respect to the
Transactions. The Merger and Distribution are structured to be tax-free
reorganizations in which neither Beverly, Capstone nor their respective
stockholders will recognize taxable gain except to the extent cash is paid in
lieu of fractional shares.
The Beverly Board of Directors has unanimously determined that the Merger
and the Distribution are fair and in the best interests of the Beverly
stockholders. The Beverly Board of Directors has approved the Merger Agreement
and the Distribution Agreement, and on , 1997 approved the New
Beverly 1997 Incentive Plan and the New Beverly Directors Option Plan described
in the attached material. The Board of Directors of Beverly recommends that the
stockholders of Beverly vote in favor of the Merger Agreement, the Distribution
Agreement, and the New Beverly Plan Proposals. You are urged to consider
carefully all aspects of the proposed Merger and Distribution discussed in the
attached Joint Proxy Statement/Prospectus and the Prospectus of New Beverly
relating to the issuance of New Beverly Common Stock in connection with the
Distribution (the "New Beverly Prospectus"), which is attached to the Joint
Proxy Statement/Prospectus as Annex A.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Beverly Stockholders, a Joint Proxy Statement/Prospectus relating to,
among other things, the actions to be taken by Beverly stockholders at the
Beverly Special Meeting, a proxy card and the New Beverly Prospectus. The Joint
Proxy Statement/Prospectus more fully describes the proposed Merger, the
Distribution and the New Beverly Plan Proposals, and includes certain
information about PCA, Capstone, Beverly and New Beverly. The Joint Proxy
Statement/Prospectus also serves as a Proxy Statement for Capstone with respect
to the Merger and certain other matters, and a Prospectus for Capstone with
respect to the shares of Capstone Common Stock to be issued upon the
consummation of the Merger. The New Beverly Prospectus more fully describes the
Distribution, and includes information about New Beverly and the New Beverly
Common Stock to be issued to Beverly stockholders in the Distribution.
All Beverly stockholders as of the Beverly Special Meeting Record Date are
cordially invited to attend the Beverly Special Meeting in person. However,
whether or not you plan to attend the Beverly Special Meeting, please complete,
sign, date and return your proxy in the enclosed postage paid envelope. If you
attend the Beverly Special Meeting, you may vote in person if you wish, even
though you have previously returned your proxy. It is important that your shares
be represented and voted at the Beverly Special Meeting.
Sincerely,
------------------------------------
David R. Banks
Chairman of the Board
2
<PAGE> 10
BEVERLY ENTERPRISES, INC.
5111 ROGERS AVENUE
SUITE 40-A
FORT SMITH, ARKANSAS 72919
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1997
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "Beverly
Special Meeting") of Beverly Enterprises, Inc., a Delaware corporation
("Beverly"), will be held on , 1997, at a.m., local
time, at located at , Fort Smith, Arkansas to consider
and vote upon the following matters more fully described in the accompanying
Joint Proxy Statement/Prospectus and the annexes thereto:
1. Approval and adoption of an Agreement and Plan of Distribution,
dated as of April 15, 1997 (the "Distribution Agreement"), by and among
Beverly, New Beverly Holdings, Inc., a Delaware corporation, and a
wholly-owned subsidiary of Beverly ("New Beverly") and Capstone Pharmacy
Services, Inc., a Delaware corporation ("Capstone"), pursuant to which,
among other things: Beverly's nursing facilities, acute long-term
transitional hospitals, rehabilitation therapy services, outpatient therapy
clinics, assisted living centers, hospices, home healthcare centers and
other healthcare and related services and businesses other than its
institutional pharmacy business (collectively, the "Remaining Healthcare
Business") will be transferred to New Beverly or one or more direct or
indirect subsidiaries of New Beverly and (ii) all of the issued and
outstanding capital stock of New Beverly, par value $0.10 per share ("New
Beverly Common Stock") shall be distributed to the stockholders of Beverly
(the "Distribution"), such that each Beverly stockholder will receive one
share of New Beverly Common Stock per share of Beverly Common Stock held by
such stockholder as of the record date set by the Beverly Board of
Directors for the determination of Beverly stockholders entitled to receive
New Beverly Common Stock in the Distribution (the "Distribution Record
Date");
2. Approval and adoption of an Agreement and Plan of Merger, dated as
of April 15, 1997 (the "Merger Agreement"), by and between Beverly and
Capstone, pursuant to which, among other things: (i) following the
Distribution, Beverly, whose sole remaining business following the
completion of the Distribution will consist of the institutional pharmacy
business (the "Institutional Pharmacy Business") conducted through its
wholly-owned subsidiary Pharmacy Corporation of America, a California
corporation ("PCA"), shall merge with and into Capstone, with Capstone as
the surviving corporation (the "Merger"); and (ii) each share of Beverly
Common Stock and the associated Rights (as defined in the Merger Agreement)
shall be converted into the right to receive, and become exchangeable for,
the number of shares of the common stock of Capstone, $0.01 par value per
share ("Capstone Common Stock") equal to the quotient of 50,000,000 divided
by the number of shares of Beverly Common Stock outstanding immediately
prior to the Effective Time of the Merger (the "Conversion Number");
3. Approval and adoption of the New Beverly 1997 Long-Term Incentive
Plan (the "New Beverly 1997 Incentive Plan");
4. Approval and adoption of the New Beverly Non-Employee Directors
Stock Option Plan (the "New Beverly Directors Option Plan" and together
with proposal (3), the "New Beverly Plan Proposals");
5. Approval of the possible adjournment of the Beverly Special Meeting
for the purpose of soliciting additional votes in favor of proposals (1)
through (4) above; and
6. Such other business as may properly come before the Beverly Special
Meeting or any adjournment or postponement thereof.
<PAGE> 11
The Distribution is being undertaken by Beverly in contemplation of the
Merger and will not occur unless both the Distribution and Merger are approved
by Beverly's stockholders and until all of the conditions precedent to the
Merger have been satisfied or waived. Only Beverly stockholders of record at the
close of business on , 1997 are entitled to notice of, and to
vote at, the Beverly Special Meeting, or at any adjournment or postponement
thereof.
By order of the Beverly Board of
Directors,
------------------------------------
Robert W. Pommerville
Secretary
2
<PAGE> 12
THE DISTRIBUTION AND THE MERGER REQUIRE THE AFFIRMATIVE VOTE OF A MAJORITY
OF THE ISSUED AND OUTSTANDING SHARES OF BEVERLY COMMON STOCK. THE NEW BEVERLY
PLAN PROPOSALS REQUIRE THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES PRESENT
AND ENTITLED TO VOTE THEREON AT A MEETING WHERE A QUORUM IS PRESENT. THE
DISTRIBUTION AND THE MERGER WILL NOT OCCUR AND THE NEW BEVERLY PLAN PROPOSALS
WILL NOT TAKE EFFECT, EVEN IF THE DISTRIBUTION PROPOSAL AND THE NEW BEVERLY PLAN
PROPOSALS ARE ADOPTED, UNLESS BOTH THE MERGER AND THE DISTRIBUTION ARE APPROVED.
WHETHER OR NOT YOU PLAN TO ATTEND THE BEVERLY SPECIAL MEETING, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED RETURN ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU ATTEND THE BEVERLY SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU
WISH TO DO SO EVEN IF YOU HAVE PREVIOUSLY SENT IN YOUR PROXY.
<PAGE> 13
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 4, 1997
JOINT PROXY STATEMENT
OF
BEVERLY ENTERPRISES, INC.
AND
CAPSTONE PHARMACY SERVICES, INC.
PROSPECTUS OF CAPSTONE PHARMACY SERVICES, INC.
This Joint Proxy Statement/Prospectus ("Joint Proxy Statement/Prospectus")
is being furnished to stockholders of Beverly Enterprises, Inc., a Delaware
corporation ("Beverly"), in connection with the solicitation of proxies by the
Board of Directors of Beverly for use at the Special Meeting of Beverly
stockholders (including any adjournment or postponement thereof) to be held on
, 1997 (the "Beverly Special Meeting"). This Joint Proxy
Statement/Prospectus also is being furnished to the stockholders of Capstone
Pharmacy Services, Inc. ("Capstone") in connection with the solicitation of
proxies by the Capstone Board of Directors for use at the Special Meeting of
Capstone stockholders (including any adjournment or postponement thereof) to be
held on September 15, 1997 (the "Capstone Special Meeting"). The Beverly Special
Meeting and the Capstone Special Meeting have been called to consider the
proposal to merge Beverly's institutional pharmacy business (the "Institutional
Pharmacy Business") with and into Capstone (the "Merger") in exchange for
Capstone common stock, par value $.01 per share ("Capstone Common Stock") and to
consider various proposals related thereto.
This Joint Proxy Statement/Prospectus also constitutes the Prospectus of
Capstone filed with the Securities and Exchange Commission (the "Commission") as
a part of a Registration Statement on Form S-4 (the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to 50 million shares of Capstone Common Stock to be issued to
stockholders of Beverly upon the consummation of the Merger.
At the Beverly Special Meeting, stockholders of Beverly will be asked to
consider and vote upon, and this Joint Proxy Statement/ Prospectus relates to,
the following proposals: (1) the approval and adoption of an Agreement and Plan
of Distribution, dated as of April 15, 1997 (the "Distribution Agreement"), by
and among Beverly, Capstone and New Beverly Holdings, Inc., a Delaware
corporation and a wholly-owned subsidiary of Beverly ("New Beverly"), pursuant
to which, among other things: (i) Beverly's nursing facilities, acute long-term
transitional hospitals, rehabilitation therapy services, outpatient therapy
clinics, assisted living centers, hospices, home healthcare centers and other
healthcare and related services and businesses other than its institutional
pharmacy business (collectively, the "Remaining Healthcare Business") will be
transferred to New Beverly or one or more direct or indirect subsidiaries of New
Beverly and (ii) all of the issued and outstanding common stock of New Beverly,
par value $0.10 per share ("New Beverly Common Stock"), shall be distributed to
the stockholders of Beverly (the "Distribution" and, together with the Merger
and related transactions, the "Transactions"), such that each Beverly
stockholder will receive one share of New Beverly Common Stock per share of
Beverly common stock, par value $0.10 per share ("Beverly Common Stock"), held
by such stockholder as of the date set by the Beverly Board of Directors for the
determination of Beverly stockholders entitled to receive the Distribution (the
"Distribution Record Date"); (2) the approval and adoption of an Agreement and
Plan of Merger, dated April 15, 1997 (the "Merger Agreement"), by and between
Beverly and Capstone pursuant to which, among other things: (i) following the
Distribution, Beverly, whose sole remaining business following the completion of
the Distribution will consist of the Institutional Pharmacy Business conducted
through its wholly-owned subsidiary, Pharmacy Corporation of America, a
California corporation ("PCA"), shall merge with and into Capstone, with
Capstone as the surviving corporation (the "Surviving Corporation"); and (ii) at
the Effective Time (as defined in the Merger Agreement) each share of Beverly
Common Stock and the associated Rights (as defined in the Merger Agreement) will
be converted into the right to receive, and become exchangeable for the number
of shares of Capstone Common Stock equal to the quotient, expressed to four
decimal places, of (a) 50,000,000 divided by (b) the number of shares of Beverly
Common Stock outstanding immediately prior to the Effective Time of the Merger
(the "Conversion Number"); (3) the approval and adoption of the New Beverly 1997
Long-Term Incentive Plan (the "New Beverly 1997 Incentive Plan"); (4) the
approval and adoption of the New Beverly Non-Employee Directors Stock Option
Plan (the "New Beverly Directors Option Plan" and, together with the New Beverly
1997 Incentive Plan, the "New Beverly Plans"); (5) the approval of the possible
adjournment of the Beverly Special Meeting for the purpose of soliciting
additional votes in favor of proposals (1) through (4) above; and (6) such other
business as may properly come
(continued on next page)
---------------------
SEE "RISK FACTORS" ON PAGE 17 OF THIS JOINT PROXY STATEMENT/PROSPECTUS FOR
A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY BOTH BEVERLY AND
CAPSTONE STOCKHOLDERS WITH RESPECT TO THE PROPOSALS DESCRIBED HEREIN AND THE
SECURITIES BEING OFFERED HEREBY.
THE SECURITIES ISSUABLE IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE NEW BEVERLY COMMON STOCK IS BEING ISSUED PURSUANT TO A SEPARATE PROSPECTUS
AND NOT PURSUANT TO THIS JOINT PROXY STATEMENT/ PROSPECTUS. A COPY OF THE
PROSPECTUS RELATING TO THE SHARES OF NEW BEVERLY COMMON STOCK TO BE ISSUED IN
THE DISTRIBUTION IS ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS ANNEX
A.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS , 1997.
<PAGE> 14
(continued from cover page)
before the Beverly Special Meeting or any adjournment or postponement thereof.
The Board of Directors of Beverly unanimously recommends that stockholders of
Beverly vote FOR all of the foregoing proposals.
The Capstone Special Meeting has been called to consider the following
proposals: (1) approval and adoption of the Merger Agreement; (2) approval and
adoption of an amendment to Capstone's Certificate of Incorporation pursuant to
which (i) the shares of Capstone Common Stock authorized for issuance will be
increased from 50 million to 300 million, (ii) the Board of Directors of
Capstone will be divided into three classes with one class standing for
re-election in each successive year, (iii) stockholders will be permitted to
call special meetings only with the consent of stockholders owning not less than
25% of the outstanding shares of Capstone, and (iv) business conducted at
special meetings of stockholders will be limited to the matters described in the
notice of the meeting; (3) approval and adoption of Capstone's 1997 Incentive
Stock Plan, pursuant to which three million shares of Capstone Common Stock will
be reserved for issuance as restricted stock, performance shares and phantom
stock and pursuant to qualified and nonqualified stock options; and (4) such
other business as may properly come before the Capstone Special Meeting or any
adjournment or postponement thereof. The Capstone Board of Directors unanimously
recommends that stockholders of Capstone vote FOR the foregoing proposals.
In connection with the Merger, Capstone will issue 50 million shares of
Capstone Common Stock, which together with debt incurred or assumed in
connection with the Merger represent an estimated transaction value on May 28,
1997 of approximately $778 million. As of May 28, 1997, the last reported sales
price for the Capstone Common Stock on The Nasdaq Stock Market's National Market
System ("Nasdaq Stock Market") was $10.06, and the last sales price for the
Beverly Common Stock as reported on the New York Stock Exchange ("NYSE")
Composite Tape was $14.25.
The purpose of the Transactions is to merge the Institutional Pharmacy
Business of Beverly with Capstone such that Beverly stockholders will receive 50
million shares of newly issued Capstone Common Stock. Beverly will have no
ownership interest in Capstone or PCA. In addition to owning an interest in
Capstone, Beverly stockholders will own the Remaining Healthcare Business
through ownership of New Beverly, an independent publicly-traded company.
Immediately following the Distribution, the name of New Beverly will be changed
to "Beverly Enterprises, Inc." It is contemplated that the shares of New Beverly
Common Stock will be listed on the NYSE and the Pacific Stock Exchange ("PSE"),
and such shares are expected to trade under the symbol "BEV." Capstone Common
Stock will continue to trade on the Nasdaq Stock Market under the symbol "DOSE."
The Merger is expected to be consummated immediately following the Distribution.
Information concerning New Beverly is set forth in the accompanying Prospectus
of New Beverly attached as Annex A (the "New Beverly Prospectus"). The Merger
Agreement and the Distribution Agreement are attached as Annex B and Annex C,
respectively, to this Joint Proxy Statement/Prospectus.
All information concerning Beverly, PCA, and New Beverly contained or
incorporated by reference in this Joint Proxy Statement/Prospectus has been
furnished by Beverly. All information concerning Capstone prior to the
consummation of the Merger contained or incorporated by reference in this Joint
Proxy Statement/Prospectus has been furnished by Capstone.
Stockholders are urged to read and carefully consider the information
contained in this Joint Proxy Statement/ Prospectus. This Joint Proxy
Statement/Prospectus, the letter to Beverly stockholders, the letter to Capstone
stockholders and the related form of proxy are first being mailed or delivered
to Beverly and Capstone stockholders on or about , 1997. Any
stockholder who has given his, her or its proxy may revoke it at any time prior
to its use. See "The Beverly Special Meeting -- Voting of Proxies" and "The
Capstone Special Meeting -- Voting of Proxies."
<PAGE> 15
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
AVAILABLE INFORMATION....................................... iv
INCORPORATION OF DOCUMENTS BY REFERENCE..................... v
CAUTIONARY STATEMENTS....................................... vi
SUMMARY..................................................... 1
Overview.................................................. 1
Parties to the Transaction................................ 1
Capstone............................................... 1
PCA.................................................... 2
Beverly................................................ 2
New Beverly............................................ 2
Capstone Special Meeting.................................. 3
Beverly Special Meeting................................... 5
Recommendations of the Beverly and Capstone Boards of
Directors.............................................. 7
Opinions of Financial Advisors............................ 7
The Transactions.......................................... 8
Restructuring.......................................... 8
Distribution........................................... 8
Merger................................................. 8
Conditions to the Merger............................. 8
Termination.......................................... 9
Delivery of Shares................................... 9
Certain Tax Considerations........................... 9
Effect of the Transactions on Employees and Employee
Benefits............................................ 10
Accounting Treatment................................. 11
No Appraisal Rights.................................. 11
Other Matters............................................. 11
Comparative Per Share Data................................ 13
Summary Financial and Other Data.......................... 14
RISK FACTORS................................................ 17
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS................................................ 22
THE CAPSTONE SPECIAL MEETING................................ 26
Date, Time and Place...................................... 26
Purpose of Capstone Special Meeting....................... 26
Capstone Special Meeting Record Date; Voting Rights;
Proxies................................................ 27
Voting of Proxies......................................... 27
Required Vote............................................. 27
Proxy Solicitation........................................ 28
THE BEVERLY SPECIAL MEETING................................. 29
Date, Time and Place...................................... 29
Purpose of Beverly Special Meeting........................ 29
Beverly Special Meeting Record Date; Voting Rights;
Proxies................................................ 30
Voting of Proxies......................................... 30
Required Vote............................................. 30
Proxy Solicitation........................................ 31
CERTAIN CONSIDERATIONS RELATED TO THE TRANSACTIONS.......... 32
Background of the Transactions............................ 32
The Distribution and the Merger........................... 33
</TABLE>
i
<PAGE> 16
<TABLE>
<S> <C>
Beverly's Reasons for the Merger; Recommendation of the Board of Directors of Beverly.................... 33
Opinions of Beverly's Financial Advisors................................................................. 36
Capstone's Reasons for the Merger; Recommendation of the Board of Directors of Capstone.................. 40
Opinion of Capstone's Financial Advisor.................................................................. 41
Directors and Officers of Capstone Following the Merger.................................................. 46
Interests of Certain Persons in the Transactions......................................................... 46
Accounting Treatment..................................................................................... 48
No Appraisal Rights...................................................................................... 48
THE DISTRIBUTION AND OTHER PRE-MERGER TRANSACTIONS......................................................... 49
Terms of the Distribution Agreement...................................................................... 49
Restructuring and Contribution of Remaining Healthcare Business to New Beverly........................... 49
Consummation of the Distribution; Treatment of Beverly Stock Options, Phantom Shares, Performance Shares,
and Shares of Restricted Stock........................................................................ 50
Manner of Effecting the Distribution..................................................................... 51
Listing of New Beverly Common Stock; Restrictions on Resale.............................................. 51
Conditions............................................................................................... 52
Settlement of Intercompany Accounts...................................................................... 52
Treatment of Indebtedness................................................................................ 52
THE MERGER................................................................................................. 58
General.................................................................................................. 58
Effective Time; Closing.................................................................................. 59
Conditions to Closing.................................................................................... 59
Representations and Warranties........................................................................... 60
Covenants................................................................................................ 60
No Solicitation.......................................................................................... 61
Termination.............................................................................................. 61
Expenses; Termination Fees............................................................................... 63
Amendment; Waiver........................................................................................ 64
Terms of the Voting Agreement............................................................................ 64
POST-CLOSING ARRANGEMENTS.................................................................................. 65
Terms of the Interim Services Agreement.................................................................. 65
Indemnification and Insurance............................................................................ 65
Terms of the Non-Competition Agreement................................................................... 66
Preferred Provider Agreement............................................................................. 66
EFFECT OF THE TRANSACTIONS ON EMPLOYEES AND EMPLOYEE BENEFITS.............................................. 67
CERTAIN TAX CONSIDERATIONS................................................................................. 71
INFORMATION CONCERNING CAPSTONE............................................................................ 77
Capstone Selected Historical Consolidated Financial Data................................................. 77
Capstone Management's Discussion and Analysis of Financial Condition and Results of Operations........... 78
Capstone Business........................................................................................ 82
Management of Capstone................................................................................... 90
Certain Capstone Transactions............................................................................ 92
Principal Stockholders of Capstone....................................................................... 94
Price Range of Capstone Common Stock..................................................................... 96
Description of Capstone Capital Stock.................................................................... 97
Restrictions on Resale................................................................................... 98
INFORMATION CONCERNING PCA................................................................................. 99
Selected Historical Financial Data of PCA................................................................ 99
PCA Management's Discussion and Analysis of Financial Condition And Results of Operations................ 100
</TABLE>
ii
<PAGE> 17
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PCA Business............................................................................................. 104
INFORMATION CONCERNING BEVERLY............................................................................. 116
Beverly Selected Historical Consolidated Financial Data.................................................. 116
Beverly Management's Discussion and Analysis of Financial Condition and Results of Operations............ 117
Beverly Business......................................................................................... 123
Beverly Management....................................................................................... 130
Principal Stockholders of Beverly........................................................................ 132
RELATIONSHIP BETWEEN PCA AND BEVERLY....................................................................... 134
COMPARATIVE RIGHTS OF STOCKHOLDERS......................................................................... 135
OTHER BEVERLY PROPOSALS.................................................................................... 139
Approval and Adoption of the New Beverly 1997 Incentive Plan............................................. 139
Approval and Adoption of the New Beverly Directors Option Plan........................................... 145
OTHER CAPSTONE PROPOSALS................................................................................... 148
Approval and Adoption of the Amendment Proposal.......................................................... 148
Approval and Adoption of the Capstone Plan Proposal...................................................... 149
LEGAL MATTERS.............................................................................................. 150
EXPERTS.................................................................................................... 150
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
Annex A -- Prospectus Relating to New Beverly Common Stock to be Issued in the Distribution................ A-1
Annex B -- Agreement and Plan of Merger.................................................................... B-1
Annex C -- Agreement and Plan of Distribution.............................................................. C-1
Annex D -- Form of Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith, Inc.......................... D-1
Annex E -- Form of Fairness Opinion of Stephens Inc........................................................ E-1
Annex F -- Form of Fairness Opinion of Adirondack Capital Advisors, LLC.................................... F-1
Annex G -- Form of Amendment to Capstone's Certificate of Incorporation.................................... G-1
Annex H -- 1997 Incentive Stock Plan of Capstone........................................................... H-1
Annex I -- New Beverly 1997 Long-Term Incentive Plan....................................................... I-1
Annex J -- New Beverly Non-Employee Directors Stock Option Plan............................................ J-1
</TABLE>
iii
<PAGE> 18
AVAILABLE INFORMATION
Capstone and Beverly are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports and other information with the Securities and
Exchange Commission (the "Commission") relating to their business, financial
position, results of operations and other matters. Such reports, proxy
statements and other information can be inspected and copied at the Public
Reference Section maintained by the Commission at Judiciary Plaza, 450 Fifth
Street N.W., Washington, D.C. 20549 and at its Regional Offices located at The
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and 7 World Trade Center, New York, New York 10048. Copies of such
material also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Beverly Common Stock is listed on the NYSE and the PSE. The Capstone
Common Stock is quoted on the Nasdaq Stock Market. Such reports, proxy
statements and other information can also be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005 or the Pacific
Stock Exchange, 301 Pine Street, San Francisco, California 94104 (with respect
to Beverly) and the Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C.
20006 (with respect to Capstone). Such reports, proxy statements and other
information can be reviewed through the Commission's Electronic Data Gathering
Analysis and Retrieval System, which is publicly available through the
Commission's Web site (http://www.sec.gov).
Capstone has filed with the Commission a Registration Statement on Form S-4
(the "Registration Statement") under the Securities Act with respect to the
Capstone Common Stock offered hereby. This Joint Proxy Statement/Prospectus does
not contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Reference is made to the Registration Statement and to the exhibits
relating thereto for further information with respect to Capstone, Beverly and
the Capstone Common Stock offered hereby.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY CAPSTONE, BEVERLY OR ANY OTHER PERSON. THIS JOINT
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF THE SECURITIES MADE UNDER THIS JOINT PROXY
STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF BEVERLY, NEW BEVERLY, PCA, OR
CAPSTONE SINCE THE DATE OF THIS JOINT PROXY STATEMENT/ PROSPECTUS.
iv
<PAGE> 19
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Capstone are
incorporated by reference in this Joint Proxy Statement/Prospectus:
1. Capstone's Annual Report on Form 10-K/A for the year ended December
31, 1996;
2. Capstone's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997;
3. Capstone's Current Report on Form 8-K, dated January 31, 1997; and
4. Capstone's Registration Statement on Form 8-A relating to Capstone's
Common Stock, dated June 18, 1986, as amended by a Form 8-A/A, dated
July 18, 1996.
The following documents filed with the Commission by Beverly are
incorporated by reference in this Joint Proxy Statement/Prospectus:
1. Beverly's Annual Report on Form 10-K for the year ended December 31,
1996 (the "1996 Beverly 10-K");
2. Beverly's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997;
3. The portions of the Proxy Statement for the Annual Meeting of
Stockholders held on May 29, 1997, that have been incorporated by
reference in the 1996 Beverly 10-K;
4. Beverly's Current Report on Form 8-K dated April 15, 1997;
5. Beverly's Registration Statement on Form 8-A relating to Beverly
Common Stock dated August 21, 1990, and any amendment or report filed
for the purpose of updating such description; and
6. Beverly's Registration Statement on Form 8-A relating to Beverly
Common Stock Purchase Rights dated September 29, 1994 and any
amendment or report filed for the purpose of updating such
description.
All documents and reports filed by Capstone and Beverly pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement/Prospectus and prior to the date of the Capstone Special Meeting or
the Beverly Special Meeting, as the case may be, shall be deemed to be
incorporated by reference in this Joint Proxy Statement/Prospectus and to be a
part hereof from the dates of filing of such documents or reports. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Joint
Proxy Statement/Prospectus to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not constitute a part of this Joint
Proxy Statement/Prospectus, except as so modified or superseded.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO EACH PERSON TO WHOM THIS JOINT
PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST AS FOLLOWS:
IN THE CASE OF DOCUMENTS RELATING TO CAPSTONE, TO:
Capstone Pharmacy Services, Inc.
9901 East Valley Ranch Parkway
Suite 3001
Irving, TX 75063
(Telephone Number: (972) 401-1541)
Attn: James D. Shelton, Secretary
OR, IN THE CASE OF DOCUMENTS RELATING TO BEVERLY, TO:
Beverly Enterprises, Inc.
5111 Rogers Avenue
Suite 40-A
Fort Smith, AR 72919
(Telephone Number: (501) 452-6712)
Attn: Robert W. Pommerville, Secretary
IN ORDER TO INSURE TIMELY DELIVERY OF THE INCORPORATED DOCUMENTS, REQUESTS
SHOULD BE RECEIVED PRIOR TO , 1997.
v
<PAGE> 20
CAUTIONARY STATEMENTS
This Joint Proxy Statement/Prospectus contains statements relating to
future results of each of Capstone, Beverly, PCA, New Beverly and the Surviving
Corporation (including certain projections and business trends) that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties, including, but not limited to,
changes in political and economic conditions; regulatory conditions; government
healthcare spending; integration of acquisitions; and competitive product and
pricing pressures, as well as other risks and uncertainties, including but not
limited to those detailed from time to time in the filings of Capstone, Beverly,
New Beverly, and the Surviving Corporation made with the Commission.
When used in this Joint Proxy Statement/Prospectus with respect to each of
Capstone, Beverly, PCA, New Beverly and the Surviving Corporation the words
"estimate," "project," "intend," "expect" and similar expressions are intended
to identify forward-looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. Such risks and uncertainties include those risks, uncertainties
and risk factors identified in this Joint Proxy Statement/Prospectus under the
headings "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Neither Capstone, PCA, Beverly, nor New
Beverly undertakes any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
vi
<PAGE> 21
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/ Prospectus. This summary is not intended to be
complete and is qualified in all respects by reference to the more detailed
information and financial statements contained elsewhere or incorporated by
reference in this Joint Proxy Statement/Prospectus and the Annexes hereto.
Stockholders are urged to read this Joint Proxy Statement/Prospectus and the
Annexes hereto in their entirety. For information regarding New Beverly, Beverly
stockholders should review the New Beverly Prospectus.
OVERVIEW
Prior to the Merger, Beverly's Remaining Healthcare Business will be
transferred or contributed to New Beverly, a wholly-owned subsidiary of Beverly,
and all of the New Beverly Common Stock will be distributed to the stockholders
of Beverly at the rate of one share of New Beverly Common Stock per share of
Beverly Common Stock held as of the Distribution Record Date. Beverly's only
remaining business then will be the Institutional Pharmacy Business operated
through PCA, which will be combined with Capstone's institutional pharmacy
business upon the Merger of Beverly with and into Capstone. All outstanding
shares of Beverly Common Stock will be converted into the right to receive an
aggregate of 50 million shares of Capstone Common Stock. Capstone will be the
Surviving Corporation in the Merger and will continue its corporate existence
under the laws of the State of Delaware. In connection with the Merger, Capstone
will assume approximately $275 million in debt incurred by PCA in connection
with the Transactions, the proceeds of which are to be paid to Beverly prior to
the Distribution. Capstone will also assume options and incentive stock awards
covering an aggregate of approximately 750,000 shares (subject to adjustment) of
Beverly Common Stock. See "Effect of the Transactions on Employees and Employee
Benefits -- Employee Benefit Agreement." As a result of the Distribution, New
Beverly will be an independent, publicly-traded company engaged in the Remaining
Healthcare Business and owned by the stockholders of Beverly as of the
Distribution Record Date. Immediately following the Merger, the name of New
Beverly will be changed to "Beverly Enterprises, Inc."
Following the Merger, Capstone is expected to be the largest institutional
pharmacy company in the United States, serving approximately 310,000 long-term
care beds in 37 states, over 110,000 inmates in correctional facilities, and
approximately 75,000 worker's compensation patients. On a pro forma basis,
reflecting the Merger, all Capstone acquisitions since January 1, 1996, and
PCA's acquisition of Interstate Pharmacy Corporation ("IPC") in 1997 as if such
transactions occurred on January 1, 1996, the net operating revenues and net
income of Capstone for the year ended December 31, 1996 would have been
approximately $814 million and $12 million, respectively. See "Unaudited Pro
Forma Combined Condensed Financial Statements."
PARTIES TO THE TRANSACTIONS
CAPSTONE
Capstone is a leading provider of institutional pharmacy services to
long-term care facilities and correctional institutions located throughout the
United States. Capstone provides long-term care facilities with comprehensive
institutional pharmacy services that include the purchasing, repackaging and
dispensing of pharmaceuticals, infusion therapy, Medicare Part B services and
pharmacy consulting services. These services are supported by computerized
record-keeping and third-party billing services. Capstone serves its long-term
care clients primarily through regional pharmacies, many of which are open 24
hours, seven days a week. Capstone has established regional pharmacies in
certain large metropolitan areas, each capable of serving in excess of 10,000
patients. In the correctional market, where it currently is the largest
non-captive provider of pharmacy services in the United States, Capstone
provides pharmaceuticals under capitated and other contracts to correctional
institutions that have privatized their inmate healthcare services. Capstone
services approximately 120,000 long-term care beds in 16 states and over 110,000
inmates in correctional facilities nationwide.
1
<PAGE> 22
PCA
PCA is presently a wholly-owned subsidiary of Beverly. Following the
Distribution and immediately prior to the Merger, Beverly's sole business will
consist of the Institutional Pharmacy Business operated through PCA. PCA is a
leading provider of pharmaceuticals and related products and services in the
institutional healthcare market and is the nation's leading provider of mail
service pharmacy benefits in the workers' compensation market. PCA provides its
institutional pharmacy products and services primarily to long-term care
facilities such as skilled nursing facilities, assisted living facilities and
retirement centers, as well as other institutional healthcare facilities such as
acute care, transitional and psychiatric hospitals and correctional
institutions. Through its 73 pharmacies, PCA purchases, repackages and dispenses
prescription and non-prescription pharmaceuticals to patients in its client
facilities and provides these facilities with infusion therapy services, medical
supplies and devices and related consultant pharmacist and information services,
including formulary management, automated record-keeping, drug therapy
evaluation and assistance with regulatory compliance. As of March 31, 1997, PCA
provided its institutional pharmacy products and services to approximately
190,000 long-term care beds in 33 states.
PCA, as the leading pharmacy benefit provider in the workers' compensation
market, provides pharmaceutical products and services through its mail service
pharmacy to approximately 75,000 workers' compensation patients throughout the
United States. These products and services include home delivery of
prescriptions to long-term, high-cost, injured workers receiving workers'
compensation benefits, an on-line retail prescription drug card for pre-approved
pharmaceutical products, medical supplies and medical equipment.
BEVERLY
Beverly's business consists principally of providing long-term healthcare,
including the operation of nursing facilities, acute long-term transitional
hospitals, institutional and mail service pharmacies, rehabilitation therapy
services, outpatient therapy clinics, assisted living centers, hospices and home
healthcare centers.
Beverly is the largest operator of nursing facilities in the United States.
At March 31, 1997, Beverly operated 627 nursing facilities with 70,623 licensed
beds. The facilities are located in 32 states and the District of Columbia, and
range in capacity from 20 to 355 beds. At March 31, 1997, Beverly also operated
73 pharmacies through PCA, 33 assisted living centers containing 869 units, 11
transitional hospitals containing 578 beds, 34 outpatient therapy clinics, 19
hospices and six home healthcare centers. Beverly's facilities had average
occupancy of 86.6%, 87.4%, 88.1% and 88.5% during the three months ended March
31, 1997 and the years ended December 31, 1996, 1995, and 1994, respectively.
NEW BEVERLY
New Beverly is currently a wholly-owned subsidiary of Beverly. By virtue of
the restructuring of Beverly and the Distribution, New Beverly will own the
Remaining Healthcare Business of Beverly and New Beverly Common Stock will be
distributed to the stockholders of Beverly. Immediately following the Merger,
New Beverly will change its name to "Beverly Enterprises, Inc." New Beverly will
make application to list the New Beverly Common Stock for trading on the NYSE
and PSE under the symbol "BEV," currently used by Beverly.
2
<PAGE> 23
CAPSTONE SPECIAL MEETING
THE MEETING
The Capstone Special Meeting will be held on September 15, 1997, at
a.m. at
.
PURPOSE OF THE MEETING
At the Capstone Special Meeting, the stockholders of Capstone will be asked
to vote on the following matters:
1. Approval and adoption of the Merger Agreement by and between
Beverly and Capstone, pursuant to which, among other things: (i)
following the transfer of the Remaining Healthcare Business to New
Beverly and the Distribution, Beverly, whose sole remaining
business following the completion of the Distribution will consist
of the Institutional Pharmacy Business conducted through PCA, will
merge with and into Capstone, with Capstone as the Surviving
Corporation; and (ii) Capstone will issue 50 million shares of
Capstone Common Stock to Beverly stockholders, assume approximately
$275 million of PCA debt, and assume options and performance stock
covering an aggregate of approximately 750,000 shares (subject to
adjustment) of Beverly Common Stock (the "Merger Proposal");
2. Approval and adoption of an amendment to Capstone's Certificate of
Incorporation (the "Amendment") pursuant to which: (i) the shares
of Capstone Common Stock authorized for issuance will be increased
from 50 million to 300 million; (ii) the Board of Directors of
Capstone will be divided into three classes with one class standing
for reelection in each successive year; (iii) stockholders will be
permitted to call special meetings only with the consent of
stockholders owning not less than 25% of the outstanding shares of
Capstone; and (iv) business conducted at special meetings of
stockholders will be limited to the matters described in the notice
of the meeting (the "Amendment Proposal"). Although the Amendment
Proposal will be voted on separately from the Merger Proposal, the
Amendment will not be effectuated unless the Merger Proposal is
approved and the Merger is consummated;
3. Approval and adoption of Capstone's 1997 Incentive Stock Plan (the
"Capstone Plan"), pursuant to which three million shares of
Capstone Common Stock will be reserved for issuance as restricted
stock, performance shares and phantom stock and pursuant to
qualified and nonqualified stock options (the "Capstone Plan
Proposal"). Although the Capstone Plan Proposal will be voted on
separately from the Merger Proposal, the Capstone Plan will not be
effectuated unless the Merger Proposal is approved and the Merger
is consummated; and
4. Such other business as may properly come before the Capstone
Special Meeting or any adjournment or postponement thereof.
VOTING
Stockholders of record as of , 1997 will be entitled to vote at
the Capstone Special Meeting. At the close of business on that day, there were
outstanding shares of Capstone Common Stock. Capstone's officers,
directors and principal stockholder, Counsel Corporation, an Ontario
corporation, ("Counsel"), have advised Capstone that they intend to vote or
direct the vote of all shares of Capstone Common Stock over which they have
voting control (a total of 6,265,529 shares, or approximately 18.4% of the
outstanding shares on May 28, 1997) in favor of the foregoing proposals.
Pursuant to a voting agreement entered into with Beverly, Counsel is obligated
to vote in favor of the foregoing proposals. See "The Merger -- Terms of the
Voting Agreement." Each share of Capstone Common Stock is entitled to one vote,
which may be given in person or by proxy authorized in writing.
To vote by proxy, a stockholder should complete, sign, date and return the
enclosed proxy in the enclosed postage paid envelope. The Capstone Board of
Directors urges you to complete the proxy card whether or not
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you plan to attend the meeting. If you attend the meeting in person, you may, if
you wish, vote in person on all matters brought before the meeting even if you
have previously delivered your proxy. Any Capstone stockholder who has given a
proxy may revoke it at any time prior to exercise by filing an instrument
revoking it with the Secretary of Capstone, by duly executing a proxy bearing a
later date, or by attending the Capstone Special Meeting and voting in person.
The presence at the meeting of a stockholder who has appointed a proxy will not
revoke the appointment. See "Capstone Special Meeting -- Voting of Proxies."
The affirmative vote of a majority of shares of Capstone Common Stock
outstanding and entitled to vote at the Capstone Special Meeting is required to
approve the Merger Proposal and the Amendment Proposal. The affirmative vote of
a majority of shares of Capstone Common Stock present, or represented by proxy,
and entitled to vote at the Capstone Special Meeting is required to approve the
Capstone Plan Proposal. Abstentions and broker non-votes will be counted for
purposes of determining the presence or absence of a quorum. Proxies that
reflect abstentions as to a particular proposal will be treated as voted for the
purpose of determining whether the proposal is approved or rejected and will
have the same effect as a vote against that proposal, while proxies that reflect
broker non-votes will not be counted as votes cast for determining the outcome
of the proposal. See "Capstone Special Meeting -- Required Vote."
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BEVERLY SPECIAL MEETING
THE MEETING
The Beverly Special Meeting will be held on , 1997 at
, local time at the
located at , Fort Smith, Arkansas.
PURPOSE OF THE MEETING
At the Beverly Special Meeting, the holders of shares of Beverly Common
Stock will consider and vote upon the following matters:
1. Approval and adoption of the Distribution Agreement and the other
transactions contemplated thereby as a result of which the Beverly
stockholders will retain their equity ownership interest in the
Remaining Healthcare Business of Beverly through their ownership of
New Beverly (the "Distribution Proposal");
2. Approval and adoption of the Merger Agreement and the other
transactions contemplated thereby, as a result of which the
Institutional Pharmacy Business of Beverly will be merged with and
into Capstone, with Beverly stockholders to receive Capstone Common
Stock in exchange for their Beverly Common Stock in accordance with
the terms of the Merger Agreement (the "Merger Proposal");
3. Approval and adoption of the New Beverly 1997 Incentive Plan;
4. Approval and adoption of the New Beverly Directors Option Plan (and
together with proposal (3), the "New Beverly Plan Proposals");
5. Approval of the possible adjournment of the Beverly Special Meeting
for the purpose of soliciting additional votes in favor of proposals
(1) through (4) above, if deemed appropriate (the "Adjournment
Proposal"); and
6. Such other business as may properly come before the Beverly Special
Meeting or any adjournment or postponement thereof. See "The Beverly
Special Meeting" and "Certain Considerations Related to the
Transactions."
VOTING
Only holders of Beverly Common Stock on , 1997 (the "Beverly
Special Meeting Record Date") will be entitled to notice of and to vote at the
Beverly Special Meeting. On the Beverly Special Meeting Record Date, there were
shares of Beverly Common Stock held by approximately holders of
record.
Under the Delaware General Corporation Law ("DGCL"), the affirmative vote
of a majority of the issued and outstanding shares of Beverly Common Stock will
be required to approve the Merger Proposal. Although the Distribution Proposal
and the Merger Proposal will be voted on separately, the Merger Agreement
provides that the Merger will not be consummated unless the Distribution
Proposal is approved by Beverly stockholders. The Distribution Proposal will be
adopted if approved by the affirmative vote of a majority of the issued and
outstanding shares of Beverly Common Stock. The affirmative vote of a majority
of the shares of Beverly Common Stock represented and entitled to vote thereon
at the Beverly Special Meeting will be required to separately approve each of
the New Beverly Plans. Each director and executive officer of Beverly has
advised Beverly that he or she intends to vote or direct the vote of all shares
of Beverly Common Stock over which he or she has voting control (a total of
1,102,793 shares or approximately 1.1%, of the outstanding shares of Beverly
Common Stock as of March 31, 1997) in favor of approval of each of the various
proposals to be considered and voted on at the Beverly Special Meeting. The
directors and executive officers of Capstone have advised Capstone that they do
not beneficially own any shares of Beverly Common Stock. See "The Beverly
Special Meeting -- Required Vote."
Any proxy given pursuant to this solicitation may be revoked with respect
to any proposal at any time prior to the vote on such proposal. Proxies may be
revoked by attending the Beverly Special Meeting and
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giving notice of revocation in open meeting or voting in person. Alternatively,
proxies may be revoked by executing a written notice of revocation bearing a
later date than the date of the proxy or executing a later dated proxy relating
to the same shares of Beverly Common Stock and, in either case, delivering such
notice or proxy to the Secretary of Beverly before the taking of any vote at the
Beverly Special Meeting. Abstentions and broker non-votes will be counted for
purposes of determining the presence or absence of a quorum. Proxies that
reflect abstentions as to a particular proposal will be treated as voted for the
purpose of determining whether the proposal is approved or rejected and will
have the same effect as a vote against that proposal, while proxies that reflect
broker non-votes will not be counted as votes cast for determining the outcome
of the proposal. See "The Beverly Special Meeting -- Voting of Proxies."
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RECOMMENDATIONS OF THE BEVERLY AND CAPSTONE BOARDS OF DIRECTORS
BEVERLY
The Board of Directors of Beverly has determined that the Transactions
constitute a significant strategic opportunity for Beverly's Institutional
Pharmacy Business as well as its Remaining Healthcare Business, and that the
terms of the Transactions are fair to and in the best interests of Beverly and
its stockholders. As a result, the Beverly Board of Directors has unanimously
approved the Transactions (including the Distribution Agreement and the Merger
Agreement) and unanimously recommends that Beverly stockholders vote in favor of
approval of the Transactions. See "Certain Considerations Related to the
Transactions -- Beverly's Reasons for the Merger; Recommendation of the Board of
Directors of Beverly." For the recommendation of Beverly's Board of Directors
regarding the New Beverly Plan Proposals, see "Other Beverly Proposals."
CAPSTONE
The Capstone Board has unanimously approved the Merger Proposal, the
Amendment Proposal, and the Capstone Plan Proposal (collectively, the "Capstone
Proposals") and the related Transactions and believes them to be fair to and in
the best interest of Capstone and its stockholders. The Capstone Board
unanimously recommends that Capstone stockholders vote in favor of approval of
the Capstone Proposals. See "Certain Considerations Related to the
Transactions -- Capstone's Reasons for the Merger; Recommendation of the Board
of Directors of Capstone" and "Other Capstone Proposals."
OPINIONS OF FINANCIAL ADVISORS
BEVERLY
Beverly has retained Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill
Lynch") and Stephens Inc. ("Stephens") to act as its co-financial advisors in
connection with the Merger. Merrill Lynch and Stephens each delivered a written
opinion to Beverly's Board of Directors dated April 15, 1997, to the effect
that, as of such date, based upon and subject to the assumptions made, general
procedures followed, factors considered and limitations on the review undertaken
by Merrill Lynch and Stephens, the Exchange Ratio is fair to the holders of
Beverly Common Stock from a financial point of view. In reaching their
conclusion, Merrill Lynch and Stephens analyzed certain public company
valuations, selected acquisitions and historical and projected results of
operations of Capstone, Beverly and PCA to determine the fairness of the
Exchange Ratio to the holders of Beverly Common Stock from a financial point of
view. Beverly is obligated to pay Merrill Lynch and Stephens an aggregate of
$2.5 million in connection with their analyses and delivery of their opinions
referred to above. If the Merger is consummated, Beverly will be obligated to
pay Merrill Lynch and Stephens an additional fee based upon the aggregate
consideration paid in the Merger. See "Certain Considerations Related to the
Transactions -- Opinions of Beverly's Financial Advisors." The full texts of
Merrill Lynch's and Stephens' written opinions, which set forth certain
assumptions made, matters considered, limitations on and scope of review, are
attached hereto as Annex D and Annex E, respectively, to this Joint Proxy
Statement/Prospectus. BEVERLY STOCKHOLDERS SHOULD READ EACH SUCH OPINION IN ITS
ENTIRETY. Jon E.M. Jacoby, an executive officer of Stephens Group, Inc., the
parent company of Stephens, is a director of Beverly. See "Certain
Considerations Related to the Transactions -- Opinions of Beverly's Financial
Advisors."
CAPSTONE
Adirondack Capital Advisors, LLC ("Adirondack") has acted as financial
advisor to Capstone in connection with the Merger and has delivered to the
Capstone Board its written opinion dated April 15, 1997, to the effect that, as
of such date, the consideration to be paid in connection with the Merger is fair
to Capstone from a financial point of view. In reaching its conclusion,
Adirondack analyzed comparable public company valuations, selected acquisitions,
and the relative contribution of the projected and historical results of
operations of Capstone and PCA to the Surviving Corporation to determine a range
of fair values of PCA.
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Adirondack earned a fee of $1.0 million in connection with the delivery of the
opinion referred to above. If the Merger is consummated, Capstone will be
obligated to pay Adirondack an additional $3.0 million. The full text of the
opinion of Adirondack, setting forth certain assumptions made, matters
considered and limits on the review undertaken, is attached as Annex F to this
Joint Proxy Statement/Prospectus and should be read in its entirety. A principal
of Adirondack, Joseph F. Furlong, III, is a director of Capstone. See "Certain
Considerations Related to the Transactions -- Opinion of Capstone's Financial
Advisor" and "Information Concerning Capstone -- Certain Capstone Transactions."
THE TRANSACTIONS
RESTRUCTURING
Prior to the Distribution Record Date, Beverly will complete an internal
restructuring pursuant to which all the assets and liabilities relating to the
Remaining Healthcare Business will be transferred or contributed to New Beverly
in one or more transactions expected to receive tax-free treatment. Upon
completion of the restructuring, the Remaining Healthcare Business will be
conducted by New Beverly and the Institutional Pharmacy Business conducted by
PCA will remain with Beverly. See "The Distribution and Other Pre-Merger
Transactions -- Contribution of Remaining Healthcare Business to New Beverly."
DISTRIBUTION
The Distribution will be effected immediately prior to the Merger. On the
Distribution Date (as such term is defined in the Distribution Agreement)
Beverly will distribute to Beverly stockholders as of the Distribution Record
Date, shares of New Beverly Common Stock. Each stockholder of Beverly as of the
Distribution Record Date will receive one share of New Beverly Common Stock per
share of Beverly Common Stock held as of the Distribution Record Date. The
Distribution will not take place unless all of the conditions to effecting the
Merger (other than the completion of the Distribution) have been fulfilled.
Beverly's transfer agent, The Bank of New York, will act as the Distribution
Agent for the Distribution and will deliver certificates for New Beverly Common
Stock as soon as practicable to holders of record of Beverly Common Stock as of
the close of business on the Distribution Record Date. All shares of New Beverly
Common Stock will be fully paid and nonassessable and the holders thereof will
not be entitled to preemptive rights. Immediately following the completion of
the Distribution, New Beverly will be an independent, publicly-traded company,
and it is contemplated that the shares of New Beverly Common Stock will be
listed on the NYSE and PSE. See "The Distribution and Other Pre-Merger
Transactions -- Consummation of the Distribution; Treatment of Beverly Stock
Options, Phantom Shares, Performance Shares and Shares of Restricted Stock."
MERGER
Following the approval and adoption of the Merger Agreement by the
requisite vote of the stockholders of Beverly and Capstone and the satisfaction
or waiver of the other conditions to the Merger, Beverly will be merged with and
into Capstone, with Capstone continuing as the Surviving Corporation. The Merger
will become effective upon filing with the Secretary of State of the State of
Delaware a duly executed Certificate of Merger, in the form required by and in
accordance with the DGCL, or at such time thereafter as is provided in the
Certificate of Merger.
Pursuant to the Merger Agreement, at the effective time of the Merger
("Effective Time") each share of Beverly Common Stock and associated Rights (as
defined in the Merger Agreement) issued and outstanding immediately prior to the
Effective Time (other than fractional shares) will be converted into the right
to receive that number of duly authorized, validly issued, fully paid and
nonassessable shares of Capstone Common Stock equal to the quotient, expressed
to four decimal places, of (a) 50,000,000 divided by (b) the number of shares of
Beverly Common Stock outstanding immediately prior to the Effective Time.
Conditions to the Merger. The obligations of each party to effect the
Merger are subject to, among other things, the fulfillment or waiver of the
following conditions: the effectiveness of the Registration Statement of
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which this Joint Proxy Statement/Prospectus is a part and the Registration
Statement related to the New Beverly Prospectus in accordance with the
provisions of the Securities Act; the approval by the stockholders of Capstone
and Beverly, at their respective Special Meetings, of the Merger (and in the
case of Beverly, the Distribution) and the transactions contemplated thereby;
obtaining all necessary regulatory consents and approvals; restructuring,
modifying, amending or terminating Beverly's indebtedness; and receiving either
a favorable private letter ruling (the "Private Letter Ruling") from the
Internal Revenue Service (the "IRS") or, at Beverly's election, a tax opinion
regarding the tax-free treatment of the Distribution and Merger. See "The
Distribution and Other Pre-Merger Transactions -- Treatment of Indebtedness" and
"The Merger -- Conditions to Closing."
Termination. The Merger Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval by the stockholders of
Beverly and Capstone, among other reasons: (a) by mutual consent of the Boards
of Directors of Capstone and Beverly; (b) by either Capstone or Beverly if
without fault of the terminating party the Merger is not consummated on or
before January 31, 1998, (or under certain conditions, April 30, 1998); (c) by
either Capstone or Beverly, if any court or governmental body issues an order
(other than a temporary restraining order) prohibiting the Merger; (d) by either
Capstone or Beverly, if approval of the stockholders of Capstone and Beverly is
not obtained with respect to the Merger and (in the case of approval by Beverly
stockholders) the Distribution; (e) by either party upon certain breaches by the
other party of representations, warranties or covenants; (f) by either party if
the board of directors of the other party shall have withdrawn, changed,
modified or taken other action inconsistent with its approval of the
Transactions; or (g) by either party if the other party negotiates a definitive
agreement with respect to a competing transaction after a good faith
determination by its Board of Directors that failure to negotiate such agreement
would violate such board's fiduciary duties. See "The Merger -- Termination."
Under certain circumstances, termination of the Merger Agreement may require one
party to reimburse the other for its expenses up to $2 million, and under
certain circumstances where a termination follows solicitation or negotiation of
a competing transaction involving a third party, termination fees of $35 million
may be required to be paid by one party to the other. See "The
Merger -- Expenses; Termination Fees."
Delivery of Shares. Promptly after the Effective Time, Capstone will mail
to each Beverly stockholder a form letter of transmittal and instructions for
use in effecting the surrender of Beverly stock certificates (the
"Certificates") for exchange. BEVERLY STOCKHOLDERS SHOULD NOT SEND IN THEIR
STOCK CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM.
Upon surrender to Capstone of a Certificate, together with a signed letter
of transmittal and any other required documents, the holder of such Certificate
will be entitled to receive from Capstone the number of shares of Capstone
Common Stock that such holder has the right to receive under the Merger
Agreement, and the Certificate will then be canceled. Under the DGCL, the
failure of a Beverly stockholder to surrender his or her Certificates will not
result in the forfeiture of the right to receive dividends or to vote the
Capstone Common Stock issuable to such Beverly stockholder.
No fractional shares of Capstone Common Stock will be issued in the Merger.
Instead, the Merger Agreement provides that each holder of Beverly Common Stock
who would otherwise have been qualified to receive a fraction of a share of
Capstone Common Stock will be entitled to receive cash equal to the Average
Market Value (as defined in the Merger Agreement) of such fractional share. The
Merger Agreement provides that for purposes of paying cash in lieu of fractional
shares, all Certificates surrendered for exchange by a holder will be aggregated
so that no holder will receive cash in lieu of fractional shares in an amount
equal to or greater than the Average Market Value of one full share of Capstone
Common Stock.
Certain Tax Considerations. In general, New Beverly will be responsible for
(i) all tax liabilities of Beverly not allocable to Beverly's pharmacy
subsidiaries (the "Pharmacy Subsidiaries"), (ii) any tax liability of New
Beverly for periods beginning after the date of the Merger, and (iii) except as
otherwise described in this section, any tax liability of Beverly resulting from
the failure of the restructuring and Distribution to qualify as transactions
described in Sections 351 and 355 of the Internal Revenue Code (the "Code")
and/or as a "reorganization" under Section 368(a)(1)(D) of the Code, or the
Merger to qualify as a "reorganization" under Section 368(a)(1)(A) of the Code.
New Beverly will also be entitled to any refunds that relate to
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those liabilities. The Surviving Corporation will generally be responsible for
(i) all tax liabilities allocable to the Pharmacy Subsidiaries, and (ii) any tax
liability of Capstone. See "Certain Tax Considerations."
It is expected that the Distribution will qualify as a tax-free
reorganization under Section 368 of the Code. Assuming that the Distribution so
qualifies, (i) the holders of Beverly Common Stock will not recognize gain or
loss upon receipt of shares of New Beverly Common Stock, (ii) each holder of
Beverly Common Stock will allocate his, her or its aggregate tax basis in the
Beverly Common Stock immediately before the Distribution among the Beverly
Common Stock and New Beverly Common Stock in proportion to their respective fair
market values, (iii) the holding period of each holder of Beverly Common Stock
for the New Beverly Common Stock will include the holding period for his, her or
its Beverly Common Stock, provided that the Beverly Common Stock is held as a
capital asset at the time of the Distribution, and (iv) Beverly will not
recognize any gain or loss on its distribution of the New Beverly Common Stock
to its stockholders. See "Certain Tax Considerations."
Beverly has requested the Private Letter Ruling from the IRS substantially
to the effect that, among other things, the Distribution will qualify as a
reorganization under Section 368(a)(1)(D) of the Code, and that neither Beverly,
New Beverly nor their stockholders will recognize any gain or loss (i) in
connection with such reorganization (as more fully described below), (ii) upon
the receipt by New Beverly of the Remaining Healthcare Business from Beverly in
exchange for the New Beverly Common Stock, or (iii) upon receipt by Beverly
stockholders of the New Beverly Common Stock in the Distribution. As an
alternative to obtaining the Private Letter Ruling, at Beverly's election,
Beverly and Capstone may request the opinion of Caplin & Drysdale, Chartered or
Ernst & Young LLP to the same effect. Tax opinions are not binding on the IRS or
any court. Receipt of either the Private Letter Ruling or a tax opinion is a
condition to the respective obligations of Beverly and Capstone to consummate
the Merger. See "The Merger -- Conditions to Closing."
It is expected that the Merger will qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Code. Assuming the Merger so
qualifies, (i) the holders of Beverly Common Stock will not recognize gain or
loss upon the receipt of Capstone Common Stock in exchange for their shares of
Beverly Common Stock, (ii) each holder of Beverly Common Stock will carry over
his, her or its tax basis in the Beverly Common Stock (as determined immediately
following the Distribution) to the Capstone Common Stock, (iii) the holding
period for each holder of Beverly Common Stock will carry over to the Capstone
Common Stock, provided that the Beverly Common Stock is held as a capital asset
immediately prior to the Effective Time of the Merger, and (iv) any holder of
Beverly Common Stock receiving cash in lieu of fractional shares will recognize
capital gain or loss (provided the shares of Beverly Common Stock surrendered
are held as capital assets immediately prior to the Effective Time of the
Merger) equal to the difference between the amount of cash received and the
portion of such holder's basis in the shares of Beverly Common Stock allocable
to such fractional share interests, and such capital gain or loss will be
long-term capital gain or loss if the holding period for such shares is more
than one year. See "Certain Tax Considerations."
Beverly and Capstone will also receive, prior to the Effective Time of the
Merger, the opinion of Caplin & Drysdale, Chartered or Ernst & Young LLP to the
effect that: (i) the Merger will qualify as a reorganization within the meaning
of Section 368(a) of the Code; (ii) no gain or loss will be recognized by
Capstone or Beverly as a result of the Merger; and (iii) no gain or loss will be
recognized by Beverly's stockholders upon the receipt of Capstone Common Stock
solely in exchange for Beverly Common Stock in connection with the Merger
(except with respect to cash received in lieu of a fractional interest in
Capstone Common Stock). Tax opinions are not binding on the IRS or any court.
Moreover, the tax opinions are based upon, among other things, certain
representations as to factual matters made by Beverly and Capstone, which
representations, if incorrect or incomplete in certain material respects, would
jeopardize the conclusions reached in the opinions. See "Certain Tax
Considerations."
Effect of the Transactions on Employees and Employee Benefits. Beverly
employees that provide services in connection with the Institutional Pharmacy
Business (together with current and former employees and current and former
independent contractors of the Institutional Pharmacy Business, the "Retained
Employees") are expected to become Capstone employees following the Merger,
while all other Beverly employees
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(together with current and former employees and current and former independent
contractors of the Remaining Healthcare Business, the "Transferred Employees")
are expected to become New Beverly employees following the Distribution.
Capstone will assume liabilities and obligations regarding the Retained
Employees and New Beverly will assume liabilities and obligations regarding the
Transferred Employees, in accordance with an Employee Benefit Matters Agreement
between Beverly, New Beverly and Capstone (the "Employee Benefit Agreement").
Pursuant to the Employee Benefit Agreement, certain adjustments will be made to
shares of Beverly Common Stock underlying options, phantom shares, restricted
shares and performance shares held by Retained Employees and Transferred
Employees, provided that the employees release Beverly, New Beverly and Capstone
from liability under the current Beverly employee benefit plans. Capstone will
assume options or awards covering an aggregate of approximately 750,000 shares
of Beverly Common Stock (prior to the adjustments described above) related to
employee benefits for Retained Employees, in addition to the 50 million shares
to be issued in the Merger. Assuming the closing prices of Beverly Common Stock
and Capstone Common Stock on the applicable adjustment dates are the same as
such prices on May 28, 1997, the parties estimate that approximately 1.1 million
shares of Capstone common stock will be issuable pursuant to the benefits to be
assumed by Capstone. See "Effect of the Transactions on Employees and Employee
Benefits."
Accounting Treatment. The Merger will be accounted for under the purchase
method of accounting and will be treated as a "reverse merger/acquisition" of
Capstone by Beverly (after giving effect to the restructuring and the
Distribution) for accounting and financial reporting purposes. Under this method
of accounting, Beverly will be treated as the acquiring entity and the assets
and liabilities of Capstone will be adjusted to their fair values in accordance
with the purchase method of accounting. As a result, the historical pre-Merger
financial statements of the Surviving Corporation will be those of Beverly's
Institutional Pharmacy Business rather than those of Capstone. See "Unaudited
Pro Forma Combined Condensed Financial Statements" and "Certain Considerations
Related to the Transactions -- Accounting Treatment."
No Appraisal Rights. Neither the holders of Beverly Common Stock nor
Capstone Common Stock will have the right to elect to have the fair value of
their shares judicially appraised and paid to them in cash in connection with
the Distribution or Merger. See "Certain Considerations Related to the
Transactions -- Appraisal Rights."
OTHER MATTERS
Certain Arrangements between Beverly, Capstone, and New Beverly. Pursuant
to the Distribution Agreement, Beverly, Capstone, and New Beverly have agreed to
enter into certain provider agreements and Ancillary Agreements (as defined in
the Distribution Agreement) to separate Beverly's Remaining Healthcare Business
from its Institutional Pharmacy Business, to provide for on-going institutional
pharmacy services by Capstone to New Beverly, and to address matters related to
employee benefits, tax allocations, non-competition and interim services among
the parties. See "Post-Closing Arrangements," "Effect of the Transactions on
Employees and Employee Benefits -- Employee Benefit Agreement," and "Certain Tax
Considerations."
Governmental and Regulatory Matters. The Merger is subject to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and the rules and regulations thereunder, which provide that certain
transactions may not be consummated until required information and material have
been furnished to the Antitrust Division of the Department of Justice (the
"Justice Department") and the Federal Trade Commission (the "FTC") and certain
waiting periods have expired or been terminated. Capstone and Beverly filings of
the required information and material with the Justice Department and the FTC
are expected to be completed on or about June 20, 1997 and the waiting period,
if not extended pursuant to a request for additional information by the FTC or
Justice Department, will terminate on or about July 20, 1997. See "The
Merger -- Conditions to Closing."
Comparative Rights of Stockholders. The rights of Capstone and Beverly
stockholders are governed by the DGCL and the respective Certificates of
Incorporation and Bylaws of Capstone and Beverly. Beverly stockholders are urged
to carefully consider the differences in rights of the stockholders of the two
entities
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arising from differences in the Certificates of Incorporation, including, as to
Capstone, the Amendment being considered under the Amendment Proposal, and
Bylaws. See "Comparative Rights of Stockholders."
Expenses. Each of Capstone, on the one hand, and Beverly and New Beverly,
on the other hand, will incur significant expenses in connection with the
Transactions. The fees and expenses of Beverly and New Beverly are currently
estimated to be approximately $20 million with respect to the Distribution and
approximately $8 million with respect to the Merger. A significant portion of
the estimated Beverly and New Beverly expenses with respect to the Distribution
are expected to arise in connection with restructuring, modifying or replacing
Beverly's existing indebtedness in connection with the Distribution. See
"Unaudited Pro Forma Combined Condensed Financial Statements," "Certain
Considerations Related to the Transactions -- Beverly's Reasons for the Merger;
Recommendation of the Board of Directors of Beverly" and "The Distribution and
Other Pre-Merger Transactions -- Treatment of Indebtedness." Capstone's fees and
expenses related to the Merger are currently estimated to be approximately $10
million. See "Information Concerning Capstone -- Capstone Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources." Either Capstone or Beverly could be required
to pay termination fees and expenses of up to $37 million under certain
circumstances if the Merger is not consummated. See "The Merger -- Expenses;
Termination Fees."
Risk Factors. Capstone and Beverly stockholders should carefully consider
certain risks in evaluating the Merger, the Distribution and related
Transactions. See "Risk Factors."
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COMPARATIVE PER SHARE DATA
The following sets forth certain data concerning the historical net
earnings and book value per share for each of Capstone and PCA, without giving
effect to the Merger; and for Capstone and PCA on a pro forma basis after giving
effect to the issuance of the Merger shares. The information presented below
should be read in conjunction with the unaudited pro forma financial information
and the historical financial statements of Capstone and PCA included elsewhere
in this Joint Proxy Statement/Prospectus. The pro forma equivalent per share
data shows, for each share of Capstone and PCA before the Merger, its equivalent
position after giving effect to the Conversion Number. Beverly stockholders will
receive an aggregate of 50 million shares of Capstone Common Stock in the
Merger. Neither Capstone nor Beverly has declared cash dividends on the Capstone
Common Stock or the Beverly Common Stock, respectively, for the periods
presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------------
PRO FORMA(1)
HISTORICAL ------------------------------------------------------------
---------------- COMBINED EQUIVALENT EQUIVALENT
CAPSTONE PCA CAPSTONE AND PCA PER CAPSTONE SHARE PER PCA SHARE(2)
-------- ----- ---------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
Fully diluted net income per
common and common
equivalent share from
continuing operations...... $0.14 $0.18 $0.14 $0.14 $0.06
Book value per common share
at end of period........... $6.65 $0.93 $6.04 $6.04 $2.66
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------------------------------------------
PRO FORMA(1)
HISTORICAL --------------------------------------------------------
---------------- COMBINED EQUIVALENT EQUIVALENT
CAPSTONE PCA CAPSTONE AND PCA PER CAPSTONE SHARE PER PCA SHARE(2)
-------- ----- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Fully diluted net income per
common and common equivalent
share from continuing
operations.................. $0.07 $0.07 $0.08 $0.08 $0.04
Book value per common share at
end of period............... $7.07 $1.00 $5.95 $5.95 $2.62
</TABLE>
- ---------------
(1) Represents the pro forma effects of the Merger, all of Capstone's
acquisitions made since January 1, 1996, and PCA's acquisition of IPC in
January 1997 as if they had been consummated on January 1, 1996. If the pro
forma impact of Capstone's and PCA's acquisitions were not included, the
combined net income from continuing operations per common and common
equivalent share and the combined book value per common share would have
been $0.15 and $5.87, respectively, for the year ended December 31, 1996 and
$0.08 and $5.95, respectively, for the three months ended March 31, 1997.
(2) Based upon an estimated Conversion Number of .44 of a share of Capstone
Common Stock for each share of Beverly Common Stock outstanding. Such
estimated Conversion Number is based on outstanding shares of Beverly Common
Stock, assumed conversion of Beverly's 5 1/2% Convertible Subordinated
Debentures, assumed vesting of 50% of Beverly's performance shares and
assumed exercise of Beverly options with an exercise price below the current
fair market value of Beverly Common Stock.
13
<PAGE> 34
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF CAPSTONE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary financial information for Capstone for the year ended
December 31, 1996, the ten months ended December 31, 1995, and the years ended
February 28, 1995, 1994, and 1993 has been derived from Capstone's audited
consolidated financial statements contained in its annual reports on Form 10-K
for the periods then ended and is qualified in its entirety by such documents.
The summary financial information of Capstone for the three months ended March
31, 1997 and 1996 has been derived from unaudited consolidated financial
statements contained in the quarterly report on Form 10-Q for the three months
ended March 31, 1997 and is qualified in its entirety by such document which, in
the opinion of Capstone's management, includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of such
information for the unaudited interim periods. The operating results for the
three months ended March 31, 1997 are not necessarily indicative of results for
the full calendar year ending December 31, 1997. This information should be read
in conjunction with "Information Concerning Capstone -- Capstone Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Capstone Consolidated Financial Statements, related notes and other Capstone
financial information included in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED TEN MONTHS
MARCH 31, YEAR ENDED ENDED YEAR ENDED FEBRUARY 28,
--------------------- DECEMBER 31, DECEMBER 31, ---------------------------
1997 1996 1996 1995 1995 1994 1993
--------- --------- ------------ ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales............. $ 69,024 $22,028 $144,398 $48,841 $43,608 $51,254 $39,555
Gross profit.......... 30,334 8,452 58,866 18,187 15,638 18,813 15,434
Income (loss) from
continuing
operations.......... 2,454 286 3,365 (645) (10,781) (521) (1,351)
Fully diluted income
(loss) from
continuing
operations per
share............... 0.07 0.02 0.14 (0.05) (1.67) (0.08) (0.22)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, FEBRUARY 28,
--------------------- --------------------------- ---------------------------
1997 1996 1996 1995 1995 1994 1993
--------- --------- ------------ ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Working capital....... $ 75,285 $20,102 $ 56,182 $10,814 $ 5,909 $ 1,932 $ 1,520
Total assets.......... 348,718 67,565 271,001 42,131 19,212 24,360 26,717
Long-term debt, less
current portion..... 84,698 24,969 39,166 2,692 7,650 2,358 1,506
Stockholders'
equity.............. 237,899 32,025 204,746 26,840 4,778 8,316 9,077
</TABLE>
14
<PAGE> 35
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF PCA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary consolidated statement of operations data and summary
consolidated balance sheet data for the years ended and as of December 31, 1996,
1995 and 1994 have been derived from the audited consolidated financial
statements of PCA and should be read in conjunction with the financial
statements and notes thereto included herein. The summary consolidated statement
of operations and balance sheet data for the years ended and as of December 31,
1993 and 1992 have been derived from PCA's internal records. The summary
consolidated statement of operations and balance sheet data for the three months
ended and as of March 31, 1997 and 1996 have been derived from the unaudited
condensed consolidated financial statements of PCA and should be read in
conjunction with those financial statements and related notes thereto included
herein. The December 31, 1993 and 1992 financial statement data, and the March
31, 1997 and 1996 financial statement data, in the opinion of PCA's management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information for the unaudited periods.
Operating results for the three months ended March 31, 1997 are not necessarily
indicative of results that may be expected for the full calendar year ending
December 31, 1997. This information should be read in conjunction with
"Information Concerning PCA -- PCA Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the PCA Consolidated
Financial Statements, related notes and other PCA financial information included
in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net operating
revenues............. $147,592 $124,376 $516,400 $451,685 $247,512 $201,670 $174,331
Gross profit............ 67,505 58,704 235,932 208,924 130,467 111,408 95,844
Costs and expenses...... 54,101 48,494 200,977 198,361 105,118 86,052 74,193
Income before provision
for income taxes..... 13,404 10,210 34,955 10,563 25,349 25,356 21,651
Net income.............. 7,828 5,926 20,287 4,586 15,058 15,075 13,055
Consolidated Balance Sheet
Data:
Working capital......... 97,331 80,133 92,134 77,512 71,794 24,537 19,754
Total assets............ 466,683 422,224 441,576 428,872 327,287 69,443 58,441
Due to Parent........... 326,343 312,365 312,395 318,610 225,006 7,267 12,446
Stockholder's equity.... 99,433 77,245 91,605 71,318 66,732 51,674 36,598
</TABLE>
15
<PAGE> 36
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary unaudited pro forma combined statements of income for
the year ended December 31, 1996 and the three months ended March 31, 1997 are
based on the respective historical financial statements of Capstone and PCA
adjusted to give effect to (i) the Merger, and (ii) all of the acquisitions made
by Capstone since January 1, 1996, and PCA's acquisition of IPC in January 1997
as though they occurred on January 1, 1996. The summary unaudited pro forma
balance sheet data at March 31, 1997 gives effect to (i) the Merger, and (ii)
all of the acquisitions made by Capstone since March 31, 1997 as if they
occurred on that date. Anticipated efficiencies from the combined businesses are
not fully determinable and therefore have been excluded from the pro forma
financial data. The summary unaudited pro forma financial data are not
necessarily indicative of the operating results that would have been achieved
had the Merger and Capstone's and PCA's acquisitions been consummated as of
January 1, 1996, nor are they necessarily indicative of future operating
results. The summary unaudited pro forma financial data should be read in
conjunction with the historical financial statements of Capstone and PCA,
related notes and other financial information included in this Joint Proxy
Statement/Prospectus:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
Income Statement Data:
Net operating revenues.............................. $220,858 $813,691
Income from operations.............................. 18,167 44,650
Income from continuing operations................... 6,995 11,642
Fully diluted earnings per share.................... 0.08 0.14
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
<S> <C> <C>
Balance Sheet Data:
Working capital..................................... $162,012
Total assets........................................ 937,589
Long term obligations, excluding current portion.... 364,115
Total stockholders' equity.......................... 497,548
</TABLE>
16
<PAGE> 37
RISK FACTORS
Stockholders of Beverly and Capstone should carefully consider the
following matters, together with the other information contained in this Joint
Proxy Statement/Prospectus, in evaluating the Transactions and before making an
investment decision with respect to the shares of Capstone Common Stock offered
hereby.
INTEGRATION OF PCA. Combining PCA with Capstone will more than double the
number of beds served by Capstone, the number of Capstone employees, and
Capstone's net sales. The integration of PCA is particularly critical to
Capstone's success. Potential obstacles to successful integration include, but
are not limited to: retaining and integrating the Surviving Corporation's
management team; consolidating pharmacies; containing costs; achieving operating
efficiencies; consolidating departmental functions; achieving purchasing
efficiencies; consolidating management information systems; coordinating field
managerial activities with corporate management; retaining and expanding the
customer base of the Surviving Corporation; introducing new products and
services to existing facilities; and adding and integrating key personnel. There
can be no assurance that PCA will be integrated successfully into Capstone's
operations, or that the business combination will not have a material adverse
effect upon the Surviving Corporation's results of operations, financial
condition, or prospects. In addition, there can be no assurance that PCA will
achieve net sales and earnings that justify Capstone's investment therein or
expenses related to the Merger. See "Information Concerning Capstone" and
"Information Concerning PCA."
DEPENDENCE ON NEW BEVERLY. Net revenues from Beverly facilities were
approximately 17%, 16%, 16%, and 31% of total net revenues of PCA for the three
months ended March 31, 1997 and the years ended December 31, 1996, 1995, and
1994, respectively. In addition, net revenues from patients in Beverly
facilities (including revenues pursuant to government reimbursement programs)
were approximately 16%, 15%, 20% and 32%, for the three months ended March 31,
1997 and the years ended December 31, 1996, 1995 and 1994, respectively. See
footnote 9 to the PCA Financial Statements included herein. On a pro forma
basis, after giving effect to the Transactions, New Beverly and its patients
would have accounted for approximately 20% of total combined net revenues of
Capstone and PCA for the year ended December 31, 1996. Beverly and Capstone have
agreed to negotiate agreements to provide for the delivery of pharmacy services
and products and ancillary services and products by Capstone to New Beverly's
long-term care facilities after the effective date of the Merger. However, such
agreements will contain provisions allowing for their termination under certain
circumstances, and there can be no assurance that after the Merger such
agreement or agreements will not be terminated at some future date. Any material
loss of business from New Beverly would have a material adverse effect on
Capstone's future operations. See "Post-Closing Arrangements -- Terms of the
Preferred Provider Agreements."
GROWTH STRATEGY. Capstone has experienced rapid growth since 1995
primarily as a result of acquiring institutional pharmacy businesses. Capstone
intends to continue its growth strategy following the Merger. Capstone's
successful implementation of its growth strategy depends upon its ability to
identify, consummate and integrate acquisitions and attract and retain qualified
personnel. The Surviving Corporation will compete for acquisition candidates
with buyers who may have greater financial and other resources and may be able
to pay higher acquisition prices than the Surviving Corporation. No assurance
can be given that the Surviving Corporation will be able to identify suitable
acquisition candidates or to consummate acquisitions on terms acceptable to it.
To the extent that the Surviving Corporation is unable to acquire institutional
pharmacy companies, or to integrate such acquisitions successfully, its ability
to expand its business would be reduced significantly. In order to implement its
growth strategy, the Surviving Corporation will require substantial capital
resources and will need to incur, from time to time, additional bank
indebtedness. The Surviving Corporation also may need to issue equity or debt
securities, in public or private transactions, the terms of which will depend on
market and other conditions. There can be no assurance that any such additional
financing will be available on terms acceptable to the Surviving Corporation, if
at all. As a result, the Surviving Corporation may not be able to continue
implementing fully its growth strategy. See "Information Concerning
Capstone -- Capstone Management's Discussion and Analysis of Financial Condition
and Results of Operations."
ASSUMPTION OF INDEBTEDNESS. Prior to the Distribution, PCA will be
required to repay to Beverly $275 million of intercompany indebtedness (the
"Assumed Pharmacy Indebtedness") plus interest thereon,
17
<PAGE> 38
equal to 9% per annum for the period between April 15, 1997 and the Distribution
Date (the "Accrued Interest Cost") and will need to incur bank indebtedness to
do so. Capstone will assume such bank debt in connection with the Merger. At
March 31, 1997, on a pro forma basis and after giving effect to the Merger and
the assumption of the PCA indebtedness, Capstone would have had approximately
$369 million of total indebtedness outstanding. Capstone intends to replace its
existing credit facility concurrently with closing the Merger in order to
refinance existing debt and expand the availability of funding for future
acquisitions and working capital. The Surviving Corporation's increased leverage
could have material consequences to holders of the Surviving Corporation's
Common Stock, including, without limitation, (i) the cost of obtaining future
financing may be increased and the ability to obtain such financing may be
impaired, (ii) a significant portion of the Surviving Corporation's earnings may
be dedicated to paying interest on its indebtedness thereby decreasing the
Surviving Corporation's flexibility in its operations, (iii) greater exposure to
interest rate fluctuations, and (iv) restrictive covenants associated with such
increased leverage may limit the Surviving Corporation's financial flexibility,
including its ability to consummate acquisitions. See "Unaudited Pro Forma
Combined Condensed Financial Statements," "Information Concerning
Capstone -- Capstone Selected Historical Consolidated Financial Data," and
"-- Capstone Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources."
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS. Capstone and PCA
derive, directly or indirectly, a majority of their net sales from
government-sponsored reimbursement programs. The Surviving Corporation's net
sales and profitability will be affected by the efforts of all payors to
continue to reduce the costs of healthcare by lowering reimbursement rates,
narrowing the scope of covered services, increasing case management review of
services, and negotiating reduced contract pricing. Any changes in reimbursement
levels under Medicare, Medicaid, or private pay programs, including managed care
contracts, could have a material adverse effect on the Surviving Corporation's
results of operations, financial condition and prospects. Changes in the mix of
patients among Medicare, Medicaid and different types of private pay sources may
adversely affect the Surviving Corporation's net sales and profitability. See
"Information Concerning Capstone -- Capstone Business -- Government Regulation"
and "Information Concerning PCA -- PCA Business -- Government Regulation."
HEALTHCARE REFORM. The healthcare industry is subject to changing
political, economic and regulatory influences that may affect the institutional
pharmacy industry. In recent years, several comprehensive national healthcare
reform proposals were introduced in the United States Congress. While none of
the proposals were adopted, healthcare reform may again be addressed by the
United States Congress. Several states also are considering healthcare reforms
through Medicaid managed care demonstration projects. Although these projects
generally exempt institutional pharmacy services and long-term care facilities,
no assurance can be given that such projects or other proposals will not change
the Medicaid reimbursement system in a manner that would affect the Surviving
Corporation's operations. Capstone and PCA cannot predict which, if any, federal
or state modifications or reform proposals will be adopted, when they may be
adopted or what their impact on the Surviving Corporation may be if adopted.
There can be no assurance that the adoption of certain modifications or
proposals will not have a material adverse effect on the Surviving Corporation's
results of operations, financial condition or prospects. See "Information
Concerning Capstone -- Capstone Business" and "Information Concerning PCA -- PCA
Business."
CHANGES IN MANAGEMENT. Upon consummation of the Merger, the management of
PCA and Capstone will be combined and some officers of Capstone, including its
chief executive officer, will not be officers of the Surviving Corporation.
There can be no assurance that the Surviving Corporation will be managed
consistent with past practices. The executive offices of Capstone and PCA will
be centralized upon consummation of the Merger, requiring relocation of some or
all of the combined management team. There can be no assurances that Capstone or
PCA will retain the members of the combined management team or that the combined
management team will be as effective as the former management teams of Capstone
or PCA. See "Certain Considerations Related to the Transactions -- Directors and
Officers of Capstone Following the Merger."
ROLE OF MANAGED CARE. As managed care assumes an increasing role in the
healthcare industry, the Surviving Corporation's future success will, in part,
be dependent on obtaining and retaining managed care contracts. Competition for
such contracts is intense and, in most cases, will require the Surviving
Corporation
18
<PAGE> 39
to compete based on breadth of services offered, pricing, ability to track and
report patient outcomes and cost data and provision of value-added pharmacy
consulting services, among other factors. In addition, reimbursement rates under
managed care contracts typically are lower than those paid by other private
third-party payors. There can be no assurance that the Surviving Corporation
will retain or continue to obtain such managed care contracts or that the
managed care contracts it obtains will be on terms as favorable to Capstone as
those of its current managed care and other contracts. See "Information
Concerning Capstone -- Capstone Business" and "Information Concerning PCA -- PCA
Business."
COMPETITION. The long-term care pharmacy markets in which Capstone and PCA
operate are fragmented. Competition in such markets comes from both small to
mid-size local operators and regional and national operators. Capstone's
competition in the correctional pharmacy market comes primarily from other large
providers. Management believes that the primary competitive factor in its
industry is breadth and quality of service. Additional competitive factors
include reputation, ease of doing business with the specific providers, ability
to develop and to maintain relationships with general medical contractors, and
competitive pricing. Some of the present and potential competitors are, or may
become, larger than the Surviving Corporation and have, or may obtain, greater
financial and marketing resources. See "Information Concerning Capstone --
Capstone Business -- Competition" and "Information Concerning PCA -- PCA
Business -- Competition."
GOVERNMENT REGULATION. Capstone and PCA are subject to extensive federal,
state and local regulation. Federal laws governing both companies' activities
include regulations covering the repackaging, storing and dispensing of drugs,
Medicare reimbursement, and certain financial relationships with physicians and
other healthcare providers. Both companies are subject to state laws governing
Medicaid, professional training, pharmacy licensure, payment in exchange for
patient referrals and the dispensing and storage of pharmaceuticals. The
pharmacies operated by Capstone and PCA must comply with all applicable laws,
regulations and licensing standards. Many of Capstone's employees must maintain
certain licenses in order to provide services. The long-term care facilities
which contract for pharmacy services are also subject to federal and state
regulations and are required to be licensed in the states in which they are
located. The failure by these institutions to comply with such regulations or to
obtain or renew any required licenses could result in the loss of the Surviving
Corporation's ability to provide pharmacy services to their residents. There can
be no assurance that federal, state or local governments will not change
existing standards or impose additional standards, compliance with which may
require the Surviving Corporation to incur additional expense. Any significant
additional expense incurred in connection with such compliance or any failure to
comply with existing or future standards could have a material adverse effect
upon the Surviving Corporation's results of operations, financial condition or
prospects. See "Information Concerning Capstone -- Capstone Business --
Government Regulation" and "Information Concerning PCA -- PCA
Business -- Government Regulation."
INFLUENCE OF COUNSEL CORPORATION AND BEVERLY. Following the completion of
the Transactions, it is anticipated that Counsel Corporation, an Ontario
corporation ("Counsel"), will beneficially own approximately 9.4% of the
outstanding Surviving Corporation's Common Stock. As a result, Counsel will be
able to exert a certain level of influence over the Surviving Corporation and
could sell shares beneficially held by it in a manner adverse to other
stockholders of Capstone. See "Information Concerning Capstone -- Principal
Stockholders of Capstone." The Board of Directors of Capstone is currently
composed of nine directors, four of whom are nominated by Counsel. Upon the
consummation of the Merger, the Merger Agreement provides for the membership of
the Surviving Corporation's Board of Directors to be increased to ten members,
of which Beverly shall have the right initially to designate five of such
members and Capstone shall have the right initially to designate five of such
members. One or more of the members initially appointed by Capstone will be an
affiliate of or appointed on behalf of Counsel, and one or more of the members
initially appointed by Beverly will be an affiliate of Beverly. In addition, the
Merger Agreement provides for the amendment of the Certificate of Incorporation
of Capstone to provide, among other matters, that (i) the Board of Directors of
Capstone be divided into three classes each of which shall consist, as nearly as
may be possible, of one-third of the number of directors constituting the Board
of Directors, with each class to stand for re-election in each successive year,
and (ii) special meetings of the Capstone stockholders may be called only by a
majority of the Board of Directors or by the holders of not less than 25% of all
shares entitled to vote at such meeting, and (iii) the business transacted at
any special meeting of the Capstone stockholders be confined to the business
19
<PAGE> 40
stated in the notice of such special meeting given to the Capstone stockholders.
See "Certain Considerations Related to the Transactions -- Directors and
Officers of Capstone Following the Merger" and "Other Capstone
Proposals -- Amendment to Certificate of Incorporation."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL EFFECT ON PRICE OF CAPSTONE
COMMON STOCK. The market price of the Capstone Common Stock could be adversely
affected by the sale of substantial amounts of Capstone Common Stock in the
public market. As of May 28, 1997, there were 34,005,266 shares of Capstone
Common Stock outstanding. Upon the completion of the Transactions, an additional
50 million shares of Capstone Common Stock will be issued to Beverly
stockholders in exchange for their Beverly Common Stock. As a result, Capstone
Common Stock may experience price volatility following the Transactions until
trading values become established. There can be no assurance as to the price at
which Capstone Common Stock will trade following the consummation of the
Transactions.
In addition, Capstone has issued 16,049,936 shares of Capstone Common Stock
and warrants covering 4,571,540 shares of Capstone Common Stock in connection
with acquisitions and in private placements. The 20,621,476 shares, including
the shares underlying the Warrants, were registered under prior Capstone
registration statements on Form S-3 and are generally freely tradable. Sales of
substantial amounts of Capstone Common Stock in the public market following the
Merger, or the perception that such sales could occur, could adversely affect
prevailing market prices of the Capstone Common Stock and could impair the
future ability of Capstone to raise capital through the sale of its equity
securities. Capstone is unable to predict the effect, if any, that future sales
of Capstone Common Stock or the availability of Capstone Common Stock for sale
may have on the market price of the Capstone Common Stock prevailing from time
to time.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS. Certain members of
Beverly's and Capstone's management and the Beverly and Capstone Board of
Directors may be deemed to have interests in the Transactions in addition to
their interests as Beverly and Capstone stockholders generally, which may cause
potential conflicts of interest. The Boards of Directors of Beverly and Capstone
were aware of these factors and considered them, among other factors, in
approving the Transactions. Among these factors are, as to Beverly, (i) the
acceleration of the vesting of currently unvested Beverly options and other
stock incentive awards as a result of the consummation of the Merger, (ii) the
treatment of Beverly options and other stock incentive awards in the
Distribution and the Merger, (iii) the indemnification provisions of the Merger
Agreement and Distribution Agreement, (iv) the payment by Capstone of a portion
of the premiums for directors' and officers' liability insurance for current
Beverly directors and officers, (v) the designation of certain directors and
executive officers of Beverly as directors or executive officers of New Beverly
and/or Capstone, (vi) cash payments as a result of the early termination of
certain incentive compensation plans of Beverly, and (vii) payment of fees to
Stephens Inc., with which a Beverly director is affiliated. In addition, the
financial advisors rendering opinions to Beverly regarding the fairness of the
Merger from a financial point of view will receive fees in connection with
rendering such opinions. Among these factors are, as to Capstone, (i) the
continuation of certain directors and officers of Capstone in their current
positions, and (ii) payment of fees to Adirondack, an affiliate of a Capstone
director, in connection with the Transactions. See "Certain Considerations
Related to the Transactions -- Opinion of Beverly's Financial Advisors,"
"-- Directors and Officers of Capstone Following the Merger," and "-- Interests
of Certain Persons in the Transactions."
FIXED EXCHANGE OF SHARES. The Merger Agreement provides that upon
consummation of the Merger, all of the outstanding shares of Beverly Common
Stock will be exchanged for 50 million shares of Capstone Common Stock. Since
the number of shares of Beverly Common Stock outstanding at the time of the
Merger may be greater than the number of shares outstanding at the date of the
Beverly Special Meeting, each share of Beverly Common Stock may be exchanged for
a smaller portion of the 50 million shares of Capstone Common Stock than would
have occurred if the exchange took place on the date of the Beverly Special
Meeting. Since the price of Beverly Common Stock or Capstone Common Stock at the
time of the Merger may vary from the price as of the date on which the Merger
Agreement was executed or the date of the Beverly Special Meeting or Capstone
Special Meeting due to changes in the business, operations and prospects of
Beverly and Capstone, general market and economic conditions, or other factors,
the market value of the shares of Capstone Common Stock which holders of the
Beverly Common Stock will receive in
20
<PAGE> 41
the Merger may be greater or less than the market value of such Beverly or
Capstone Common Stock as of any prior date. See "The Merger -- General."
TAX TREATMENT OF THE TRANSACTIONS. The Transactions have been structured
as a "Morris Trust" transaction in order to qualify as a tax-free reorganization
under Section 368 of the Code. New Beverly is responsible for the tax liability
of Beverly or Capstone (as successor to Beverly) resulting from the failure to
qualify for such treatment. Beverly has requested the Private Letter Ruling from
the IRS to confirm, among other things, the tax treatment of the Transactions.
As an alternative to the Private Letter Ruling, at Beverly's election, the
parties may receive an opinion of either Caplin & Drysdale, Chartered or Ernst &
Young LLP covering substantially the same issues. Such an opinion is not binding
on the IRS or any court and is based on certain representations as to factual
matters made by Beverly and Capstone that, if incorrect or incomplete, would
jeopardize the conclusions reached in the opinion. There can be no assurance
that a private letter ruling will be obtained or, if a tax opinion is received
in lieu of a private letter ruling, that such opinion will protect Beverly,
Capstone, the Surviving Corporation or New Beverly from the potential tax
liability associated with the failure to qualify for the desired tax treatment.
In addition, Congress is contemplating certain legislation that, if enacted,
would limit the availability of tax-free reorganization treatment in "Morris
Trust" transactions. As currently drafted, this legislation would not impact the
tax treatment of the Transactions but there can be no assurance that any
legislation adopted would not have a negative impact on the financial condition,
results of operations and cash flow of New Beverly. See "Certain Tax
Considerations."
LIABILITY AND ADEQUACY OF INSURANCE. The provision of healthcare services
entails an inherent risk of liability. Capstone currently maintains product and
professional liability insurance intended to cover such claims in amounts which
it believes are consistent with industry standards. Following the Effective
Time, the Surviving Corporation will be responsible for providing such insurance
coverage as it may deem appropriate with respect to the assets and business of
the Institutional Pharmacy Business. Capstone and Beverly have agreed to use
their joint best efforts to obtain a commitment for retroactive insurance
coverage with respect to both known liabilities and unreported losses prior to
the Effective Time that are related to the Institutional Pharmacy Business.
Capstone has agreed that at the Effective Time, it will, at its expense, cause
such retroactive insurance coverage to be in effect for the Surviving
Corporation. There can be no assurance that claims in excess of the insurance
coverage or claims not covered by insurance will not arise. A successful claim
in excess of its insurance coverage could have a material adverse effect upon
the Surviving Corporation's results of operations, financial condition and
future prospects. Claims, regardless of their merit or eventual outcome, may
also have a material adverse effect upon the Surviving Corporation's ability to
attract customers, to maintain its insurance policies or to expand its business.
There can be no assurance that the Surviving Corporation will be able to obtain
adequate liability insurance coverage in the future on acceptable terms, if at
all. See "Post-Closing Arrangements -- Indemnification and Insurance" and
"Information Concerning Capstone -- Capstone Business."
RISKS RELATING TO THE DISTRIBUTION. Beverly stockholders should also
consider certain risks relating to New Beverly and the Distribution. See "Risk
Factors" in the New Beverly Prospectus.
21
<PAGE> 42
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed statements of income
give effect to the Merger and all acquisitions made by Capstone since January 1,
1996 and PCA's acquisition of IPC on January 1, 1997 as though such acquisitions
occurred on January 1, 1996. The unaudited pro forma combined condensed balance
sheet at March 31, 1997 gives effect to the Merger and the acquisitions made by
Capstone since March 31, 1997 as if they occurred on March 31, 1997. This pro
forma information has been prepared utilizing the audited historical
consolidated financial statements of Capstone and PCA for the year ended
December 31, 1996 and unaudited historical condensed consolidated financial
statements of Capstone and PCA for the three months ended March 31, 1997. This
information should be read in conjunction with the historical financial
statements and notes thereto of Capstone and PCA, which appear elsewhere herein.
Reference is also made to the unaudited pro forma condensed financial statements
appearing in the New Beverly Prospectus reflecting the spin-off of New Beverly
from Beverly. The pro forma financial data are provided for comparative purposes
only and are not necessarily indicative of the results which would have occurred
had the acquisitions or the Transactions been consummated on January 1, 1996,
nor are they necessarily indicative of future results.
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------
ACQUISITION MERGER
CAPSTONE PCA ADJUSTMENTS(1) ADJUSTMENTS(2) TOTAL
-------- -------- -------------- -------------- --------
<S> <C> <C> <C> <C> <C>
Net operating revenues.................. $144,398 $516,400 $152,893 $ -- $813,691
Cost of goods sold...................... 85,532 280,468 84,695 -- 450,695
-------- -------- -------- -------- --------
Gross profit............................ 58,866 235,932 68,198 -- 362,996
Operating expenses:
Selling, general and administrative.... 46,838 184,751 53,642 -- 285,231
Depreciation and amortization.......... 4,634 16,392 6,292 2,972(3) 30,290
Restructuring charges.................. 2,825 -- -- -- 2,825
-------- -------- -------- -------- --------
Total operating expenses......... 54,297 201,143 59,934 2,972 318,346
-------- -------- -------- -------- --------
Income from operations.................. 4,569 34,789 8,264 (2,972) 44,650
Non-operating expense, net:
Acquisition financing fees and
expenses............................. 4,574 -- -- -- 4,574
Interest, net.......................... 1,900 (166) 4,859 17,055(4) 23,648
Other (income) expense, net............ (149) -- 177 -- 28
-------- -------- -------- -------- --------
Total non-operating expenses,
net............................ 6,325 (166) 5,036 17,055 28,250
-------- -------- -------- -------- --------
Income (loss) before provision for
(benefit from) income taxes............ (1,756) 34,955 3,228 (20,027) 16,400
Provision for (benefit from) income
taxes.................................. (5,121) 14,668 2,033 (6,822)(5) 4,758
-------- -------- -------- -------- --------
Income from continuing operations....... $ 3,365 $ 20,287 $ 1,195 $(13,205) $ 11,642
======== ======== ======== ======== ========
Per share data (primary)(6):
Earnings per share from continuing
operations........................... $ 0.15 $ 0.14
======== ========
Weighted average shares outstanding.... 22,917 13,022 50,000 85,939
======== ======== ======== ========
Per share data (fully diluted)(6):
Earnings per share from continuing
operations........................... $ 0.14 $ 0.14
======== ========
Weighted average shares outstanding.... 23,215 13,022 50,000 86,237
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
----------------------------------------------------------------
ACQUISITION MERGER
CAPSTONE PCA ADJUSTMENTS(1) ADJUSTMENTS(2) TOTAL
-------- -------- -------------- -------------- --------
<S> <C> <C> <C> <C> <C>
Net operating revenues.................. $69,024 $147,592 $ 4,242 $ -- $220,858
Cost of goods sold...................... 38,690 80,087 2,610 -- 121,387
-------- -------- -------- -------- --------
Gross profit............................ 30,334 67,505 1,632 -- 99,471
Operating expenses:
Selling, general and administrative.... 22,926 49,229 1,096 -- 73,251
Depreciation and amortization.......... 2,357 4,826 127 743(3) 8,053
-------- -------- -------- -------- --------
Total operating expenses......... 25,283 54,055 1,223 743 81,304
-------- -------- -------- -------- --------
Income from operations.................. 5,051 13,450 409 (743) 18,167
Interest, net........................... 1,156 46 326 4,328(4) 5,856
-------- -------- -------- -------- --------
Income before provision for income
taxes.................................. 3,895 13,404 83 (5,071) 12,311
Provision for income taxes.............. 1,441 5,576 30 (1,731)(5) 5,316
-------- -------- -------- -------- --------
Income from continuing operations....... $ 2,454 $ 7,828 $ 53 $ (3,340) $ 6,995
======== ======== ======== ======== ========
Per share data (primary)(6):
Earnings per share from continuing
operations........................... $ 0.07 $ 0.08
======== ========
Weighted average shares outstanding.... 36,684 50,000 86,684
======== ======== ========
Per share data (fully diluted)(6):
Earnings per share from continuing
operations........................... $ 0.07 $ 0.08
======== ========
Weighted average shares outstanding.... 36,916 50,000 86,916
======== ======== ========
</TABLE>
22
<PAGE> 43
NOTES TO PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF INCOME
(1) Represents the pro forma effects of all acquisitions made by Capstone since
January 1, 1996 as though they occurred on January 1, 1996, and the pro
forma effect of the acquisition of IPC by PCA on January 1, 1997 as though
it occurred on January 1, 1996. The table below summarizes the pro forma
effects of these acquisitions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 THREE MONTHS ENDED MARCH 31, 1997
-------------------------------------- ------------------------------------
CAPSTONE PCA CAPSTONE PCA
ACQUISITIONS ACQUISITION TOTAL ACQUISITIONS ACQUISITION TOTAL
------------ ------------ -------- ------------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues.................. $135,454 $17,439 $152,893 $4,242 -- $4,242
Cost of goods sold...................... 74,321 10,374 84,695 2,610 -- 2,610
-------- ------- -------- ------ -------- ------
Gross profit............................ 61,133 7,065 68,198 1,632 -- 1,632
Income from operations.................. 8,216 48 8,264 409 -- 409
Non-operating expenses, net............. 4,952 84 5,036 326 -- 326
-------- ------- -------- ------ -------- ------
Income (loss) before provision for
(benefit from) income taxes........... 3,264 (36) 3,228 83 -- 83
Net income (loss)....................... $ 1,217 $ (22) $ 1,195 $ 53 -- $ 53
======== ======= ======== ====== ======== ======
</TABLE>
(2) Represents the pro forma effects of the Merger as though it occurred on
January 1, 1996.
(3) Represents amortization associated with the excess of purchase price over
the estimated fair value of net assets acquired in the Merger calculated on
a straight line basis over 40 years.
(4) Represents interest expense on borrowings under a new bank credit facility
to be entered into in conjunction with the Merger using an expected annual
interest rate of six month LIBOR plus 50 basis points during the respective
periods, and amortization, over the expected five-year term of such bank
credit facility, of approximately $1.5 million of deferred financing costs
expected to be incurred in conjunction with such borrowings. Borrowings
under the new bank credit facility are expected to initially include $275
million to partially repay PCA's intercompany balance to Beverly. If the
LIBOR rate were to increase by 1/2%, pro forma interest expense would
increase by approximately $1,375,000 and $344,000, respectively, for the
year ended December 31, 1996 and the three months ended March 31, 1997.
(5) Represents the tax effect on pro forma adjustments, excluding the adjustment
related to amortization of nondeductible goodwill generated in the Merger,
using a 40% statutory tax rate.
(6) Pro forma earnings per share and weighted average shares outstanding are
based upon historical Capstone Common Stock and common stock equivalents
adjusted for common stock issued in conjunction with Capstone's acquisitions
since January 1, 1996, and the conversion of shares of Beverly Common Stock
into 50 million shares of Capstone Common Stock.
23
<PAGE> 44
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUISITION MERGER
CAPSTONE PCA ADJUSTMENTS(1) ADJUSTMENTS TOTAL
-------- -------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......... $ 10,308 $ 5,671 $ (106) $ (1,500)(2) $ 14,373
Accounts receivable, less
allowance for doubtful
accounts....................... 63,402 100,696 1,258 -- 165,356
Notes and other receivables, less
allowance for doubtful
accounts....................... -- 1,297 -- -- 1,297
Inventories....................... 18,135 23,682 91 -- 41,908
Prepaid expenses and other........ 6,753 424 (7) -- 7,170
-------- -------- ------ --------- --------
Total current assets...... 98,598 131,770 1,236 (1,500) 230,104
Property and equipment, net......... 12,130 34,579 135 -- 46,844
Other assets:
Goodwill, net..................... 236,024 288,086 1,944 18,000(3) 644,927
100,873(4)
Systems development, net.......... -- 4,891 -- -- 4,891
Other, net........................ 1,966 7,357 -- 1,500(2) 10,823
-------- -------- ------ --------- --------
Total other assets........ 237,990 300,334 1,944 120,373 660,641
-------- -------- ------ --------- --------
Total assets.............. $348,718 $466,683 $3,315 $ 118,873 $937,589
======== ======== ====== ========= ========
Current liabilities:
Accounts payable and accrued
expenses....................... $ 17,860 $ 27,396 $ 340 $ -- $ 45,596
Other accrued liabilities......... 2,007 5,965 -- 10,000(3) 17,972
Current portion of long-term
obligations.................... 3,446 1,078 -- -- 4,524
-------- -------- ------ --------- --------
Total current
liabilities............. 23,313 34,439 340 10,000 68,092
Long term obligations............... 84,698 1,442 2,975 275,000(2) 364,115
Other liabilities and deferred
items............................. 2,808 -- -- -- 2,808
Deferred income taxes payable....... -- 5,026 -- -- 5,026
Due to Parent....................... -- 326,343 -- (326,343)(2) --
-------- -------- ------ --------- --------
Total liabilities......... 110,819 367,250 3,315 (41,343) 440,041
Stockholders' equity:
Common stock...................... 337 1 -- 500(5) 837
(337)(4)
336(6)
Additional paid-in capital........ 244,264 3,866 -- (500)(5) 401,145
(244,264)(4)
(336)(6)
338,772(4)
8,000(3)
51,343(2)
Retained earnings (accumulated
deficit)....................... (6,702) 95,566 -- 6,702(4) 95,566
-------- -------- ------ --------- --------
Total stockholders'
equity.................. 237,899 99,433 -- 160,216 497,548
-------- -------- ------ --------- --------
Total liabilities and
stockholders' equity.... $348,718 $466,683 $3,315 $ 118,873 $937,589
======== ======== ====== ========= ========
</TABLE>
24
<PAGE> 45
NOTES TO PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
(1) Represents the pro forma effects of all acquisitions made by Capstone since
March 31, 1997 as though they occurred on March 31, 1997.
(2) Represents the net effects of: (i) borrowings of $275 million under a new
bank credit facility to be entered into in conjunction with the Merger, with
the proceeds used to repay PCA's "Due to Parent" balance; (ii) eliminating
the remaining "Due to Parent" balance as a contribution to capital; and
(iii) recording deferred financing costs incurred in conjunction with the
new bank credit facility.
(3) Represents the recording of estimated Merger costs, as follows:
<TABLE>
<S> <C>
PCA's estimated Merger costs to be capitalized
into the purchase price (in thousands):
Investment banker fees................ $ 5,200
Professional fees and other
Merger-related costs............... 2,800
-------
8,000
-------
Capstone's Merger costs (assuming none
of such costs are deductible for tax
purposes) to be recognized in the
operations of Capstone prior to the
Merger (in thousands):
Investment banker fees................ 4,000
Professional fees..................... 2,500
Other Merger-related costs............ 3,500
-------
10,000
-------
Total estimated Merger
costs........................ $18,000
=======
</TABLE>
(4) Represents the reverse merger/acquisition of Capstone by Beverly (after
giving effect to the restructuring and the Distribution) based upon
Capstone's 33,666,814 shares of outstanding common stock as of March 31,
1997, valued at the average closing price for the five-day period from April
14 through April 18 of $10.0625, and the elimination of Capstone's net
assets.
The components of the purchase price are presented below (in thousands):
<TABLE>
<S> <C>
Fair value of Capstone Common Stock..... $338,772
Estimated PCA Merger cost............... 8,000
--------
Total purchase cost........... 346,772
Historical book value of Capstone....... 237,899
Adjustment of historical book value of
net assets of Capstone................ (10,000)
--------
Purchase adjusted value of net
assets............................. 227,899
--------
Excess of purchase price over the
estimated fair value of net assets
acquired.............................. 118,873
Less: Estimated Merger costs recorded as
part of footnote (3) above............ (18,000)
--------
Remaining purchase price adjustment to
be recorded........................ $100,873
========
</TABLE>
(5) Represents the issuance of 50 million shares of Capstone Common Stock.
(6) Represents the elimination of PCA common stock and additional paid-in
capital.
25
<PAGE> 46
THE CAPSTONE SPECIAL MEETING
DATE, TIME AND PLACE
The Capstone Special Meeting will be held on September 15, 1997 at
a.m., local time, at .
PURPOSE OF CAPSTONE SPECIAL MEETING
This Joint Proxy Statement/Prospectus is being furnished to the
stockholders of Capstone in connection with the solicitation of proxies on
behalf of the Board of Directors of Capstone for use at the Capstone Special
Meeting to be held on September 15, 1997 at the time and place specified in the
accompanying Notice of Special Meeting of Capstone stockholders, or any
adjournments or postponements thereof. At the Capstone Special Meeting, the
stockholders of Capstone will be asked to vote upon:
1. Approval and adoption of the Merger Agreement pursuant to which,
among other things: (i) following the Distribution, Beverly, whose
sole remaining business following the completion of the Distribution
will consist of the Institutional Pharmacy Business conducted through
PCA, will merge with and into Capstone, with Capstone as the
Surviving Corporation; and (ii) Capstone will issue 50 million shares
of Capstone Common Stock to Beverly stockholders, assume
approximately $275 million in PCA debt, and assume options and
performance stock covering an aggregate of approximately 750,000
shares (subject to adjustment) of Beverly Common Stock (the "Merger
Proposal");
2. Approval and adoption of the Amendment pursuant to which: (i) the
shares of Capstone Common Stock authorized for issuance will be
increased from 50 million to 300 million; (ii) the Board of Directors
of Capstone will be divided into three classes with one class
standing for re-election in each successive year; (iii) stockholders
will be permitted to call special meetings only with the consent of
stockholders owning not less than 25% of the outstanding shares of
Capstone; and (iv) business conducted at special meetings of
stockholders will be limited to the matters described in the notice
of the meeting (the "Amendment Proposal"). Although the Amendment
Proposal will be voted on separately from the Merger Proposal, the
Amendment will not take effect unless the Merger Proposal is approved
and the Merger is consummated;
3. Approval and adoption of the Capstone Plan, pursuant to which three
million shares of Capstone Common Stock will be reserved for issuance
as restricted stock, performance shares and phantom stock and
pursuant to qualified and nonqualified stock options (the "Capstone
Plan Proposal"). Although the Capstone Plan Proposal will be voted on
separately from the Merger Proposal, the Capstone Plan will not take
effect unless the Merger Proposal is approved and the Merger is
consummated; and
4. Such other business as may properly come before the Capstone Special
Meeting or any adjournment or postponement thereof.
Pursuant to the Merger Agreement, at the Effective Time, Beverly will merge
with and into Capstone, with Capstone as the Surviving Corporation, and the
shares of Beverly Common Stock outstanding prior to the Merger will be canceled
and converted into the right to receive an aggregate of 50 million shares of
Capstone Common Stock. See "The Merger."
For more information regarding the Merger and related transactions and
certain effects of the Merger, see "The Distribution and Other Pre-Merger
Transactions," "The Merger," "Post-Closing Arrangements," "Certain Tax
Considerations," "Effect of the Transactions on Employees and Employee
Benefits -- Employee Benefit Agreement," and "Comparative Rights of
Stockholders."
Under the DGCL, holders of Capstone Common Stock are NOT entitled to
appraisal rights in connection with the Transactions. See "Comparative Rights of
Stockholders -- No Appraisal Rights."
26
<PAGE> 47
THE BOARD OF DIRECTORS OF CAPSTONE HAS UNANIMOUSLY APPROVED THE MERGER
PROPOSAL AND UNANIMOUSLY RECOMMENDS THAT ALL STOCKHOLDERS VOTE FOR THE APPROVAL
OF SUCH PROPOSAL. SEE "CERTAIN CONSIDERATIONS RELATED TO THE TRANSACTIONS."
For more information on the Amendment Proposal and the Capstone Plan
Proposal, including the Capstone Board of Directors' recommendation on voting,
see "Other Capstone Proposals."
CAPSTONE SPECIAL MEETING RECORD DATE; VOTING RIGHTS; PROXIES
Capstone stockholders of record at the close of business on ,
1997 are entitled to notice of and to vote at the Capstone Special Meeting or
any adjournment or postponement thereof. Each stockholder is entitled to one
vote per share of Capstone Common Stock held of record on the Capstone Special
Meeting Record Date with respect to each of the Merger Proposal, the Amendment
Proposal, the Capstone Plan Proposal, and each other matter properly submitted
for consideration at the Capstone Special Meeting. As of the Capstone Special
Meeting Record Date, there were shares of Capstone Common Stock
outstanding and entitled to vote which were held by approximately holders
of record. Capstone stockholders are entitled to cast their votes at the
Capstone Special Meeting in person or by properly executed proxies.
VOTING OF PROXIES
All properly executed proxies received prior to or at the Capstone Special
Meeting from holders of Capstone Common Stock who are entitled to vote and are
represented at the Capstone Special Meeting and not revoked will be voted at
such meeting in accordance with the instructions indicated in such proxies. If
no instructions are indicated, such proxies will be voted FOR approval and
adoption of the Merger Proposal, the Amendment Proposal and the Capstone Plan
Proposal.
If any other matters are properly presented at the Capstone Special Meeting
for consideration, the persons named in the enclosed form of proxy, and acting
thereunder, will have discretion to vote on such matters in accordance with
their best judgment (unless authorization to use such discretion is withheld).
Capstone is not aware of any matters expected to be presented at the Capstone
Special Meeting other than as described in the Notice of Capstone Special
Meeting of Stockholders.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Capstone (including by telegram or facsimile), before the
taking of the vote at the Capstone Special Meeting, a written notice of
revocation bearing a later date than the date of the proxy or by giving notice
of revocation in open meeting, (ii) duly executing a later-dated proxy relating
to the same shares of Capstone Common Stock and delivering it to the Secretary
of Capstone (including by telegram or facsimile) before the taking of the vote
at the Capstone Special Meeting, or (iii) attending the Capstone Special Meeting
and voting in person. In order to vote in person at the Capstone Special
Meeting, Capstone stockholders must attend the meeting and cast their votes in
accordance with the voting procedures established for such meeting. Attendance
at the Capstone Special Meeting will not in and of itself constitute a
revocation of a proxy. Any written notice of revocation or subsequent proxy must
be sent to Capstone's transfer agent at: First Union National Bank, 1525 W.T.
Harris Blvd., Charlotte, North Carolina 28288, Attention: Lynn Ballard. Capstone
stockholders who require assistance in changing or revoking a proxy should
contact James D. Shelton, Secretary, by telephone at (972) 401-1541.
REQUIRED VOTE
Under the DGCL, the affirmative vote of a majority of the issued and
outstanding shares of Capstone Common Stock is required to approve the Merger
Proposal and the Amendment Proposal. The affirmative vote of a majority of the
shares of Capstone Common Stock present and entitled to vote at the Capstone
Special Meeting is required to approve the Capstone Plan Proposal. The presence,
either in person or by
27
<PAGE> 48
properly executed proxy, of a majority of the outstanding shares of Capstone
Common Stock as of the Capstone Special Meeting Record Date is necessary to
constitute a quorum at the Capstone Special Meeting.
Abstentions and broker non-votes (i.e., shares of Capstone Common Stock
held in record name by brokers or nominees as to which (i) instructions have not
been received from the beneficial owners or persons entitled to vote and the
broker or nominee does not have discretionary voting power or (ii) the record
holder has indicated on the proxy card or otherwise notified Capstone that such
record holder does not have authority to vote on that matter) are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business. In accordance with the DGCL, proxies that reflect abstentions as to
a particular proposal will be treated as voted for the purpose of determining
whether the proposal is approved or rejected and will have the same effect as a
vote against that proposal, while proxies that reflect broker non-votes will not
be counted as votes cast for determining the outcome of the proposal.
PROXY SOLICITATION
Capstone will pay for the cost of solicitation of proxies on behalf of the
Board of Directors of Capstone. In addition to soliciting proxies by mail,
directors, officers, and employees of Capstone may solicit proxies in person or
by telephone, telecopy, telegram, or other means of communication. Arrangements
will also be made with brokerage firms and other custodians, nominees and
fiduciaries for the forwarding of proxy solicitation material to beneficial
owners of shares of Capstone Common Stock held of record by such persons as of
the Capstone Special Meeting Record Date, and Capstone may reimburse such
custodians, nominees, and fiduciaries for reasonable expenses incurred in
connection therewith. Capstone has retained Corporate Communications as a proxy
solicitor at an estimated cost not to exceed $5,000 to assist in its
solicitation of proxies from Capstone stockholders.
28
<PAGE> 49
THE BEVERLY SPECIAL MEETING
DATE, TIME AND PLACE
The Beverly Special Meeting will be held on , 1997 at
, local time, at the located at
, Fort Smith, Arkansas.
PURPOSE OF BEVERLY SPECIAL MEETING
This Joint Proxy Statement/Prospectus is being furnished to the
stockholders of Beverly in connection with the solicitation of proxies on behalf
of the Board of Directors of Beverly for use at the Beverly Special Meeting to
be held on , 1997 at the time and place specified in the
accompanying Notice of Special Meeting of Beverly stockholders, or any
adjournments or postponements thereof. At the Beverly Special Meeting, the
stockholders of Beverly will be asked to vote upon:
(1) Approval and adoption of the Distribution Agreement and the
transactions contemplated thereby, including (a) the restructuring,
pursuant to which all of Beverly's Remaining Healthcare Business
will be transferred or contributed to New Beverly, and (b) the
Distribution, pursuant to which all of the New Beverly Common Stock
will be distributed to the stockholders of Beverly (the
"Distribution Proposal");
(2) Approval and adoption of the Merger Agreement pursuant to which
Beverly (whose sole remaining business after the Distribution will
consist of the Institutional Pharmacy Business operated by PCA) will
merge with and into Capstone, with Capstone as the Surviving
Corporation, and with Beverly's stockholders to receive Capstone
Common Stock in exchange for their Beverly Common Stock, in
accordance with the terms of the Merger Agreement (the "Merger
Proposal");
(3) Approval and adoption of the New Beverly 1997 Incentive Plan;
(4) Approval and adoption of the New Beverly Directors Plan;
(5) Approval of the Adjournment Proposal; and
(6) Such other business as may properly come before the Beverly Special
Meeting or any adjournments or postponements thereof.
Immediately prior to the Effective Time of the Merger, Beverly will
distribute all of the New Beverly Common Stock to holders of Beverly Common
Stock, whereby each stockholder of Beverly will receive one share of New Beverly
Common Stock for each share of Beverly Common Stock held by such stockholder as
of the Distribution Record Date. See "The Distribution and Other Pre-Merger
Transactions -- Consummation of the Distribution; Treatment of Beverly Stock
Options, Phantom Shares, Performance Shares, and Restricted Shares." Pursuant to
the Merger Agreement, at the Effective Time, Beverly will merge with and into
Capstone, with Capstone as the Surviving Corporation, and each share of Beverly
Common Stock outstanding prior to the Merger, together with the associated
Rights (as defined in the Merger Agreement), will be canceled and converted into
the right to receive an amount of shares of Capstone Common Stock equal to the
Conversion Number. Based on shares of Beverly Common Stock outstanding
on a fully diluted basis on the Beverly Special Meeting Record Date, the
Conversion Number would be . See "The Merger -- General."
The Distribution Proposal and the Merger Proposal will be considered and
voted on separately by Beverly stockholders, but neither the Merger nor the
Distribution will be effected unless both Transactions are approved by Beverly
stockholders. The Distribution will not take place unless and until all other
conditions to the Merger (other than the occurrence of the Distribution itself
and the filing of a Certificate of Merger with the Delaware Secretary of State)
have been satisfied, including stockholder approval of both the Distribution
Proposal and the Merger Proposal. It is anticipated that the Distribution will
not be effected until immediately prior to the Effective Time of the Merger.
Additionally, the New Beverly Plan Proposals will not be implemented if the
Merger and Distribution are not effected.
29
<PAGE> 50
THE BOARD OF DIRECTORS OF BEVERLY HAS UNANIMOUSLY APPROVED THE DISTRIBUTION
PROPOSAL, THE MERGER PROPOSAL AND THE NEW BEVERLY PLAN PROPOSALS, AND
UNANIMOUSLY RECOMMENDS THAT ALL STOCKHOLDERS VOTE FOR THE APPROVAL OF SUCH
PROPOSALS.
BEVERLY SPECIAL MEETING RECORD DATE; VOTING RIGHTS; PROXIES
Beverly stockholders of record at the close of business on ,
1997 are entitled to notice of and to vote at the Beverly Special Meeting or any
adjournment or postponement thereof. Each stockholder is entitled to one vote
per share of Beverly Common Stock held of record on the Beverly Special Meeting
Record Date with respect to each of the Distribution Proposal, the Merger
Proposal, the New Beverly Plan Proposals and each other matter properly
submitted for consideration at the Beverly Special Meeting. As of the Beverly
Special Meeting Record Date, there were shares of Beverly Common Stock
outstanding and entitled to vote which were held by approximately
holders of record. Beverly stockholders are entitled to cast their votes at the
Beverly Special Meeting in person or by properly executed proxies.
VOTING OF PROXIES
All properly executed proxies received prior to or at the Beverly Special
Meeting from holders of Beverly Common Stock who are entitled to vote and are
represented at the Beverly Special Meeting and not revoked will be voted at such
meeting in accordance with the instructions indicated in such proxies. If no
instructions are indicated, such proxies will be voted FOR approval and adoption
of the Distribution Proposal, the Merger Proposal and the New Beverly Plan
Proposals.
There is a possibility that a motion may be considered at the Beverly
Special Meeting which would adjourn the Beverly Special Meeting for the purpose
of soliciting additional proxies in favor of the Distribution Proposal, the
Merger Proposal and the New Beverly Plan Proposals. Accordingly, stockholders of
Beverly are being asked to vote in favor of any such proposal that may be
brought before the Beverly Special Meeting.
If any other matters are properly presented at the Beverly Special Meeting
for consideration, the persons named in the enclosed form of proxy, and acting
thereunder, will have discretion to vote on such matters in accordance with
their best judgment (unless authorization to use such discretion is withheld).
Beverly is not aware of any matters expected to be presented at the Beverly
Special Meeting other than as described in the Notice of Beverly Special Meeting
of Stockholders.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Beverly, before the taking of the vote at the Beverly
Special Meeting, a written notice of revocation bearing a later date than the
date of the proxy or by giving notice of revocation in open meeting, (ii) duly
executing a later-dated proxy relating to the same shares of Beverly Common
Stock and delivering it to the Secretary of Beverly, before the taking of the
vote at the Beverly Special Meeting, or (iii) attending the Beverly Special
Meeting and voting in person. In order to vote in person at the Beverly Special
Meeting, Beverly stockholders must attend the meeting and cast their votes in
accordance with the voting procedures established for such meeting. Attendance
at the Beverly Special Meeting will not in and of itself constitute a revocation
of a proxy. Any written notice of revocation or subsequent proxy must be sent
to: Beverly Enterprises, Inc., 5111 Rogers Avenue, Suite 40-A, Fort Smith, AR
72919-0155, Attention: Robert W. Pommerville, Secretary. Beverly stockholders
who require assistance in changing or revoking a proxy should contact Mr.
Pommerville by telephone at (501) 452-6712.
REQUIRED VOTE
Under the DGCL, the affirmative vote of a majority of the issued and
outstanding shares of Beverly Common Stock is required to approve the Merger
Proposal and the affirmative vote of a majority of the issued and outstanding
shares of Beverly Common Stock is required to approve the Distribution Proposal.
The affirmative vote of a majority of the shares of Beverly Common Stock present
and entitled to vote thereon at the Beverly Special Meeting is required to
approve the New Beverly Plan Proposals and the Adjournment Proposal. The
presence, either in person or by properly executed proxy, of a majority of the
outstanding shares
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of Beverly Common Stock as of the Beverly Special Meeting Record Date is
necessary to constitute a quorum at the Beverly Special Meeting.
Abstentions and broker non-votes (i.e., shares of Beverly Common Stock held
in record name by brokers or nominees as to which (i) instructions have not been
received from the beneficial owners or persons entitled to vote and the broker
or nominee does not have discretionary voting power, or (ii) the record holder
has indicated on the proxy card or otherwise notified Beverly that such record
holder does not have authority to vote on that matter) are counted for purposes
of determining the presence or absence of a quorum for the transaction of
business. In accordance with the DGCL, proxies that reflect abstentions as to a
particular proposal will be treated as voted for the purpose of determining
whether the proposal is approved or rejected and will have the same effect as a
vote against that proposal, while proxies that reflect broker non-votes will not
be counted as votes cast for determining the outcome of the proposal.
Under the DGCL, holders of Beverly Common Stock are not entitled to
appraisal rights in connection with the Transactions.
PROXY SOLICITATION
Beverly will pay for the cost of solicitation of proxies on behalf of the
Board of Directors of Beverly, including expenses incurred in the printing,
mailing and filing (including without limitation, SEC filing fees, fees related
to any state securities or "blue sky" laws and stock exchange listing
application fees) as to the New Beverly Prospectus, and Capstone will pay for
the cost of solicitation of proxies on behalf of the Board of Directors of
Capstone, including expenses incurred in the printing, mailing and filing
(including without limitation, SEC filing fees, fees related to any state
securities or "blue sky" laws and stock exchange listing application fees) as to
the Joint Proxy Statement/Prospectus and the registration statement of which it
is a part. In addition to soliciting proxies by mail, directors, officers and
employees of Beverly may solicit proxies in person or by telephone, telecopy,
telegram or other means of communication. Arrangements will also be made with
brokerage firms and other custodians, nominees and fiduciaries for the
forwarding of proxy solicitation material to beneficial owners of shares of
Beverly Common Stock held of record by such persons as of the Beverly Special
Meeting Record Date, and Beverly may reimburse such custodians, nominees and
fiduciaries for reasonable expenses incurred in connection therewith. Beverly
has retained Georgeson & Co. as a proxy solicitor at an estimated cost not to
exceed $10,000, plus reimbursement of expenses, to assist in its solicitation of
proxies from Beverly stockholders.
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CERTAIN CONSIDERATIONS RELATED TO THE TRANSACTIONS
BACKGROUND OF THE TRANSACTIONS
Beverly and Capstone regularly consider the acquisition or development of
new businesses and review the prospects for their existing businesses. Since the
beginning of 1995, Capstone has aggressively pursued opportunities for growth,
believing that the institutional pharmacy industry is in a period of rapid
consolidation and that growth is crucial to providing high quality, low cost
services. Beverly has for several years believed that the trading prices for
Beverly Common Stock do not adequately reflect the intrinsic value of the
Institutional Pharmacy Business operated by PCA. Beginning in 1994, and
continuing into 1997, Beverly has explored various strategies to realize the
value of the Institutional Pharmacy Business, including an initial public
offering ("IPO") of PCA common stock, a possible transaction to spin-off PCA
stock to Beverly stockholders, and various business combinations.
Beverly management has believed that separating its Institutional Pharmacy
Business from its Remaining Healthcare Business would eliminate the perception
of PCA as a captive subsidiary of Beverly and thereby open substantial new
markets and potential customers to PCA. Beverly management also believed that in
connection with any separation of the Institutional Pharmacy Business into a
free-standing publicly traded company, it was important that there exist a
reasonably liquid trading market for the equity securities of PCA. Furthermore,
Beverly management believed that an adequate base of independent investment
research information would need to be available in the market place in order for
investors to better understand the Institutional Pharmacy Business, and that
stockholder interests would be best served if the total market capitalization of
the entity resulting from any such separation was of a sufficient size to
attract interest from independent research sources regarding the business and
prospects of PCA. In early 1995, Beverly management began exploring alternative
means of maximizing for stockholders the value of its Institutional Pharmacy
Business, and began evaluating a possible spin-off or other distribution of PCA
to Beverly stockholders, an initial public offering of PCA capital stock or a
business combination of PCA with another institutional pharmacy company.
In April, 1995, recognizing that market price-to-earnings multiples are
typically higher for companies in the institutional pharmacy business than for
those in the long-term care business, Beverly announced its intention to
spin-off PCA to its stockholders. However, these intentions were hindered by
operating and management difficulties which developed at PCA during the second
quarter of 1995. These difficulties were primarily the result of problems
encountered in integrating the operations of the institutional pharmacy
businesses of Synetic, Inc. and Insta-Care Holdings, Inc., both of which were
acquired by PCA in the fourth quarter of 1994, as well as changes in management
and internal restructuring of operations within PCA during 1995. As a result of
these difficulties, Beverly's Board of Directors determined in mid-1995 to defer
the implementation of its plan to separate PCA from Beverly until the
integration of recent acquisitions and management and organizational
restructuring had been completed and implemented. In connection with the
restructuring, Dr. Renschler was named as chief executive officer of PCA in June
1996.
Once PCA's integration of acquisitions and restructuring were completed
after mid-1996, Beverly's management resumed evaluating the possibility of
distributing Beverly's Institutional Pharmacy Business in a tax-free
distribution. Beverly's management decided to evaluate alternative PCA
separation plans, including an IPO of PCA common stock, to be followed later by
a distribution of the remaining PCA common stock to Beverly Stockholders, or a
business combination of PCA with another institutional pharmacy business.
Following preliminary discussions initiated by Capstone and its financial
advisor in the fall of 1996 regarding a possible transaction, financial advisors
and representatives of Beverly and Capstone met on December 6, 1996, and
discussed the possibility of a tax-free reorganization using a "Morris Trust"
structure. Capstone's and Beverly's representatives agreed that any business
combination transaction would include only Beverly's Institutional Pharmacy
Business. Within a week of that meeting, a confidentiality agreement was signed
and preliminary financial information was exchanged by the parties.
Representatives of Beverly and Capstone, and their respective financial
advisors, met again on December 17, 1996 and January 22, 1997 to
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discuss the possible structure of a transaction and to begin discussing
preliminary valuation ranges. Additional due diligence was performed by various
representatives of Beverly and Capstone beginning January 22, 1997.
In February and early March 1997, Beverly's management and outside counsel,
together with PCA representatives and representatives of an investment banking
firm and its counsel, also began discussions and held due diligence meetings in
Dallas, Texas and Tampa, Florida concerning plans for a possible initial public
offering of approximately 20% of the common stock of PCA, to be followed within
three to six months thereafter by a spin-off of the remaining common stock of
PCA to Beverly stockholders.
In February 1997, Beverly management apprised the Beverly Board of
Directors of certain expressions of interest by Capstone and others regarding a
possible transaction involving a "Morris Trust" structure, as well as an
alternative transaction involving an initial public offering of PCA Common
Stock, followed by a tax-free spin-off of the balance of PCA Common Stock some
time later to Beverly stockholders. The Beverly Board of Directors authorized
management to continue pursuing both alternatives.
On March 11, 1997, representatives of Beverly and Capstone and their
financial advisors, met in Fort Smith, Arkansas and began discussing principal
business issues, including valuation ranges, merger consideration, management
issues and other aspects relating to transactional, due diligence and scheduling
matters.
On March 17 and 18, 1997, the companies held additional management meetings
in Dallas to share additional information. Following the Dallas meetings, the
Board of Directors of Capstone was updated on the progress of discussions and
Capstone's Board authorized management to continue developing a potential
transaction with Beverly. Beverly and Capstone began negotiating a merger
agreement the week of March 24. During such negotiations the parties discussed
the respective values of PCA and Capstone, the allocation of certain Beverly
indebtedness to PCA and the management of the Surviving Corporation. On March
27, 1997, Beverly's management updated the Beverly Board of Directors on the
progress of negotiations and was authorized to continue discussions with
Capstone, as well as to confirm whether other expressions of interest were
likely to lead to serious negotiations regarding a business combination with
PCA. Representatives of Beverly and Capstone resolved several issues related to
the potential merger on April 14, 1997, and negotiations concerning a merger
agreement continued. On April 15, 1997, the terms of the proposed Merger (and,
with respect to Beverly, the Distribution) were presented to the Boards of
Directors of Beverly and Capstone, and following detailed presentations by
management and their respective investment bankers, the terms of the Merger
(and, with respect to Beverly, the Distribution) were approved by each Board of
Directors. An Agreement and Plan of Merger was signed after the close of
business on April 15, 1997, and the transaction was publicly announced prior to
the opening of the financial markets in New York on April 16, 1997.
THE DISTRIBUTION AND THE MERGER
Following the approval and adoption of the Distribution Proposal by the
stockholders of Beverly and the Merger Proposal by the stockholders of Beverly
and Capstone and the satisfaction or waiver of the other conditions to the
Merger, (i) on the Distribution Date, Beverly will effect the Distribution, and
(ii) Beverly will be merged with and into Capstone, with Capstone continuing as
the Surviving Corporation. The Merger will become effective upon filing a
certificate of merger (the "Certificate of Merger") with the Secretary of State
of the State of Delaware.
BEVERLY'S REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF
BEVERLY
The Board of Directors of Beverly believes the Transactions constitute a
significant strategic opportunity for both Beverly's Institutional Pharmacy
Business and its Remaining Healthcare Business. The Board of Directors of
Beverly believes that the terms of the Distribution and the Merger are fair to,
and in the best interests of, Beverly and its stockholders. In reaching this
determination, the Beverly Board of Directors consulted with Beverly management,
as well as financial and legal advisors, and considered the following factors,
which were viewed as material:
(1) The Surviving Corporation is expected to benefit from several
operational efficiencies including, but not limited to (a) greater
purchasing power with distributors and manufacturers, (b) elimination of
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duplicate functions, (c) consolidation of local pharmacy operations where
service areas overlap, and (d) the integration of information systems and
related personnel.
(2) The Surviving Corporation will possess greater managerial,
operational and financial resources than PCA would have as a stand-alone
entity. As a result of its greater financial resources and independence,
the Surviving Corporation may be expected to have better access to capital
than would otherwise be available to PCA as a stand-alone entity.
(3) The size and market capitalization of the Surviving Corporation is
expected to increase stockholder liquidity as well as the market visibility
of the combined pharmacy operations.
(4) Separating Beverly's Institutional Pharmacy Business from
Beverly's Remaining Healthcare Business, while securing a binding
commitment to quality pharmacy services from the Surviving Corporation
should eliminate the appearance of PCA being a "captive" pharmacy of
Beverly.
(5) Separating Beverly's Institutional Pharmacy Business from
Beverly's Remaining Healthcare Business will enhance the ability of Beverly
stockholders to participate in the institutional pharmacy industry's rapid
consolidation through an accelerated acquisition program. The institutional
pharmacy industry currently is fragmented, but the larger industry
participants are acquiring and merging with smaller, independent pharmacy
operators. Beverly has historically found that some owners of independent
pharmacies prefer, for various reasons, to combine with a pharmacy company
rather than become part of a long-term healthcare company, and Beverly
management believes that sellers of independent pharmacy operations in some
cases may be more interested in receiving equity in a publicly-traded
institutional pharmacy company than cash, debt, or equity in a long-term
healthcare company.
(6) The Surviving Corporation will have broader geographic coverage
than PCA, which is expected to enhance the ability of the Surviving
Corporation to serve customers with geographically diverse operations and
to compete in an increasingly managed-care oriented marketplace.
(7) The expanded customer base of the Surviving Corporation should
provide increased economies of scale with respect to PCA's clinical
information systems, pharmacy formularies and group purchasing
organization.
(8) Capstone has invested in programs designed to help customers
deliver the most appropriate medical treatment to their patients and
optimize costs within contracted arrangements with managed care providers.
The Merger will allow the Surviving Corporation to offer these benefits to
PCA's customers while deriving financial benefit from any related cost or
marketing advantages. In the same regard, Beverly through its 1995
acquisition of Pharmacy Management Services, Inc. ("PMSI") has invested in
programs offering national mail order pharmacy services to the worker's
compensation market. The Merger should provide the Surviving Corporation
the means for expanding these services into more non-traditional markets
such as assisted living and home healthcare settings, and to chronically or
catastrophically injured patients outside the worker's compensation market.
(9) The Transactions facilitate both a tax-free realization of the
value of Beverly's Institutional Pharmacy Business and an approximate $275
million reduction in Beverly's outstanding debt.
(10) The Transactions allow Beverly stockholders to receive fair value
for Beverly's Institutional Pharmacy Business and to retain their
investment in both the Institutional Pharmacy Business operated by the
Surviving Corporation and the Remaining Healthcare Business operated by New
Beverly.
(11) Since 1994 Beverly's management has devoted a substantial amount
of time and resources to the growth of, and the realization of Beverly
stockholder value in, the Institutional Pharmacy Business. Consummation of
the Transactions will allow Beverly's management to focus solely on the
continued growth and development of its Remaining Healthcare Business.
In approving the Merger Agreement, the Distribution Agreement and the
transactions contemplated thereby, and in recommending that Beverly's
stockholders approve the Merger and the Distribution, the Beverly Board of
Directors also considered that the proposed structure of the Merger and
provisions relating to
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corporate governance, ownership and control of Capstone following the Merger
were sufficient to assure that the interests of Beverly's stockholders, who will
own approximately 57% of the Surviving Corporation following the Merger and the
Distribution, will be protected. The determination of the amount of
consideration received by Beverly and its stockholders in the Transactions was
primarily a function of the difference in the perceived general value of PCA and
the value of the equity that Capstone was willing to issue in the Merger, which
difference was compensated for by the incurrence of new debt by PCA, with
proceeds to be paid to Beverly in partial satisfaction of intercompany debt
between PCA and Beverly, and assumption of PCA's new indebtedness by Capstone as
a consequence of the Merger. As a result, the Beverly Board of Directors
concluded that the amount of Capstone Common Stock to be received in the Merger
was fair given the then prevailing market price of Capstone Common Stock when
taken together with the amount of Beverly indebtedness to be repaid by PCA as a
consequence of the Merger. The Beverly Board of Directors also determined that
the conditions under which the Merger Agreement may be terminated and fees
payable upon such termination would not preclude a third party acquiror from
submitting a competing offer that might provide more value to Beverly's
stockholders, and that the amount of fees payable upon termination were, on a
per share basis, not inconsistent with the termination fees that were applicable
in comparable transactions. Furthermore, the Beverly Board of Directors also
believed that the reciprocal nature of the termination provisions was
appropriate, given the structure of the Merger as a "merger of equals."
Similarly, the Beverly directors confirmed that substantially all of the members
of Beverly's management team (other than Dr. Renschler) intended to continue
employment with New Beverly following the Distribution. In the view of the
Beverly Board of Directors, the Merrill Lynch and Stephens fairness opinions, to
the effect that the consideration to be received by the Beverly stockholders
pursuant to the Merger, taken as a whole, is fair to such holders from a
financial point of view, further supports the determination by Beverly's Board
of Directors that the consideration to be received by Beverly stockholders is
fair.
The Beverly Board of Directors considered a number of potentially negative
factors in its deliberations concerning the Transactions. The Beverly Board of
Directors considered the matters discussed under "-- Interests of Certain
Persons in the Transactions" and determined such interests did not significantly
affect the Beverly Board's recommendation, since such interests largely related
to the vesting of outstanding options or rights under existing incentive plans
and employment agreements that were not expected to be material in amount,
rather than interests or affiliations with Capstone. Moreover, as a condition to
receiving full vesting with respect to employee stock options and related
incentives, and partial vesting with respect to Beverly performance shares, each
Beverly officer who was a party to an employment or severance agreement would be
required to waive his or her rights to claim any benefits under such agreement
resulting from a "change in control," thereby reducing significantly the amount
of payments that Beverly would be required to make upon completion of the
Transactions. Beverly and New Beverly will incur significant expense in
connection with the Transactions, currently estimated to be approximately $20
million related to the Distribution and approximately $8 million related to the
Merger. A significant portion of the estimated Beverly and New Beverly expenses
with respect to the Distribution are expected to arise in connection with
restructuring, modifying or replacing Beverly's existing indebtedness in
connection with the Distribution. Beverly's expenses will include legal,
accounting, financial advisor, registration, exchange listing, printing and
other fees and related expenses. The exact amount of such fees and expenses
cannot be determined until some time following consummation of the Merger and
the Distribution. See "Unaudited Pro Forma Combined Condensed Financial
Statements" and the notes thereto, and "The Distribution and Other Pre-Merger
Transactions -- Treatment of Indebtedness."
The foregoing discussion of the information and factors considered and
given weight by the Beverly Board of Directors is not intended to be exhaustive
but includes the material factors considered by the Beverly Board of Directors.
In addition, in reaching the determination to approve and recommend the
Transactions, in view of the wide variety of factors considered in connection
with its evaluation of the proposed Transactions, the Beverly Board of Directors
did not find it practical to and did not quantify or otherwise attempt to assign
any relative or specific weights to the foregoing factors, and individual
directors may have given different weights to different factors.
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THE BOARD OF DIRECTORS OF BEVERLY UNANIMOUSLY RECOMMENDS TO THE HOLDERS OF
BEVERLY COMMON STOCK THAT THE DISTRIBUTION, THE MERGER AND THE TRANSACTIONS
CONTEMPLATED THEREBY BE APPROVED.
OPINIONS OF BEVERLY'S FINANCIAL ADVISORS
Beverly retained Merrill Lynch and Stephens to act as its co-financial
advisors in connection with a possible business combination involving PCA. Jon
E.M. Jacoby, an executive officer of Stephens Group, Inc., the parent company of
Stephens Inc., is a director of Beverly. Merrill Lynch and Stephens each
delivered a written opinion dated April 15, 1997 to Beverly's Board of Directors
to the effect that, as of such date and based upon and subject to the
assumptions made, general procedures followed, factors considered and
limitations on the review undertaken as set forth therein, the Exchange Ratio
was fair to the holders of Beverly Common Stock from a financial point of view.
As used in the following discussion, the term "Exchange Ratio" shall have the
same meaning as "Conversion Number" has in the Merger Agreement. The written
opinions of Merrill Lynch and Stephens, both dated April 15, 1997, are
collectively referred to herein as the "Fairness Opinions."
THE FULL TEXTS OF THE FAIRNESS OPINIONS, WHICH SET FORTH THE ASSUMPTIONS
MADE, GENERAL PROCEDURES FOLLOWED, FACTORS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY MERRILL LYNCH AND STEPHENS IN RENDERING THEIR OPINIONS, ARE
ATTACHED AS ANNEXES D AND E HERETO, RESPECTIVELY, AND ARE INCORPORATED HEREIN BY
REFERENCE. THE FAIRNESS OPINIONS WERE PROVIDED TO BEVERLY'S BOARD OF DIRECTORS
FOR ITS INFORMATION AND ARE DIRECTED ONLY TO THE FAIRNESS FROM A FINANCIAL POINT
OF VIEW OF THE EXCHANGE RATIO AND DO NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER OF BEVERLY AS TO HOW SUCH STOCKHOLDER SHOULD VOTE ON THE MERGER OR
ANY MATTER RELATED THERETO. THE SUMMARY OF THE FAIRNESS OPINIONS SET FORTH IN
THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXTS OF THE FAIRNESS OPINIONS. HOLDERS OF BEVERLY COMMON STOCK ARE
URGED TO, AND SHOULD, READ THE FAIRNESS OPINIONS IN THEIR ENTIRETY. TERMS
DEFINED HEREIN SHALL HAVE SUCH MEANING SOLELY FOR PURPOSES OF THIS SUMMARY OF
THE FAIRNESS OPINIONS.
The Conversion Number was determined through negotiations between Capstone
and Beverly and was approved by the Beverly Board of Directors.
In arriving at the Fairness Opinions, Merrill Lynch and Stephens, among
other things: (i) reviewed certain publicly available business and financial
information that they deemed relevant relating to Beverly and Capstone and the
respective industries in which they operate; (ii) reviewed certain information,
including financial forecasts relating to the business, earnings, cash flow,
assets, liabilities and prospects of Beverly (after giving effect to the
restructuring and the Distribution) and Capstone, as well as the amount and
timing of the cost savings, related expenses and synergies expected to result
from the Merger (the "Expected Synergies") furnished to Merrill Lynch and
Stephens by Beverly and Capstone; (iii) conducted discussions with members of
senior management and representatives of each of Beverly and Capstone concerning
the businesses and prospects of Beverly (after giving effect to the
restructuring and the Distribution) and Capstone, including after giving effect
to the Merger; (iv) reviewed the historical market prices and trading activity
for the Capstone Common Stock and compared them with those of certain
publicly-traded companies that Merrill Lynch and Stephens deemed to be
comparable to Capstone, including after giving effect to the Merger; (v)
compared the historical and projected results of operations of Beverly (after
giving effect to the restructuring and the Distribution) and Capstone,
including, with respect to projected results of operations, after giving effect
to the Merger, with those of certain companies that Merrill Lynch and Stephens
deemed to be comparable to Beverly (after giving effect to the restructuring and
the Distribution) and Capstone, including after giving effect to the Merger;
(vi) compared the proposed financial terms of the Merger with the financial
terms of certain other mergers and acquisitions which Merrill Lynch and Stephens
deemed to be relevant; (vii) reviewed a draft of the Merger Agreement and
assumed that the final form of such agreement would not vary in any manner that
is material to their analyses; and (viii) reviewed such other financial studies
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and analyses and performed such other investigations and took into account such
other matters as Merrill Lynch and Stephens deemed necessary, including their
assessment of general economic, market and monetary conditions.
In preparing the Fairness Opinions, Merrill Lynch and Stephens assumed and
relied on the accuracy and completeness of all information supplied or otherwise
made available to them, discussed with or reviewed by or for them, or publicly
available, and further relied on the assurances of management of Beverly and
Capstone that they were not aware of any facts that would make such information
inaccurate or misleading. Merrill Lynch and Stephens have not assumed any
responsibility for independently verifying such information, have not undertaken
an independent evaluation or appraisal of the assets or liabilities of Beverly
or Capstone or been furnished with such an evaluation or appraisal and have not
conducted a physical inspection of the properties or facilities of Beverly or
Capstone. With respect to the financial forecast information, including the
Expected Synergies, furnished to or discussed with Merrill Lynch and Stephens by
Beverly, Capstone or their representatives, Merrill Lynch and Stephens assumed
that it was reasonably prepared and reflected the best currently available
estimates and judgment of Beverly's and Capstone's managements as to the
expected future financial performance of Beverly (after giving effect to the
restructuring and the Distribution) or Capstone, including after giving effect
to the Merger and the Expected Synergies. Neither Merrill Lynch nor Stephens
expressed an opinion as to such financial forecast information or the
assumptions on which they were based. In addition, Merrill Lynch and Stephens
assumed that the Merger will qualify as a tax-free reorganization for federal
income tax purposes. For purposes of rendering the Fairness Opinions, Merrill
Lynch and Stephens assumed, in all respects material to their analyses, that the
representations and warranties of each party to the Merger Agreement and all
related documents and instruments (collectively, the "Documents") contained
therein are true and correct, that each party to the Documents will perform all
of the covenants and agreements required to be performed by such party under
such Documents and that all conditions to the consummation of the Merger will be
satisfied without waiver thereof.
Neither Merrill Lynch nor Stephens was asked to consider, and the Fairness
Opinions do not in any manner address, either the price at which shares of
Capstone Common Stock will trade following the announcement or consummation of
the Merger or any aspect of the restructuring and the Distribution, including,
without limitation, their fairness or the price at which the shares of New
Beverly Common Stock will trade following the restructuring and the
Distribution. The Fairness Opinions do not constitute a recommendation to any
holder of Beverly Common Stock as to how such holder should vote on the Merger
or any matter related thereto. The Fairness Opinions are necessarily based upon
market, economic and other conditions as they existed on, and could be evaluated
as of, the date of such opinions.
In preparing their analyses, Merrill Lynch and Stephens relied upon
projections for the Institutional Pharmacy Business (pro forma to account for
$275 million of net debt to be assumed by Capstone) for fiscal years 1997
through 2001, prepared by management of Beverly, and projections for Capstone
for fiscal years 1997 through 2001, prepared by management of Beverly,
reflecting (i) a base case with respect to revenue growth (the "Base Case"), and
(ii) a more conservative case with respect to revenue growth (the "Downside
Case").
Set forth below is a brief summary of the material analyses presented by
Merrill Lynch and Stephens to the Beverly Board of Directors in connection with
the Fairness Opinions.
Valuation of the Institutional Pharmacy Business After the Restructuring and
the Distribution
Comparable Company Trading Analysis. Merrill Lynch and Stephens compared
certain financial information for the Institutional Pharmacy Business with the
corresponding publicly available information for five other publicly-traded
institutional pharmacy companies which Merrill Lynch and Stephens deemed to be
reasonably similar (the "Comparable Companies"). The Comparable Companies were:
American Medserve Corporation, Capstone, NCS HealthCare, Inc., Omnicare, Inc.
and Vitalink Pharmacy Services, Inc.
Merrill Lynch and Stephens calculated multiples for the Comparable
Companies of per share market price ("Price") to estimated 1997 earnings per
share ("1997 EPS") and estimated 1998 earnings per share ("1998 EPS") based on
closing prices and First Call consensus analysts' estimates as of April 11,
1997. The
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analysis indicated (i) a median and mean multiple of Price to 1997 EPS for the
Comparable Companies of 25.3x and 24.0x, respectively, and (ii) a median and
mean multiple of Price to 1998 EPS for the Comparable Companies of 18.5x and
18.3x, respectively. Based on the comparable company trading analysis, Merrill
Lynch and Stephens applied multiples ranging from 20.0x to 25.0x to estimated
1997 net income for the Institutional Pharmacy Business and derived a range of
implied enterprise value for the Institutional Pharmacy Business of $677 million
to $778 million.
Comparable Transaction Analysis. Merrill Lynch and Stephens reviewed
certain publicly available information regarding five selected institutional
pharmacy related business combinations with transaction values of at least $40
million announced since December 1993 (the "Comparable Transactions").
Merrill Lynch and Stephens compared the transaction value of the Comparable
Transactions as a multiple of last twelve months' ("LTM") earnings before
interest, taxes, depreciation and amortization ("EBITDA") for the acquired
companies. Based on the comparable transaction analysis, Merrill Lynch and
Stephens applied multiples ranging from 9.4x to 11.5x to estimated 1997 EBITDA
for the Institutional Pharmacy Business and derived a range of implied
enterprise values for the Institutional Pharmacy Business of $708 million to
$865 million.
Discounted Cash Flow Analysis. Merrill Lynch and Stephens calculated a
range of implied enterprise values for the Institutional Pharmacy Business based
on the value, discounted to January 1, 1997, of its year end five-year stream of
projected unlevered free cash flow, its projected 2001 terminal value based on
terminal multiples of EBITDA ranging from 9.0x to 11.0x and discount rates
ranging from 11.0% to 13.0%. Based on such analysis, Merrill Lynch and Stephens
derived a summary reference range of implied enterprise values for the
Institutional Pharmacy Business of $730 million to $895 million.
Valuation of Capstone
Analysis of Stock Trading Price. Merrill Lynch and Stephens reviewed the
performance of the per share closing market price for Capstone Common Stock for
the period from April 1995 to April 1997 and compared the movement of such
closing prices with the movement of the Standard & Poor's 400 index. The stock
trading price for the 52-week trading period prior to April 11, 1997 indicated a
high of $13.38 and a low of $8.63. The 90-day, 30-day and 10-day average prices
for the period prior to April 11, 1997 were $11.57, $11.71 and $10.86,
respectively.
Comparable Company Trading Analysis. Merrill Lynch and Stephens compared
certain financial information for Capstone with the corresponding publicly
available information for the Comparable Companies. Merrill Lynch and Stephens
calculated multiples for the Comparable Companies of Price to 1997 EPS and 1998
EPS. The analysis indicated (i) a median and mean multiple of Price to 1997 EPS
for the Comparable Companies of 25.3x and 24.0x, respectively, and (ii) a median
and mean multiple of Price to 1998 EPS for the Comparable Companies of 18.5x and
18.3x, respectively. Based on the comparable company trading analysis, Merrill
Lynch and Stephens applied multiples ranging from 24.0x to 30.0x to estimated
1997 EPS for Capstone and derived a range of implied per share equity value for
Capstone ranging from $9.12 to $12.30.
Comparable Transaction Analysis. Merrill Lynch and Stephens reviewed
certain publicly available information regarding the Comparable Transactions and
compared the transaction value of the Comparable Transactions as a multiple of
LTM EBITDA for the acquired companies. Based on the comparable transaction
analysis, Merrill Lynch and Stephens applied multiples ranging from 9.4x to
11.5x to Capstone's estimated 1997 EBITDA and derived a range of implied per
share equity value for Capstone ranging from $7.66 to $9.80.
Discounted Cash Flow Analysis. Merrill Lynch and Stephens calculated a
range of implied per share equity value for Capstone based on the value,
discounted to January 1, 1997, of its year end five-year stream of projected
unlevered free cash flow, its projected 2001 terminal value based on terminal
multiples of EBITDA ranging from 9.0x to 11.0x and discount rates ranging from
11.0% to 13.0%. Based on the discounted cash flow analysis, Merrill Lynch and
Stephens derived a summary reference range of implied per share equity value for
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Capstone of (i) $9.86 to $12.83, assuming the Base Case, and (ii) $8.98 to
$11.71, assuming the Downside Case.
The Merger
Pro Forma Combined Operations Analysis. Merrill Lynch and Stephens reviewed
the geographic markets in which the companies would operate following the
Merger, including the various institutional pharmacy properties which would be
owned in such markets. Merrill Lynch and Stephens also reviewed with the Beverly
Board of Directors the Expected Synergies anticipated to result from the Merger,
estimated to range from $20 million to $27 million. In addition, Merrill Lynch
and Stephens calculated the after-tax capitalized value of the Expected
Synergies, ranging from $318 million to $419 million, by applying a 25.0x
multiple to the Expected Synergies.
Merrill Lynch and Stephens also applied a discounted cash flow analysis to
the Expected Synergies based on the value, discounted to January 1, 1997, of the
five-year stream of Expected Synergies, projected 2001 terminal value based on
terminal multiples of Expected Synergies ranging from 9.0x to 11.0x and discount
rates ranging from 11.0% to 13.0%. Merrill Lynch and Stephens assumed that $15,
$20 and $25 million of Expected Synergies were realized in 1997, 1998 and 1999,
respectively, with the Expected Synergies continuing to grow at 3.5% per year
thereafter, through 2001. Based on the discounted cash flow analysis, Merrill
Lynch derived a summary reference range of (i) implied equity value of the
Expected Synergies ranging from $182 million to $220 million and (ii) implied
per share value of the Expected Synergies ranging from $2.09 to $2.53.
Pro Forma Financial Analysis. Merrill Lynch and Stephens analyzed certain
pro forma effects resulting from the Merger, including the potential impact of
the Merger on projected earnings per share of Capstone, assuming $15, $20 and
$25 million of the Expected Synergies were achieved in 1997, 1998 and 1999,
respectively. In addition, Merrill Lynch and Stephens assumed that the purchase
method of accounting would be used to account for the transaction and that
goodwill arising from the transaction would be amortized over a period of 40
years. This analysis indicated that the Merger would be accretive to the
earnings per share of Capstone Common Stock.
Exchange Ratio Analysis. Merrill Lynch and Stephens calculated a range of
implied Exchange Ratios by dividing the equity value of the Institutional
Pharmacy Business derived from the discounted cash flow analysis set forth above
by the combined equity value of the Institutional Pharmacy Business and Capstone
derived from the discounted cash flow analyses set forth above. In this
analysis, Merrill Lynch and Stephens assumed that 0% and 50% of the Expected
Synergies from the Merger were allocated to Capstone. This analysis indicated an
aggregate number of shares of Capstone Common Stock to be received by the
holders of Beverly Common Stock in the Merger (the "Aggregate Equity Merger
Consideration") ranging from (A) if 0% of the Expected Synergies are allocated
to Capstone (i) 46.10 million to 48.27 million shares, assuming the Base Case,
and (ii) 50.60 million to 52.91 million shares, assuming the Downside Case, and
(B) if 50% of the Expected Synergies are allocated to Capstone (i) 36.94 million
to 39.22 million shares, assuming the Base Case, and (ii) 39.78 million to 42.23
million shares, assuming the Downside Case.
In addition, Merrill Lynch and Stephens calculated the relative
contributions to projected net income of Capstone following the Merger from each
of Capstone and the Institutional Pharmacy Business for the fiscal years ending
December 31, 1997 through 2001. This analysis resulted in the Institutional
Pharmacy Business' contribution to the pro forma projected net income of
Capstone of (A) if 0% of the Expected Synergies are allocated to Capstone, (i)
ranging from 54.6% to 56.7% for the fiscal years ending December 31, 1997
through 2001, assuming the Base Case, and (ii) ranging from 56.2% to 58.4% for
the fiscal years ending December 31, 1997 through 2001, assuming the Downside
Case, and (B) if 50% of the Expected Synergies are allocated to Capstone, (i)
ranging from 45.6% to 47.7% for the fiscal years ending December 31, 1997
through 2001, assuming the Base Case, and (ii) ranging from 46.6% to 49.6% for
the fiscal years ending December 31, 1997 through 2001, assuming the Downside
Case. This analysis indicated the Aggregate Equity Merger Consideration ranging
from 48.75 million shares to 52.26 million shares.
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The summary set forth above does not purport to be a complete description
of the analyses performed by Merrill Lynch and Stephens in arriving at the
Fairness Opinions or the presentation made by Merrill Lynch and Stephens to the
Beverly Board of Directors. Arriving at a fairness opinion is a complex
analytical process not readily susceptible to partial or summary description. In
addition, Merrill Lynch and Stephens believe that their analyses must be
considered as a whole and that selecting portions of their analyses and of the
factors considered by them, without considering all such factors and analyses,
could create an incomplete view of the process underlying their analyses set
forth in the Fairness Opinions. The matters considered by Merrill Lynch and
Stephens in their analyses are based on numerous macroeconomic, operating and
financial assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond Beverly's or
Capstone's control and involve the application of complex methodologies and
educated judgment. Any estimates incorporated in the analyses performed by
Merrill Lynch and Stephens are not necessarily indicative of actual past or
future results or values, which may be significantly more or less favorable than
such estimates. Estimated values do not purport to be appraisals and do not
necessarily reflect the prices at which businesses or companies may be sold in
the future, and such estimates are inherently subject to uncertainty. No public
company utilized as a comparison is identical to Beverly or Capstone or the
business segment for which a comparison is being made, and none of the
Comparable Transactions or other business combinations utilized as a comparison
is identical to the Merger. Accordingly, an analysis of publicly traded
comparable companies and comparable business combinations is not mathematical;
rather it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the comparable companies and other
factors that could affect the public trading value of the comparable companies
to which they are being compared.
Beverly selected Merrill Lynch and Stephens to act as its co-financial
advisors on the basis of their reputations as nationally recognized investment
banking and advisory firms with substantial expertise in transactions similar to
the Merger. Merrill Lynch and Stephens, as part of their investment banking
business, are continuously engaged in the valuation of businesses and securities
in connection with mergers and acquisitions.
Merrill Lynch and Stephens Fees. Pursuant to letter agreements between
Beverly and each of Merrill Lynch and Stephens, Beverly agreed to pay each of
Merrill Lynch and Stephens (i) $250,000 upon Beverly's execution of such letter
agreement, and (ii) an additional fee of $1,000,000 upon the execution of a
definitive agreement to effect a business combination involving the
Institutional Pharmacy Business. In addition, Beverly has agreed to pay each of
Merrill Lynch and Stephens a fee contingent upon and payable upon the closing of
the Merger or certain other business combinations involving the Institutional
Pharmacy Business in an amount equal to 0.325% of the aggregate consideration
paid to Beverly and its stockholders in the Merger or such other business
combination, including the amount of any indebtedness of Beverly assumed by the
purchaser in the Merger or such other business combination (against which the
$1,250,000 referred to in clauses (i) and (ii) above will be credited). Beverly
also has agreed to reimburse each of Merrill Lynch and Stephens for its
reasonable out-of-pocket expenses (including reasonable fees and disbursements
of its legal counsel) and to indemnify each of Merrill Lynch and Stephens and
certain related persons for certain liabilities, including liabilities under the
federal securities laws, related to or arising out of its engagement.
Merrill Lynch and Stephens have, in the past, provided financial advisory
and/or financing services to Beverly and may continue to do so and have
received, and may receive, fees for the rendering of such services. In the
ordinary course of their businesses, Merrill Lynch and Stephens and their
affiliates may actively trade the debt and equity securities of Beverly and
Capstone (and anticipate trading after the Merger in the securities of Capstone
and/or New Beverly) for their own accounts and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
CAPSTONE'S REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF
CAPSTONE
The Board of Directors of Capstone believes that the terms of the Merger
are consistent with, and in furtherance of the long-term business strategies of
Capstone, and are fair to, and in the best interests of, Capstone and its
stockholders. In reaching this decision, Capstone's Board of Directors heard
reports from its financial advisor and management regarding the Merger, and its
decision was based in large part upon
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balancing the risks and benefits of the Merger. The Capstone Board of Directors
unanimously approved the Merger.
In its deliberations and in making its determination, the Capstone Board of
Directors considered a number of factors, including:
(1) The Surviving Corporation is expected to benefit from several
operational efficiencies including, but not limited to (a) greater
purchasing power with distributors and manufacturers, (b) elimination of
duplicate functions, (c) consolidation of local pharmacy operations where
service areas overlap, and (d) the integration of information systems and
related personnel.
(2) The Surviving Corporation will possess greater managerial,
operational and financial resources than Capstone. As a result of its
greater financial resources, the Surviving Corporation may be expected to
have enhanced access to capital on more favorable terms than were
previously available to Capstone.
(3) The size and market capitalization of the Surviving Corporation is
expected to increase stockholder liquidity as well as the market visibility
of the combined pharmacy operations.
(4) The Surviving Corporation will have broader geographic coverage
than Capstone, which is expected to enhance its ability to serve customers
with geographically diverse operations and compete in a marketplace
increasingly oriented towards managed care.
The foregoing discussion of the information and factors considered and
given weight by Capstone's Board of Directors is not intended to be exhaustive.
In view of the variety of factors considered in connection with its evaluation
of the Merger, the Capstone Board did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determination. In addition, individual members of the Capstone
Board of Directors may have given different weights to different factors.
OPINION OF CAPSTONE'S FINANCIAL ADVISOR
Capstone engaged Adirondack as financial advisor in connection with the
proposed merger of Capstone with the Institutional Pharmacy Business of Beverly.
A principal of Adirondack, Joseph Furlong, is a director of Capstone. On April
15, 1997, Adirondack delivered its written opinion (the "Adirondack Opinion") to
the Capstone Board that, as of such date and subject to the assumptions made,
general procedures followed, factors considered and limitations on the review,
the consideration paid by Capstone in the Merger is fair, from a financial point
of view, to Capstone.
THE FULL TEXT OF THE ADIRONDACK OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, GENERAL PROCEDURES FOLLOWED, FACTORS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY ADIRONDACK IN RENDERING ITS OPINION, IS ATTACHED AS ANNEX F
AND IS INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE OPINION SET FORTH
BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
ADIRONDACK OPINION. HOLDERS OF CAPSTONE COMMON STOCK ARE URGED TO READ THE
ADIRONDACK OPINION CAREFULLY AND IN ITS ENTIRETY. TERMS DEFINED HEREIN WILL HAVE
SUCH MEANING SOLELY FOR PURPOSES OF THIS SUMMARY OF THE ADIRONDACK OPINION.
No limitations were imposed by Capstone on the scope of Adirondack's
investigation or the procedures to be followed by Adirondack in rendering its
opinion. Adirondack was not requested to and did not make any recommendation to
the Capstone Board as to the form or amount of the consideration to be paid in
the Merger, which was determined through arm's-length negotiations between
Capstone and Beverly. In arriving at its opinion, Adirondack did not render an
opinion as to a specific range of values for PCA, but made its determination as
to the fairness, from a financial point of view, of the consideration paid by
Capstone in the Merger on the basis of the financial and comparative analyses
described below. The Adirondack Opinion was rendered for the benefit of the
Capstone Board in its evaluation of the Merger and does not constitute a
recommendation to any Capstone stockholder as to how such stockholder should
vote with respect to the Merger Proposal, Amendment Proposal or Capstone Plan
Proposal. Adirondack was not requested to opine as
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to, and its opinion does not in any manner address, Capstone's underlying
business decision to proceed with or effect the Merger.
In connection with its opinion, Adirondack reviewed and analyzed, among
other things: (i) the Merger Agreement and the Distribution Agreement; (ii)
publicly available business and financial information concerning Capstone and
PCA and the industry in which they operate; and (iii) certain internal
non-public financial and operating data provided to Adirondack by the
managements of Capstone and Beverly relating to the businesses of Capstone and
PCA, including projections of future financial results of such businesses
prepared by Capstone and Beverly. Adirondack also had discussions with members
of the senior managements of Capstone and Beverly concerning the operations,
historical financial statements and future prospects of Capstone and PCA, before
and after giving effect to the Distribution and the Merger, as well as their
views of the business, operational and strategic benefits and other implications
of the Distribution and the Merger, including the level of synergies reasonably
obtainable upon consummation of the Merger. Adirondack also compared the
financial and operating performance of Capstone and PCA with publicly available
information concerning certain other companies Adirondack deemed comparable,
reviewed the relevant historical stock prices and trading volumes of the
Capstone Common Stock, to the extent Adirondack deemed relevant, the Beverly
Common Stock and certain publicly-traded securities of such other combinations
and acquisition transactions it deemed reasonably comparable to the Merger and
otherwise relevant to its inquiry, and Adirondack made such other analyses and
examinations as it deemed necessary or appropriate.
Adirondack assumed and relied upon, without assuming any responsibility for
verification, the accuracy and completeness of all of the financial and other
information provided to, discussed with, or reviewed by or for it, or publicly
available for purposes of its opinion and further relied upon the assurances of
management of Capstone and Beverly that they are not aware of any facts that
will make such information inaccurate or misleading. Adirondack did not make or
obtain any independent evaluations or appraisals of the assets or liabilities of
Capstone or PCA and did not conduct a physical inspection of the properties and
facilities of Capstone or PCA. Adirondack assumed that the financial projections
and the estimates of reasonably obtainable synergies provided to Adirondack by
Capstone and Beverly were reasonably determined on bases reflecting the best
then currently available estimates and judgments of the managements of Capstone
and Beverly as to the future financial performance of Capstone or PCA, as the
case may be (including after taking account of the impact of the Distribution
and the Merger), and Adirondack expressed no view as to such projections and
estimates of reasonably obtainable synergies or the assumptions on which they
were based.
In arriving at its opinion, Adirondack assumed, with Capstone's consent,
that the synergies described by Capstone as being reasonably obtainable will be
obtained and that the representations and warranties of each party to the Merger
Agreement contained therein are true and correct; that each party to the Merger
Agreement and to the Distribution Agreement will perform all of the covenants
and agreements required to be performed by such party under such agreements; and
that all conditions to the consummation of the Merger (including, without
limitation, the completion of the Distribution) will be satisfied without waiver
thereof. Adirondack also assumed that all material governmental, regulatory, or
other consents and approvals will be obtained in connection with the
Distribution and the Merger and that in the course of obtaining any necessary
governmental, regulatory, or other consents and approvals, or any amendments,
modifications or waivers to any documents to which either Capstone or Beverly is
a party, no restrictions will be imposed or amendments, modifications or waivers
made that would have any material adverse effect on the contemplated benefits to
Capstone of the Merger. Adirondack based its opinion on market, economic and
other conditions as they existed on, and could be evaluated as of the date of
its opinion.
The following is a summary of the financial analyses used by Adirondack and
does not purport to be a complete description of the analyses performed by
Adirondack. The preparation of a fairness opinion is a complex process and is
not necessarily susceptible to partial analysis or summary description.
Selecting portions of the analyses or of the summary set forth below, without
considering the analysis as a whole, could create an incomplete view of the
processes underlying Adirondack's opinion. In arriving at its fairness
determination, Adirondack considered the results of all such analyses. The
analyses were prepared solely for the purposes of enabling Adirondack to render
its opinion to the Capstone Board as to the fairness, from a financial point of
view, to Capstone of the Conversion Number. Analyses based upon forecasts of
future results
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are not necessarily indicative of actual future values, which may be
significantly more or less favorable than suggested by such analyses.
Comparable Public Company Analysis. Adirondack reviewed certain publicly
available financial and operating data of selected publicly-traded institutional
pharmacy companies to determine a range of multiples for such companies. To
determine a reference range of values for PCA, Adirondack compared those
multiples with the implied multiples for PCA based on the consideration to be
paid by Capstone for PCA in the Merger (the "Merger Consideration"), which was
calculated based on the Conversion Number, a Capstone Common Stock price of
$12.00, and Capstone's assumption in the Merger of $275 million aggregate
indebtedness of PCA. The selected institutional pharmacy companies
(collectively, the "Institutional Pharmacy Comparable Group") were Vitalink
Pharmacy Services, Inc. ("Vitalink"), NCS Healthcare, Inc. ("NCS Healthcare"),
Omnicare, Inc. ("Omnicare"), Capstone, and American Medserv Corporation
("American Medserv"). For each company in the Institutional Pharmacy Comparable
Group, Adirondack calculated a range of multiples of Market Value of Common
Equity (market price of common stock multiplied by the number of outstanding
shares) to net income from continuing operations for the latest twelve months
and for 1997 in each case based on mean analyst earning estimates ("Estimated
1997"). Adirondack also calculated a range of multiples of Market Capitalization
(Market Value of Common Equity plus the book value of indebtedness for borrowed
money and preferred stock, less cash and equivalents) for revenues, EBITDA
(earnings before interest, taxes, depreciation, amortization, and non-recurring
items) and EBIT (earnings before interest, taxes, and non-recurring items) for
each company in the Institutional Pharmacy Comparable Group, in each case for
the latest twelve months.
For the Institutional Pharmacy Comparable Group, the following range of
multiples (excluding extreme outliers) of Market Value of Common Equity were
calculated: low of 17.3x to high of 45.3x with a mean of 32.8x and a median of
35.7x as a multiple of net income from continuing operations for the latest
twelve months, and low of 16.4x to a high of 30.5x with a mean of 25.5x and a
median of 27.5x net income from continuing operations for Estimated 1997. For
the Institutional Pharmacy Comparable Group, the following range of multiples
(excluding extreme outliers) of Market Capitalization were calculated: a low of
1.5x to a high of 2.5x with a mean of 2.0x and a median of 2.1x as a multiple of
latest twelve months revenues; a low of 9.0x to a high of 26.2x with a mean of
16.1x and a median of 14.7x as a multiple of latest twelve months EBITDA; and
low of 10.9x to high of 20.3x with a mean of 16.3x and a median of 17.8x as of
multiple of latest twelve months EBIT.
Based on the Merger Consideration and financial information prepared by
Beverly, the following implied multiples of Market Value of Common Equity were
calculated for PCA: 30.6x as a multiple of net income from continuing operations
for the twelve months ended December 31, 1996, and 25.6x as a multiple of net
income from continuing operations as estimated by Beverly for the twelve months
ending December 31,1997. The following implied multiples of Market
Capitalization were calculated for PCA: for the twelve months ended December 31,
1996 (based on financial information prepared by Beverly), 1.6x as a multiple of
revenues, 13.6x as a multiple of EBITDA, and 18.8x as a multiple of EBIT; and
for the twelve months ending December 31, 1997 (based on estimates prepared by
Beverly), 1.4x as a multiple of estimated revenues, 11.5x as a multiple of
estimated EBITDA, and 15.8x as a multiple of estimated EBIT.
Because of the lack of truly comparable companies due to the inherent
differences between the businesses, operations, and prospects of PCA and the
businesses, operations and prospects of the companies included in the
Institutional Pharmacy Comparable Group, Adirondack believed that it was
inappropriate to, and therefore did not rely solely on, the quantitative results
of the analysis and, accordingly, also made qualitative judgments concerning
differences between the financial and the operating characteristics of PCA and
the companies in the Institutional Pharmacy Comparable Group that would affect
the public trading values of such other companies.
Comparable Transaction Analysis. Adirondack reviewed certain publicly
available information regarding thirteen selected institutional pharmacy
industry transactions (the "Transaction Comparables") announced since November
1992. Because a majority of these transactions involved the sale of private
companies, however, limited financial data was publicly available. Adirondack
analyzed the transaction prices
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realized in these transactions, expressed as a multiple of selected operating
and financial data of the acquired companies for the purpose of determining a
reference range of values for PCA. The Transaction Comparables reviewed were
Capstone's acquisition of Symphony Pharmacy Services, Inc., Capstone's
acquisition of IMD Corporation, Capstone's acquisition of Geri-Care Systems,
Inc., Capstone's acquisition of Clinical Care -- SNF Pharmacy, Inc., Capstone's
acquisition of Portaro Pharmacies, Inc., Living Centers of America, Inc.'s
acquisition of a 51% interest in Abbey Pharmaceutical Services, Inc., which it
did not previously own, Omnicare's acquisition of Evergreen Pharmaceutical, Inc.
and Evergreen Pharmaceutical East, Inc., GranCare's acquisition of CompuPharm,
Inc., Vitalink's acquisition of West End Family Pharmacy, Inc., Vitalink's
acquisition of TeamCare Pharmacy Inc., Omnicare's acquisition of Pompton Nursing
Home Suppliers, Omnicare's acquisition of Downeast Pharmacy -- Long-Term Care
Division, Omnicare's acquisition of Three Forks Apothecary, and Omnicare's
acquisition of Jacob's Healthcare Systems. To the extent such information was
publicly available, Adirondack calculated multiples of the Transaction Value
(Purchase Price plus book value of indebtedness for borrowed money and preferred
stock less cash and equivalents) to the most recent preacquisition twelve-month
revenues, EBIT of the acquired company, and the Transaction Value paid per bed
for the number of beds services by the acquired company.
The following range of multiples (excluding extreme outliers) of
Transaction Value were calculated: a low of 0.8x to a high of 1.7x with a mean
of 1.2x and a median of 1.2x as a multiple of latest twelve months
pre-acquisition revenues; and low of 5.7x to high of 20.4x with a mean of 12.9x
and a median of 12.3x as a multiple of latest twelve months pre-acquisition
EBIT.
Based upon the Merger Consideration and Financial information prepared by
Beverly the following implied multiples of purchase price were calculated for
PCA: 30.6x as a multiple of net income from continuing operations for the twelve
months ended December 31, 1996 and 25.6x as a multiple of net income from
continuing operations as estimated by Beverly for the twelve months ending
December 31, 1997. The following implied multiples of Transaction Value were
calculated for PCA: for the twelve months ended December 31, 1996 (based on
financial information prepared by Beverly), 1.6x as a multiple of revenues,
13.6x as a multiple of EBITDA, and 18.8x as a multiple of EBIT; and for the
twelve months ending December 31, 1997 (based on estimates prepared by Beverly),
1.4x as a multiple of estimated revenues, 11.5x as a multiple of estimated
EBITDA, and 15.8x as a multiple of estimated EBIT.
Because of market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of PCA
and the acquired businesses analyzed, Adirondack believed that a purely
quantitative comparable transaction analysis would not be particularly
meaningful in the context of the Merger. Adirondack believed that an appropriate
use of a comparable transaction analysis in this instance would involve
qualitative judgments concerning differences between the characteristics of
these transactions and the Merger that would affect the acquisition values of
PCA and such acquired companies.
Discounted Cash Flow Analysis. Adirondack performed a discounted cash flow
analysis of PCA based upon certain financial projections provided to Adirondack
by Beverly for the years 1997 through 2000. Using such projections, Adirondack
calculated a range of values for PCA based upon the discounted net present value
of the sum of (i) the projected stream of unlevered free cash flows (calculated
as EBITDA less taxes less changes in working capital less capital expenditures)
to PCA through the year 2001, and (ii) the projected terminal value of PCA at
the year 2001 based upon both a range of multiples of projected EBITDA and upon
the continued generation of the 2001 unlevered free cash flow as a perpetuity.
Adirondack applied discount rates ranging from 9.0% to 14.0% and multiples of
EBITDA ranging from 15.0x to 19.0x. Based on the foregoing, Adirondack
calculated the implied firm value of PCA to be in a range between $609.1 million
and $1,621.1 million.
Contribution Analysis. Adirondack reviewed the estimated revenues, EBITDA,
EBIT, and Unlevered Net Income for Capstone and PCA based on historical
information and projections as to future financial results provided to
Adirondack by Capstone and Beverly for each respective company. Based on such
review, Adirondack analyzed the relative financial contributions of each of
Capstone and PCA to the pro forma consolidated entity for the twelve month
periods ending December 31, 1996, 1997, and 1998. Based on such
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analysis, Adirondack determined that Capstone's contribution to the pro forma
consolidated revenues for the twelve month periods ending December 31, 1996,
1997, and 1998 were 21.9%, 37.3%, and 38.7%; Capstone's contribution to the pro
forma consolidated EBITDA for the twelve month periods ending December 31, 1996,
1997, and 1998 were 17.3%, 37.3%, and 40.2%; Capstone's contributions to the pro
forma consolidated EBIT for the twelve month periods ending December 31, 1996,
1997 and 1998 were 15.1%, 38.0%, and 41.3%; and Capstone's contributions to the
pro forma consolidated Unlevered Net Income for the twelve month periods ending
December 31, 1996, 1997, and 1998 were 6.5%, 38.0%, and 45.9%. Adirondack noted,
after giving effect to the issuance of Capstone shares in the Merger and based
on the outstanding shares of Capstone as of December 31, 1996, that the Capstone
stockholders would own 42.7% and that the Beverly stockholders would own 57.3%
of Capstone on a pro forma basis after giving effect to the Merger.
Pro Forma Merger Analysis. Adirondack reviewed certain financial
information provided to Adirondack by Capstone and Beverly, including
projections as to future financial results of Capstone and PCA, on a stand-alone
basis. Adirondack combined the projected operating results of Capstone with the
corresponding projected operating results of PCA to arrive at the consolidated
company projected net income. In performing this analysis, Adirondack assumed
that the Merger was consummated on January 1, 1997 for the Merger Consideration
and that the estimates by Capstone and Beverly of revenue enhancement and
purchasing and operating synergy contributions would be achieved. Such analysis
indicated that, based on the foregoing, the Merger would be accretive to
Capstone's projected net income for the fiscal year ended December 31, 1997 and
the fiscal years thereafter.
Other Analyses. Adirondack reviewed the performance of historical trading
prices and volume of Beverly Common Stock and Capstone Common Stock for certain
periods, and compared such per share market price movements to the Standard &
Poor's 500 Index and, with respect to Capstone, an index of selected publicly
traded institutional pharmacy companies.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses and
the application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Accordingly, Adirondack believes that its analysis must be
considered as a whole and that considering any portion of such analysis and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the Adirondack
Opinion. In its analyses, Adirondack made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Capstone and PCA. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the value
of businesses do not purport to be appraisals or to reflect the prices at which
businesses may actually be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty and none of Beverly, Capstone and
Adirondack assume responsibility for the accuracy of such analyses and
estimates.
Adirondack, as part of its financial advisory business, is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions and valuations for corporate and other purposes. Capstone selected
Adirondack as its financial advisor based on Adirondack's experience and
expertise particularly with respect to the healthcare industry.
Pursuant to an engagement letter between Capstone and Adirondack a fee of
$1 million became payable to Adirondack upon delivery of the Adirondack Opinion.
In addition, Adirondack will receive a transaction fee, payable upon completion
of the Merger, equal to $3 million and will be reimbursed for certain of its
related expenses. Adirondack will not be entitled to any additional fees or
compensation in the event the Merger and Distribution are not approved or
otherwise consummated. Capstone also agreed to indemnify Adirondack, its
affiliates and each of its directors, officers, agents and employees and each
person, if any, controlling Adirondack or any of its affiliates against certain
liabilities, including liabilities under federal securities laws.
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In the past, Adirondack has provided financial advisory services for
Capstone and has received fees for the rendering of these services. See
"Information Concerning Capstone -- Certain Capstone Transactions."
DIRECTORS AND OFFICERS OF CAPSTONE FOLLOWING THE MERGER
Directors. Each of Capstone and Beverly have the right to nominate five
directors to the Board of Directors of the Surviving Corporation. The parties
intend to make their nominations on or before July 31, 1997.
Executive Officers. The table below sets forth certain information
concerning each person who is expected to serve as an executive officer of the
Surviving Corporation.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
C. Arnold Renschler, M.D. ................................... 55 President, Chief Executive Officer and Director
James D. Shelton............................................. 42 Executive Vice President, Chief Financial Officer and
Secretary
Robert Della Valle........................................... 45 Executive Vice President, Chief Operating Officer
R. Scott Jones............................................... 38 Senior Vice President, Marketing and Sales
</TABLE>
Mr. Renschler joined Beverly in 1996 as Executive Vice President and
President of PCA. From 1990 to 1996, Mr. Renschler was Senior Vice President and
Chief Clinical Officer, as well as President of three operating divisions of
NovaCare, Inc. and a member of its board of directors. Prior to that time, he
held a series of key executive positions at Manor Healthcare Corp., including
President and Chief Operating Officer.
Mr. Shelton has served as Executive Vice President, Chief Financial Officer
and Secretary of Capstone since February 1997. Mr. Shelton served as Vice
President-Chief Financial Officer of Allied Pharmacy Management Inc. ("Allied"),
a pharmacy subsidiary of Cardinal Health Inc. from December 1993 to January
1997. Mr. Shelton served as Vice President of Evergreen Healthcare, Inc., a
long-term care company, from October 1992 to December 1993, and as Vice
President-Chief Financial Officer of its predecessor, National Heritage, Inc.,
from February 1990 to October 1992.
Mr. Della Valle joined Capstone as Executive Vice President and Chief
Operating Officer in July 1996. Prior to joining Capstone, Mr. Della Valle was
President and Chief Executive Officer and, prior to that, Vice President of
Allied. He had been employed by Allied since June 1987 and held the position of
President and Chief Executive Officer from July 1993 to July 1996.
Mr. Jones has served as Vice President, Marketing and Sales since joining
PCA in January 1997. Prior to joining PCA, he was employed by General Electric
Medical Systems, a global manufacturer of medical imaging equipment, from 1988
to 1997. From 1991 to 1993 Mr. Jones was Manager, Business Development and
Product Manager -- Surgical Products. From 1993 to 1995 he held the position of
Manager, Americas X-Ray Business and from 1995 to 1997 he was Director,
Multi-Hospital Systems Operations.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
Beverly. Certain members of Beverly's management and the Beverly Board of
Directors may be deemed to have interests in the Transactions in addition to
their interests as Beverly stockholders generally, which may cause potential
conflicts of interest. The Beverly Board of Directors was aware of these factors
and considered them, among other factors, in approving the Transactions. Among
these factors are: (i) the acceleration of the vesting of currently unvested
Beverly options, phantom shares, performance shares (as to 50% of such
performance shares) and restricted shares as a result of the consummation of the
Merger as described under "Effect of the Transactions on Employees and Employee
Benefits," (ii) the treatment of Beverly options in the Distribution and the
Merger as described under "Effect of the Transactions on Employees and Employee
Benefits," (iii) the indemnification provisions of the Merger Agreement and the
Distribution Agreement as described under "Post-Closing
Arrangements -- Indemnification," and (iv) the payment by Capstone of a portion
of the premiums for directors' and officers' liability insurance for current
Beverly directors and officers as described under "Post-Closing
Arrangements -- Indemnification." Substantially all of the directors and
executive officers of Beverly will be directors and executive officers of New
Beverly following the Distribution
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except for C. Arnold Renschler, M.D., who will resign his office of Executive
Vice President of Beverly to become Chief Executive Officer and a director of
Capstone as of the Effective Time of the Merger. See "Certain Considerations
Related to the Transactions -- Directors and Officers of Capstone Following the
Merger."
In addition, pursuant to the Merger Agreement, Beverly and Capstone have
agreed to reconstitute the Capstone Board of Directors to include ten members,
five of whom will be designated by Beverly, and five of whom will be designated
by Capstone. Further, Capstone's Certificate of Incorporation will be amended to
provide for (i) a staggered Board of Directors consisting of three classes of
directors who will serve terms up to three years each and (ii) special meetings
of the stockholders of Capstone to only be called by a majority of the Board of
Directors or by the holders of not less than 25% of all of the shares entitled
to vote at such meeting, with the business transacted at special meetings of the
Capstone stockholders to be limited to the business stated in the notice given
to the stockholders.
As of March 31, 1997, the 17 executive officers and directors of Beverly
(as a group) beneficially owned an aggregate of 632,897 shares of Beverly Common
Stock (excluding shares subject to outstanding stock options). All such shares
will be treated in the Merger and the Distribution in the same manner as shares
of Beverly Common Stock held by other stockholders of Beverly.
As of March 31, 1997, the executive officers of Beverly (as a group) also
held options to purchase an aggregate of 1,996,529 shares of Beverly Common
Stock pursuant to Beverly's stock option and related stock incentive plans,
1,054,500 of which are not currently exercisable, 44,023 phantom shares, none of
which are currently vested, awards to receive an aggregate of 374,000
performance shares, none of which are currently vested, and an aggregate of
76,000 shares of restricted stock. In addition, as of March 31, 1997, the non-
employee directors of Beverly (as a group) held options to purchase an aggregate
of 97,500 shares of Beverly Common Stock. Assuming the executive officers and
directors execute a Consent and Release upon the consummation of the Merger, all
of the options, phantom stock and restricted stock held by such executive
officers and non-employee directors will immediately become fully vested and
exercisable and one-half of the awards regarding performance shares will
immediately become fully vested and exercisable. See "Effect of the Transactions
on Employees and Employee Benefits -- Employee Benefit Agreement."
C. Arnold Renschler, M.D., an Executive Vice President of Beverly and
President and Chief Executive Officer of PCA, is expected to resign from his
position with Beverly as of the Effective Time of the Merger and enter into an
employment agreement with the Surviving Corporation, the terms of which are
expected to be negotiated in June 1997. See "-- Directors and Officers of
Capstone Following the Merger."
Capstone. Certain members of Capstone's management and the Capstone Board
of Directors may be deemed to have interests in the Transactions in addition to
their interests as Capstone stockholders generally, which may cause potential
conflicts of interest. Mr. Furlong is a director of Capstone and is the
president of and a principal of Adirondack, which will receive certain fees in
connection with the Transactions. See "Information Concerning
Capstone -- Certain Capstone Transactions." Pursuant to the Merger Agreement,
Beverly and Capstone have agreed to reconstitute the Capstone Board of Directors
to include ten members, five of whom will be designated by Beverly, and five of
whom will be designated by Capstone. Further, Capstone's Certificate of
Incorporation will be amended to provide for (i) a staggered Board of Directors
consisting of three classes of directors who will serve terms up to three years
each and (ii) special meetings of the stockholders of Capstone to only be called
by a majority of the Board of Directors or by the holders of not less than 25%
of all of the shares entitled to vote at such meeting, with the business
transacted at special meetings of the Capstone stockholders to be confined to
the business stated in the notice given to the stockholders. Allan C. Silber,
Chairman of Capstone, will remain as Chairman following the Merger and certain
members of Capstone's management will continue to serve in their same roles. In
addition, the officers and directors of Capstone, and their affiliates
(including Counsel) beneficially own approximately 26.1% of Capstone Common
Stock. See "-- Directors and Officers of Capstone following the Merger" and
"Information Concerning Capstone -- Principal Stockholders of Capstone."
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<PAGE> 68
ACCOUNTING TREATMENT
The Merger will be treated as a purchase for accounting and financial
reporting purposes. The Merger will be treated as a "reverse merger/acquisition"
of Capstone by Beverly (after giving effect to the restructuring and the
Distribution) because, among other factors, (i) the Beverly stockholders, as a
group, will own approximately 57% of the total shares outstanding of the
Surviving Corporation, (ii) C. Arnold Renschler, M.D., currently Executive Vice
President of Beverly and President and Chief Executive Officer of PCA, will be
the President, Chief Executive Officer and a director of Capstone after the
Merger, and (iii) the market value of the securities and cash (in the case of
fractional shares only) to be received by Beverly stockholders will exceed the
market value of the securities retained by Capstone stockholders. Under this
method of accounting, Beverly will be treated as the acquiring entity and the
assets and liabilities of Capstone will be adjusted to their fair values in
accordance with the purchase method of accounting. As a result, the historical
pre-merger financial statements of the Surviving Corporation will be those of
Beverly's Institutional Pharmacy Business rather than Capstone. See "Unaudited
Pro Forma Combined Condensed Financial Statements."
NO APPRAISAL RIGHTS
Neither the holders of Beverly Common Stock nor the holders of Capstone
Common Stock will have the right to elect to have the fair value of their shares
judicially appraised and paid to them in cash in connection with the
Distribution or the Merger. Section 262 of the DGCL ("Section 262") provides
appraisal rights to stockholders of Delaware corporations in connection with
certain mergers and consolidations. Under Section 262, appraisal rights are not
available to the share owners of a corporation that is a party to a merger if
the corporation's stock is listed on a national securities exchange or the
Nasdaq Stock Market as of the record date set to determine the share owners
entitled to receive notice of and to vote at the meeting of share owners to
approve the merger so long as the consideration to be received by such share
owners in the merger consists of (i) shares of the capital stock of the
surviving corporation in the merger, (ii) shares of the capital stock of any
other corporation provided that such stock is listed on a national securities
exchange as of the date on which the merger becomes effective, (iii) cash in
lieu of fractional shares, or (iv) a combination of the foregoing.
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THE DISTRIBUTION AND OTHER PRE-MERGER TRANSACTIONS
This section of the Joint Proxy Statement/Prospectus describes certain
aspects of the proposed restructuring of Beverly and Distribution. The following
descriptions do not purport to be complete and are qualified by reference to the
Distribution Agreement, which is attached as Annex B hereto, and the Merger
Agreement, which is attached as Annex C hereto.
TERMS OF THE DISTRIBUTION AGREEMENT
Simultaneously with the execution of the Merger Agreement, Beverly, New
Beverly and Capstone executed the Distribution Agreement. Following the Merger,
Capstone will succeed to Beverly's obligations arising pursuant to the
Distribution Agreement by operation of law following the Merger. The
Distribution Agreement provides a general framework for allocating Beverly's
assets and liabilities pursuant to the Internal Beverly Restructuring Plan
(attached as Exhibit A to the Distribution Agreement), to segregate the
Remaining Healthcare Business from the Institutional Pharmacy Business prior to
the Distribution Date in preparation for the Distribution and the Merger. The
Distribution Agreement also sets forth the general terms on which Beverly will
conduct its business prior to the Distribution Date, as well as the terms
regarding certain relationships between Capstone and New Beverly following the
Distribution.
The Distribution Agreement provides that the Distribution will be effected
by distributing to each holder of Beverly Common Stock as of the close of
business on the Distribution Date certificates representing one share of New
Beverly Common Stock for each share of Beverly Common Stock held by such holder
as of such time. See "-- Manner of Effecting the Distribution."
RESTRUCTURING AND CONTRIBUTION OF REMAINING HEALTHCARE BUSINESS TO NEW BEVERLY
New Beverly, which is a wholly-owned subsidiary of Beverly, was recently
organized for purposes of the Transactions. Until shortly before the Merger, New
Beverly will own no material assets and will conduct no business activities
other than in preparation for the Transactions. Consummation of the Distribution
is a condition to the Merger.
Prior to the Distribution Record Date, Beverly will complete an internal
restructuring pursuant to which all the assets and liabilities relating to the
Remaining Healthcare Business will be transferred or contributed to New Beverly
in one or more tax-free transactions such that upon completion of such
restructuring, the Remaining Healthcare Business will be conducted by New
Beverly, a direct subsidiary of Beverly, and various direct and indirect
subsidiaries of New Beverly. At the same time, any assets and liabilities of
Beverly relating primarily to the Institutional Pharmacy Business which are not
already in the Pharmacy Subsidiaries (as defined in the Distribution Agreement)
will be transferred to such Pharmacy Subsidiaries so that upon completion of
such restructuring the Institutional Pharmacy Business will be conducted by PCA,
a direct subsidiary of Beverly, and various direct and indirect subsidiaries of
PCA.
In connection with the consummation of the transactions contemplated by the
Distribution Agreement and the Merger Agreement, Beverly, New Beverly, and
Capstone will enter into additional agreements and arrangements designed to
complete the separation of Beverly's Remaining Healthcare Business from its
Institutional Pharmacy Business and to define certain intercompany relationships
subsequent to the completion of the Merger. Among these agreements are: (i) the
Employee Benefit Agreement; (ii) the Tax Allocation and Indemnification
Agreement (the "Tax Allocation and Indemnification Agreement") between Beverly
and New Beverly; (iii) the Non-competition Agreement (the "Non-competition
Agreement") between Capstone and New Beverly; (iv) the Interim Services
Agreement (the "Interim Services Agreement") between New Beverly and Beverly;
and (v) the Affiliate Agreement (the "Affiliate Agreement") between Capstone and
certain individuals who may be deemed affiliates of Beverly.
As provided in the Distribution Agreement, prior to the consummation of the
Distribution, Beverly will take certain actions as the sole stockholder of New
Beverly or will ratify actions taken by officers and directors of New Beverly in
connection with establishing New Beverly as an independent company, including:
(i) incorporating New Beverly under the laws of the state of Delaware; (ii)
adopting the Certificate of
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Incorporation and Bylaws of New Beverly to be in effect at the Time of
Distribution (as defined in the Distribution Agreement); (iii) electing as
directors of New Beverly the individuals named in the New Beverly Prospectus
(attached hereto as Annex A) and causing the appointment of officers of New
Beverly to serve in such capacities following the Distribution; and (iv)
adopting various incentive compensation plans for the benefit of directors,
officers, and employees of New Beverly to be in effect following the
Distribution. For information concerning the Certificate of Incorporation and
Bylaws of New Beverly, see "Description of New Beverly Capital Stock -- The
Charter and Bylaws of New Beverly" in the New Beverly Prospectus. For
information concerning the individuals who may serve as directors and executive
officers of New Beverly following the Distribution and certain compensatory
arrangements for their benefit, including stock incentive plans, see "Executive
and Director Compensation" in the New Beverly Prospectus.
Pursuant to the Distribution Agreement, New Beverly will acquire the right
to use the name "Beverly" in connection with continuing the conduct of the
Remaining Healthcare Business. It is anticipated that immediately following the
Merger, New Beverly will change its name to "Beverly Enterprises, Inc."
CONSUMMATION OF THE DISTRIBUTION; TREATMENT OF BEVERLY STOCK OPTIONS, PHANTOM
SHARES, PERFORMANCE SHARES, AND SHARES OF RESTRICTED STOCK
The Distribution will be effected immediately prior to the Merger. However,
the Distribution will not be effected unless both the Distribution Proposal and
the Merger Proposal are approved by Beverly's stockholders. The Board of
Directors of Beverly has not yet established the Distribution Record Date,
although it is anticipated that the Distribution Record Date will be the date on
which the Distribution occurs (the "Distribution Date") and will be immediately
prior to the Effective Time of the Merger.
On the Distribution Date Beverly's Board of Directors will cause Beverly to
distribute to Beverly stockholders, as of the Distribution Record Date, shares
of New Beverly Common Stock. Each stockholder of Beverly as of the Distribution
Record Date will receive one share of New Beverly Common Stock for each share of
Beverly Common Stock held as of the Distribution Record Date. Immediately
following the completion of the Distribution, New Beverly will be an
independent, publicly-traded company, and it is contemplated that the shares of
New Beverly Common Stock will be listed on the NYSE and the PSE under the
trading symbol "BEV."
As a consequence of the Distribution, options to purchase shares of Beverly
Common Stock that are outstanding under the applicable Beverly employee benefit
plans immediately prior to the Time of Distribution (as defined in the
Distribution Agreement), whether or not exercisable, and that have been granted
to Transferred Employees, will be assumed by New Beverly in accordance with the
Employee Benefit Agreement and such shares will be exercisable upon the same
terms and conditions as under the applicable Beverly employee benefit plan and
the applicable option agreement issued thereunder, except that (i) the number of
shares of New Beverly Common Stock for which such options may be converted, and
(ii) the option exercise price per share of such options will be adjusted in
accordance with the Employee Benefit Agreement. For information with respect to
the treatment of employee benefits for Retained Employees see "Effect of the
Transactions on Employees and Employee Benefit Matters -- Employee Benefit
Agreement."
The exercise price and number of shares subject to purchase under each
outstanding Beverly Option will be adjusted pursuant to the Employee Benefit
Agreement to reflect the Distribution for each holder of such an option who
executes a Consent and Release approved by Beverly. See "Effect of the
Transactions on Employees and Employee Benefit Matters -- Employee Benefit
Agreement."
As of the Time of Distribution, by virtue of the Distribution and without
any action on the part of the holders thereof, New Beverly will assume each
unvested Beverly phantom share held by Transferred Employees, and each Beverly
performance share and share of Beverly restricted stock that is outstanding
under the applicable Beverly employee benefit plan immediately prior to the Time
of Distribution, giving effect to the adjustments provided for in the Employee
Benefit Agreement, and will substitute for each such share, a new unvested
phantom share, performance share or share of restricted stock of New Beverly
Common Stock upon the same terms and conditions, including vesting requirements
(as adjusted to take into account the transactions referred to in the
Distribution Agreement, including the requirement that employment
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services be performed for New Beverly or one of its subsidiaries) as applied to
the Beverly phantom share, Beverly performance share or share of Beverly
restricted stock for which it has been substituted.
The number of Beverly shares subject to each outstanding Beverly phantom
share, Beverly performance share and share of Beverly restricted stock will be
adjusted pursuant to the Employee Benefit Agreement to reflect the Distribution
for each holder of such share who executes a Consent and Release approved by
Beverly.
Prior to the Effective Time, Beverly will: (i) obtain consents from holders
of Beverly phantom shares, performance shares, shares of restricted stock and
outstanding options to purchase Beverly Common Stock, granted under the
applicable Beverly employee benefit plans; and (ii) make any amendments to the
terms of the applicable Beverly employee benefit plans or any award granted
thereunder that, in the case of either (i) or (ii), are necessary to give effect
to the transactions contemplated under this caption.
MANNER OF EFFECTING THE DISTRIBUTION
It is expected that Beverly's Board of Directors will determine the
Distribution Date and that the Distribution will be made on the Distribution
Date to stockholders of record of Beverly Common Stock as of the Distribution
Record Date. The Merger is expected to take place promptly following the
satisfaction of certain conditions set forth in the Merger Agreement and is
expected to occur in the fourth quarter of 1997. The Distribution will not take
place unless all of the conditions to effecting the Merger (other than the
completion of the Distribution) have been fulfilled, and there can be no
assurance as to the timing or consummation of the Distribution. Beverly's
transfer agent, The Bank of New York, will act as the Distribution Agent for the
Distribution and will deliver certificates for New Beverly Common Stock as soon
as practicable to holders of record of Beverly Common Stock as of the close of
business on the Distribution Record Date on the basis of one share of New
Beverly Common Stock for every one share of Beverly Common Stock held on the
Distribution Record Date. All shares of New Beverly Common Stock will be fully
paid and nonassessable, and the holders thereof will not be entitled to
preemptive rights. See "Description of Capital Stock" in the New Beverly
Prospectus. Following the completion of the Distribution, New Beverly will
operate as an independent, publicly-traded company.
YOU WILL NOT BE REQUIRED TO PAY ANY CASH OR OTHER CONSIDERATION FOR THE
SHARES OF NEW BEVERLY COMMON STOCK RECEIVED IN THE DISTRIBUTION NOR WILL YOU
NEED TO SURRENDER YOUR BEVERLY COMMON STOCK CERTIFICATES IN ORDER TO RECEIVE
SHARES OF NEW BEVERLY COMMON STOCK IN THE DISTRIBUTION. THE DISTRIBUTION AGENT
WILL SEND YOU YOUR NEW BEVERLY STOCK CERTIFICATES FOLLOWING THE CONSUMMATION OF
THE DISTRIBUTION.
LISTING OF NEW BEVERLY COMMON STOCK; RESTRICTIONS ON RESALE
New Beverly will apply for listing the New Beverly Common Stock on the NYSE
and PSE under the symbol "BEV," currently used by Beverly. The New Beverly
Common Stock received pursuant to the Distribution will be freely transferable
under the Securities Act, except for shares of New Beverly Common Stock received
by any person who may be deemed to be an "affiliate" of New Beverly within the
meaning of Rule 144 promulgated under the Securities Act. Persons who may be
deemed to be affiliates of New Beverly after the Distribution generally include
individuals or entities that control, are controlled by, or are under common
control with New Beverly, and may include the directors and executive officers
of New Beverly. Persons who are affiliates of New Beverly will be permitted to
sell their New Beverly Common Stock received pursuant to the Distribution only
pursuant to an effective registration statement under the Securities Act or
pursuant to an exemption from the registration requirements of the Securities
Act. The Registration Statement associated with the New Beverly Prospectus will
not cover resales of New Beverly Common Stock by affiliates of New Beverly. See
"Shares Eligible for Future Sale" in the New Beverly Prospectus.
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CONDITIONS
The Merger Agreement requires, as a condition to the consummation of the
Merger, Beverly stockholder approval of the Distribution. The completion of the
Distribution is also a condition to the consummation of the Merger, and Beverly
does not presently intend to consummate the Distribution unless and until all of
the conditions to the consummation of the Merger (other than completion of the
Distribution) have been satisfied. The consummation of the Merger is subject to
a number of conditions set forth in the Merger Agreement. See "The
Merger -- Conditions to Closing."
SETTLEMENT OF INTERCOMPANY ACCOUNTS
The Distribution Agreement provides that prior to the Distribution Date and
after settlement of the Assumed Pharmacy Indebtedness and the related Accrued
Interest Cost, all intercompany accounts existing between Beverly and any of its
subsidiaries (other than the Pharmacy Subsidiaries), on the one hand, and the
Pharmacy Subsidiaries, on the other hand, will be netted out, in each case in
such manner and amount as may be agreed to in writing by duly authorized
representatives of Beverly, Capstone and New Beverly; and (i) the resulting net
balance due, if any, from the Pharmacy Subsidiaries to Beverly and any of its
subsidiaries (other than the Pharmacy Subsidiaries) will be contributed to the
appropriate Pharmacy Subsidiaries as additional capital; and (ii) the resulting
net balance due, if any, from Beverly and any of its subsidiaries (other than
the Pharmacy Subsidiaries) to the Pharmacy Subsidiaries will be distributed to
Beverly as a dividend.
Further, New Beverly will provide an accounting to Capstone of the
settlement of the intercompany accounts described above as soon as reasonably
practicable following the Effective Time of the Merger. To the extent that the
aggregate cash collected by Beverly from the Pharmacy Subsidiaries during the
period from the date of the Distribution Agreement to the Distribution Date, is
greater than the sum of (i) the Assumed Pharmacy Indebtedness and the related
Accrued Interest Cost, (ii) Beverly's normal management fees collected from the
Pharmacy Subsidiaries during such period in amounts consistent with past
practices in the ordinary course of business, and (iii) the Closing Debt, (as
defined below and, collectively, the "Beverly Interim Period Cash
Entitlements"), then New Beverly will reimburse Capstone for the amount in
excess of the Beverly Interim Period Cash Entitlements. To the extent that the
amount of Beverly Interim Period Cash Entitlements is in excess of the aggregate
cash collected by Beverly from the Pharmacy Subsidiaries during the period from
the date of the Distribution Agreement to the Distribution Date, Capstone will
reimburse New Beverly for the amount of such difference. "Closing Debt" is
defined to mean the amount of Beverly's indebtedness incurred in connection with
the acquisition of institutional pharmacy businesses approved by Capstone during
the period commencing at the time of execution of the Distribution Agreement and
ending at the Distribution Date, which amount will be in addition to the Assumed
Pharmacy Indebtedness. New Beverly will be reimbursed for the Closing Debt
pursuant and subject to the provisions described above.
TREATMENT OF INDEBTEDNESS
The Distribution Agreement provides that Beverly and New Beverly will take
all commercially reasonable action to cause New Beverly or an appropriate
subsidiary of New Beverly to assume all of the items of Beverly's consolidated
indebtedness other than (i) the Assumed Pharmacy Indebtedness and related
Accrued Interest Cost, (ii) the Closing Debt, (iii) other permitted indebtedness
constituting Institutional Pharmacy Liabilities (as defined in the Distribution
Agreement), and (iv) certain capital leases and other items, if any, relating to
the Institutional Pharmacy Business.
Prior to the Time of Distribution, Beverly, and after the Time of
Distribution, New Beverly is required to pay or cause to be paid, or otherwise
provide for by appropriate assurances (in each case satisfactory to Capstone),
to the extent Beverly or New Beverly is unable to effect releases of Beverly and
the Pharmacy Subsidiaries from liability thereunder, all Beverly or New Beverly
indebtedness or other non-contingent liabilities as to which Beverly or any of
the Pharmacy Subsidiaries is a direct obligor, other than the Assumed Pharmacy
Indebtedness and Institutional Pharmacy Liabilities. See "The
Merger -- Covenants."
Beverly and Capstone have agreed to use all commercially reasonable efforts
to cause Beverly's Pharmacy Subsidiaries to borrow $275 million from third party
lenders on terms mutually agreeable to Beverly and
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Capstone for the purpose of repaying such amount to Beverly prior to the
Distribution in settlement of the Assumed Pharmacy Indebtedness, which borrowing
shall continue after the Effective Time as an obligation of the Surviving
Corporation. See "Information Concerning Capstone -- Capstone Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources."
The Merger Agreement provides, among other things, that it is a condition
to Capstone's obligations to consummate the Merger, and Beverly has agreed that
prior to the Distribution and the Merger it will amend, modify or replace
substantially all of its existing indebtedness so that upon closing the Merger,
Beverly will have been released from liability under all its existing
indebtedness for borrowed money, except for the Institutional Pharmacy
Liabilities and certain other pharmacy-related obligations. Accordingly, Beverly
will be obligated to seek modifications or amendments to numerous credit or
lending agreements, leases and other instruments with third parties for the
purpose of causing New Beverly to be substituted as the obligor in Beverly's
place, and obtaining the release of Beverly from liability thereunder. To the
extent that Beverly is not able to obtain releases from such liabilities or able
to refinance the same, Capstone may not be obligated to consummate the Merger,
or if it elects to consummate the Merger, where there remain any direct
obligations of Beverly to third persons for borrowed money, to reduce the amount
of Assumed Pharmacy Indebtedness which PCA is obligated to repay Beverly, by the
amount of any direct indebtedness of Beverly as to which Beverly has not
obtained a release.
Set forth below is a summary of the principal obligations of Beverly
whereunder it is either the primary obligor or guarantor, and Beverly's present
plans with respect to satisfaction of its covenants and the condition in the
Merger Agreement with respect to obtaining a release from liability. In one or
more cases Beverly may not be able to effect appropriate modifications to the
debt instruments and release of Beverly from liability thereunder, and
accordingly Beverly may be required to refinance or pay off such indebtedness or
terminate such leases, under terms and conditions which may be less favorable
than presently exist, and there is no assurance that Beverly will be able to
successfully refinance any such indebtedness. For information with respect to
anticipated one-time transactional costs associated with Beverly's effecting
debt amendments, modifications or replacements, see "Unaudited Pro Forma
Combined Condensed Financial Statements."
EXISTING CREDIT FACILITY
Beverly currently has in place a letter of credit/revolving credit facility
which permits borrowings of up to $375 million (the "Existing Credit Facility").
The Existing Credit Facility was established pursuant to an Amended and Restated
Credit Agreement dated as of December 20, 1996 (as heretofore amended, the
"Existing Credit Agreement") by and among Beverly, as borrower, and Morgan
Guaranty Bank of New York, as Issuing Bank, and as Agent for a lending bank
group. The Existing Credit Agreement terminates on December 31, 2001.
The obligations of Beverly under the Existing Credit Facility are
guaranteed by Beverly's active, direct and indirect subsidiaries other than
Beverly Funding Corporation and Beverly Indemnity, Ltd. (including Beverly's
Pharmacy Subsidiaries) and are secured by a pledge of all of the capital stock
of PCA and certain of Beverly's other Pharmacy Subsidiaries (the "Pledged
Stock").
The Existing Credit Agreement contains representations and warranties,
affirmative covenants, reporting covenants, negative covenants and events of
default customary for similar financing transactions. Covenants include but are
not limited to certain restrictions on investments, debt incurrence, contingent
obligations, liens, consolidations, mergers and asset sales, payment of
dividends and the purchase or redemption of capital stock. In addition, Beverly
is required to comply with certain financial covenants governing, among other
things, minimum consolidated net worth, fixed charge coverage ratio, and the
ratio of adjusted consolidated debt to consolidated net worth.
In order to effect the Distribution, Beverly will be required to amend the
Existing Credit Agreement and the Existing Credit Facility (as amended and
described below, the "New Beverly Credit Agreement" and the "New Beverly Credit
Facility", respectively) to provide, among other things: substitution of New
Beverly as the borrower and release of Beverly from its obligations thereunder;
release of the Pledged Stock and substitution therefor of the capital stock of
certain direct or indirect subsidiaries of Beverly engaged in the
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Remaining Healthcare Business and having a fair market value substantially
equivalent to the fair market value of the Pledged Stock; release of all
Pharmacy Subsidiaries (as defined in the Distribution Agreement) as guarantors;
and adjustment of the covenants to reflect the effect of the Distribution and
the Merger. Beverly has initiated informal discussions with the Existing Credit
Facility lenders regarding the foregoing matters, but no binding commitments
have yet been sought or obtained.
9% SENIOR NOTES
As of March 31, 1997 there was outstanding $180 million principal amount of
9% senior notes due 2006 (the "9% Senior Notes") that were issued pursuant to an
indenture dated as of February 1, 1996 (the "9% Indenture") between Beverly and
The Chase Manhattan Bank, as trustee (the "9% Senior Note Trustee") for the
holders of the 9% Senior Notes. The 9% Senior Notes are senior in right of
payment to all subordinated indebtedness of Beverly (including the convertible
debentures, discussed below). The 9% Senior Notes are not redeemable prior to
February 15, 2001. The 9% Indenture contains affirmative covenants, reporting
covenants, negative covenants and events of default customary for similar public
debt financing transactions. Covenants include but are not limited to certain
restrictions on: investments; liens; debt incurrence; issuance of preferred
stock; consolidations, mergers and asset sales; payment of dividends and the
purchase or redemption of capital stock and subordinated indebtedness. Many of
these limitations relate to certain financial tests or ratios which include but
are not limited to minimum consolidated net worth, debt to consolidated cash
flow and fixed charge coverage.
In order that the 9% Senior Notes be assigned to and assumed by New
Beverly, and Beverly be released from liability thereunder, Beverly intends to
solicit the consent of holders of a majority of the principal amount outstanding
of the 9% Senior Notes (the "Consent Solicitation") to the following matters:
(i) waiver of the consolidated net worth test in connection with the
Distribution; (ii) substitution of New Beverly as the "Company" for all purposes
of the 9% Indenture and the release of Beverly and the Pharmacy Subsidiaries
from all liability and obligations thereunder and (iii) waiver of the limitation
on redemption of subordinated debentures to permit Beverly to redeem the
subordinated debentures, as discussed below. If the consent of the required
holders is obtained, Beverly and the 9% Senior Note Trustee will enter into a
supplemental indenture to substitute New Beverly as primary obligor thereunder,
release Beverly and the Pharmacy Subsidiaries from further liability under the
9% Senior Notes and permit the redemption of the subordinated debentures.
There can be no assurance given that Beverly will be successful in
obtaining the consent of the required majority 9% Senior Note holders. If it is
not successful in the Consent Solicitation, Beverly anticipates it or New
Beverly will make an exchange offer whereby holders of the 9% Senior Notes would
be offered in exchange for the 9% Senior Notes a New Beverly debt security
without the limitation on redemption of subordinated debentures and without a
guarantee from the Pharmacy Subsidiaries (the "New Beverly Notes"). It is
expected that the New Beverly Notes will, except as noted above, contain
covenants similar to the 9% Senior Notes but there can be no assurance that any
New Beverly Notes issued pursuant to an exchange offer will not have higher
coupon rates, be issued at a discount or contain covenants more onerous or
restrictive than those in the 9% Indenture or 9% Senior Notes.
SUBORDINATED DEBENTURES
5 1/2% Debentures
As of March 31, 1997, there was outstanding $150 million aggregate
principal amount of 5 1/2% convertible subordinated debentures ("5 1/2%
Debentures"). The 5 1/2% Debentures bear interest at a rate of 5 1/2% per annum,
mature August 1, 2018 and are redeemable at a redemption price of 103.85% of
principal amount plus accrued and unpaid interest thereon until August 1, 1997
at which time the redemption price is reduced to 103.30% of principal plus
accrued and unpaid interest. The 5 1/2% Debentures are convertible into Beverly
Common Stock at the option of the holder at any time prior to close of business
on July 31, 2018 but if the 5 1/2% Debentures are called for redemption, holders
must convert them prior to the close of business on the business day immediately
preceding the redemption date. The conversion price currently in effect is
$13.33 per share.
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The 9% Indenture contains a covenant that restricts Beverly's ability to
redeem or repurchase subordinated debt such as the 5 1/2% Debentures unless the
redemption is accomplished with the net cash proceeds from an incurrence of
subordinated indebtedness of a longer term and no more than the principal amount
of the subordinated indebtedness being redeemed.
Beverly intends to proceed with one or more of the following alternatives:
(i) in order to make the redemption of the 5 1/2% Debentures permissible, seek,
as part of the Consent Solicitation, consent from the holders of 9% Notes to
permit the redemption of the 5 1/2% Debenture, commence an exchange with such
holders whereby the 9% Senior Notes would be replaced by New Beverly Notes or
negotiate a stand-by commitment for the issuance of subordinated indebtedness,
whose net cash proceeds would qualify under the restrictive covenant contained
in the 9% Indenture to be used to redeem the 5 1/2% Debentures, and, once the
redemption is permissible; call the 5 1/2% Debentures for redemption after
August 1, 1997; (ii) solicit the consent of the holders of the 5 1/2% Debentures
to the following matters: (a) substitution of New Beverly for Beverly; (b)
assumption by New Beverly of the obligations of Beverly and (c) release of
Beverly from its obligations under the 5 1/2% Debentures or (iii) commence an
exchange offer or other refinancing to pay off the 5 1/2% Debentures. In the
event of a call for redemption, Beverly anticipates that if the price of the
Beverly Common Stock is more than 3.30% above the conversion price of $13.33
immediately prior to the redemption date, the holders will be likely to convert
their 5 1/2% Debentures to Beverly Common Stock. Conversion of all or
substantially all of the 5 1/2% Debentures into Beverly Common Stock prior to
the Effective Time of the Merger would cause an increase in the number of
outstanding shares of Beverly Common Stock and would result in holders of
Beverly Common Stock receiving a comparatively smaller number of shares of
Capstone Common Stock in the Merger.
7 5/8% Debentures
As of March 31, 1997 there was outstanding approximately $62.5 million
aggregate principal amount of 7 5/8% convertible subordinated debentures
("7 5/8% Debentures"). The 7 5/8% Debentures bear interest at a rate of 7 5/8%
per annum, mature March 15, 2003, are presently redeemable at a redemption price
of 100% of principal amount plus accrued and unpaid interest thereon and are
subject to an annual sinking fund redemption of $7.5 million. The 7 5/8% Bonds
are convertible into Beverly Common Stock at the option of the holder at any
time prior to the close of business on March 14, 2003 but if the 7 5/8% Bonds
are called for redemption, holders must convert them prior to the close of
business on the business day immediately preceding the redemption date. The
conversion price currently in effect is $20.47 per share.
Beverly intends to proceed with one or more of the following alternatives:
(i) in order to make the redemption of the 7 5/8% Debentures permissible, seek,
as part of the Consent Solicitation, consent from the holders of the 9% Senior
Notes to permit the redemption of the 7 5/8% Debentures or commence an exchange
offer with such holders whereby the 9% Senior Notes would be replaced by New
Beverly Notes and once the redemption is permissible, call the 7 5/8% Debentures
for redemption, (ii) solicit the consent of the holders of the 7 5/8% Debentures
to the following matters: (a) substitution of New Beverly for Beverly; (b)
assumption by New Beverly of the obligations of Beverly and (c) release of
Beverly from its obligations under the 7 5/8% Debentures or (iii) commence an
exchange offer or other refinancing to pay off the 7 5/8% Debentures. In the
event of a call for redemption, Beverly does not presently anticipate that the
price of Beverly Common Stock will be above the conversion price of $20.47 to
the expected redemption date in late 1997, and therefore Beverly anticipates
that all of the 7 5/8% Debentures will be redeemed.
INDUSTRIAL REVENUE BONDS
As of March 31, 1997, Beverly has guaranteed the obligations of various
subsidiaries and others on 104 issues of industrial revenue bonds in various
states and local jurisdictions, totalling an aggregate principal amount of
approximately $298.3 million (individually an "IRB" and collectively the
"IRBs"). A total of 89 issues with an aggregate principal amount of
approximately $208.6 million involve Beverly guarantees of the obligations of
Beverly subsidiaries operating the Remaining Healthcare Business, while 15
issues with an aggregate principal amount of approximately $89.7 million
involved guarantees of the obligations of third parties that have acquired
facilities from subsidiaries of Beverly subject to IRBs. The IRBs bear interest
at
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rates ranging from 3.6% to 11.5% per annum, mature from December 31, 1997 to
December 1, 2019, and are not redeemable until from June 1, 1997 to June 1,
2013. Beverly's obligations are set forth in a guaranty agreement for each issue
(individually a "Guaranty Agreement" and collectively the "Guaranty
Agreements"). The Guaranty Agreements have been entered into by Beverly and 21
respective trustees (individually an "IRB Trustee" and collectively the "IRB
Trustees"). In order to effect the Distribution, Beverly intends to request each
IRB Trustee to enter into appropriate assumption, substitution and release
documents to, among other things: (i) substitute New Beverly as the guarantor,
assuming all of Beverly's obligations under the relevant Guaranty Agreement and
(ii) release Beverly from all obligations under the Guaranty Agreement. While
Beverly will seek the assumption, substitution and release from the IRB
Trustees, there can be no assurance given that one or more IRB Trustees will not
require that the holders of the IRBs consent to the proposed changes. If
consents from the IRB holders are required, Beverly anticipates promptly seeking
such consents. There remains the possibility that one or more IRB holders may
not consent to the proposed change and if such consent is not obtained from all
IRB holders Beverly proposes to refinance or pay off that portion of the IRBs
with respect to which consents have not been obtained.
FIRST MORTGAGE BONDS
As of March 31, 1997, there was outstanding approximately $48.4 million
aggregate principal amount of first mortgage bonds (the "First Mortgage Bonds")
in two series: Series A ("Series A Bonds") and Series B ("Series B Bonds"). The
Series A Bonds bear interest at a rate of 8 3/4% per annum, mature July 1, 2008
and are redeemable after July 1, 1997 at a redemption price of 105% of the
principal amount plus accrued and unpaid interest thereon. The Series B Bonds
bear interest at a rate of 8 5/8% per annum, mature October 1, 2008 and are not
redeemable prior to October 1, 1997. After October 1, 1997, the Series B Bonds
are redeemable at a redemption price of 105% of the principal amount plus
accrued and unpaid interest thereon.
The First Mortgage Bonds were issued pursuant to an indenture dated as of
April 1, 1993 (as supplemented the "First Mortgage Bond Indenture") between
Beverly and First Union Bank of Connecticut, as trustee (the "First Mortgage
Bond Trustee") for the holders of such bonds. The First Mortgage Bond Indenture
permits the substitution of New Beverly for Beverly, the assumption by New
Beverly of the obligations of Beverly under the First Mortgage Bond Indenture
and the First Mortgage Bonds and the release of Beverly from such obligations,
upon the condition that (a) New Beverly executes documents necessary to evidence
the assumption; (b) such transaction will not disturb the continuance of the
lien of the First Mortgage Bond Indenture on the property mortgaged and pledged
as collateral and (c) immediately after giving effect to the transaction, no
default or event of default will occur.
In order to effect the Distribution, Beverly, New Beverly and the First
Mortgage Bond Trustee will execute and enter into a supplemental indenture and
other documents necessary to provide for the (i) substitution of New Beverly for
Beverly, (ii) assumption by New Beverly of the obligations of Beverly and (iii)
release of Beverly from its obligations under the First Mortgage Bond Indenture
and the First Mortgage Bonds.
8.75% NOTES
As of March 31, 1997, there was outstanding approximately $24.8 million
aggregate principal amount of 8.75% Notes ("8.75% Notes"), which were issued
pursuant to an indenture dated as of December 30, 1993 (as supplemented, the
"8.75% Note Indenture"), between Beverly and Boatman's Trust Company as trustee
for the holders of such notes. The 8.75% Notes bear interest at a rate of 8.75%
per annum, mature December 31, 2003, and are redeemable at a redemption price of
100% of the principal amount plus accrued and unpaid interest thereon. Beverly
intends to call the 8.75% Notes for redemption prior to the Distribution.
MEDIUM TERM NOTES
As of March 31, 1997 there was outstanding $50.0 million aggregate
principal amount of medium term notes (the "Medium Term Notes"), which were
issued by Beverly Funding Corporation ("BFC"), a wholly-owned subsidiary of
Beverly, pursuant to an indenture dated as of December 1, 1994 (the "Medium Term
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Note Indenture") between BFC and The Chase Manhattan Bank, as trustee (the
"Medium Term Note Trustee") for the holders of such notes. The Medium Term Notes
bear interest at LIBOR (as defined in the Medium Term Note Indenture) plus 0.35%
and mature on June 15, 2000. The Medium Term Notes are secured by a security
interest in patient accounts receivable generated by subsidiaries of Beverly and
sold to BFC.
The Medium Term Notes were issued in a private placement to The Long Term
Credit Bank of Japan, Los Angeles Agency ("LTCB") as holder of the entire amount
of notes issued.
Beverly has agreed to certain covenants pursuant to the First Amendment and
Restatement to Master Sales and Servicing Agreement (the "Servicing Agreement")
dated as of December 1, 1994. In order to effect the Distribution, Beverly will
seek the consent of LTCB as the sole holder of the Medium Term Notes to permit
the following under the Servicing Agreement and the Medium Term Note Indenture:
(i) substitution of New Beverly for Beverly for all purposes of such
instruments; (ii) assumption by New Beverly of the obligations of Beverly and
(iii) release of Beverly from its obligations under the Servicing Agreement and
the Medium Term Note Indenture. Although no binding commitments have yet been
requested or obtained, based upon informal discussions between the parties,
Beverly anticipates that prior to the Distribution Beverly, New Beverly, the
Medium Term Note Trustee, and LTCB will enter into appropriate documents to
reflect these consents and agreements.
REIT PROMISSORY NOTES
As of March 31, 1997 there was outstanding approximately $42.2 million
aggregate principal amount of promissory notes due to real estate investment
trusts ("REIT Promissory Notes"). The REIT Promissory Notes, which were executed
by subsidiaries of Beverly that are part of the Remaining Healthcare Business
that will transfer to New Beverly as part of the Distribution bear interest at
rates ranging from 9.95% to 11.80% and mature from July 1, 2003 to May 1, 2010.
Health Care Property Investors ("HCPI") holds approximately $34.3 million of the
REIT Promissory Notes, which may not be prepaid until 2005. Nationwide Health
Properties ("NHP") holds approximately $7.9 million of the REIT Promissory
Notes, which have no prepayment rights. Beverly guarantees the performance under
the REIT Promissory Notes by the obligors, pursuant to one or more guaranty
agreements (individually a "Guaranty Agreement" and collectively the "Guaranty
Agreements").
Prior to the Distribution, Beverly intends to seek the consent of both HCPI
and NHP to permit the following under the Guaranty Agreements and the REIT
Promissory Notes: (i) substitution of New Beverly for Beverly; (ii) assumption
by New Beverly of the obligations of Beverly and (iii) release of Beverly from
its obligations. Although there have been preliminary discussions between
Beverly and representatives of the holders of the REIT Promissory Notes, the
terms on which a consent may be granted by the holders of the REIT Promissory
Notes remain uncertain.
BANK LOANS, MORTGAGES AND NOTES PAYABLE
As of March 31, 1997, there was outstanding approximately $127.5 million
aggregate principal amount of certain bank loans, mortgages and notes payable
representing financings by various subsidiaries of Beverly engaged in the
Remaining Healthcare Business that will be transferred to New Beverly as part of
the Distribution (the "Miscellaneous Debt Obligations"). The Miscellaneous Debt
Obligations represent obligations ranging from $10.3 million to $25 million in
outstanding principal amount, bear interest at rates ranging from 5.75% to 9.08%
per annum, mature at various dates from August 7, 1999 to September 30, 2006 and
are prepayable at various dates from September 1, 1997 to June 1, 2000. The
Miscellaneous Debt Obligations are guaranteed by Beverly, and certain of them
contain financial and other covenants related to Beverly.
Prior to the Distribution, Beverly intends to seek amendments of the
Miscellaneous Debt Obligations to provide, among other things: (i) substitution
of New Beverly as guarantor in place of Beverly; (ii) assumption by New Beverly
of the obligations of Beverly; (iii) release of Beverly from its obligations and
(iv) adjustment of certain covenants to reflect the effects of the Distribution
and the Merger. To the extent Beverly is unable to cause appropriate amendments
to be made in the Miscellaneous Debt Obligations to effect the foregoing,
Beverly expects the Miscellaneous Debt Obligations will be paid off or
refinanced with other lenders.
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THE MERGER
GENERAL
This section of the Joint Proxy Statement/Prospectus describes certain
aspects of the proposed Merger. To the extent that it relates to the Merger
Agreement, the following description does not purport to be complete and is
qualified by reference to the Merger Agreement, which is attached as Annex B to
this Joint Proxy Statement/Prospectus.
Following the approval and adoption of the Merger Agreement by the
requisite vote of the stockholders of Beverly and Capstone and the satisfaction
or waiver of the other conditions to the Merger, Beverly will be merged with
Capstone, with Capstone continuing as the Surviving Corporation. The Merger will
become effective upon filing a Certificate of Merger with the Secretary of State
of the State of Delaware.
The Certificate of Incorporation and Bylaws of Capstone as in effect
immediately prior to the Effective Time will be the Certificate of Incorporation
and Bylaws of the Surviving Corporation, except that to the extent that, prior
to the Effective Time, the stockholders of Capstone shall have approved (i) an
increase in the number of authorized shares of Capstone Common Stock from 50
million to 300 million, (ii) the election of the Board of Directors of Capstone
to staggered terms not to exceed three years each, and (iii) a provision
specifying that special meetings of the Capstone stockholders may be called only
by the Capstone Board of Directors or by stockholders holding not less than 25%
of the then outstanding shares of Capstone Common Stock and that only that
business specified in the notice of such special meeting may be transacted at
such meeting, all as proposed to be voted on at the Capstone Special Meeting.
The Certificate of Incorporation of Capstone shall be amended to reflect the
approved changes at the Effective Time.
Pursuant to the Merger Agreement, at the Effective Time each share of
Beverly Common Stock issued and outstanding immediately prior to the Effective
Time (other than fractional shares to be canceled as described below) will be
converted at the Effective Time into the right to receive that number of duly
authorized, validly issued, fully paid and nonassessable shares of Capstone
Common Stock equal to the quotient, calculated to four decimal places, of (a)
50,000,000 divided by (b) the number of shares of Beverly Common Stock
outstanding immediately prior to the Effective Time. In the event of any change
in Capstone Common Stock or Beverly Common Stock by reason of any stock split,
readjustment, stock dividend, exchange of shares, reclassification,
reorganization or otherwise (other than the Distribution) the Conversion Number
will be correspondingly adjusted.
Promptly after the Effective Time, Capstone will mail to each record holder
of an outstanding certificate or certificates which immediately prior to the
Effective Time represented shares of Beverly Common Stock (the "Certificates"),
a form letter of transmittal and instructions for use in effecting the surrender
of the Certificates for exchange. BEVERLY STOCKHOLDERS SHOULD NOT SEND IN THEIR
STOCK CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM.
Upon surrender by Beverly stockholders to Capstone of their Certificates,
(together with such letter of transmittal duly executed together with any other
required documents) the Beverly stockholders will be entitled to receive from
Capstone the number of shares of Capstone Common Stock which such holder has the
right to receive under the Merger Agreement, and such Beverly Certificate will
then be canceled. Under the DGCL, the failure of a Beverly stockholder to
surrender his or her Certificates will not result in the forfeiture of the right
to receive dividends or to vote the Capstone Common Stock issuable to such
stockholder.
No fractional shares of Capstone Common Stock will be issued in the Merger.
Instead, the Merger Agreement provides that each holder of Beverly Common Stock
who would otherwise have been qualified to receive a fraction of a share of
Capstone Common Stock will be entitled to receive, in lieu thereof, cash
(without interest) in an amount equal to the fraction of a share to which such
holder would otherwise have been entitled, multiplied by the Average Market
Value of Capstone Common Stock less the amount of any withholding taxes which
may be required thereon. The Merger Agreement provides that for purposes of
paying such cash in lieu of fractional shares, all Certificates surrendered for
exchange by a Beverly stockholder will be
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aggregated, and no such holder will receive cash in lieu of fractional shares in
an amount equal to or greater than the value of one full share of Capstone
Common Stock with respect to all such Certificates surrendered.
EFFECTIVE TIME; CLOSING
The Merger will become effective, and the Effective Time will occur, on the
date and at the time that a Certificate of Merger is filed with the Secretary of
State of the State of Delaware, or at such later date and time as the parties
may agree and as may be specified in the Certificate of Merger. The Merger
Agreement provides that the closing of the Merger (the "Closing") will take
place within two days following the first business day on which all the
conditions specified therein are fulfilled or waived, or on such other date as
Beverly and Capstone may agree. The date upon which the Closing will occur is
herein called the "Closing Date."
CONDITIONS TO CLOSING
Mutual Conditions. The obligations of each party to effect the Merger are
subject to, among other things, the fulfillment or waiver of the following
conditions:
(1) the effectiveness in accordance with the provisions of the
Securities Act of (a) the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part, and (b) the Registration Statement of which
the New Beverly Prospectus is a part;
(2) the requisite vote of the stockholders of Beverly and Capstone at
their respective Special Meetings necessary to approve the Merger, the
Distribution (as to Beverly stockholders) and the transactions contemplated
thereby;
(3) the execution of the Distribution Agreement and the completion of
the Distribution;
(4) the Capstone Common Stock issuable in the Merger will have been
authorized for quotation on the Nasdaq Stock Market or listed on the NYSE
subject to official notice of issuance;
(5) no writ, order, decree or injunction of a court of competent
jurisdiction or governmental entity will have been entered against Capstone
or Beverly, including pursuant to the HSR Act, and no proceedings will have
been threatened or commenced by any governmental entity which seek to
prohibit or restrict the consummation of the Merger or Distribution;
(6) all action required to effect the restructuring and modification
of Beverly's debt will have been completed; and
(7) the receipt of the Private Letter Ruling from the IRS or, at
Beverly's election, the opinion of Caplin & Drysdale, Chartered or Ernst &
Young LLP. A request for the Private Letter Ruling was filed with the IRS
on May 17, 1997, and is not expected to be acted on prior to the third
quarter of 1997.
Conditions to Capstone's Obligations. The obligation of Capstone to
consummate the Merger is further subject to the fulfillment or waiver of among
other things, the following conditions: the representations and warranties of
Beverly contained in the Merger Agreement and the Distribution Agreement will be
true and correct in all material respects; Beverly will have performed and
complied in all material respects with all of its agreements, obligations and
conditions required by the Merger Agreement and the Distribution Agreement; and
there will not have occurred since December 31, 1996 any event, condition,
change, occurrence, or circumstance which has had, or is reasonably likely to
have, a material adverse effect on Beverly; Capstone will have received an
auditors' letter in customary form and scope from Beverly's independent
auditors; PCA's unaudited consolidated results of operations for the period from
January 1, 1997 to the end of the month immediately prior to the Effective Time
will not have materially declined compared to forecasted results given to
Capstone prior to April 15, 1997; PCA's unaudited consolidated working capital
as of the end of the month immediately prior to the Effective Time has not
declined below the level of such working capital reflected in the unaudited PCA
financial statements as of March 31, 1997, except for certain specified changes;
and all necessary regulatory and governmental consents and approvals will have
been obtained.
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Conditions to Beverly's Obligations. The obligation of Beverly to
consummate the Merger is further subject to the fulfillment or waiver of among
other things, the following conditions: the representations and warranties of
Capstone contained in the Merger Agreement will be true and correct in all
material respects; Capstone will have performed and complied in all material
respects with all of its agreements, obligations and conditions required by the
Merger Agreement; all necessary regulatory and governmental consents will have
been obtained; there will not have occurred since December 31, 1996, any event,
condition, change, occurrence, or circumstance which has had or is reasonably
likely to have a material adverse effect on Capstone; Beverly will have received
an auditors' letter in customary form and scope from Capstone's independent
auditors; Capstone's unaudited consolidated results of operations for the period
from January 1, 1997, to the end of the month immediately prior to the Effective
Time will not have materially declined compared to forecasted results given to
Beverly prior to April 15, 1997; PCA will have repaid to Beverly the Assumed
Pharmacy Indebtedness; and Counsel will have entered into and complied with the
Voting Agreement.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain customary representations and
warranties by each of Capstone and Beverly (as to such party) concerning: the
organization and qualification of Capstone and Beverly and their respective
subsidiaries; the capitalization of each of Capstone and Beverly; the authority
of each of Capstone and Beverly relative to the execution and delivery of and
performance of its respective obligations under the Merger Agreement; the
authority of Beverly relative to the execution and delivery and performance of
their obligations under the Distribution Agreement; approval by the Board of
Directors of each of Capstone and Beverly regarding certain related matters;
obtaining necessary approvals to consummate the transactions contemplated by the
Merger Agreement and, in the case of Beverly, the Distribution Agreement; the
absence of any conflict with, or violations of the corporate documents and
certain binding instruments of each of Capstone and Beverly or their respective
subsidiaries or with or of any statute, rule, regulation, order or decree of
courts or governmental entities, subject to certain exceptions; the accuracy of
reports and documents filed by each of Capstone and Beverly with the Commission
since December 31, 1991, and certain financial statements of each company; the
absence of undisclosed liabilities or obligations of Capstone, Beverly and each
of their respective subsidiaries; the absence of material changes in the
business of Beverly's Institutional Pharmacy Business and Capstone since
December 31, 1996; the absence of litigation involving either Capstone or
Beverly or their respective subsidiaries that would have a material adverse
effect on the business of either party; and compliance by each of Capstone and
Beverly and their respective subsidiaries with applicable laws and agreements.
In addition, the Merger Agreement contains representations and warranties
concerning: (i) Beverly's receipt of the opinions of Merrill Lynch and Stephens;
(ii) Beverly's delivery to Capstone of a letter identifying all persons who may
be deemed "affiliates" of Beverly for the purpose of Rule 145 under the
Securities Act and the written agreement of each such person; and (iii)
Capstone's receipt of the opinion of Adirondack.
COVENANTS
The Merger Agreement provides that, except as contemplated by the Merger
Agreement, the Distribution Agreement, or as otherwise previously disclosed to
Capstone, PCA will be obligated to conduct its business in the ordinary course
of business consistent with past practice, including specific covenants as to
certain permissible activities. The Merger Agreement also requires that, except
as provided in the Merger Agreement or as otherwise previously disclosed to
Beverly, Capstone and each of its subsidiaries will be obligated to conduct its
business in the ordinary course of business consistent with past practice,
including specific covenants as to certain permissible activities. Each of
Beverly and Capstone have agreed to use all commercially reasonable efforts to
take or cause to be taken all action and other things necessary, proper or
appropriate under applicable laws and regulations to consummate the transactions
contemplated by the Merger Agreement and the Distribution Agreement, including
the filing of necessary pre-merger notification
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reports with applicable federal antitrust authorities and obtaining all
necessary third party consents, approvals or waivers that may be required.
Beverly has agreed to use its reasonable best efforts to cause its
outstanding indebtedness for borrowed money to be restructured, modified or
amended, as appropriate, to cause such indebtedness to be assumed by New
Beverly. The amount of such debt outstanding at March 31, 1997 to be
restructured equaled approximately $1.2 billion. See "The Distribution and Other
Pre-Merger Transactions -- Treatment of Indebtedness" and "Capitalization" in
the New Beverly Prospectus.
NO SOLICITATION
Each of Capstone and Beverly has agreed that, prior to the Effective Time,
it and its subsidiaries will not, and will not give authorization or permission
to any of its or its subsidiaries' directors, officers, employees, agents or
representatives to, and will use all commercially reasonable efforts to see that
such persons do not, directly or indirectly solicit, initiate, facilitate or
encourage (including by way of furnishing or disclosing information): (i) any
merger, consolidation, other business combination involving either Capstone or
its subsidiaries or Beverly or its subsidiaries; (ii) any acquisition of all or
any substantial portion of the assets or capital stock of either Capstone and
its subsidiaries taken as a whole or Beverly and its subsidiaries; or (iii)
inquiries or proposals concerning or which may reasonably be expected to lead
to, any of the foregoing (each an "Acquisition Transaction") or negotiate,
explore or otherwise communicate in any way with any third party (other than
Beverly or its affiliates in the case of Capstone and Capstone and its
affiliates in the case of Beverly) with respect to any Acquisition Transaction
or enter into any agreement, arrangement or understanding requiring it to
abandon, terminate or fail to consummate the Merger or any other transactions
expressly contemplated by the Merger Agreement, or contemplated to be a material
part thereof. Notwithstanding the foregoing in the event that there is an
unsolicited written proposal for an Acquisition Transaction from a bona fide
financially capable third party, the party receiving such proposal, in its
discretion, will be permitted to furnish non-public information to and negotiate
with any such third party only if: (i) two business days' written notice will
have been given to the other party; and (ii) the Board of Directors of the party
receiving such proposal will have determined in good faith, after having
received advice from its investment banker and outside legal counsel, that the
failure to provide such non-public information to or negotiate with such third
party would be inconsistent with such Board of Directors' fiduciary duties to
the stockholders.
TERMINATION
Termination by Mutual Consent or by Either Party. The Merger Agreement may
be terminated at any time prior to the Effective Time, whether before or after
approval by the stockholders of Beverly and Capstone: (a) by mutual consent of
the Boards of Directors of Capstone and Beverly; (b) by either Capstone or
Beverly if without fault of such terminating party the Merger will not have been
consummated on or before January 31, 1998, which date may be extended to April
30, 1998, subject to certain conditions; (c) by either Capstone or Beverly, if
any court of competent jurisdiction in the United States or other governmental
body in the United States will have issued an order (other than a temporary
restraining order), decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the Merger, and such order, decree, ruling or
other action will have become final and nonappealable; or (d) by either Capstone
or Beverly, if the necessary approval of the stockholders of Capstone and
Beverly is not obtained.
Termination by Capstone Only. The Merger Agreement may be terminated and
the Merger may be abandoned by action of the Board of Directors of Capstone, at
any time prior to the Effective Time, before or after the approval by the
stockholders of Capstone, if (a) Beverly has failed to comply in any material
respect with any of the covenants or agreements contained in Articles I and V of
the Merger Agreement to be complied with or performed by Beverly at or prior to
such date of termination, (b) there is a breach that has not been cured
following notice of any representation or warranty of Beverly contained in the
Merger Agreement or Distribution Agreement such that the closing conditions of
the Merger Agreement would not be satisfied, (c) Beverly has furnished or
disclosed non-public information to, or commenced negotiations with, a third
party with respect to any prohibited pharmacy acquisition transaction or Beverly
Business Combination Transaction, as defined below, or will have resolved to do
the foregoing and publicly disclosed such resolution,
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(d) the Board of Directors of Beverly has withdrawn, changed, modified in any
manner or taken action inconsistent with its recommendation of the Distribution
Agreement, the Distribution, the Merger Agreement, the Merger or the other
transactions contemplated thereby or has resolved to do any of the foregoing and
publicly disclosed such resolution, or (e) a definitive agreement with respect
to a Capstone Business Combination Transaction (as hereinafter defined) has been
negotiated and Capstone's Board of Directors has determined after having
received advice from its investment banker and outside legal counsel that
failure to terminate the Merger Agreement would be inconsistent with such
Board's fiduciary duties to the stockholders of Capstone; provided, however,
that two business days' prior written notice will have been given to Beverly
(which notice will include the material terms and conditions, and financing
arrangements and identity of the third party proposing the Capstone Acquisition
Transaction or Capstone Business Combination Transaction), and that prior to
terminating the Merger Agreement Capstone has made all payments of termination
fees as described below. See "-- Expenses; Termination Fees."
The term "Capstone Acquisition Transaction" is defined as any merger,
consolidation, other business combination involving Capstone or its
subsidiaries, acquisition of all or any substantial portion of the assets or
capital stock of Capstone and its subsidiaries taken as a whole, or inquiries or
proposals concerning or which may reasonably be expected to lead to any of the
foregoing. The term "Capstone Business Combination Transaction" is defined as
any of the following involving Capstone or any of its subsidiaries that is
material to the business, results of operation, prospects or financial condition
of Capstone and its subsidiaries taken as a whole: (1) any merger,
consolidation, share exchange, business combination or other similar transaction
(other than the Merger); (2) any sale, lease, exchange, transfer or other
disposition of 25% or more of the assets of Capstone and its subsidiaries, taken
as a whole, in a single transaction or series of transactions; or (3) the
acquisition by a person or entity, or any "group" (as such term is defined under
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations thereunder) of beneficial ownership of
33 1/3% or more of Capstone Common Stock, whether by tender offer, exchange
offer or otherwise.
Termination by Beverly Only. The Merger Agreement may be terminated and
the Merger may be abandoned by action of the Board of Directors of Beverly, at
any time prior to the Effective Time, before or after the approval by the
stockholders of Beverly, if (a) Capstone has failed to comply in any material
respect with any of the covenants or agreements contained in Articles I and V of
the Merger Agreement to be complied with or performed by Capstone at or prior to
such date of termination, (b) there is a breach that has not been cured
following notice of any representation or warranty of Capstone contained in the
Merger Agreement such that the closing conditions in favor of Beverly would not
be satisfied, (c) Capstone has furnished or disclosed non-public information to,
or commenced negotiations with, a third party with respect to a Capstone
Acquisition Transaction or has resolved to do either of the foregoing and
publicly disclosed such resolution, (d) the Board of Directors of Capstone has
withdrawn, changed, modified in any manner or taken action inconsistent with its
recommendation of the Merger Agreement, the Merger or the other transactions
contemplated thereby or has resolved to do any of the foregoing and publicly
disclosed such resolution, (e) a definitive agreement with respect to a Beverly
Business Combination Transaction or Pharmacy Acquisition Transaction (as defined
below) has been negotiated and Beverly's Board of Directors has determined after
having received advice from its investment banker and outside legal counsel that
failure to terminate the Merger Agreement would be inconsistent with the Board's
fiduciary duties to the stockholders of Beverly; provided, however, that two
business days' prior written notice will have been given to Capstone (which
notice shall include the material terms and conditions, and financing
arrangements and identity of the third party proposing the Pharmacy Acquisition
Transaction or the Beverly Business Combination Transaction) and that prior to
terminating the Merger Agreement Beverly has made all payments of termination
fees as described below, or (f) Counsel has breached its obligations pursuant to
the non-solicitation section of the Voting Agreement. See "-- Expenses;
Termination Fees."
The term "Pharmacy Acquisition Transaction" is defined in the Merger
Agreement as any merger, consolidation or other business combination primarily
involving the Institutional Pharmacy Business, an acquisition primarily relating
to all or a substantial portion of the assets used in the Institutional Pharmacy
Business or of the capital stock of any Pharmacy Subsidiaries or inquiries or
proposals concerning which or
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may reasonably be expected to lead to any of the foregoing. The term "Beverly
Business Combination Transaction" is defined as any of the following involving
Beverly or any Pharmacy Subsidiary that is material to the business, results of
operation, prospects or financial condition of the Institutional Pharmacy
Business taken as a whole: (1) any merger, consolidation, share exchange,
business combination or other similar transaction (other than the Merger)
including the Remaining Healthcare Business; (2) any sale, lease, exchange,
transfer or other disposition of 25% or more of the assets of Beverly (other
than assets related to the Remaining Healthcare Business) and its Pharmacy
Subsidiaries (as defined in the Merger Agreement), taken as a whole, in a single
transaction or series of transactions; or (3) the acquisition by a person or
entity, or any "group" (as such term is defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) of beneficial ownership
of 33 1/3% or more of Beverly Common Stock, whether by tender offer, exchange
offer or otherwise.
EXPENSES; TERMINATION FEES
Other than as set forth below, Capstone and Beverly will bear their
respective expenses incurred in connection with the Merger except that expenses
incurred in printing, mailing and filing (including without limitation, SEC
filing fees, fees related to any state securities or "blue sky" laws and stock
exchange listing application fees), (i) as to the Joint Proxy
Statement/Prospectus, and Registration Statement, will be paid by Capstone, and
(ii) as to the New Beverly Prospectus and Registration Statement will be paid by
New Beverly. Notwithstanding the above, the parties have agreed that, should the
Merger Agreement be terminated pursuant to certain of the events described
above, the terminating party shall reimburse the other for up to $2 million in
documented fees and expenses incurred in connection with the transactions
contemplated by the Merger Agreement.
If the Merger Agreement is terminated pursuant to clause (e) set forth
under "-- Termination by Beverly Only" above, then Beverly shall pay Capstone a
fee of $35.0 million and up to $2.0 million in documented fees and expenses (the
"Beverly Termination Payment") payable in immediately available funds prior to
and as a condition of such termination and entering into the transaction
contemplated by such definitive agreement. To the extent a Beverly Termination
Payment has not already become payable and been paid and if, prior to any
termination by either party as set forth under "-- Termination by Mutual Consent
or by Either Party" above (except clause (a) or, if Beverly terminates because
Capstone stockholders' approval is not obtained, clause (d)) or by Capstone only
as set forth under "-- Termination by Capstone Only" above (except clause (e)),
any person shall have submitted a bona fide proposal concerning a Pharmacy
Acquisition Transaction or a Beverly Business Combination Transaction and within
eighteen months after the termination of the Merger Agreement, Beverly or any of
its subsidiaries proposes to enter into a definitive agreement with a third
party with respect to a Pharmacy Acquisition Transaction or a Beverly Business
Combination Transaction is proposed to be effected, then Beverly, prior to
entering into any such definitive agreement, shall be obligated to pay Capstone
the Beverly Termination Payment prior to and as a condition of entering into
such definitive agreement. Further, in the event that the Merger Agreement is
terminated and Beverly either (i) subsequently distributes all or part of the
stock of PCA or its successors or any other entity primarily engaged in
operating Beverly's Institutional Pharmacy Business, to Beverly stockholders pro
rata, or (ii) engages an underwriter with respect to a bona fide firm commitment
underwriting concerning a public offering of securities of PCA or its successor
or any other entity primarily engaged in operating Beverly's Institutional
Pharmacy Business at any time after April 15, 1997 and within six months after
the termination of the Merger Agreement, and (iii) a termination of the Merger
Agreement by Beverly occurs pursuant to the terms set forth in clauses (b) or
(c) under "-- Termination by Mutual Consent or by Either Party," above or by
either party, because Beverly stockholders' approval is not obtained, pursuant
to clause (d) of said paragraph, and such public offering occurs at any time
within eighteen months of such termination or such spin-off occurs within six
months after such termination, then Beverly shall cause the Beverly Termination
Payment to be paid to Capstone concurrently with the consummation of such public
offering or spin-off, as the case may be.
If the Merger Agreement is terminated by Capstone pursuant to clause (e) as
set forth under "-- Termination by Capstone Only" above, then Capstone shall pay
Beverly a fee of $35.0 million and up to $2 million in documented fees and
expenses (the "Capstone Termination Payment") payable in immediately
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available funds prior to and as a condition of such termination and entering
into the transaction contemplated by such definitive agreement (the amount of
such payments and manner specified for making the payments being called the
"Capstone Payments"). To the extent a Capstone Termination Payment has not
already become payable and been paid and if, prior to any termination as set
forth under "-- Termination by Mutual Consent or by Either Party" above (except
clause (a) or, if Capstone terminates because Beverly stockholders' approval is
not obtained, clause (d)) or as set forth under "-- Termination by Beverly Only"
above (except clause (e)), any person shall have submitted a bona fide proposal
concerning a Capstone Business Combination Transaction and within eighteen
months after the termination of the Merger Agreement, Capstone or any of its
Subsidiaries proposes to enter into a definitive agreement with a third party
with respect to a Capstone Acquisition Transaction or a Capstone Business
Combination Transaction is proposed to be effected, then Capstone, prior to
entering into any such definitive agreement, shall be obligated to pay Beverly
the Capstone Termination Payment, payable in immediately available funds prior
to and as a condition of entering into such definitive agreement.
AMENDMENT; WAIVER
Subject to applicable law, the Merger Agreement may be amended, modified or
supplemented only by written agreement of Capstone and Beverly at any time prior
to the Effective Time with respect to any of the terms contained therein;
provided, however, that, after the Merger Agreement is adopted by the
stockholders of Capstone or Beverly, no such amendment or modification will
change the amount or form of the Closing Consideration (as defined in the Merger
Agreement).
Any failure of Capstone or Beverly to comply with any obligation, covenant,
agreement or condition contained in the Merger Agreement may be waived by
Capstone or Beverly, respectively, only by a written instrument signed by the
party granting such waiver, but the waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition will not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. All consents are required to be in writing.
TERMS OF THE VOTING AGREEMENT
Counsel, the beneficial owner of approximately 23% of the Capstone Common
Stock prior to the Merger, entered into a Voting Agreement (the "Voting
Agreement") with Beverly, pursuant to which Counsel agreed to vote all shares
over which it has voting power in favor of the Merger and agreed not to withdraw
its vote prior to the earlier of the effective time of the Merger or the
termination of the Merger. Counsel also agreed, pursuant to the Voting Agreement
to refrain from soliciting alternative transactions.
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POST-CLOSING ARRANGEMENTS
TERMS OF THE INTERIM SERVICES AGREEMENT
Prior to the Distribution Date, New Beverly and Beverly will execute the
Interim Services Agreement, which establishes a framework for New Beverly to
provide to Capstone, as the successor to Beverly following the Effective Time of
the Merger, certain services as may be requested by Capstone to insure an
orderly transition of the Institutional Pharmacy Business. The contemplated
services may include those services that have been historically provided by
Beverly on a centralized basis to the Institutional Pharmacy Business, such as
cash management, compensation and benefits administrative assistance, management
information systems and legal services. The term of the Interim Services
Agreement extends through April 30, 1998, or as otherwise mutually agreed by the
parties. New Beverly will be reimbursed for all direct and indirect costs and
expenses incurred in connection with providing any services, as well as the
allocated portion of the base salaries of the New Beverly employees actually
providing services; provided that in no event will the amount to be reimbursed
to New Beverly for such services be less than the fair market value for such
services.
INDEMNIFICATION AND INSURANCE
The Distribution Agreement provides that from and after the Distribution
Date, Capstone will indemnify, defend and hold harmless New Beverly, and its
subsidiaries, as well as the directors and officers of New Beverly and the
various New Beverly subsidiaries (collectively, the "New Beverly Indemnitees")
from and against all losses arising out of or relating to (i) the Institutional
Pharmacy Liabilities, (ii) any breach, whether before or after the Distribution
Date, by Beverly or the Pharmacy Subsidiaries of any provision of the
Distribution Agreement or any Ancillary Agreement and (iii) liabilities related
to the operation of Capstone.
New Beverly will, following the Distribution Date, indemnify and hold
harmless, Beverly (and Capstone as its successor), each Pharmacy Subsidiary, and
the directors and officers of Beverly and the Pharmacy Subsidiaries from and
against losses arising out of or resulting from (i) the Remaining Healthcare
Liabilities (as defined in the Distribution Agreement), (ii) the breach, whether
before or after the Distribution Date, by New Beverly or any New Beverly
subsidiary, of any provision of the Distribution Agreement or any Ancillary
Agreement, (iii) any claims arising out of the New Beverly Prospectus or the
Registration Statement pertaining thereto, and (iv) the failure to qualify as a
tax-free reorganization.
For a period of six years following the anniversary of the Distribution
Date, Capstone will maintain in effect in such manner as is contemplated by the
Merger Agreement policies of directors' and officers' liability insurance with
respect to claims against present or former officers or directors of Beverly and
its subsidiaries arising from facts or events occurring prior to the Effective
Time of the Merger. The cost of maintaining such coverage in effect will be
shared as follows: (i) for the first three years after the Distribution Date,
New Beverly and Capstone will each bear 50% of the premium cost of maintaining
said insurance policies or any applicable runoff policy in substitution or
replacement thereof; and (ii) for the following three years, New Beverly will
bear 70% of such premium cost, and Capstone will bear 30% of such premium cost.
Following the Distribution Date, Capstone will be responsible for providing
such insurance coverage as it may deem appropriate with respect to the assets
and business of the Institutional Pharmacy Business. Similarly, New Beverly will
be responsible for maintaining such insurance coverage as it deems appropriate
with respect to the assets and business of the Remaining Healthcare Business.
Notwithstanding the above, Capstone and Beverly, pursuant to the terms of the
Merger Agreement, have agreed to use their joint best efforts to expeditiously
obtain a commitment for retroactive insurance coverage, which will be reasonably
acceptable to Beverly, with respect to both known liabilities and unreported
losses which are related to the Institutional Pharmacy Business which may have
occurred or may occur at any time prior to the Effective Time. Capstone has
agreed that at the Effective Time, it will, at its expense, cause such
retroactive insurance coverage to be in effect.
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TERMS OF THE NON-COMPETITION AGREEMENT
In connection with the Distribution and the Merger, Beverly, Capstone and
New Beverly will enter into a Non-competition Agreement whereby New Beverly will
agree not to engage in the institutional pharmacy business (as defined in the
Non-competition Agreement) within a 120-mile radius of any pharmacy included in
the Institutional Pharmacy Business or operated by Capstone during the five-year
term of such agreement, except that the Non-competition Agreement will not
restrict or impair any activities of New Beverly or any of its subsidiaries as
currently provided in connection with the provision of any healthcare services
or products in certain defined settings and in other settings where long-term
healthcare is not the primary service furnished.
If New Beverly, during the term of the Non-competition Agreement, acquires
a pharmacy dispensing services business as part of the acquisition of a larger
business where the pharmacy dispensing services business does not constitute the
principal part of the larger business, New Beverly has agreed to offer to sell
such pharmacy dispensing services business to Capstone within six months of the
purchase of such business. The purchase price of any such pharmacy dispensing
services business which Capstone elects to acquire under the Non-competition
Agreement will be determined based upon an appraisal of an independent business
appraisal firm.
PREFERRED PROVIDER AGREEMENTS
Beverly and Capstone have agreed to negotiate one or more agreements to
provide for, among other things, the delivery of pharmacy services and products
and ancillary services and products after the Effective Time of the Merger by
Capstone, to currently operated or subsequently acquired New Beverly long-term
care facilities. The parties intend to complete their negotiations prior to June
30, 1997.
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EFFECT OF THE TRANSACTIONS ON EMPLOYEES AND EMPLOYEE BENEFITS
EMPLOYEE BENEFIT AGREEMENT
Beverly, New Beverly and Capstone will execute an Employee Benefit Matters
Agreement (the "Employee Benefit Agreement") on or prior to the Distribution
Date to allocate responsibilities and obligations between New Beverly and the
Surviving Corporation for various employee and employee benefit matters,
including the rights and claims of employees of the Institutional Pharmacy
Business, who will become employees of Capstone after the Merger (and, where
appropriate, also covering former employees and current and former independent
contractors of the Institutional Pharmacy Business who provide or previously
provided services primarily in connection with the Institutional Pharmacy
Business) (collectively, the "Retained Employees"), and the rights and claims of
employees of the Remaining Healthcare Business, who will transfer to and become
employees of New Beverly (and, where appropriate, also covering former employees
and current and former independent contractors of the Remaining Healthcare
Business who provide or previously provided services primarily in connection
with the Remaining Healthcare Business) (collectively, the "Transferred
Employees"). The Employee Benefit Agreement allocates such responsibilities and
obligations with respect to salary, wages and related benefits, as well as
benefits under the current Beverly stock plans, non-tax qualified benefit plans,
employee welfare benefit plans and tax-qualified defined contribution plans.
Beverly and New Beverly intend to transfer the Transferred Employees to New
Beverly or one of its subsidiaries, as appropriate, immediately prior to the
Distribution. With respect to the Transferred Employees, New Beverly will assume
the liabilities and obligations regarding, and will continue to be responsible
for, all claims made by or on behalf of Transferred Employees concerning salary,
wages, benefits, stock-based compensation, non-qualified plans, qualified plans,
welfare plans, severance pay, salary continuation and post-employment
obligations. With respect to Retained Employees, Beverly will retain and
Capstone shall assume all such liabilities and obligations with respect to and
concerning Retained Employees except for certain benefits of Retained Employees
provided under certain non-tax qualified benefit plans that are to be maintained
for such Retained Employees by New Beverly. Beverly and Capstone will, however,
retain liability for such benefits of Retained Employees, and will indemnify New
Beverly to the extent of the net cost to New Beverly of providing such benefits.
All of the employee welfare benefit plans maintained by Beverly will be
assumed, along with any underlying assets held for such plans, by New Beverly.
New Beverly's assumption of liability for the provision of benefits under these
plans will cover all liabilities with respect to Transferred Employees and will
cover all liabilities for Retained Employees arising with respect to claims
incurred up to the Distribution. However, Beverly will retain and Capstone will
assume all coverage and benefit liabilities for Retained Employees as of the
Distribution. Beverly's and Capstone's obligations with respect to Retained
Employees as of the Distribution under COBRA will be administered and paid for
by New Beverly, with Beverly and Capstone providing reimbursement to New Beverly
for all costs incurred.
Effective as of the Distribution, New Beverly will assume the Beverly
Enterprises 401(k) Savings Plus Plan, taking on all of its assets and
liabilities. New Beverly will continue to maintain that plan for the benefit of
the Transferred Employees. The Retained Employees will cease to participate in
that plan. New Beverly will cause the assets held in that plan for the benefit
of the Retained Employees to be transferred in a trustee-to-trustee transfer to
another tax-qualified plan of which the Surviving Corporation is sponsor. The
transferee plan will be designated by the Surviving Corporation. The Pharmacy
Corporation of America Retirement Savings Plan will be amended to provide for
its assumption by Capstone. The Beverly Enterprises, Inc. 1988 Stock Purchase
Plan will be amended and assumed by New Beverly and Retained Employees will
cease to participate in that plan. Retained Employees will receive a cash
distribution of any remaining balance held in that plan to the extent it has not
been used to purchase stock.
Beverly, New Beverly and Capstone intend to amend the existing Beverly
stock plans prior to the Distribution to provide for the assumption by Capstone
of such plans and certain options, restricted shares, performance shares and
phantom shares granted thereunder. In addition, prior to the Distribution, New
Beverly shall adopt one or more stock option plans and the participants
initially shall be all Transferred
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Employees who hold Beverly options, restricted shares, performance shares and/or
phantom shares, which benefits shall be subject to accelerated vesting and other
adjustments for those Transferred Employees who, as applicable, have agreed to
release Beverly, New Beverly and Capstone from any and all liability under the
existing Beverly stock plans, including any liability that would arise by virtue
of a change in control arising under any such plan or under any option or shares
granted thereunder, as described more fully below (the "Consent and Release").
For all Retained Employees and Transferred Employees who have executed a
Consent and Release, (i) each option to purchase Beverly Common Stock then
outstanding will become fully vested and exercisable, (ii) all restrictions on
outstanding restricted shares will lapse and each such share shall become fully
vested, (iii) each outstanding award of phantom shares shall become fully
vested, and (iv) each outstanding performance share of Beverly Common Stock
shall become vested to the extent of 50% of such share. For all Retained
Employees and Transferred Employees who fail to execute and deliver a Consent
and Release, no such vesting shall occur.
Effective immediately after the Distribution, New Beverly will substitute
for each outstanding Beverly option held by a Transferred Employee, subject to
the optionee's consent to the extent required, a New Beverly option to acquire
shares of New Beverly Common Stock, which option shall be of the same character
and subject to substantially the same terms and conditions, including the
vesting schedule, as the Beverly option for which it is substituted, provided,
however, that solely with respect to the Transferred Employees who have executed
and delivered to Beverly a Consent and Release: (i) the exercise price per share
of New Beverly Common Stock for which the option may be exercised shall be an
amount equal to the product of (x) the per share exercise price under the
Beverly option immediately prior to the Distribution, and (y) the fraction
representing the Fair Market Value (defined as the last reported sales price per
share of the Beverly Common Stock as reported on the New York Stock Exchange
composite tape for the valuation date in question) of a share of New Beverly
Common Stock immediately after the Distribution (which, for purposes of this
determination, shall mean such value of a share of New Beverly Common Stock,
trading on a "when issued" basis, on the Ex-Dividend Date (as defined below))
divided by the Fair Market Value of a share of Beverly Common Stock immediately
before the Distribution (which, for purposes of this determination, means the
last trading day before the Ex-Dividend Date) (the "Distributed Stock
Fraction"), and (ii) the number of New Beverly shares for which the option may
be exercised shall be an amount equal to the quotient of (x) the number of
shares of Beverly stock for which the Beverly option could have been exercised,
had it been fully vested, immediately prior to the Distribution, divided by (y)
the Distributed Stock Fraction. No such adjustment to the exercise price and
number of New Beverly shares for which the option may be exercised shall apply
to options held by Transferred Employees who have declined to execute and
deliver to Beverly a Consent and Release. As used in the Distribution Agreement,
the term "Ex-Dividend Date" means the date on which shares of Beverly Common
Stock will commence trading on the New York Stock Exchange on an ex-dividend
basis (i.e., shares purchased on or after such date will not entitle the holder
to receive shares of New Beverly Common Stock in the Distribution).
New Beverly will also substitute, with the grantee's consent to the extent
required, (i) for each then outstanding unvested phantom share granted with
respect to Beverly Common Stock and held by a Transferred Employee, new unvested
phantom shares which shall be granted with respect to New Beverly Common Stock,
and (ii) for each then outstanding unvested performance share or restricted
share of Beverly Common Stock held by either (A) a Transferred Employee or (B) a
Retained Employee who declines to execute and deliver to Beverly a Consent and
Release, new unvested performance shares or restricted shares of New Beverly
Common Stock, as the case may be. With respect to a Transferred Employee who has
executed and delivered to Beverly a Consent and Release, the number of New
Beverly phantom or performance shares, as the case may be, substituted for each
phantom or performance share of Beverly Common Stock, shall be equal to the
quotient of one divided by the Distributed Stock Fraction; but no such
adjustment to the number of phantom, performance or restricted shares of New
Beverly Common Stock shall be made with respect to any such shares held by
persons, whether Transferred Employees or Retained Employees, who have declined
to execute and deliver to Beverly a Consent and Release. With respect to a
Retained Employee who has executed and delivered to Beverly a Consent and
Release, no new phantom, performance or restricted shares
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of New Beverly Common Stock shall be issued in substitution for outstanding
unvested phantom, performance or restricted shares of Beverly Common Stock. In
all other respects, all such shares shall be subject to the same terms and
conditions, including vesting requirements (as adjusted to take into account the
Distribution and all transactions related thereto, including the requirement
that employment services be provided for New Beverly or its subsidiaries), as
the phantom, performance or restricted share, as the case may be, for which they
have been substituted.
For each Retained Employee who has executed and delivered a Consent and
Release, Beverly will maintain each outstanding Beverly option held by a
Retained Employee to preserve the terms and conditions of the Beverly option,
except that (i) the exercise price per share of Beverly Common Stock for which
the option may be exercised shall be an amount equal to the product of (x) the
per share exercise price under the Beverly option immediately prior to the
Distribution, and (y) the fraction representing the Fair Market Value of a share
of Beverly Common Stock immediately after the Distribution (which, for purposes
of this determination, shall mean such value on the Ex-Dividend Date), divided
by the Fair Market Value of such share immediately before the Distribution
(which, for purposes of this determination, shall mean such value on the last
trading day before the Ex-Dividend Date) (the "Retained Stock Fraction"), and
(ii) the number of shares of Beverly Common Stock for which the option may be
exercised shall be an amount equal to the quotient of (x) the number of shares
of Beverly Common Stock for which the Beverly Option could have been exercised,
had it been fully vested, immediately prior to the Distribution, divided by (y)
the Retained Stock Fraction. No such adjustment to the exercise price and number
of shares of New Beverly Common Stock for which the option may be exercised
shall apply to options held by Retained Employees who have failed to execute and
deliver a Consent and Release.
For each Retained Employee who has executed and delivered a Consent and
Release, the number of shares of Beverly Common Stock represented by each
outstanding unvested performance or phantom share of Beverly Common Stock shall
be equal to the quotient of one divided by the Retained Stock Fraction; but no
such adjustment to the number of unvested restricted, performance or phantom
shares of Beverly Common Stock shall be made with respect to Retained Employees
who have declined to execute and deliver to Beverly a Consent and Release. With
respect to each Transferred Employee who has executed and delivered to Beverly a
Consent and Release, all outstanding unvested phantom, performance and
restricted shares of Beverly Common Stock shall be canceled or forfeited, as the
case may be.
Capstone has agreed to assume the Beverly stock plans and each Beverly
option granted thereunder that is held by a Retained Employee, and each such
option so assumed shall be exercisable upon the same terms and conditions as
under the applicable Beverly stock plan and the applicable option agreement
issued thereunder, except that (i) each such option shall be exercisable for
that number of shares of Capstone Common Stock into which the number of shares
of Beverly Common Stock subject to such option immediately prior to the
Effective Time of the Merger, but after giving effect to the adjustments
described above, would have been converted pursuant to the Merger Agreement if
such option, had it been fully vested, had been exercised immediately prior to
the Effective Time of the Merger and (ii) the exercise price per share of
Capstone Common Stock for which the option may be exercised, determined after
giving effect to the adjustments described above, shall be an amount equal to
the quotient of (x) such adjusted exercise price per share of Beverly Common
Stock for which the option could have been exercised, had it been fully vested,
immediately prior to the Effective Time of the Merger, divided by (y) the
Conversion Number.
As of the Effective Time of the Merger, Capstone shall assume each
outstanding unvested phantom share granted with respect to Beverly Common Stock
held by a Retained Employee, and each outstanding unvested performance share
and/or restricted share of Beverly Common Stock held by either a Transferred
Employee or Retained Employee, in each instance after giving effect to the
adjustments described above, and shall substitute (i) for each such phantom
share new unvested phantom shares which shall be granted with respect to
Capstone Common Stock, and (ii) for each such performance share or restricted
share, as the case may be, new unvested performance shares or restricted shares
of Capstone Common Stock; provided, however, that, the number of new phantom,
performance or restricted shares of Capstone Common Stock substituted for each
phantom, performance or restricted share of Beverly Common Stock, as the case
may be, shall be equal to the Conversion Number. With respect to each
Transferred Employee who has executed and delivered to
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<PAGE> 90
Beverly a Consent and Release, all outstanding unvested phantom, performance and
restricted shares of Beverly Common Stock shall be canceled or forfeited, as the
case may be, and no new phantom, performance or restricted shares of Capstone
Common Stock shall be issued in substitution therefor. In the case of any such
assumption and substitution, in all other respects, all such shares shall be
subject to the same terms and conditions, including vesting requirements (as
adjusted to take into account the Merger and all transactions related thereto,
including the requirement that employment services be provided for Capstone or
its subsidiaries), as the phantom, performance or restricted share, as the case
may be, for which it has been substituted.
Capstone's obligation under the Employee Benefit Agreement to assume
Beverly options, phantom shares, restricted shares and performance shares held
by Retained Employees will not be subject to any provision of the Merger
Agreement limiting to 50 million the maximum number of shares of Capstone Common
Stock which may be issued pursuant to the Merger Agreement. The phantom shares,
restricted shares and one-half of the performance shares (collectively, the
"Retained Shares") will vest in connection with the Merger subject to certain
conditions, and will convert to Capstone Common Stock in accordance with the
Conversion Number. Capstone will assume Beverly options with respect to
approximately 700,000 shares of Beverly Common Stock (the "Retained Options")
and unvested performance shares related to approximately 50,000 shares of
Beverly Common Stock (together with the Retained Options, the "Retained
Benefits"), subject to the adjustments described below. The Retained Benefits
will be adjusted (i) after the Distribution to reflect the change in market
value of Beverly following the Distribution, and (ii) in connection with the
Merger to apply the Conversion Number. As a result, the actual number of shares
of Capstone Common Stock into which the Retained Benefits will convert cannot be
determined until the Effective Time of the Merger. If the foregoing adjustments
had been made on May 28, 1997, the companies estimate that the Retained Benefits
would have converted into benefits covering approximately 1.1 million shares of
Capstone common stock. The weighted average exercise price for the Retained
Options, prior to adjustment, is approximately $11.16. New Beverly will
indemnify Capstone against costs incurred as a result of claims relating to the
Retained Benefits and Retained Shares in excess of Capstone's obligation to
assume benefits related to up to 900,000 shares (subject to the foregoing
adjustments) of Beverly Common Stock. To the extent there are any forfeitures of
restricted or performance stock after the date of the Transactions under the
terms of any of the Stock Plans, the forfeited shares will revert back to the
issuer and will not become the property of any other party to the Transactions.
Prior to the Distribution, Beverly, New Beverly and Capstone shall
cooperate to amend all of Beverly's existing non-tax qualified benefit plans,
employee welfare benefit plans and tax-qualified defined contribution plans
consistent with the transactions described above, and to provide generally for
(i) the assumption of such plans by New Beverly, (ii) the ongoing participation
in such plans by all Transferred Employees, (iii) the cessation of participation
in such plans as of the Distribution by all Retained Employees and (iv) taking
such other steps as may be necessary to prevent the consummation of the Merger,
the Distribution and the transactions contemplated thereby from causing,
resulting in, or being treated as a termination of employment, cessation of
service or a change of control with respect to such plans.
CAPSTONE BENEFITS
Capstone is considering implementing various bonus and retention plans in
order to retain key employees of Capstone through the Effective Time of the
Merger and to retain key employees of the Surviving Corporation following the
Effective Time of the Merger. As of the date of this Joint Proxy Statement/
Prospectus no such plans have been enacted and there can be no assurance that
such plans will be adopted or, if adopted, as to the terms of such plans as
adopted.
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CERTAIN TAX CONSIDERATIONS
TAX ALLOCATION BETWEEN THE PARTIES
Prior to the Distribution, Beverly and New Beverly will enter into a Tax
Allocation and Indemnification Agreement. This agreement sets forth each party's
rights and obligations with respect to the allocation and payment of tax
liabilities and entitlements to refunds, if any, for any federal, state or local
taxes for periods before and after the Effective Time of the Merger. The Tax
Allocation and Indemnification Agreement also addresses related matters such as
the allocation of responsibility in connection with the preparation and filing
of any tax returns, the conduct of proceedings related to taxes, cooperation of
the parties with respect to certain tax matters, and the indemnification of the
parties against certain liabilities allocated under the Tax Allocation and
Indemnification Agreement.
In general, under the Tax Allocation and Indemnification Agreement, New
Beverly will be responsible for (i) all tax liabilities of Beverly not allocable
to the Pharmacy Subsidiaries, (ii) any tax liability of New Beverly for periods
beginning after the date of the Merger, and (iii) except as otherwise described
in this section, any tax liability of Beverly resulting from the failure of the
restructuring and the Distribution to qualify as transactions described in
Sections 351 and 355 of the Code and/or as a "reorganization" under Section
368(a)(1)(D) of the Code, or the Merger to qualify as a "reorganization" under
Section 368(a)(1)(A) of the Code. New Beverly will also be entitled to any
refunds that relate to those liabilities.
Under the Tax Allocation and Indemnification Agreement, the Surviving
Corporation will generally be responsible for (i) all tax liabilities allocable
to the Pharmacy Subsidiaries, and (ii) any tax liability of Capstone.
If the tax return for the Beverly consolidated group (the "Group Tax
Return") for taxable year 1996 is filed before the Distribution, Beverly will be
responsible for preparing and filing such Group Tax Return in a manner that
fairly reflects the interests of Beverly and New Beverly. If the Group Tax
Return for taxable year 1996 is filed after the Distribution, New Beverly will
be responsible for preparing such Group Tax Return in a manner that fairly
reflects the interests of Beverly and for furnishing the completed Group Tax
Return to Beverly in time to permit the timely signing and filing of such Group
Tax Return by Beverly. Beverly will be responsible for preparing and filing the
Group Tax Return for taxable year 1997 in a manner which fairly reflects the
interests of New Beverly. New Beverly will be responsible for providing to
Beverly for taxable year 1997 the information relating to New Beverly that is
needed for the preparation of the taxable year 1997 Group Tax Return. All Group
Tax Returns filed after the date of the Merger will be prepared on a basis
consistent with the elections, accounting methods, conventions and principles of
taxation used for the most recent taxable periods for which Group Tax Returns
have been filed.
If the consolidated federal income tax liability reported on the Group Tax
Return (the "Group Tax Liability"), if any, for any relevant tax period includes
alternative minimum tax imposed by (and defined in) section 55 of the Code, the
total amount of alternative minimum tax will be allocated to New Beverly. The
remaining portion of the Group Tax Liability (after reduction for alternative
minimum tax) will be apportioned between Beverly and New Beverly. The amount
apportioned to Beverly will be based upon a determination of the tax liability
of the Institutional Pharmacy Business had such business filed a federal income
tax return on a stand-alone basis, and the amount apportioned to New Beverly
will be the remaining portion of the Group Tax Liability, excluding any portion
attributable to Capstone.
For any tax period for which a Group Tax Return is filed after April 15,
1997, New Beverly will be liable for the amount of taxes allocated to New
Beverly reduced by the excess of (a) the total amount of estimated federal
income taxes paid by Beverly with respect to any portion of such tax period
which occurs on or before the Distribution, over (b) the amount included as a
payable to Beverly for federal income taxes with respect to such tax period
determined as of April 15, 1997. If the amount allocated to New Beverly for any
tax period with a reduction as provided above is a positive number, such net
amount will be a joint and several liability of New Beverly and its subsidiaries
enforceable by Beverly and its subsidiaries under the terms of the Tax
Allocation and Indemnification Agreement. If the amount allocated to New Beverly
for any tax period
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reduced as provided above is a negative number, Beverly and its subsidiaries
will be jointly and severally liable for the payment of an amount equal to such
negative number to New Beverly.
If, as a result of any filing of an amended return or claim for refund,
final determination or settlement with the IRS, or court decision, relating to a
Group Tax Return for any tax period, there is an increase in the Group Tax
Liability, then each of Beverly and New Beverly will be allocated the portion of
the increase in the Group Tax Liability that is attributable to it under the
apportionment method described above, plus any allocable interest and penalties.
If there is a reduction in the Group Tax Liability, then each of Beverly and New
Beverly will be allocated the portion of the refund from such reduction in the
Group Tax Liability that is attributable to it under the apportionment method
described above, plus any allocable interest.
Each party to the agreement agrees to pay and be responsible for, and will
indemnify, defend and hold harmless all other parties from and against all
liabilities allocated to it under the Tax Allocation and Indemnification
Agreement. If any party pays or has paid any Group Tax Liability or state or
local income or franchise tax liability for which another party is or becomes
liable pursuant to the terms of the Tax Allocation and Indemnification
Agreement, appropriate reimbursement will be made no later than ten days after
demand for such reimbursement is made. The portion of any refund, rebate, or
reimbursement received by any party to which another party is entitled pursuant
to the Tax Allocation and Indemnification Agreement will be paid over within ten
days. Any payments required to be made between the parties that are not made in
a timely fashion will bear interest calculated at the rate specified under
Section 6621(a)(2) of the Code from the date such payment is due to the date the
payment is made.
Beverly agrees to (i) retain all Group Tax Returns, related schedules and
work papers, and all material records and other documents as required under
Section 6001 of the Code and the regulations promulgated thereunder existing on
the date of the Tax Allocation and Indemnification Agreement or relating to tax
periods ending with the Distribution, for seven years following the
Distribution, or such longer period as a tax deficiency may be assessed or a
refund claim filed under applicable periods of limitation, and (ii) allow New
Beverly and its representatives (and representatives of any of its affiliates),
at times and dates reasonably acceptable to Beverly, to inspect, review and make
copies of such records, and have access to such employees, as New Beverly may
reasonably deem necessary or appropriate from time to time.
DESCRIPTION OF TAX CONSEQUENCES OF TRANSACTION
The following is a summary description of the material federal income tax
consequences of the Transactions. This summary is for general informational
purposes only and is not intended as a complete description of all of the tax
consequences of the Transactions and does not discuss tax consequences under the
laws of state or local governments or of any other jurisdiction. Moreover, the
tax treatment of a stockholder may vary depending upon his, her or its
particular situation. In this regard, certain stockholders (including (i)
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers, and persons who are not citizens or residents of the United
States or who are foreign corporations, foreign partnerships or foreign trusts
or estates as defined for United States federal income tax purposes, and (ii)
stockholders that hold shares as part of a position in a "straddle" or as part
of a "hedging" or "conversion" transaction for United States federal income tax
purposes and stockholders with a "functional currency" other than the United
States dollar) may be subject to special rules not discussed below. In addition,
this summary applies only to shares which are held as capital assets. The
following discussion may not be applicable to a stockholder who acquired his or
her shares pursuant to the exercise of stock options or otherwise as
compensation.
THE FOLLOWING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE
CODE, TREASURY REGULATIONS THEREUNDER, AND CURRENT ADMINISTRATIVE RULINGS AND
COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE WHICH MAY OR MAY NOT
BE RETROACTIVE, AND ANY SUCH CHANGES COULD AFFECT THE TAX CONSEQUENCES DESCRIBED
HEREIN. SEE "POSSIBLE FUTURE LEGISLATION" BELOW. EACH STOCKHOLDER IS URGED TO
CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
TRANSACTION DESCRIBED HEREIN, INCLUDING, THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR
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FOREIGN TAX LAWS, AND THE POSSIBLE EFFECTS OF CHANGES OF APPLICABLE TAX LAWS.
THE DISTRIBUTION
On May 17, 1997, Beverly requested a Private Letter Ruling from the IRS
substantially to the effect that, among other things, the Distribution will
qualify as a reorganization within Section 368(a)(1)(D), and that neither
Beverly, New Beverly nor their stockholders will recognize any gain or loss (i)
in connection with such reorganization transaction (as more fully described
below), (ii) upon the receipt by New Beverly of the Remaining Healthcare Assets
(as defined in the Distribution Agreement) from Beverly in exchange for the New
Beverly Common Stock, or (iii) upon receipt by Beverly stockholders of the New
Beverly Common Stock in the Distribution. Receipt of the Private Letter Ruling,
or an opinion to the effect as set forth below, at the election of Beverly, is a
condition to the respective obligations of Beverly and Capstone to consummate
the Merger. Beverly does not expect to have the Private Letter Ruling request
acted upon prior to the third quarter of 1997. See "The Merger -- Conditions to
Closing."
As an alternative to obtaining the Private Letter Ruling, at Beverly's
election, Beverly and Capstone have the right to receive the opinion of Caplin &
Drysdale, Chartered or Ernst & Young LLP to the effect that:
(1) the transfer by Beverly to New Beverly of the Remaining Healthcare
Assets, solely in exchange for New Beverly Common Stock, and the
assumption by New Beverly of the Remaining Healthcare Liabilities of
Beverly, followed by Beverly's distribution of the New Beverly Common
Stock to Beverly's stockholders, will constitute a reorganization
within the meaning of Section 368(a)(1)(D) of the Code;
(2) Beverly will recognize no gain or loss in connection with the
transactions described in (1) above, except to the extent that gain
or loss is required to be recognized on intercompany transactions;
(3) New Beverly will recognize no gain or loss upon the receipt of the
Remaining Healthcare Assets from Beverly in exchange for the New
Beverly Common Stock; and
(4) Beverly's stockholders will recognize no gain or loss (and no amount
will be included in the income of Beverly's stockholders) upon the
receipt of the New Beverly Common Stock in the Distribution.
Tax opinions are not binding on the IRS or any court. Moreover, the tax
opinions are based upon, among other things, certain representations as to
factual matters made by Beverly and Capstone, which representations if incorrect
or incomplete in certain material respects, would jeopardize the conclusions
reached in the opinions.
It is expected that the Distribution will qualify as a tax-free
reorganization under Section 368 of the Code. Assuming that the Distribution so
qualifies, (i) the holders of Beverly Common Stock will not recognize gain or
loss upon receipt of shares of New Beverly Common Stock, (ii) each holder of
Beverly Common Stock will allocate his, her or its aggregate tax basis in the
Beverly Common Stock immediately before the Distribution among the Beverly
Common Stock and New Beverly Common Stock in proportion to their respective fair
market values, (iii) the holding period of each holder of Beverly Common Stock
for the New Beverly Common Stock will include the holding period for his, her or
its Beverly Common Stock, provided that the Beverly Common Stock is held as a
capital asset at the time of the Distribution, and (iv) Beverly will not
recognize any gain or loss on its distribution of the New Beverly Common Stock
to its stockholders, except to the extent that gain or loss is required to be
recognized on intercompany transactions.
No fractional shares of New Beverly Common Stock will be distributed in the
Distribution. A holder of Beverly Common Stock who, pursuant to the
Distribution, receives cash in lieu of fractional shares of New Beverly Common
Stock will be treated as having received such fractional shares of New Beverly
Common Stock pursuant to the Distribution and then as having received such cash
in a sale of such fractional shares of New Beverly Common Stock. Such holder
will generally recognize capital gain or loss pursuant to such deemed sale equal
to the difference between the amount of cash received and such holder's adjusted
tax basis
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in the fractional share of New Beverly Common Stock received. Such gain or loss
will be capital (provided the Beverly Common Stock is held as a capital asset at
the time of the Distribution) and will be treated as a long-term capital gain or
loss if the holding period for the fractional shares of New Beverly Common Stock
deemed to be received and then sold is more than one year.
If the Distribution does not qualify as a tax-free reorganization under
Section 368 of the Code, then each holder of Beverly Common Stock who received
shares of New Beverly Common Stock in the Distribution will be treated as if
such holder received a taxable distribution in an amount equal to the fair
market value of the New Beverly Common Stock received. Such distribution will be
treated as (i) a dividend to the extent paid out of Beverly's current and
accumulated earnings and profits, then (ii) a reduction in such holder's basis
in Beverly Common Stock to the extent the amount received exceeds the amount
referenced in clause (i), and then (iii) a gain from the sale or exchange of
Beverly Common Stock to the extent the amount received exceeds the sum of the
amounts referenced in clauses (i) and (ii). Each holder's basis in the New
Beverly Common Stock would be equal to the fair market value of such stock at
the time of the Distribution. In addition, if the Distribution were not to
qualify as a tax-free reorganization under Section 368 of the Code, then, in
general, a corporate level federal income tax would be payable by the
consolidated group of which Beverly is the common parent, which tax would be
based upon the gain (computed as the difference between the fair market value of
the stock distributed and the distributing corporation's adjusted basis on such
stock) realized by Beverly upon its distribution of the stock of New Beverly to
its stockholders in the Distribution and New Beverly would be liable for the
payment of such tax pursuant to the terms of the Tax Allocation and
Indemnification Agreement.
THE MERGER
Beverly and Capstone will receive, prior to the Effective Time of the
Merger, the opinion of Caplin & Drysdale, Chartered or Ernst & Young LLP to the
effect that:
(1) the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code;
(2) no gain or loss will be recognized by Capstone or Beverly as a
result of the Merger; and
(3) no gain or loss will be recognized by Beverly's stockholders upon
the receipt of Capstone Common Stock solely in exchange for
Beverly Common Stock in connection with the Merger (except with
respect to cash received in lieu of a fractional interest in
Capstone Common Stock).
Tax opinions are not binding on the IRS or any court. Moreover, the tax
opinions are based upon, among other things, certain representations as to
factual matters made by Beverly and Capstone, which representations, if
incorrect or incomplete in certain material respects, would jeopardize the
conclusions reached in the opinions.
It is expected that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code. If the Merger so qualifies, (i) the
holders of Beverly Common Stock will not recognize gain or loss upon the receipt
of Capstone Common Stock in exchange for their shares of Beverly Common Stock,
(ii) each holder of Beverly Common Stock will carry over his, her or its tax
basis in the Beverly Common Stock (as determined immediately following the
Distribution) to the Capstone Common Stock, (iii) the holding period for each
holder of Beverly Common Stock will carry over to the Capstone Common Stock,
provided that the Beverly Common Stock is held as a capital asset immediately
prior to the Effective Time of the Merger, and (iv) any holder of Beverly Common
Stock receiving cash in lieu of fractional shares will recognize capital gain or
loss (provided the shares of Beverly Common Stock surrendered are held as
capital assets immediately prior to the Effective Time of the Merger) equal to
the difference between the amount of cash received and the portion of such
holder's basis in the shares of Beverly Common Stock allocable to such
fractional share interests, and such capital gain or loss will be long-term
capital gain or loss if the holding period for such shares is more than one
year.
If the Merger does not qualify as a reorganization within the meaning of
Section 368(a) of the Code, then each holder of Beverly Common Stock will
recognize gain or loss upon the receipt of the Capstone
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Common Stock in exchange for such Beverly Common Stock equal to the difference
between the fair market value of the Capstone Common Stock received and such
holder's basis in Beverly Common Stock. In this regard, the failure of the
Merger to qualify as a reorganization within the meaning of Code Section 368(a)
of the Code may also cause the Distribution to not qualify as a tax-free
reorganization under Section 368 of the Code, in which case (as described in
"-- The Distribution" above) each holder of Beverly Common Stock who receives
shares of New Beverly Common Stock in the Distribution, will be treated as if
such holder received a taxable distribution in an amount equal to the fair
market value of the New Beverly Common Stock received. Such distribution would
be treated as (i) a dividend to the extent paid out of Beverly's current and
accumulated earnings and profits, then (ii) a reduction in such holder's basis
in Beverly Common Stock to the extent the amount received exceeds the amount
referenced in clause (i), and then (iii) gain from the sale or exchange of
Beverly Common Stock to the extent the amount received exceeds the sum of the
amounts referenced in clauses (i) and (ii). Each holder's basis in the New
Beverly Common Stock would be equal to the fair market value of such stock at
the time of the Distribution.
In addition, if the Merger were not to qualify as a tax-free reorganization
under Section 368 of the Code, then, in general, a corporate level federal
income tax would be payable by the consolidated group of which Beverly is the
common parent, which tax would be based upon the gain (computed as the
difference between the fair market value of the PCA stock exchanged in the
Merger and Beverly's adjusted basis in such stock) realized by Beverly upon the
consummation of the Merger.
POSSIBLE FUTURE LEGISLATION
On April 17, 1997, proposed legislation was introduced in the U.S. Congress
which, if enacted in its initial form, would provide that in certain corporate
business transactions where a pre-arranged plan exists involving a distribution
or "spin-off" to stockholders of portions of a business enterprise, accompanied
by a merger or acquisition of a specific unit of the enterprise involving a
third party acquiror, the transaction would cease to receive tax-free treatment
under the Code and would result in the imposition of taxable gain at the
corporate level as of the date of the distribution to stockholders. Acquisitions
occurring within the four-year period beginning two years prior to the date of
distribution to stockholders would be presumed to be pursuant to a pre-arranged
plan. Whether a corporation was "acquired" would be determined under rules
similar to those of present Section 355(d) of the Code. Thus, an acquisition
would occur if a person acquired more than 50% of the vote or value of the stock
of the controlled or distributing corporation pursuant to a plan or arrangement.
As introduced, the legislation would take effect for distributions occurring
after April 16, 1997, unless, among other things, the distribution is made
pursuant to a written agreement which, subject to customary conditions, was
binding on such date and at all times thereafter, or such distribution is
described on or before such date in a public announcement or in a filing with
the Securities and Exchange Commission required solely by reason of the
distribution. Capstone and Beverly believe the Distribution and the Merger are
not subject to the provisions of the proposed legislation described above, since
(i) Beverly stockholders are expected to own more than 50% of the common stock
of Capstone after the Merger; (ii) the Transactions were the subject of a
binding contract entered into on April 15, 1997, and (iii) the Transactions were
described in public announcements by Beverly and Capstone on April 16, 1997.
There can be no assurance, however, that the proposed legislation, if enacted,
will be enacted in the form proposed on April 17, 1997, or that the transition
rules described above will not be changed in a manner adverse to the parties
engaged in the Transactions.
BACK-UP WITHHOLDING REQUIREMENTS
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of Beverly Common Stock, unless
the stockholder (i) is a corporation or comes with certain other exempt
categories, and, when required, demonstrates these facts, or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A stockholder who does not supply Beverly with
his, her or its correct taxpayer identification number may be subject to
penalties imposed by the IRS. Any amount withheld under these rules will be
refunded or credited against the stockholder's federal income tax liability.
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Stockholders should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption. If information reporting requirements apply to a stockholder, the
amount of dividends paid with respect to such shares will be reported annually
to the IRS and to such stockholder.
These back-up withholding tax and information reporting rules currently are
under review by the United States Treasury Department and proposed Treasury
Regulations issued on April 15, 1996, would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules may be changed.
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INFORMATION CONCERNING CAPSTONE
CAPSTONE SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data for the years ended December 31,
1996, the ten months ended December 31, 1995 and the years ended February 28,
1995, 1994, and 1993 are derived from the audited consolidated financial
statements of Capstone. The financial data for the three months ended March 31,
1997 and 1996 are derived from unaudited consolidated financial statements. The
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring items, which Capstone considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1997. The data should be read in conjunction with Capstone's
Consolidated Financial Statements, related notes and other financial information
included in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED TEN MONTHS
MARCH 31, YEAR ENDED ENDED YEAR ENDED FEBRUARY 28,
--------------------------- DECEMBER 31, DECEMBER 31, ------------------------------------
1997 1996 1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales..................... $ 69,024 $ 22,028 $ 144,398 $ 48,841 $ 43,608 $ 51,254 $ 39,555
Cost of sales................. 38,690 13,576 85,532 30,654 27,970 32,441 24,121
--------- --------- --------- --------- --------- --------- ---------
Gross profit.......... 30,334 8,452 58,866 18,187 15,638 18,813 15,434
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Selling, general and
administrative expenses... 22,926 7,277 46,838 17,469 18,637 17,241 14,828
Depreciation and
amortization.............. 2,357 569 4,634 1,103 989 1,037 1,092
Costs in connection with
litigation................ -- -- -- -- 4,389 463 83
Restructuring charge........ -- -- 2,825 240 2,069 -- --
Terminated acquisition
costs..................... -- -- -- -- -- -- 395
--------- --------- --------- --------- --------- --------- ---------
Total operating
expenses............ 25,283 7,846 54,297 18,812 26,084 18,741 16,398
--------- --------- --------- --------- --------- --------- ---------
Operating income
(loss).............. 5,051 606 4,569 (625) (10,446) 72 (964)
Total non-operating expense,
net......................... 1,156 217 6,325 245 801 644 387
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes....................... 3,895 389 (1,756) (870) (11,247) (572) (1,351)
Provision (benefit) for income
taxes....................... 1,441 103 (5,121) (225) (466) (51) --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from
continuing
operations.......... $ 2,454 $ 286 $ 3,365 $ (645) $ (10,781) $ (521) $ (1,351)
========= ========= ========= ========= ========= ========= =========
Fully diluted income (loss)
from continuing operations
per share................... $ 0.07 $ 0.02 $ 0.14 $ (0.05) $ (1.67) $ (0.08) $ (0.22)
========= ========= ========= ========= ========= ========= =========
Fully diluted weighted average
shares outstanding.......... 36,915,693 16,692,186 23,214,767 12,398,401 6,458,891 6,071,687 6,187,376
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, FEBRUARY 28,
------------------ ------------------ ---------------------------
1997 1996 1996 1995 1995 1994 1993
------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 75,285 $ 20,102 $ 56,182 $10,814 $ 5,909 $ 1,932 $ 1,520
Total assets.................................... 348,718 67,565 271,001 42,131 19,212 24,360 26,717
Long-term debt, less current portion............ 84,698 24,969 39,166 2,692 7,650 2,358 1,506
Stockholders' equity............................ 237,899 32,025 204,746 26,840 4,778 8,316 9,077
</TABLE>
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<PAGE> 98
CAPSTONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the Consolidated Financial Statements, including the related notes,
and the other financial information incorporated by reference herein.
GENERAL
Capstone is a leading provider of institutional pharmacy services to
long-term care facilities and correctional institutions throughout the United
States. Capstone provides its long-term care clients with comprehensive
institutional pharmacy services that include (i) the purchasing, repackaging and
dispensing of pharmaceuticals, (ii) infusion therapy and Medicare Part B
services, which are comprised of enteral nutrition and urologic supplies, and
(iii) pharmacy consulting services, all of which are supported by computerized
recordkeeping and third-party billing services. Capstone serves its long-term
care clients primarily through regional pharmacies many of which are open 24
hours, seven days a week. In the correctional business, Capstone provides
pharmaceuticals primarily under capitated contracts at correctional institutions
that have privatized inmate healthcare services.
Healthcare providers are continuing to be challenged to reduce costs while
maintaining the quality of patient care. Management believes that these factors
will result in the continuing consolidation of institutional pharmacy providers
during the next few years. In addition, Capstone believes that its strategy of
creating larger regional pharmacies in metropolitan areas will allow it to
reduce the costs of providing services to the residents it serves. Capstone is
also developing a formulary and various other clinical programs which it
believes will enhance the quality of patient care while reducing the costs of
providing this care.
In May of 1995, Capstone implemented a corporate restructuring plan that
included installation of a new management team, refocusing Capstone's operations
on core institutional pharmacy businesses and the initiation of an aggressive
acquisition strategy. In conjunction with the restructuring, Capstone exited
certain non-strategic, unprofitable lines of business. Capstone sold its
medical/surgical supply operation, closed a long-term care pharmacy in Missouri,
discontinued its long-term care mail order pharmacy operations and sold its
computer software division. Capstone took certain charges and realized certain
gains relating to the discontinuation of these operations.
During the third quarter of 1996, Capstone implemented a restructuring plan
to consolidate and integrate Capstone's acquisitions with existing operations,
as well as promote an efficient structure to support continued growth. Key
aspects of this plan include the consolidation of California, Pennsylvania and
Maryland long-term care pharmacies, the closure of excess facilities and the
relocation of Capstone's corporate headquarters to Irving, Texas.
The acquisition of institutional pharmacy companies has resulted in a
significant change in Capstone's financial profile. Between May 1995 and April
1997, the Company completed a total of 14 such acquisitions. All of these
acquisitions have been accounted for using the purchase method of accounting,
and as a result Capstone will incur significant future amortization expense
associated with goodwill.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997, Compared with the Three Months Ended
March 31, 1996
Net Sales. Net sales increased to $69,024,000 in the 1997 period from
$22,028,000 in the 1996 period, an increase of $46,996,000, or 213%. This
increase is primarily attributable to the addition of revenue related to the
acquisitions completed and the beds added as a result of the Company's preferred
provider agreements with long-term care operators.
Cost of Sales. Cost of sales includes the cost of pharmaceuticals sold to
patients and institutions. Cost of sales increased to $38,690,000 in the 1997
period from $13,576,000 in the 1996 period, an increase of $25,114,000, or 185%.
As a percentage of net sales, cost of sales decreased to 56.1% in the 1997
period from
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<PAGE> 99
61.6% in the 1996 period as a result of more favorable reimbursement in the
markets of the acquired companies, the addition of higher margin infusion and
Medicare Part B services and purchasing efficiencies related to greater
purchasing volume. In addition, the Company entered into new prime vendor and
group purchasing organization agreements during the fourth quarter of 1996.
These agreements resulted in a reduction in cost of goods sold during the 1997
period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include salaries, benefits, facility expenses and other
administrative overhead. Selling, general and administrative expenses increased
to $22,925,000 in the 1997 period from $7,277,000 in the 1996 period, an
increase of $15,648,000, or 215%. This increase in expenses was due to
acquisitions closed subsequent to the 1996 period. As a percentage of net sales,
selling, general and administrative expenses were 33.2% in the 1997 period,
compared to 33.0% in the 1996 period. Management believes that selling, general
and administrative expenses as a percentage of net revenues in future periods
will decline as operational synergies and the benefits of restructuring plans
are fully realized.
Depreciation and Amortization. Depreciation and amortization increased to
$2,357,000 in the 1997 period from $569,000 in the 1996 period, an increase of
$1,788,000, or 314%. This increase is due mainly to the increased amortization
expense incurred as a result of the acquisitions.
Non-operating Expense. Non-operating expenses include interest and other
nonoperating items. Non-operating expenses increased to $1,156,000 in the 1997
period from $218,000 in the 1996 period, an increase of $938,000. The increase
is primarily due to interest expense on bank borrowings related to acquisitions.
Income Taxes. Income taxes in the 1997 and 1996 periods are recorded at
effective rates of 37% and 26%, respectively. The increase in the effective tax
rates is due to the full realization of federal net operating loss carryforwards
during the fourth quarter of 1996.
Fiscal Year Ended December 31, 1996, Compared to the Ten Months Ended
December 31, 1995
Net Sales. Net sales increased to $144,398,000 in 1996 from $48,841,000 in
1995, an increase of $95,557,000, or 196%. This increase is primarily
attributable to the acquisition of Symphony and other institutional pharmacy
businesses during 1996. Additionally, Capstone anticipates that continued
acquisitions of institutional pharmacies will be a significant contributor to
revenue growth in the next few years. Net revenue in 1997 will also be higher
than 1996 as a result of realizing a full year's contribution from businesses
that were acquired during 1996. In addition to growth through acquisitions,
Capstone anticipates net revenues will increase in future years as a result of
new contracts, preferred provider agreements and the increase in ancillary
services provided such as intravenous therapy and Medicare Part B services.
Cost of Sales. Cost of sales includes the cost of pharmaceuticals sold to
patients and institutions. Cost of sales increased to $85,532,000 in 1996 from
$30,654,000 in 1995 an increase of $54,878,000, or 179%. The increase in dollar
amount of cost of sales is due to the corresponding increase in revenue levels
for 1996. As a percentage of net sales, cost of sales decreased to 59.2% in 1996
from 62.6% in 1995. This is a result of more favorable reimbursement in the
markets of the acquired companies, the addition of higher margin infusion
therapy, Medicare Part B services and purchasing efficiencies as related to
greater purchasing volume. In addition, Capstone entered into new prime vendor
and group purchasing organization agreements during the fourth quarter of 1996.
Capstone anticipates that these agreements will result in a further reduction in
the cost of pharmaceuticals purchased in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include salaries, benefits, facility and delivery
expenses and other administrative overhead. Selling, general and administrative
expenses increased to $46,838,000 in 1996 from $17,469,000 in 1995, an increase
of $29,369,000 or 168%. The increase in the amount of selling, general and
administrative expenses during 1996 was due to the six acquisitions finalized in
1996. As a percentage of net sales, selling, general and administrative expenses
were 32.4% in the 1996 period compared to 35.8% in the 1995 period. This
decrease is a result of the corporate restructuring discussed above and initial
operational efficiencies achieved through the acquisition of Symphony.
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<PAGE> 100
Depreciation and Amortization. Depreciation and amortization increased to
$4,634,000 in 1996 from $1,103,000 in 1995, an increase of $3,531,000, or 320%.
This increase is attributable to assets and goodwill associated with
acquisitions completed during 1996.
Non-operating Expense. Non-operating expenses include interest,
acquisition financing fees and expenses and other non-operating items.
Non-operating expenses increased to $6,325,000 in 1996 from $245,000 in 1995.
During 1996, the increase in non-operating expenses is attributable to one-time
charges of $4,574,000 related to acquisition financing fees for the Symphony
transaction and increased interest expense primarily resulting from borrowings
related to 1996 acquisitions. The ten months ended December 31, 1995 include a
gain on the sale of Capstone's medical/surgical supply business.
Income Taxes. Income taxes in the 1996 and 1995 periods consist of
accruals for estimated state and local incomes taxes based upon apportioned
state taxable income, offset by estimated refundable federal income taxes
resulting from the benefit of net operating loss carryforwards. In 1996,
Capstone realized a benefit for income taxes of $5,121,000 which was primarily
as a result of the reversal of a deferred tax asset valuation allowance
established in prior periods.
Ten Months Ended December 31, 1995 Compared with the Fiscal Year Ended
February 28, 1995
Net Sales. Net sales for the ten months ended December 31, 1995 were
$48,841,000 compared to $43,608,000 for the fiscal year ended February 28, 1995.
Of this difference, net revenues increased by approximately $13,815,000 due to
the acquisition of Premier. Net sales decreased substantially due to the sale of
the medical/surgical supply business, partially offset by the addition of new
correctional contracts.
Cost of Sales. Cost of sales for the ten months ended December 31, 1995
was $30,654,000 compared to $27,970,000 for the fiscal year ended February 28,
1995. Of this difference, approximately $8,148,000 was attributable to the
Premier acquisition. As a percentage of net sales, cost of sales for the ten
months ended December 31, 1995 was 62.8% compared to 64.1% for fiscal 1995. The
decrease as a percentage of net sales was primarily due to the sale of the lower
margin medical/surgical supply business. In addition, Capstone renegotiated its
purchasing contracts during the ten months ended December 31, 1995, lowering its
cost of sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the ten months ended December 31, 1995 were
$17,469,000 compared to $18,637,000 for the fiscal year ended February 28, 1995.
As a percentage of net sales, selling, general and administrative expenses for
the ten months ended December 31, 1995 were 35.8% compared to 42.7% for fiscal
1995. The decrease as a percentage of net sales was due to the sale of the
medical/surgical supply business and reduced costs as a result of the corporate
restructuring discussed above. The Premier acquisition added approximately
$4,800,000 of additional selling, general and administrative expense.
Non-Operating Expense, Net. Net non-operating expenses consist of (i) net
interest expense for the ten months ended December 31, 1995 of $677,000 compared
to $905,000 for the fiscal year ended February 28, 1995, decreasing primarily as
a result of the reduction of Capstone's debt by using proceeds from private
placements and the difference between the ten month and twelve month periods,
and (ii) other income for the ten months ended December 31, 1995 of $432,000
compared to $104,000 for the fiscal year ended February 28, 1995 decreasing
primarily as a result of a gain on the sale of assets from Capstone's
medical/surgical supply business.
Income Taxes. Benefit for income taxes for the ten months ended December
31, 1995 was $225,000 compared to $466,000 for the fiscal year ended February
28, 1995. The benefit for income taxes for the ten months ended December 31,
1995, primarily resulted from the carry back of a prior year taxable loss to
prior periods.
CAPITAL RESOURCES
Capstone requires capital primarily for the acquisition of institutional
pharmacy companies, to finance its working capital requirements and for the
purchase of equipment for existing pharmacies.
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<PAGE> 101
In December 1996, Capstone entered into a revolving $125 million credit
facility (the "Credit Facility") with a syndicate of banks for which Bankers
Trust Company acts as agent. Approximately $32 million of the Credit Facility
was used to retire amounts outstanding under Capstone's prior credit facility.
Borrowings under the agreement are secured by substantially all of the assets of
Capstone. The Credit Facility bears interest, at the option of Capstone, at (a)
Bankers Trust Company's prime rate plus an applicable margin based on Capstone's
leverage ratio, or (b) the prevailing Eurodollar rate quoted by Bankers Trust
Company, plus an applicable margin based upon Capstone's leverage ratio.
Availability under the Credit Facility is subject to Capstone's leverage ratio
and other provisions and covenants, all as defined by the underlying agreement.
As of May 27, 1997, Capstone had outstanding borrowings of approximately $93
million under the Credit Facility.
Capstone believes the Credit Facility is sufficient to fund its current
working capital needs prior to the Merger. Capstone intends to negotiate a $500
million credit facility to close simultaneously with the Merger. The new credit
facility will be used, in part, to repay amounts outstanding under the Credit
Facility and debt incurred by PCA to repay the Assumed Pharmacy Indebtedness,
and to pay fees and expenses related to the Transactions. Capstone's fees and
expenses related to the Transactions are estimated to be approximately $10
million. These fees and expenses include printing, registration and mailing
expenses for the Joint Proxy Statement/Prospectus, legal, accounting and
financial advisor fees and fees to list the 50 million shares of Capstone Common
Stock on the Nasdaq Stock Market. The estimated fees and expenses related to
replacing the Credit Facility are also included in the estimate. The exact
amount of such fees and expenses cannot be determined until some time following
consummation of the Merger. In order to implement its growth strategy, Capstone
will require substantial capital resources and will need to incur, from time to
time, additional bank indebtedness. Capstone also may need to issue, in public
or in private transactions, equity or debt securities, the availability and
terms of which will depend on market and other conditions. There can be no
assurance that any such additional financing will be available on terms
acceptable to Capstone, if at all.
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<PAGE> 102
CAPSTONE BUSINESS
GENERAL
Capstone is a leading provider of institutional pharmacy services to
long-term care facilities and correctional institutions throughout the United
States. Capstone provides long-term care facilities with comprehensive
institutional pharmacy services that include the purchasing, repackaging and
dispensing of pharmaceuticals, infusion therapy, Medicare Part B services, and
pharmacy consulting services, all of which are supported by computerized record
keeping and third-party billing services. Capstone services approximately
120,000 long-term care beds in 16 states and over 110,000 inmates in
correctional facilities nationwide. Capstone serves its long-term care clients
primarily through regional pharmacies many of which are open 24 hours, seven
days a week. Capstone has established regional pharmacies in certain large
metropolitan areas, each capable of serving in excess of 10,000 patients.
Management believes that Capstone can compete more effectively in metropolitan
markets by providing a broader range of services to its long-term care clients
on a more cost-effective basis than many of its competitors. Management further
believes that Capstone's expanded national presence enables it to compete more
effectively for larger customers who operate multiple facilities, in part by
achieving purchasing efficiencies and other economies of scale. Capstone has
developed relationships with several large operators of long-term care
facilities.
In the correctional business, where it currently is the largest non-captive
provider of pharmacy services in the United States, Capstone provides
pharmaceuticals under capitated and other contracts to correctional institutions
that have privatized their inmate healthcare services. Management believes
Capstone's experience in managing capitated correctional contracts, which
involves the utilization of closed formularies, generic substitution, rigorous
drug utilization review and proactive physician education, will provide a
significant competitive advantage as managed care becomes more prevalent in the
long-term care industry.
In connection with an investment by Counsel in December 1994, Capstone
installed a new management team, refocused its operating strategy on its core
institutional pharmacy business and initiated an aggressive acquisition
strategy. As a result of these efforts, Capstone's net sales increased to $144
million for the year ended December 31, 1996 from $56 million for the twelve
months ended December 31, 1995 and to $69 million for the three months ended
March 31, 1997 from $22 million for the three months ended March 31, 1996.
Capstone's profitability also improved during the same time period, with income
from continuing operations before costs relating to pharmacy closures and
restructuring charges of $6.4 million for the year ended December 31, 1996
compared to a loss from continuing operations of $736,000 for the twelve months
ended December 31, 1995. Capstone's strategy is to enhance its position as a
leading provider of institutional pharmacy services by: (i) acquiring
institutional pharmacy companies in metropolitan markets; (ii) achieving
regional market density in order to enhance its operating leverage; (iii)
entering preferred provider agreements with long-term care companies; and (iv)
emphasizing internal growth through the addition of new clients and the
expansion of ancillary services. Capstone acquired six institutional pharmacy
service companies in 1996, including Symphony. The Symphony Acquisition
increased the number of long-term care beds served by Capstone by approximately
40,000 and enabled Capstone to enter six new states. The Company is a party to
various preferred provider agreements with long-term care companies, including
IHS, that operate approximately 34,000 beds pursuant to which Capstone has the
right to provide certain institutional pharmacy services to such beds subject to
various terms and conditions. Since December 31, 1994, Capstone has increased
its long-term care bed count from approximately 16,200 to approximately 120,000
and the number of inmates served in correctional institutions from approximately
65,000 to approximately 110,000.
RECENT DEVELOPMENTS
Acquisitions. During May 1997, Capstone acquired substantially all of the
assets of Care Apothecary, a provider of institutional pharmacy services to
nursing homes in Harrisburg, Pennsylvania, and a division of Care Health
Systems, Inc. Care Apothecary services approximately 1,500 long-term care beds,
with annualized revenues of approximately $3.4 million.
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INDUSTRY OVERVIEW
Institutional pharmacies purchase, repackage and dispense pharmaceuticals
primarily to residents of long-term care facilities such as nursing homes,
sub-acute facilities, assisted living facilities and, in certain instances, to
inmates in correctional institutions. Unlike acute care hospitals, most
long-term care facilities do not maintain on-site pharmacies because they do not
generally require a volume of prescribed medications sufficient to cost-justify
an in-house pharmacy. Prior to the 1970s, the pharmacy needs of long-term care
facilities generally were fulfilled by local retail pharmacies. In response to
increasingly strict nursing home regulations, changes in the reimbursement
environment and the increasing acuity of long-term care patients, the breadth of
pharmacy services required by long-term care facilities has increased
substantially. In addition to providing oral medications, many institutional
pharmacies provide infusion therapy, Medicare Part B services and consulting
services. The Medicare Part B services include enteral nutrition services and
urologic supplies. Pharmacy consulting services include monitoring the control
and administration of pharmaceuticals within a facility, assistance in complying
with applicable regulations, therapeutic monitoring and drug utilization review
services. Capstone believes that institutional pharmacy companies are best
positioned to meet evolving market demands in the long-term care industry.
Industry analysts estimate that the provision of institutional pharmacy
services is a $4.5 billion industry that is growing approximately 10% per year.
Management believes this growth is being driven by three primary factors: (i)
the increasing number of residents receiving treatment in long-term care or
other institutional settings; (ii) the increasing acuity of residents in
long-term care facilities; and (iii) the changing demographics associated with
an aging population in the United States Management believes that several
factors will continue to influence the increase in the number of patients
residing in long-term care settings including the aging of the population,
earlier discharge of patients from acute care settings into lower cost
institutional settings, growth in the number of assisted living beds and a
decreasing tendency for families to maintain the role as primary care giver for
elderly relatives. Factors influencing the increase in medications administered
to institutional patients include advances in medical technology, which have
resulted in new drug therapy alternatives, and the increasing acuity of nursing
home and sub-acute patients as a result of quicker discharge following acute
care procedures. Management believes that the average long-term care patient
receives approximately six to eight medications per day.
The long-term care segment of the institutional pharmacy industry is
fragmented, with small retail pharmacies serving approximately 27% of long-term
care facilities, independent institutional pharmacy companies serving
approximately 43% of long-term care facilities and in-house captive pharmacies
serving the remaining 30% of such facilities. Management believes that
consolidation will accelerate as long-term care providers continue to migrate
from traditional retail pharmacies to larger institutional pharmacy companies
and some long-term care companies divest themselves of captive pharmacies. Other
factors driving consolidation in the institutional pharmacy industry include:
Economies of Scale. Larger institutional pharmacies are able to
leverage corporate purchasing agreements to reduce drug costs. Management
believes that industry-wide drug costs average between 50% and 60% of
sales, making purchasing efficiencies critical to controlling costs.
Industry participants purchase the majority of their drug supplies from
large drug wholesalers, and larger industry participants have greater
bargaining power to reduce costs associated with such purchases.
Ability to Provide a Broad Range of Services. As a result of their
ability to serve multiple facilities from a single location, larger
pharmacies generally are able to offer more services at a lower cost per
bed. These services include 24 hours, seven days per week coverage,
clinical pharmacists, registered nurses and more frequent deliveries.
Regulatory Expertise and Systems Capabilities. Long-term care
facilities are demanding more sophisticated and specialized services from
pharmacy providers due, in part, to increasingly complex government
regulations requiring enhanced planning, monitoring and reporting
capabilities regarding patient care. As a result, long-term care
administrators seek experienced institutional pharmacy providers which
offer computerized information and documentation systems designed to
monitor patient care and to assist in controlling facility and payor costs.
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<PAGE> 104
SERVICES
Pharmacy Services. Capstone's core business is providing pharmaceutical
dispensing services to residents of long-term care facilities and correctional
institutions. Capstone purchases pharmaceuticals in bulk quantities from
wholesalers and manufacturers and dispenses both prescription and
non-prescription drugs in patient-specific packages in accordance with physician
orders. Prescription and non-prescription medications are delivered at least
daily to long-term care facilities for administration to residents by the
nursing staffs of such facilities. Capstone's pharmacists package drugs to meet
each patient's needs for either single-day or multi-day dosage requirements.
Capstone can customize the timing and packaging of its delivery system to meet
specific client needs.
Capstone uses an order processing system that enables its long-term care
clients to order pharmaceuticals using either a pre-printed label or monthly
order forms. Clients generally take delivery of routine orders within 24 hours;
however, many of Capstone's pharmacies are open 24 hours to provide emergency
service when needed. Once a physician order is received by Capstone, it is
entered into one of Capstone's pharmacy computer systems where information is
screened for drug and food interactions, allergies, and refill limitations. Upon
entry, the prescription becomes part of the permanent patient record, and a
label is printed for application to Capstone's package. The package label
contains specific patient information as well as physician name, medication,
dosage information and cautionary messages. Prior to delivery, the completed
prescription is reviewed by one of Capstone's pharmacists and re-verified
against the original order entry data. Following this final quality assurance
check, the prescription is delivered by courier service to the facility.
As an additional service, Capstone furnishes its clients with customized
information from its computerized medical records and documentation system. This
system aggregates and organizes detailed patient medical records, facility drug
usage and monthly management and quality assurance reports. Management believes
this system of client-tailored information management, combined with Capstone's
patient-specific delivery system, results in improved efficiency and accuracy in
the administration of medications and reduces the likelihood of drug-related
adverse consequences.
In addition to its core long-term care and correctional business, Capstone
also provides pharmacy management services to seven acute care hospitals
pursuant to management contracts on either a single-year or multi-year basis.
Pharmacy Consulting Services. Capstone provides value-added consulting
services that help clients comply with federal and state regulations, manage
medication costs and maximize the therapeutic efficacy of drug regimens. These
pharmacy consulting services include (i) regular review of each patient's
medical record and drug regimen, (ii) recommendation of therapeutic
alternatives, where appropriate, (iii) monthly evaluation of facility-wide drug
usage and drug costs, (iv) maintenance of drug administration records that
assist the long-term care facility with regulatory compliance, (v) participating
on certain key committees of client facilities as well as periodic involvement
in staff meetings, (vi) monthly inspection of facility's medication carts and
drug storage rooms, and (vii) providing training programs.
Ancillary Services. Capstone provides long-term care facilities with
infusion therapies and Medicare Part B services, including enteral nutrition and
urologic supplies, as well as counseling and assistance with regulatory
compliance in connection with such services. Capstone's registered nurses
provide on-site training to client facility staff members in the use of infusion
and enteral supplies and equipment. Capstone currently offers a comprehensive
range of infusion services including its "IV Express" program which provides
nationwide, next-day delivery service for facilities which fall outside
Capstone's traditional service area. Prior to the acquisition of Medidyne Corp.
and Symphony in July 1996, ancillary services did not comprise a material
component of Capstone's net sales.
OPERATIONS
Organization. Capstone's long-term care operations are divided into five
geographic regions, each headed by a regional vice president. Management
believes this regional organizational structure provides the flexibility to
accommodate continued growth. Capstone believes that the institutional pharmacy
business is
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<PAGE> 105
dependent in large part on personal service and encourages its pharmacists to
develop personal relationships and to be responsive to local market demands.
Capstone uses more centralized financial and inventory control systems support
than typically available to small, independent pharmacy operators. Additional
services performed at the corporate level include quality improvement oversight,
financial and accounting functions, clinical program development, group
purchasing, marketing, acquisitions and corporate development activities.
Pharmacy Distribution Model. In the long-term care business, Capstone
typically provides services through regional pharmacies that have the capability
to serve long-term care facilities within a 150-mile radius. These regional
pharmacies are generally open 24 hours, seven days a week and are staffed with
clinical pharmacists, registered nurses and pharmacy technicians. Capstone
provides services from pharmacies in 16 states. In the correctional business,
Capstone dispenses pharmaceuticals via overnight delivery primarily from a
centralized mail service pharmacy operation located in Baltimore, Maryland.
Formulary Management. Capstone utilizes a closed formulary management
system, Capstone Select(SM), in its capitated correctional business. Under
Capstone's closed formulary, Capstone pharmacists assist prescribing physicians
in selecting the most appropriate drug among therapeutic alternatives, including
generic substitutions, and in the selection of the most cost-effective dosing
regimen.
Management believes that its experience with formulary management in its
correctional business, combined with Symphony's newly established long-term care
formulary program, should enhance Capstone's ability to implement an effective
formulary management system that will be attractive to long-term care providers
and third-party payors.
Sales & Marketing. Capstone's marketing efforts are directed at long-term
care facility operators and providers of healthcare services to correctional
institutions. While pricing is an important factor in the selection of pharmacy
providers, Capstone's experience is that the primary factor, particularly among
long-term care operators, is the quality and range of services offered.
Consequently, Capstone strives to provide high-quality services that are
tailored to each client's needs. Once a relationship is established, Capstone
then attempts to expand the range of services it provides.
Capstone's marketing efforts are conducted by regional vice presidents with
support from local pharmacy managers and regional salespersons. Capstone's
consultant pharmacists and nurse consultants also are integral to the marketing
effort because of their daily contact with the facility managers and the
residents in those facilities.
Suppliers. Capstone purchases substantially all of its pharmaceutical
inventories from wholesalers and manufacturers. During the fourth quarter of
1996, Capstone negotiated a new primary wholesaler agreement with terms that are
more favorable to Capstone than its previous contracts. Capstone also has in
place secondary wholesaler agreements to minimize its purchasing channels while
maximizing inventory quality and cost savings. Because of readily available
alternatives, Capstone is not dependent on any one supplier.
Customers. The primary customers of Capstone are long-term care
facilities, correctional facilities, and hospitals. Capstone is not dependent on
any one customer. The table below sets forth the percentage of revenues from
continuing operations derived from each client source for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
PAYOR SOURCE DECEMBER 31, 1996 DECEMBER 31, 1995 FEBRUARY 28, 1995
------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Long-Term Care Facilities.......... 81.5% 63.3% 59.2%
Correctional Facilities............ 12.1 23.1 21.1
Hospital........................... 6.4 13.6 6.8
Medical/Surgical................... -- -- 12.9
</TABLE>
COMPETITION
The institutional pharmacy market is fragmented and competition varies
significantly from market to market. Capstone's competitors include small retail
pharmacies, large chain pharmacies, in-house captive pharmacies and national
institutional pharmacies. Management believes that the competitive factors most
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important in Capstone's lines of business are quality and range of service
offered, reputation with referral sources, ease of doing business with the
provider, ability to develop and to maintain relationships with referral sources
and competitive prices. Some of Capstone's present and potential competitors are
significantly larger than Capstone and have, or may obtain, greater financial
and marketing resources than Capstone. In addition, there are relatively few
barriers to entry in the local markets served by Capstone, and it may encounter
substantial competition from local market entrants.
REIMBURSEMENT
Capstone is reimbursed, directly or indirectly, by government-sponsored
programs for a majority of its institutional pharmacy services.
The Medicaid program is a federal-state cooperative program designed to
enable states to provide medical assistance to aged, blind or disabled
individuals, or to members of families with dependent children whose income and
resources are insufficient to meet the costs of necessary medical services.
State participation in the Medicaid program is voluntary. To become eligible to
receive federal funds, a state must submit a Medicaid "state plan" to the
Secretary of Health and Human Services for approval. The federal Medicaid
statute specifies a variety of requirements which the state plan must meet,
including requirements relating to eligibility, coverage of services, payment
and administration. For residents eligible for Medicaid, Capstone bills the
individual state Medicaid program. Medicaid programs are funded jointly by the
federal government and individual states and are administered by the states. The
reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by the Healthcare Financing
Administration and applicable federal law. Federal regulations and the
regulations of certain states establish "upper limits" for reimbursement for
prescription drugs under Medicaid. Pharmacy services are priced on a
state-by-state basis at the lower of "usual and customary" charges or cost
(which generally is defined as a function of average wholesale price) plus a
fixed dispensing fee which is adjusted to reflect associated costs on an annual
or less frequent basis. State Medicaid programs generally have long-established
programs for reimbursement which have been revised and refined over time and
have not had a material adverse effect on the pricing policies or receivables
collection for long-term care facility pharmacy services. Any future changes in
such reimbursement program or in regulations relating thereto, such as
reductions in the allowable reimbursement levels or the timing of processing of
payments, could adversely affect Capstone's business.
Medicare, a federally-funded health insurance program, consists of two
parts: Medicare Part A, which covers, among other things, pharmaceutical costs
for eligible long-term patients; and Medicare Part B, which covers certain items
and services provided by medical suppliers, including enteral nutrition and
urologic supplies. Medicare Part A requires long-term care facilities to submit
all of their costs for patient care, including pharmaceutical costs, in a
unified bill. Thus, fees for pharmaceuticals provided to Medicare Part A
patients are paid to Capstone by the long-term care facility on a monthly basis.
Pricing is consistent with that of private pay residents. Medicare Part A has a
cost-sharing arrangement under which patients must pay a portion of their costs.
These non-covered co-payments are billed by the facility directly to the
residents or the state Medicaid plan, as the case may be.
Payment for Medicare Part B is based on a fee schedule, which varies
depending on the state in which the patient receiving the items resides, and is
made on a per-item basis directly to the supplier. Capstone either bills
Medicare directly for Medicare Part B covered products for each patient or,
alternatively, assists the long-term care facility in meeting Medicare Part B
eligibility requirements and prepares bills on behalf of the facility. Medicare
Part B also has an annual deductible as well as a co-payment obligation on
behalf of the patient, and the portion not covered by Medicare is billed
directly to the patient or appropriate secondary payor.
The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings,
and freezes and funding reductions, all of which may adversely affect Capstone's
business. There can be no assurance that payments for pharmaceutical supplies
and services under governmental reimbursement programs will continue to be based
on the current
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methodology or remain comparable to present levels. In this regard, Capstone may
be subject to rate reductions as a result of federal budgetary legislation
related to the Medicare and Medicaid programs. In addition, various state
Medicaid programs periodically experience budgetary shortfalls which may result
in Medicaid payment delays to Capstone. To date, Capstone has not experienced
any material adverse effect due to any such budgetary shortfall.
In addition, the failure, even if inadvertent, of Capstone and/or its
client institutions to comply with applicable reimbursement regulations could
adversely affect Capstone's business financial condition and results of
operation. Additionally, changes in such reimbursement programs or in
regulations related thereto, such as reductions in the allowable reimbursement
levels, modifications in the timing or processing of payments and other changes
intended to limit or decrease the growth of Medicaid and Medicare expenditures,
could adversely affect Capstone's business.
For patients carrying third-party insurance, the patient's individual
insurance plan is billed monthly. For those patients who are ineligible for the
Medicaid and Medicare programs and are not covered by private insurance,
Capstone bills the individual or another responsible party monthly based on
prevailing regional market rates or "usual and customary" charges. In New York,
Capstone receives the majority of its payments directly from the long-term care
facilities it serves.
GOVERNMENT REGULATION
Institutional pharmacies, as well as the long-term care facilities they
serve, are subject to extensive federal, state and local regulation. These
regulations delineate qualifications required for day-to-day operations,
reimbursement and documentation of select activities. Capstone continuously
monitors the effects of regulatory activity on its operations.
States require that companies operating a pharmacy within the state be
licensed by the state board of pharmacy. Capstone currently has its pharmacies
licensed in each state in which it operates a pharmacy. In addition, Capstone
currently delivers prescription drugs from its licensed pharmacies to many
states in which Capstone does not operate a pharmacy. Most of these states
regulate the delivery of prescription drugs by out of state pharmacies to
patients in such states. Capstone's pharmacies hold these requisite licenses. In
addition, Capstone's pharmacies are registered with the appropriate state and
federal authorities pursuant to statutes governing the regulation of controlled
substances.
Long-term care facilities are also required to be licensed in the states in
which they operate and, if serving Medicare or Medicaid patients, must be
certified to be in compliance with applicable program participation
requirements. Long-term care facilities are also subject to state and federal
nursing home regulations which impose strict compliance standards relating to
quality of care for long-term care facilities operations, including extensive
documentation and reporting requirements. In addition, pharmacists, nurses and
other healthcare professionals who provide services on Capstone's behalf are in
most cases required to obtain and maintain professional licenses and are subject
to state regulation regarding professional standards of conduct.
Federal and state laws impose certain repackaging, labeling, and packing
insert requirements on pharmacies that repackage drugs for distribution beyond
the regular practice of dispensing or selling drugs directly to retail patients.
A drug repackager must be registered with the Food and Drug Administration.
Capstone holds all required registration and licenses, and its repackaging
operations are in material compliance with applicable state and federal
requirements.
The long-term care pharmacy business operates under regulatory and cost
containment pressures from state and federal legislation primarily affecting
Medicaid and, to a lesser extent, Medicare. As is the case for nursing home
services generally, Capstone receives reimbursement from both the Medicaid and
Medicare programs, directly from individual residents (private pay), and from
other payors such as third-party insurers. Capstone believes that its
reimbursement mix is in line with long-term care expenditures nationally.
Federal regulations contain a variety of requirements relating to the
furnishing of prescription drugs under Medicaid. First, states are given broad
authority, subject to certain standards, to limit or specify conditions to the
coverage of particular drugs. Second, federal Medicaid law establishes standards
affecting pharmacy
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practices. These standards include general requirements relating to patient
counseling and drug utilization review and more specific requirements for
long-term care facilities relating to drug regimen reviews for Medicaid patients
in such facilities. Recent regulations clarify that, under federal law, a
pharmacy is not required to meet the general standards for drugs dispensed to
long-term care facility residents if the long-term care facility complies with
the drug regimen review requirements. However, the regulations indicate that
states may nevertheless require pharmacies to comply with the general standards,
regardless of whether the long-term care facility satisfies the drug regimen
review requirement, and the states in which Capstone operates currently do
require its pharmacies to comply therewith. Third, federal regulations impose
certain requirements relating to reimbursement for prescription drugs furnished
to Medicaid patients.
In addition to requirements imposed by federal law, states have substantial
discretion to determine administrative, coverage, eligibility and payment
policies under their state Medicaid programs which may affect Capstone's
operations. For example, some states have enacted "freedom of choice"
requirements which may prohibit a long-term care facility from requiring its
residents to purchase pharmacy or other ancillary medical services or supplies
from particular providers. Such limitations may increase the competition which
Capstone faces in providing services to long-term care patients.
Capstone is subject to federal and state laws that govern financial and
other arrangements between healthcare providers. These laws include the federal
anti-kickback statute and physician self-referral prohibitions. The
anti-kickback statute was originally enacted in 1977 and amended in 1987, and
prohibits, among other things, knowingly and willfully soliciting, receiving,
offering or paying any remuneration directly or indirectly in return for or to
induce the referral of an individual to a person for the furnishing of any item
or service for which payment may be made in whole or in part under Medicare or
Medicaid. Many states have enacted similar statutes which are not necessarily
limited to items and services for which payment is made by Medicare or Medicaid.
Violations of these laws may result in fines, imprisonment, and exclusion from
the Medicare and Medicaid programs or other state-funded programs. Federal and
state court decisions interpreting these statutes are limited, but have
generally construed the statutes to apply if "one purpose" of remuneration is to
induce referrals or other conduct within the statute. In August 1994, the Office
of Inspector General ("OIG") of the Department of Health and Human Services,
issued a Special Fraud Alert regarding prescription drug marketing schemes which
it believes may violate the anti-kickback statute. Among the specific activities
identified in the Fraud Alert were a "product conversion" program in which a
drug company offered cash awards to pharmacies who changed from another
company's drug product to their product. The Fraud Alert also targets marketing
programs in which drug companies offer cash or other benefits to pharmacists in
exchange for marketing tasks in the course of pharmacy practice related to
Medicare or Medicaid.
The physician self-referral prohibition, commonly referred to as the
"Stark" law, prohibits a physician from referring Medicare or Medicaid patients
to "designated health services" in which the physician (or family member) has a
financial interest, either through ownership or compensation arrangements.
Prohibited referrals will not be reimbursed by Medicare or Medicaid, and the
statute makes it illegal to seek reimbursement from any other source. In
addition, violations may result in fines and/or civil penalties and exclusion
from the Medicare and Medicaid programs. The list of "designated health
services" includes outpatient prescription drugs. Some states have also passed
similar "anti-self referral" legislation. Capstone does not believe that the
Stark law or similar state laws, have had, or will have, a significant adverse
impact on the operations of Capstone.
In addition, a number of states have recently undertaken enforcement
actions against pharmaceutical manufacturers involving pharmaceutical marketing
programs, including programs containing incentives to pharmacists to dispense
one particular product rather than another. These enforcement actions arose
under state consumer protection laws which generally prohibit false advertising,
deceptive trade practices, and the like. Further, a number of states involved in
these enforcement actions have requested that the U.S. Food and Drug
Administration ("FDA") exercise greater regulatory oversight in the area of
pharmaceutical promotional activities by pharmacists. It is not possible to
determine whether the FDA will act in this regard or what effect, if any, the
FDA involvement would have on Capstone's operations.
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Capstone believes its contract arrangements with other healthcare
providers, its pharmaceutical suppliers and its pharmacy practices are in
compliance with these laws. There can be no assurance that such laws will not,
however, be interpreted in the future in a manner inconsistent with Capstone's
interpretation and application.
EMPLOYEES
As of May 20, 1997, Capstone had approximately 1,600 full-time employees
and approximately 625 part-time employees. Management believes Capstone's
relationship with its employees is good. None of Capstone's employees are
represented by labor unions under any collective bargaining agreement.
LEGAL PROCEEDINGS
A lawsuit, Marvin Levine, Gloria Levine, and John McBay v. Capstone
Pharmacy Services, Inc., Premier-Pharmacy, Inc., ("Premier") and Compuscript,
Inc., was filed in the Supreme Court of the State of New York, County of
Westchester (No. 19238/95) on November 15, 1995. The plaintiffs sold the stock
of Compuscript, Inc. ("Compuscript") to Premier in 1993 pursuant to the terms of
a purchase agreement and claim that Premier, which Capstone has acquired, and
Compuscript owe them approximately $1,000,000 under promissory notes delivered
to them as part of the consideration for their Compuscript stock. Plaintiffs
also claim that Compuscript and Premier owe them an additional $1,100,000
because of the alleged occurrence of certain events that would give rise to such
an obligation under the Agreement. Finally, the plaintiffs claim Capstone is
liable for tortiously interfering with their rights under the purchase agreement
and under the promissory notes. The complaint seeks total judgments of
$7,100,000, plus interest and costs against the defendants. The defendants,
including Capstone, have answered the complaint and are vigorously contesting
the plaintiffs' claims. In addition, Premier has filed a counterclaim against
the plaintiffs for breaches of certain representations and warranties in the
purchase agreement. Capstone does not believe that this litigation is likely to
have a material adverse effect on Capstone's financial position or results of
operations.
Capstone is from time to time subject to claims and suits arising in the
ordinary course of business, including claims for repayment of monies paid to
Capstone under Medicare or Medicaid. Although Capstone and its subsidiaries are
not parties to any such litigation in which, in management's opinion, an adverse
determination would have a material effect on Capstone's financial position,
there can be no assurance that Capstone will not become involved in such
litigation in the future.
Except for the above described proceedings, as of May 28, 1997, there were
no material legal proceedings pending against Capstone nor, to Capstone's
knowledge, were any material proceedings against it contemplated by any
governmental authority.
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MANAGEMENT OF CAPSTONE
CAPSTONE'S DIRECTORS AND EXECUTIVE OFFICERS ARE AS FOLLOWS*:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
R. Dirk Allison............................ 41 President, Chief Executive Officer and
Director
James D. Shelton........................... 42 Executive Vice President, Chief Financial
Officer and Secretary
Robert Della Valle......................... 45 Executive Vice President and Chief
Operating Officer
Joseph F. Furlong, III(1).................. 48 Director
John Haronian(2)(3)........................ 64 Director
Morris A. Perlis(1)........................ 48 Vice Chairman
Albert Reichmann(1)........................ 68 Director
Allan C. Silber............................ 48 Chairman
Edward Sonshine, Q.C.(2)................... 50 Director
Gail Wilensky, Ph.D.(3).................... 53 Director
John E. Zuccotti(2)........................ 59 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Disinterested Stock Option Plan Committee.
* For information regarding the management of Capstone following The Merger,
see "Certain Considerations Related to the Termination -- Directors and
Officers of Capstone Following the Merger."
Mr. Allison has served as President and Chief Executive Officer of Capstone
since May 1995. He served as President and Chief Executive Officer of
PremierPharmacy, Inc., an institutional pharmacy company ("Premier"), from July
1993 to May 1995. Mr. Allison served as President and Chief Executive Officer of
Allied Pharmacy Management, Inc., a pharmacy company ("Allied"), from February
1988 to June 1993.
Mr. Shelton has served as Executive Vice President, Chief Financial Officer
and Secretary of Capstone since February 1997. Mr. Shelton served as Vice
President-Chief Financial Officer of Allied from December 1993 to January 1997.
Mr. Shelton served as Vice President of Evergreen Healthcare, Inc., a long-term
care company, from October 1992 to December 1993, and as Vice President-Chief
Financial Officer of its predecessor, National Heritage, Inc., from February
1990 to October 1992.
Mr. Della Valle joined Capstone as Executive Vice President and Chief
Operating Officer in July 1996. Prior to joining Capstone, Mr. Della Valle was
President and Chief Executive Officer and Vice President of Allied. He had been
employed by Allied since June 1987 and held the position of President and Chief
Executive Officer from July 1993 to July 1996.
Mr. Furlong has served as a Director of Capstone since December 1994. Mr.
Furlong has been President of Adirondack Capital Advisors, L.L.C., a financial
advisory firm since May 1996. He was a partner of Colman Furlong & Co., a
merchant banking firm, from February 1991 to April 1996 and he was a partner of
Robertson Stephens & Company, an investment banking firm from November 1984 to
January 1991. Mr. Furlong has served as a director of American HomePatient,
Inc., a home healthcare provider ("American HomePatient"), since June 1994. He
has served as a director of Healthy Planet Products, an environmentally friendly
greeting card manufacturer since July 1996.
Mr. Haronian has served as a Director of Capstone since January 1994. Mr.
Haronian has served as President of Tri-State Group, since April 1991. Mr.
Haronian has served as President of Peoples Liquor, Inc. since November 1991.
From May 1965 until November 1990, Mr. Haronian served as President of Douglas
Drug, Inc.
Mr. Perlis has been Vice Chairman of Capstone since May 1995 and a Director
since December 1994. Mr. Perlis served as interim chief executive officer of
Capstone from December 1994 to May 1995. He has
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served as a director of and consultant to Counsel, a Canadian corporation
primarily engaged in the healthcare industry, since September 1992, and as
President of Counsel since January 1994. Mr. Perlis has served as a director of
American HomePatient since March 1993, and as its Chairman since May 1994. He
has served as a director of NOMA, Inc., a manufacturer of consumer wire and
cable, since September 1993. Mr. Perlis was President of Morris A. Perlis &
Assoc., an executive management consulting firm, from September 1992 until
January 1994 and President of American Express Canada, Inc. from September 1988
until September 1992. Mr. Perlis served as interim President of Stadtlander Drug
Co., Inc., a mail order pharmacy company ("Stadtlander"), from September 1996 to
December 1996. He has served as director of Stadtlander since July 1996 and as
Chief Executive Officer since September 1996.
Mr. Reichmann has served as a Director of Capstone since August 1995. He
has served as Chairman and a Director of Olympia & York Developments, Limited, a
privately held Canadian real estate company, for at least five years prior to
February 1993. Mr. Reichmann currently participates in major philanthropic
activities in addition to serving on the boards of several major hospitals in
Canada.
Mr. Silber has served as Chairman since February 1995 and a director of
Capstone since December 1994. Mr. Silber has been Chairman, Chief Executive
Officer and a director of Counsel since August 1979. He served as President of
Counsel from August 1979 until January 1994. Mr. Silber has served as a director
of American HomePatient since September 1991. Mr. Silber served as chairman of
American HomePatient from September 1991 to May 1994. He has served as director
of Stadtlander since July 1996 and as Chairman since September 1996.
Mr. Sonshine has served as a Director of Capstone since December 1994. He
has been President and Chief Executive Officer of RioCan Real Estate Investment
Trust of Toronto, Canada since July 1995. Mr. Sonshine has served as a director
of American HomePatient since September 1991. Mr. Sonshine has served as Vice
Chairman of Counsel since January 1994, as a director of Counsel Management
Services, Inc. since October 1993. Mr. Sonshine served as Executive Vice
President of Counsel from February 1987 until January 1994. Mr. Sonshine served
as President and Chief Executive Officer of Icarus Realty Corp. from February
1987 until September 1993. He has served as a director of Stadtlander since July
1996.
Dr. Wilensky has served as a Director since August 1995. She has served as
the John M. Olin Senior Fellow, Project HOPE since January 1993, and as Chair,
Physician Payment Review Commission since May 1995. Dr. Wilensky served as
Deputy Assistant to the President for Policy Development from March 1992 to
January 1993. She was Administrator of the Healthcare Financing Administration
of the Department of Health and Human Services from January 1990 to March 1992.
Dr. Wilensky also serves as a director for Advanced Tissue Sciences, Coram
Healthcare, Neopath Inc., Quest Diagnostics, St. Jude Medical, Syncor
International, SMS Corporation and United Healthcare.
Mr. Zuccotti has served as a Director of Capstone since August 1995. He has
served as Chairman, CEO and President of World Financial Properties, Inc., a
real estate company, since November 1996, and had served as President and Chief
Executive Officer of its predecessor company Olympia & York Companies (U.S.A.),
since January 1990. Mr. Zuccotti served as a director of Olympia & York
Companies (U.S.A.) since the inception of a board of directors in July 1993. He
has served as a director of Dreyfus Strategic Municipal Bond Fund, Inc. since
November 1989. Mr. Zuccotti also serves as director of Dreyfus California Tax
Exempt Money Market Fund, Dreyfus Capital Value Fund, Inc., Dreyfus Insured
Municipal Bond Fund, Dreyfus New Leaders Fund, Inc., Dreyfus Strategic
Municipals, Inc., Dreyfus Municipal Bond Fund, Inc., Dreyfus Municipal Money
Market Fund, Inc., and Starrett Housing Corporation. He also serves on the Board
of Trustees of Columbia University.
Pursuant to a Stock Purchase Agreement by and between Capstone and Counsel,
dated December 16, 1994, so long as Counsel continues to own the common stock
acquired under the Stock Purchase Agreement, Capstone will use its best efforts
to cause the election to its Board of Directors of four individuals designated
by Counsel who are reasonably acceptable to Capstone, currently Messrs. Silber,
Perlis, Sonshine and Furlong. The Stock Purchase Agreement also specifies that
Capstone will use its best efforts to maintain a Board of Directors consisting
of eleven members. Currently Mr. Silber serves as Chairman of the Board and Mr.
Perlis as Vice Chairman. Notwithstanding the above, Beverly and Capstone,
pursuant to the Merger
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Agreement, have agreed that following the Merger, each of Capstone and Beverly
shall have the right to nominate five directors to the Board of Directors of the
Surviving Corporation. See "Certain Considerations Related to the
Transactions -- Directors and Officers of Capstone Following the Merger."
Pursuant to the Voting Agreement, Counsel has agreed to vote in favor of the
Merger Agreement. See "The Merger -- Terms of the Voting Agreement."
CERTAIN CAPSTONE TRANSACTIONS
CERTAIN SERVICES BY NON-EMPLOYEE DIRECTORS
Since his election to the Board of Directors in December 1994, Mr. Silber
has provided various services to Capstone in connection with improving the
financial position, results of operations and capital structure of Capstone.
These have included his service as Co-Chairman and Chairman of the Board of
Directors, assistance with routine acquisitions, assistance with the completion
of certain private placements and direction of the replacement of Capstone's
bank line of credit. Mr. Silber has received no cash compensation for such
services.
Since his election to the Board of Directors in December 1994, Mr. Perlis
has provided various services to Capstone in connection with Capstone's long
term strategy and decisions concerning the retention or disposition of
Capstone's lines of business. These have included his service as Vice Chairman
of the Board of Directors and interim Chief Executive Officer, negotiation of
modifications to material contracts and indebtedness of Capstone, assistance
with personnel and operational matters, and assistance with Capstone's
regulatory compliance program. Mr. Perlis has received no cash compensation for
such services.
Set forth below is a summary of various transactions involving Capstone and
certain directors, officers, stockholders or other affiliates. It is the policy
of Capstone to notify the Board of Directors and seek the approval of a majority
of the members of the Board or an appropriate committee who are not related to
an interested party in connection with transactions between Capstone and a
related party.
PRIVATE OFFERINGS BY CAPSTONE
On July 29, 1996, Counsel purchased from Capstone in a private placement
transaction, 2,112,490 shares of common stock at a price of approximately $11.83
per share for net proceeds to Capstone of $25 million. The proceeds were used as
part of the purchase price for the Symphony acquisition.
Counsel Corporation beneficially owns approximately 23.0% of the
outstanding Common Stock and voting power of Capstone and, as such, is
Capstone's largest stockholder. As a result of Counsel's investment in Capstone,
Capstone has agreed to use its best efforts to cause four Counsel nominees to
serve on Capstone's Board of Directors. As a result of the foregoing, Counsel
has a significant influence on matters brought before the stockholders or the
Board of Directors, although it cannot control the outcome of any vote.
CONSULTING SERVICES
Mr. Furlong is a principal of Adirondack. Capstone has entered into an
agreement with Adirondack, dated June 25, 1996 pursuant to which Adirondack will
assist Capstone in identifying and negotiating transactions with acquisition
targets. Adirondack receives as compensation 3.0% of the first $10.0 million of
aggregate transaction value plus .7% of aggregate transaction value in excess
thereof as well as a number of warrants to buy Capstone's common stock set
according to a formula, not to exceed 200,000 in the aggregate, at a strike
price of $12.00. As of May 20, 1997 Capstone had issued warrants to purchase
200,000 shares and had paid approximately $1,109,740 in connection with this
Agreement. An additional $87,000 was earned, but unpaid in connection with this
Agreement.
Adirondack and Capstone have also entered into an agreement, dated December
10, 1996, pursuant to which Adirondack serves as financial advisor to Capstone
in connection with the Merger. Pursuant to that agreement, Adirondack has earned
$1.0 million for rendering a fairness opinion and will receive an additional
$3.0 million if the Merger is consummated.
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An affiliate of Mr. Reichmann received fees of $445,000 in connection with
the Geri-Care and IMD acquisitions.
Mr. Silber and Mr. Perlis received fees of $600,000 and $400,000,
respectively in connection with the Symphony acquisition.
Curtis B. Johnson, the general counsel of DCAmerica Inc. ("DCA"), a Counsel
Corporation subsidiary, has provided legal services to Capstone since April 1995
pursuant to an agreement between Capstone and DCA providing for reimbursement of
DCA's allocable costs related to such services. Mr. Johnson has options to
acquire 25,000 shares of Capstone's common stock for an exercise price of $4.31
per share.
Marvin Sirota, a former officer and director of Capstone, is providing
consulting services pursuant to a Severance and Consulting Agreement dated
January 15, 1995. Under the Severance and Consulting Agreement, Mr. Sirota
received $11,607.00 per month through May 31, 1997 plus expenses incurred in
connection with his obligations to Capstone.
Frank Mandelbaum, a former officer and director of Capstone, is providing
consulting services pursuant to a Severance and Consulting Agreement dated
January 26, 1995. Under the Severance and Consulting Agreement, Mr. Mandelbaum
received $11,607.00 per month through May 31, 1997 plus expenses incurred in
connection with his obligations to Capstone.
Charles Lathrop, Jr., a former officer and director of Capstone, is
providing consulting services pursuant to a Severance and Consulting Agreement
dated March 8, 1995. Under the Severance and Consulting Agreement, Mr. Lathrop
received $10,000 per month through April 14, 1997 and will receive $4,583 per
month for twelve months thereafter, plus expenses incurred in connection with
his obligations to Capstone.
It is the policy of Capstone to notify the Board of Directors and seek the
approval of a majority of the members of the Board or its Executive Committee
who are not related to Counsel in connection with transactions between Capstone
and its affiliates, including Counsel.
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PRINCIPAL STOCKHOLDERS OF CAPSTONE
The following table sets forth, as of May 28, 1997 the number and
percentage of shares of Capstone's Common Stock owned by (i) all persons known
to Capstone to be holders of 5% or more of such securities, (ii) each director,
(iii) each of the executive officers, and (iv) all directors and executive
officers of Capstone, as of May 27, 1997, as a group. Unless otherwise
indicated, all holdings are of record and beneficial.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY OF TOTAL
NAME OWNED(1) OUTSTANDING(2)
- ---- ------------ --------------
<S> <C> <C>
Counsel Corporation(3)...................................... 8,356,815 23.0%
Exchange Tower
Two First Canadian Place, Suite 1300
Toronto, Ontario, Canada M5X 1E3
Denis A. and Sandra Lou Portaro Revocable Trust of 1992 and
Ronald Belville........................................... 2,513,804 7.4
2596 Mission Street
San Marino, California 91108
Integrated Health Services, Inc............................. 2,112,490 6.2
10065 Red Run Blvd.
Owings Mills, Maryland 21117
Dirk Allison(4)............................................. 225,245 *
James D. Shelton............................................ -0- *
Robert Della Valle(5)....................................... 33,333 *
Allan C. Silber(6).......................................... 498,333 1.4
Morris A. Perlis(6)......................................... 498,333 1.4
Joseph F. Furlong, III(7),(8),(9)........................... 277,000 *
John Haronian (8)(10)....................................... 145,000 *
Edward Sonshine, Q.C.(7),(8)................................ 77,000 *
Gail Wilensky, Ph.D.(11).................................... 17,500 *
Albert Reichmann(11)........................................ 17,500 *
John E. Zuccotti(11),(12)................................... 27,000 *
All directors and executive officers as a group(13) (11
persons).................................................. 1,816,244 5.1%
</TABLE>
- ---------------
* Indicates less than 1%
(1) Unless otherwise indicated, the persons or entities identified in this
table have sole voting and investment power with respect to all shares
shown as beneficially owned by them, subject to community property laws,
where applicable.
(2) The percentages shown are based on 34,005,266 shares of Common Stock
outstanding on May 28, 1997, plus, as to each individual and group listed,
the number of shares of Common Stock deemed to be owned by such holder
pursuant to Rule 13d-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"), which includes shares subject to stock options and
warrants held by such holder which are exercisable within sixty (60) days
of such date.
(3) Includes 1,298,181 and 1,038,545 shares issuable upon the exercise of
warrants at $4.50 and $5.50 per share, respectively. Directors Silber,
Sonshine and Perlis are directors of Counsel and director Silber
beneficially owns or controls approximately 18% of the common stock of
Counsel, a majority of which is pledged to a lender. Directors Sonshine and
Perlis own in the aggregate less than 5% of Counsel's common stock. All of
the directors listed in this footnote (3) disclaim beneficial ownership of
shares of Common Stock in their capacity as directors of Counsel, and Mr.
Silber disclaims beneficial ownership of shares of Common Stock in his
capacity as a significant stockholder of Counsel.
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(4) Includes 15,170 and 12,136 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively and 16,666, 15,000, 50,000, 83,333
and 2,500 shares issuable upon the exercise of options at $4.31, $4.44,
$8.50, $10.50 and $11.25 per share, respectively.
(5) Includes 33,333 shares issuable upon the exercise of options at $10.50 per
share.
(6) Includes 25,000 and 20,000 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively and 15,000, 2,500, 250,000, 50,000,
83,333 and 2,500 shares issuable upon the exercise of options at $4.44,
$7.50, $4.31, $8.50, $10.50 and $11.25 per share, respectively.
(7) Includes 15,000 and 12,000 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively.
(8) Includes 15,000, 2,500 and 2,500 shares issuable upon the exercise of
options at $4.44, $7.50 and $11.25 per share, respectively.
(9) Includes 200,000 shares issuable upon the exercise of warrants at $12.00
per share.
(10) Includes 15,000 and 15,000 shares issuable upon the exercise of options at
$2.85 and $3.50 per share, respectively, and 25,000 and 20,000 shares
issuable upon the exercise of warrants at $4.50 per share, and $5.50 per
share, respectively.
(11) Includes 15,000 and 2,500 shares issuable upon the exercise of options at
$4.44 and $11.25 per share, respectively.
(12) Includes 2,500 and 2,000 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively.
(13) Includes 1,570,804 shares issuable upon the exercise of options and
warrants.
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PRICE RANGE OF CAPSTONE COMMON STOCK
Capstone's Common Stock is traded on the Nasdaq Stock Market under the
designation "DOSE." The following table indicates high and low closing sales
quotations for the periods indicated based upon information supplied by the
Nasdaq Stock Market. Such over-the-counter market quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions:
<TABLE>
<CAPTION>
BID QUOTATIONS
----------------
HIGH LOW
------ ------
<S> <C> <C>
Ten Months Ended December 31, 1995(1)
1st Quarter............................................... $ 5.00 $ 2.81
2nd Quarter............................................... 5.56 4.00
3rd Quarter............................................... 6.94 5.19
4th Quarter (December only)............................... 7.88 6.25
Year Ended December 31, 1996
1st Quarter............................................... $ 9.25 $ 7.00
2nd Quarter............................................... 13.38 8.50
3rd Quarter............................................... 13.63 9.75
4th Quarter............................................... 13.13 9.38
Year Ended December 31, 1997
1st Quarter............................................... $12.88 $10.56
2nd Quarter(2)............................................ 11.75 7.75
</TABLE>
- ---------------
(1) Effective December 31, 1995, Capstone changed its year end from February 28
to December 31.
(2) Through May 28, 1997.
As of May 28, 1997, the number of record holders of Capstone's shares was
approximately 570, which does not included individual participants in security
position listings. On May 28, 1997, the closing bid quotation for Capstone's
common stock was $10.06, as reported by the Nasdaq Stock Market.
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DESCRIPTION OF CAPSTONE CAPITAL STOCK
GENERAL
Capstone is authorized to issue 50 million shares of common stock, par
value $.01 per share. As of May 28, 1997, there were 34,005,266 shares issued
and outstanding. In addition as of May 28, 1997, there were options and warrants
outstanding to purchase 2,835,533 and 4,122,409 shares of Capstone Common Stock,
respectively.
COMMON STOCK
The holders of shares of Capstone Common Stock are entitled to one vote for
each share held of record on all matters to be voted on by stockholders. There
is no cumulative voting with respect to the election of directors. The holders
of shares of Capstone Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available
therefore. In the event of a liquidation, dissolution or winding up of Capstone,
the holders of shares of Capstone Common Stock are entitled to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision has been made for each class of stock, if any,
having preference over the shares of Capstone Common Stock. Holders of shares of
Capstone Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
shares of Capstone Common Stock. All of the outstanding shares of Capstone
Common Stock are fully paid and nonassessable.
TRANSFER AGENT
The transfer agent and registrar for the Capstone Common Stock is First
Union National Bank of North Carolina (Charlotte, N.C.), located at 1525 West W.
T. Harris Boulevard, Charlotte, NC 28288.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Certificate of Incorporation provides that directors of Capstone will
not be personally liable to Capstone or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the directors' duty of loyalty to Capstone or its stockholders, (ii)
for acts of omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the DGCL relating to
prohibited dividends or distribution or the repurchase or redemption of stock or
(iv) for any transaction from which the director derives an improper personal
benefit. The provision does not apply to claims against directors for violations
of certain laws, including federal securities laws. If the DGCL is amended to
authorize further elimination or limitation of director's liability, then the
liability of directors of Capstone shall automatically be limited to the fullest
extent provided by law. The Certificate of Incorporation and the Bylaws of
Capstone also contain provisions to indemnify the directors, officers, employees
or other agents to the fullest extent permitted by the DGCL. These provisions
may have the practical effect in certain cases of eliminating the ability of
stockholders to collect monetary damages from directors.
PROVISIONS WITH POSSIBLE ANTI-TAKEOVER EFFECTS
Provisions of the DGCL prohibit "business combinations" between Capstone
and certain stockholders unless the established requirements are met.
Consequently, the business combination provisions of the DGCL may have the
effect of deterring merger proposals, tender offers or other attempts to effect
changes in control of Capstone that are not negotiated with and approved by the
Capstone Board of Directors.
Additionally, the following provisions of Capstone's Certificate of
Incorporation and Bylaws may be considered to have anti-takeover implications:
(a) the ability of the board to increase the number of directors and fill (but
only until the next annual meeting of stockholders) the vacancies resulting from
such increase; and (b) the ability of the Capstone board of directors to
establish the rights of, and to issue, substantial amounts of preferred stock
without the need for stockholder approval, which preferred stock, among other
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<PAGE> 118
things, may be used to create voting impediments with respect to changes in
control of Capstone or to dilute the stock ownership of holders of shares of
Capstone Common Stock seeking to obtain control of Capstone.
If the Amendment Proposal is adopted and effectuated, certain new
provisions may be considered to have anti-takeover implications. See "Other
Capstone Proposals -- Amendment to Certificate of Incorporation."
RESTRICTIONS ON RESALE
The shares of Capstone Common Stock to be issued to stockholders of Beverly
pursuant to the Merger Agreement have been registered under the Securities Act,
thereby allowing such shares to be freely traded without restrictions by persons
who will not be "affiliates" (as defined in the Securities Act) of Capstone or
who were not "affiliates" of Beverly prior to the Merger. Directors and
executive officers of Beverly may be deemed to have been "affiliates" of Beverly
within the meaning of the Securities Act. Any such person will not be able to
resell the Capstone Common Stock received by him or her in the Merger unless
such stock is registered for resale or an exemption from registration under the
Securities Act is available, such as Rule 145. All such persons should carefully
consider the limitations imposed by Rule 145 under the Securities Act prior to
effecting any resales of Capstone Common Stock. In general, under Rule 145 as
currently in effect, persons who may be deemed affiliates (as that terms is
described in the Securities Act) of Beverly as of the Beverly Special Meeting
would be entitled to sell within any three-month period a number of shares of
Capstone Common Stock that does not exceed the greater of 1% of the then
outstanding shares of Capstone Common Stock or the average weekly trading volume
during the four calendar weeks preceding a sale by such person. Sales under Rule
145 are also subject to certain provisions relating to the manner of sale and
availability of current information about Capstone. Such limitations would
generally cease to apply to non-affiliates of Capstone following the first
anniversary of the Effective Time provided that Capstone meets certain public
information requirements or the second anniversary of the Effective Time
otherwise. This Joint Proxy Statement/Prospectus does not cover any resales of
Capstone Common Stock received by affiliates of Beverly or by certain of their
family members or related interests.
Pursuant to the Merger Agreement, Beverly will prepare and deliver to
Capstone a list (reasonably satisfactory to counsel for Capstone) identifying
all persons who, at the time of the Special Meeting, may be deemed to be
"affiliates" of Beverly as that term is defined in Rule 145 under the Securities
Act. Beverly shall use its reasonable best efforts to cause each person
identified as an affiliate in such list to deliver to Capstone on or prior to
the Effective Time a written agreement (in a form previously approved by Beverly
and Capstone) that such affiliate will not sell, transfer, or otherwise dispose
of any shares of Capstone Common Stock issued to such possible affiliate
pursuant to the Merger except pursuant to an effective registration statement or
in compliance with Rule 145 or an exemption from the registration requirements
of the Securities Act and it is a condition to the obligation of Capstone to
close the Merger that it received such written agreements.
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INFORMATION CONCERNING PCA
PCA SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following consolidated statement of operations and balance sheet data
for the years ended and as of December 31, 1996, 1995 and 1994 have been derived
from the audited consolidated financial statements of PCA and should be read in
conjunction with the financial statements and notes thereto included herein. The
consolidated statement of operations and balance sheet data for the years ended
and as of December 31, 1993 and 1992 have been derived from PCA's internal
records. The consolidated statement of operations and balance sheet data for the
three months ended and as of March 31, 1997 and 1996 have been derived from the
unaudited condensed consolidated financial statements of PCA and should be read
in conjunction with those financial statements and related notes thereto
included herein. The December 31, 1993 and 1992 financial statement data, and
the March 31, 1997 and 1996 financial statement data, in the opinion of PCA's
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information for the
unaudited periods. Operating results for the three months ended March 31, 1997
are not necessarily indicative of results that may be expected for the full
calendar year ending December 31, 1997. This information should be read in
conjunction with "Information Concerning PCA -- PCA Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the PCA
Consolidated Financial Statements, related notes and other PCA financial
information included in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED AT OR FOR THE
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Non-affiliates................................ $122,390 $105,221 $434,317 $377,664 $170,299 $130,055 $117,764
Affiliates.................................... 25,202 19,155 82,083 74,021 77,213 71,615 56,567
-------- -------- -------- -------- -------- -------- --------
Net operating revenues.......................... 147,592 124,376 516,400 451,685.. 247,512 201,670 174,331
Cost of goods sold.............................. 80,087 65,672 280,468 242,761 117,045 90,262 78,487
-------- -------- -------- -------- -------- -------- --------
Gross profit.................................. 67,505 58,704 235,932 208,924 130,467 111,408 95,844
Costs and expenses:
Selling, general and administrative........... 46,858 42,534 171,251 158,115 91,883 78,798 67,528
Provision for doubtful accounts............... 2,371 2,189 13,500 17,679 7,388 3,403 3,534
Interest, net................................. 46 (36) (166) (195) 113 110 114
Depreciation and amortization................. 4,826 3,807 16,392 13,219 5,734 3,741 3,017
Impairment of long-lived assets:
Adoption of SFAS No. 121.................... -- -- -- 5,392 -- -- --
Development and other costs................. -- -- -- 4,151 -- -- --
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses................ 54,101 48,494 200,977 198,361 105,118 86,052 74,193
-------- -------- -------- -------- -------- -------- --------
Income before provision for income taxes........ 13,404 10,210 34,955 10,563 25,349 25,356 21,651
Provision for income taxes...................... 5,576 4,284 14,668 5,977 10,291 10,281 8,596
-------- -------- -------- -------- -------- -------- --------
Net income...................................... $ 7,828 $ 5,926 $ 20,287 $ 4,586 $ 15,058 $ 15,075 $ 13,055
======== ======== ======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................. $ 97,331 $ 80,133 $ 92,134 $ 77,512 $ 71,794 $ 24,537 $ 19,754
Total assets.................................... 466,683 422,224 441,576 428,872 327,287 69,443 58,441
Current portion of long-term obligations........ 1,078 574 968 630 633 877 533
Long-term obligations, excluding current
portion....................................... 1,442 73 1,334 125 514 423 19
Due to Parent................................... 326,343 312,365 312,395 318,610 225,006 7,267 12,446
Stockholder's equity............................ 99,433 77,245 91,605 71,318 66,732 51,674 36,598
</TABLE>
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PCA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
As of March 31, 1997, PCA operated 73 pharmacies in 28 states and is one of
the nation's largest institutional pharmacies providing drugs and related
products and services to nursing facilities, acute and transitional care
hospitals, home care providers, psychiatric facilities, correctional facilities,
assisted living centers, retirement homes and their patients. PCA provides its
long-term care customers with comprehensive institutional pharmacy services that
include: (i) the purchasing, repackaging and dispensing of pharmaceuticals, (ii)
infusion therapy and Medicare Part B services, which are comprised of enteral
nutrition and urological supplies, and (iii) pharmacy consulting services, which
include evaluations of patient drug therapy, and drug handling, distribution and
administration within a nursing facility as well as assistance with state and
federal regulatory compliance. Pharmacy Management Service Inc. ("PMSI"), PCA's
mail service pharmacy, is the nation's largest mail service provider of drugs
and medical equipment to workers' compensation payors, claimants and employers.
The long-term care pharmacy industry has historically been highly
fragmented and healthcare providers are being challenged to reduce costs while
maintaining quality patient care in non-hospital settings. PCA's growth strategy
has been to focus on its internal growth strategy by expanding its service
offering of specialized services such as intravenous therapy and continuing to
look for external growth through selective acquisitions of quality local and
regional institutional pharmacy companies. PCA also intends to expand its mail
service business by offering a broader spectrum of products and services to
patients, regardless of setting.
RESULTS OF OPERATIONS
Three months ended March 31, 1997 compared to three months ended March 31,
1996
Net Operating Revenues. PCA's net operating revenues increased
approximately $23,200,000 for the three months ended March 31, 1997, as compared
to the same period in 1996. This increase consists of approximately $15,300,000
of same store growth and approximately $7,900,000 related to acquisitions,
principally the late-1996 acquisition of Kohll Extended Care Pharmacy, Inc. in
Omaha, Nebraska and the January 1, 1997 acquisition of IPC. Same store growth is
attributable to increased infusion therapy of approximately $4,500,000 and
growth in the core institutional pharmacy business of approximately $8,400,000
due to concentrated marketing and customer retention initiatives. In addition,
PCA's mail service revenues increased approximately $2,400,000 or 11.3%
primarily due to increased marketing of durable medical equipment and supplies
to catastrophically injured patients. For the three months ended March 31, 1997,
PCA derived approximately 17.1% of its revenues from sales to Beverly
facilities, as compared to 15.4% for the same period in 1996. This increase in
sales to Beverly facilities is primarily attributable to additional Beverly
facilities being serviced by newly opened or acquired pharmacies.
Cost of Goods Sold. PCA's cost of goods sold increased approximately
$14,400,000 for the three months ended March 31, 1997, as compared to the same
period in 1996. As a percentage of net operating revenues, cost of goods sold
was 54.3% in 1997 as compared to 52.8% for 1996. The increase in cost of goods
sold as a percentage of net operating revenues in 1997 was primarily related to
the following factors: (i) mail service cost of goods sold was approximately 1%
higher primarily due to competitive pricing pressures in the managed care
market, (ii) revenue associated with higher margin enteral and urological
products decreased approximately $870,000 or 6.4% and (iii) cost of goods sold
increased in several markets due to increased competition.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include wages and related expenses, facility expenses,
and other administrative overhead. Selling, general and administrative expenses
increased approximately $4,300,000 or 10.2% for the three months ended March 31,
1997 as compared to the same period in 1996. Approximately $2,500,000 of this
increase was attributable to the acquisitions in Omaha and Hawaii. The remaining
increase in selling, general and administrative expenses was related to the
increase in same store revenues discussed above. As a percentage of revenues,
selling,
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general and administrative expenses decreased to 31.7% for the three months
ended March 31, 1997 from 34.2% for the same period in 1996. This decrease was
primarily the result of implementing certain cost reduction initiatives.
Depreciation and Amortization. For the three months ended March 31, 1997,
depreciation and amortization increased approximately $1,000,000 as compared to
the same period in 1996. Approximately $450,000 of this increase was related to
acquisitions during such period. The remaining increase was attributable to
investments in medical carts and other equipment as well as leasehold
improvements.
Net Income. Net income was $7,828,000 for the three months ended March 31,
1997, as compared to $5,926,000 for the same period in 1996. PCA had an
estimated annual effective tax rate of 41.6% for the three months ended March
31, 1997, compared to 42% for the same period in 1996. The estimated annual
effective tax rates for 1997 and 1996 are different than the federal statutory
rate primarily due to the impact of state income taxes and amortization of
nondeductible goodwill.
Year ended December 31, 1996 compared to year ended December 31, 1995
Net Operating Revenues. PCA's net operating revenues increased
approximately $64,700,000 for the year ended December 31, 1996, as compared to
the same period in 1995. This increase was primarily related to the 1995
acquisition of PMSI's mail service pharmacy and other acquisitions, which added
approximately $54,100,000 to revenues, and to a lesser extent same store growth.
On a same store basis, revenues increased approximately $10,600,000 primarily
due to increased sales of infusion therapy products and services. For the year
ended December 31, 1996, PCA derived approximately 15.9% of its revenues from
sales to Beverly facilities, as compared to 16.4% in 1995. This decrease in
revenues from sales to Beverly facilities is primarily attributable to Beverly's
disposition of approximately 83 nursing facilities in 1996 and 29 nursing
facilities in 1995.
Cost of Goods Sold. PCA's cost of goods sold increased approximately
$37,700,000 for the year ended December 31, 1996, as compared to the same period
in 1995. Cost of goods sold as a percentage of net operating revenues was 54.3%
in 1996 as compared to 53.7% for 1995, primarily related to the full year impact
of the lower margin mail service business purchased from PMSI.
Selling, General and Administrative Expenses. PCA's total selling, general
and administrative expenses increased approximately $13,100,000 for the year
ended December 31, 1996 as compared to the same period in 1995. Approximately
$5,200,000 of this increase was related to the mid-1995 purchase of PMSI with
the remainder of the increase attributable to increased same store revenues and
severance and relocation expenses associated with the 1996 reorganization and
relocation of PCA's corporate offices.
Provision for Doubtful Accounts. The provision for doubtful accounts
decreased approximately $4,200,000 for the year ended December 31, 1996 as
compared to the same period in 1995, primarily related to improved management
controls related to the centralization of billing offices and the assimilation
of acquired pharmacies in 1994.
Depreciation and Amortization. Depreciation and amortization expense
increased approximately $3,200,000 for the year ended December 31, 1996 as
compared to the same period in 1995, primarily related to the amortization of
goodwill associated with the PMSI transaction completed in mid-1995.
Net Income. Net income was $20,287,000 for the year ended December 31,
1996, as compared to $4,586,000 for the same period in 1995. Net income for 1995
included a pre-tax charge of $9,543,000 for impaired long-lived assets related
to the adoption of SFAS No. 121 (as defined below) and the write-off of software
and software development costs. PCA had an annual effective tax rate of 42% for
the year ended December 31, 1996, compared to 56.6% for the same period in 1995.
The annual effective tax rate for 1996 was different than the federal statutory
rate primarily due to the impact of nondeductible goodwill associated with the
acquisition of PMSI. The annual effective tax rate for 1995 was different than
the federal statutory rate primarily due to the impact of nondeductible goodwill
included in the adjustments resulting from the adoption of SFAS No. 121.
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Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Operating Revenues. PCA's net operating revenues increased
approximately $204,200,000 for the year ended December 31, 1995, as compared to
the same period in 1994. This increase was primarily related to the late-1994
acquisitions of Insta-Care and Synetic which added approximately $131,300,000 to
revenues, and the June 1995 acquisition of PMSI which added approximately
$41,600,000 to revenues. On a same store basis, revenues increased approximately
$31,300,000 primarily due to increased marketing efforts. For the year ended
December 31, 1995, PCA derived approximately 16.4% of its revenues from sales to
Beverly facilities, as compared to 31.2% for 1994. This decrease in revenues
from sales to Beverly facilities was primarily attributable to the additional
non-Beverly business generated by Insta-Care, Synetic and PMSI.
Cost of Goods Sold. PCA's cost of goods sold increased approximately
$125,700,000 for the year ended December 31, 1995, as compared to the same
period in 1994. As a percentage of net operating revenues, cost of goods sold
was 53.7% in 1995 as compared to 47.3% for 1994. This increase in cost of goods
sold as a percentage of revenues in 1995 was primarily related to ongoing
integration of the Insta-Care and Synetic pharmacies purchased in late-1994 and
the acquisition of PMSI's lower margin mail service pharmacy.
Selling, General and Administrative Expenses. PCA's selling, general and
administrative expenses increased approximately $66,200,000 for the year ended
December 31, 1995 as compared to the same period in 1994. Substantially all of
this increase was attributable to the late-1994 acquisitions of Insta-Care and
Synetic and the mid-1995 acquisition of PMSI.
Provision for Doubtful Accounts. PCA's provision for doubtful accounts for
the year ended December 31, 1995 increased approximately $10,300,000 compared to
the same period in 1994. Substantially all of this increase was attributable to
the acquisition and assimilation of Insta-Care and Synetic.
Depreciation and Amortization. Depreciation and amortization expense for
the year ended December 31, 1995 increased approximately $7,500,000 as compared
to the same period in 1994. Substantially all of this increase was due to the
amortization of goodwill associated with the acquisitions of Insta-Care, Synetic
and PMSI.
Adoption of SFAS No. 121. In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," ("SFAS No. 121") which requires impairment losses to be recognized for
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows are not sufficient to recover the assets'
carrying amounts. The impairment loss is measured by comparing the fair value of
the asset to its carrying amount.
In 1995, PCA recorded an impairment loss of approximately $5,400,000 upon
adoption of SFAS No. 121. The impairment indicators which led to recording this
loss were as follows: two pharmacies, purchased by PCA in late 1994, had
operating losses in 1995, and PCA anticipated future operating losses for these
facilities primarily related to Beverly's lack of presence in the markets; one
pharmacy, located in a state where Beverly had recently sold all of its
interests, began to lose the contracts that had been assumed by the new owners,
and it became apparent that the operations would not recover to their previous
level; and, lastly, PCA operates a medical records servicing business which lost
approximately half of its business in 1995 when Beverly pursued a different
vendor for this service. Accordingly, management estimated the undiscounted
future cash flows to be generated by each business. The undiscounted future cash
flow estimates were less than the carrying value of such businesses, so
management estimated the fair value of such businesses and wrote the carrying
values down to their estimates of fair value. Management calculated the fair
values of the impaired businesses by using the present values of estimated
future cash flows.
Development and Other Costs. In addition to the SFAS No. 121 charge, PCA
recorded an impairment loss in 1995 of approximately $4,150,000 primarily
related to the write-off of software costs. In late 1995, PMSI's Vice President
of Management Information Systems assumed the management information systems'
functions for PCA and redirected PCA's systems development initiatives which
caused a write-off of certain software and systems development costs.
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Net Income. Net income was $4,586,000 for the year ended December 31, 1995,
as compared to $15,058,000 for the same period in 1994. Net income for 1995
included a pre-tax charge of $9,543,000 for impaired long-lived assets related
to the adoption of SFAS No. 121 and the write-off of software and software
development costs. PCA had an annual effective tax rate of 56.6% for the year
ended December 31, 1995, compared to 40.6% for the same period in 1994. The
annual effective tax rate for 1995 was different than the federal statutory rate
primarily due to the impact of nondeductible goodwill included in the
adjustments resulting from the adoption of SFAS No. 121 and nondeductible
goodwill resulting from the PMSI acquisition.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, PCA had approximately $5,700,000 in cash and cash
equivalents and net working capital of approximately $97,300,000. Substantially
all cash received by PCA is deposited daily and wired to Beverly's corporate
cash account. In turn, all of PCA's operating expenses, capital expenditures and
other cash needs are paid by Beverly and charged back to PCA. Such amounts are
not subject to repayment terms, do not bear interest, and are repaid by PCA from
excess operating cash.
PCA had net cash provided by operating activities for the three months
ended March 31, 1997 of approximately $10,400,000 which, along with cash on hand
and advances from Beverly, was primarily used for acquisitions of approximately
$22,100,000 and capital expenditures of approximately $2,800,000. The
institutional pharmacy business is not capital intensive and the primary capital
expenditures are related to medical carts and other medical equipment. PCA
leases all vehicles used in the daily delivery of products to its customers.
Subsequent to the Merger, PCA's obligations and capital expenditures will
be funded by the Surviving Corporation's working capital and net cash provided
by operating activities, as well as available borrowings under the Surviving
Corporation's bank credit facility. See "Information Concerning
Capstone -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources."
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PCA BUSINESS
GENERAL
Beverly's institutional pharmacy business is conducted through its
wholly-owned subsidiary, PCA, and certain subsidiaries of PCA. When used under
this caption, the term "PCA" shall include PCA and its consolidated
subsidiaries. PCA is a leading provider of pharmaceuticals and related products
and services in the institutional healthcare market, and is the nation's leading
provider of mail service pharmacy benefits in the workers' compensation market.
PCA provides its institutional pharmacy products and services primarily to
long-term care facilities such as skilled nursing facilities, assisted living
facilities and retirement centers, as well as other institutional healthcare
facilities such as acute care, transitional and psychiatric hospitals and
correctional institutions. Through its 73 pharmacies, PCA purchases, repackages
and dispenses prescription and non-prescription pharmaceuticals to patients in
its client facilities, and provides these facilities with infusion therapy
services, medical supplies and devices and related consultant pharmacist and
information services, including formulary management, automated record-keeping,
drug therapy evaluation and assistance with regulatory compliance. As of March
31, 1997, PCA provided its institutional pharmacy products and services to
approximately 190,000 long-term care beds at over 2,500 long-term care
facilities located in 33 states.
PCA, as the leading pharmacy benefit provider in the workers' compensation
market, provides pharmaceutical products and services through its mail service
pharmacy to approximately 75,000 workers' compensation patients throughout the
United States. These products and services include home delivery of
prescriptions to long-term, high-cost, injured workers receiving workers'
compensation benefits, an on-line retail prescription drug card for pre-approved
pharmaceutical products, and medical supplies and medical equipment.
Beverly, the nation's largest operator of long-term care facilities in the
United States, formed PCA in 1983. PCA's affiliation with Beverly not only has
provided PCA with a substantial initial customer base of nursing facilities, but
also has enabled PCA to develop and enhance its position as a low-cost provider
of quality pharmacy and consultant pharmacist services. In recent years, PCA has
expanded its presence in the institutional pharmacy market, entered the workers'
compensation market and substantially broadened its customer base primarily
through the following acquisitions: (i) in November 1994, Insta-Care, a
subsidiary of Eckerd Corporation which served approximately 65,000 patients in
the institutional pharmacy market, primarily in New England, Florida and Texas;
(ii) in December 1994, three institutional pharmacy subsidiaries owned by
Synetic, a subsidiary of Merck & Co., Inc., which served approximately 45,000
patients located primarily in New England and Indiana (the Insta-Care and
Synetic acquisitions were material to PCA and, therefore, certain financial
statements for Insta-Care and Synetic prior to PCA's acquisitions of such
companies are included in this Joint Proxy Statement/Prospectus); (iii) in June
1995, PMSI, a publicly-traded company based in Tampa, Florida which provided
nationwide mail order pharmacy products and services to approximately 75,000
patients in the workers' compensation market; and (iv) in January 1997, the
assets and business of IPC, the owner of 12 pharmacies, primarily in the State
of Hawaii serving approximately 3,300 institutional pharmacy patients.
INSTITUTIONAL PHARMACY INDUSTRY
Institutional pharmacies purchase both prescription and nonprescription
pharmaceuticals and other medical supplies from wholesale distributors and
manufacturers, and subsequently repackage and distribute these medications to
patients in nursing homes, assisted living facilities, retirement centers and
other institutional settings. These pharmacies also provide consultant
pharmacist services which include, among other things, individual patient drug
therapy evaluation and the monitoring of the control, administration and storage
of prescribed medications within the institution to ensure compliance with state
and federal regulations. Unlike hospitals, most long-term care institutions do
not have an on-site pharmacy to dispense prescription drugs; institutional
pharmacies accordingly play an integral role in long-term care by providing a
high quality, cost-efficient means of dispensing and monitoring patient
medication. In addition, because of the limited direct involvement of physicians
in administering daily care in these settings, institutional pharmacies often
provide further support services such as infusion therapy and consultant
pharmacist services.
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The pharmacy services industry historically has been highly fragmented and
is characterized principally by three types of providers: retail pharmacies
(approximately 27% of the market), independent institutional pharmacies
(approximately 43% of the market) and institutional pharmacies owned by
long-term care providers (approximately 30% of the market). Several important
trends underpin the strength of the long-term care market, including the aging
of the U.S. population, the focus on providing high quality healthcare in lower
cost, non-hospital settings, and the early discharge of patients from acute-care
hospitals for cost containment purposes. In line with these trends, certain
functions and ancillary services previously performed by acute-care hospitals
are being moved to long-term care facilities, where patients can receive
comparable care at a lower cost. These services include intravenous therapy,
ventilator and pharmacy care, wound care, cardiac rehabilitation, kidney
dialysis and care for patients with AIDS, head trauma and Alzheimer's disease.
These conditions provide an additional growth opportunity for long-term care
facilities, including institutional pharmacies which can meet the product and
service needs of these new, more complex therapies.
Long-term care facilities are demanding more sophisticated and specialized
services from institutional pharmacy providers resulting from implementation in
1990 of the Omnibus Budget Reconciliation Act of 1987 ("OBRA"). The OBRA
regulations created a stringent standard of care in long-term care facilities
related to planning, monitoring and reporting on the progress of patient care
and prescription drug therapy. As a result, it has been PCA's experience that
nursing home administrators now increasingly seek experienced pharmacists and
specialized providers associated with larger institutional pharmacy companies,
which offer computerized information and documentation systems to help ensure
regulatory compliance, to provide a broader range of services and to offer
economies of scale.
GROWTH STRATEGY
PCA's growth strategy, based on its recognition of the growing needs of the
long-term care market for higher quality care, better cost containment and
increasingly specialized services, and the highly fragmented nature of the
long-term care pharmacy industry, has been focused on exploiting PCA's internal
growth potential, and on continuing its external growth through selective
acquisitions.
The principal elements of PCA's strategy to maximize its internal growth
potential include cross-marketing its products and services to existing
customers, increasing its service offerings to Beverly long-term care
facilities, increasing penetration in existing PCA markets, introducing new
products and services, enhancing PCA's operating leverage, using strategic
alliances to better position PCA in a managed care environment and continuing to
develop clinical and technological expertise. PCA also intends to expand its
mail service drug card offering and use its medical supply expertise to provide
a broader spectrum of services to chronically disabled patients in a variety of
settings.
In addition to emphasizing strong internal growth, PCA's growth strategy
has been driven by the goal of building a national institutional pharmacy
operation through the acquisition of quality local and regional institutional
pharmacies and pharmacy service companies. The principal elements of PCA's
acquisition strategy include: achieving market density in regions where PCA
already has a presence; capitalizing on opportunities to obtain new customers or
products and services; achieving further economies of scale; increasing
purchasing power and efficiencies in operating and administrative functions; and
expanding into new geographic markets.
SERVICES
PCA purchases, repackages and dispenses, in patient-ready packaging,
pharmaceuticals to patients or residents in its client facilities and provides
such facilities with related consultant pharmacist and information services,
including formulary management, automated medical record-keeping, drug therapy
evaluation and regulatory assistance. To complement its core pharmacy services,
PCA provides an array of ancillary healthcare services, such as infusion
therapy, medical records development, as well as medical supplies, enterals,
nutritional supplements, therapy and durable medical equipment.
Pharmacy Services. PCA's core pharmacy service includes the customized
filling of prescription and non-prescription medications in accordance with
physician orders and delivery of such prescriptions to long-
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term care, assisted living and other institutional facilities for administration
to individual patients by the facilities' nursing staff. PCA typically services
nursing homes, subacute and transitional care units in nursing homes, long-term
acute care hospitals, home care providers, psychiatric facilities, correctional
facilities, assisted living facilities, and retirement homes within one-to-two
hour commuting time from PCA pharmacy locations for product lines requiring
on-site delivery. However, some healthcare products do not require immediate
delivery and can be supplied from regional or centralized locations, enabling
PCA to take advantage of less expensive manufacturer drop shipment capabilities.
PCA maintains a 24 hour on-call pharmacist service 365 days a year from most
sites for emergency dispensing and delivery or for consultation with the
facilities' staff or the attending physician. PCA's national emergency
preparedness plan ensures that appropriate equipment, supplies and manpower are
available when necessary to each PCA pharmacy and therefore to its customers.
PCA purchases pharmaceutical products in bulk quantities from wholesalers
and manufacturers and dispenses both prescription and non-prescription drugs in
patient-specific packages in accordance with physician orders, including,
typically in 30 day, seven day or 24 hour quantities, unit dose, modified unit
dose or blister card packaging. Upon receipt of a physician order, the
information is entered into PCA's pharmacy computer system where information is
screened for drug and food interactions, allergies and refill limitations. Upon
entry, the prescription becomes part of the permanent patient record, and a
label is printed for application to PCA's package. When required or specifically
requested by the physician or patient, branded drugs are dispensed. Generic
drugs are dispensed in accordance with applicable state and federal laws and as
requested by the physician or patient. Only those generic drugs approved for
equivalence by the Food and Drug Administration are dispensed in place of
branded drugs. The package label contains specific patient information as well
as physician name, medication, dosage information and cautionary messages.
Prior to delivery to the client facility, the completed prescription with
patient-specific label attached is reviewed by one of PCA's pharmacists and
re-verified against the original order entry data. Following this final quality
assurance check, the prescription is delivered to the client facility. PCA's
pharmacists package drugs for delivery on a customized basis to meet each
patient's needs for either single-day or multi-day dosage requirements. Patient
care considerations, as well as the regulations governing long-term care
facilities, require the delivery of urgently needed drugs often within an hour
or two. Accordingly, PCA operates its own delivery service to meet emergency
patient care needs and delivers needed products and services 24 hours a day, 365
days a year. To assist client facilities in distributing pharmacy products, PCA
provides client facilities with an easy-to-use and accurate distribution system,
including mobile medication carts, accessories and customized emergency drug
kits.
Integral to PCA's drug distribution system is its computerized medical
records and documentation system. Upon request from the customer, PCA provides
to the facility computerized medication administration records, physician's
order sheets and treatment records for each patient. Data extracted from these
computerized records are also formulated into monthly management reports on
patient care and quality assurance. The computerized documentation system, in
combination with the unit dose or modified unit dose drug delivery systems,
results in greater efficiency in nursing time, improved control, reduced drug
waste in the facility and lower error rates in both dispensing and
administration.
Consultant Pharmacist Services. Federal and state regulations mandate that
long-term care facilities improve the quality of patient care by obtaining
consultant pharmacist services to monitor and report on prescription drug
therapy. The OBRA legislation implemented in 1990 seeks to further upgrade and
standardize patient care by setting forth more stringent standards relating to
planning, monitoring and reporting on the progress of prescription drug therapy
as well as facility-wide drug usage. Noncompliance with these regulations may
result in monetary sanctions as well as the potential loss of the facility's
ability to participate in Medicare and Medicaid reimbursement programs.
PCA provides consultant pharmacist services which help clients comply with
federal and state regulations applicable to long-term care facilities. These
services include: (i) providing comprehensive, monthly drug regimen reviews for
each patient in the facility to assess the appropriateness and efficacy of drug
therapies, including reviewing the patient's medical records, monitoring drug
reactions to other drugs or food, monitoring
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lab results, and recommending alternate therapies or recommending the
discontinuation of unnecessary drugs; (ii) participating on certain key
committees of client facilities as well as periodic involvement in staff
meetings; (iii) inspecting monthly the facility's medication carts and storage
rooms; (iv) monitoring and monthly reporting on facility-wide drug usage and
drug administration systems and practices; (v) developing and maintaining
pharmaceutical policy and procedures manuals; (vi) assisting the long-term care
facility in complying with state and federal regulations as they pertain to
patient care; and (vii) providing training programs.
PCA's consultant pharmacists also work directly with clients' professional
staffs to ensure safe, rational and cost-effective drug therapy, and compliance
with federal and state long-term care facility regulations governing the
ordering, storage and administration of medication. PCA's consultant pharmacists
participate in formulary development and implementation and in therapeutic
interchange programs, and assist other healthcare professionals in drug use
evaluation and disease management. The consultant pharmacists also provide
in-service training programs about new clinical therapies, infection control,
care planning and cost containment measures. PCA has recently introduced a
proprietary software program customized for pharmacy consulting practices,
entitled PCA Consultware(TM), designed to help consultant pharmacists
efficiently generate communications to nursing facility professionals, produce
professional and informative quality assurance reports, monitor response to
their recommendations such as therapeutic interchange requests and help document
the clinical and economic value of their services.
Additionally, PCA offers a specialized line of consulting services which
help long-term care facilities enhance care and reduce and contain costs as well
as comply with state and federal regulations. Under this service line, PCA
provides: (i) data required for OBRA and other regulatory purposes, including
reports on psychotropic drug usage (chemical restraints), antibiotic usage
(infection control) and other drug usage; (ii) disease management programs
designed to lead the nursing facility staff in making the best clinical and
cost-effective drug therapy decisions that will result in improved medical
outcomes and lower overall costs to the healthcare system; (iii) drug class or
disease-specific drug usage evaluation programs designed to improve the use of a
class of drugs, such as antidepressants, or improve the management of a disease,
such as peptic ulcer disease, or the approach to a particular problem, such as
drug-related falls in the nursing facility; (iv) on-site educational seminars
for the long-term care facility's staff on topics such as drug information
relating to clinical indications, adverse drug reactions, drug protocols and
special geriatric considerations in drug therapy, and information and training
on intravenous drug therapy and updates on OBRA and other regulatory compliance
issues; and (v) mock regulatory reviews for facility professional staffs.
Formulary Management. PCA employs formulary management techniques designed
to assist physicians in making the best clinical choice of drug therapy for
patients at the lowest possible cost. Using PCA's proprietary formulary program,
introduced in 1995 and published annually in conjunction with the American
Medical Directors Association and the University of Arizona School of Pharmacy,
PCA pharmacists assist prescribing physicians in designating the use of
particular drugs from among therapeutic alternatives (including generic
substitutions) and in the use of more cost-effective delivery systems and dose
forms. The PCA formulary takes into account such factors as pharmacology, safety
and toxicity, efficacy, drug administration, quality of life and other
considerations specific to the elderly population of long-term care facilities.
PCA's formulary guidelines also provide relative pharmaceutical cost information
to residents, their insurers or other payors. Adherence to the PCA formulary
guidelines is intended to improve drug therapy results, lower costs for
residents and strengthen PCA's purchasing power with drug manufacturers.
Mail Order Services. PCA provides a broad array of pharmacy products and
services, including prescription and non-prescription pharmaceuticals, medical
supplies and medical equipment, to workers' compensation claimants in all 50
states. Workers' compensation laws require employers to provide medical
disability benefits to employees who suffer job-related injuries and
disabilities, without cost-sharing by the injured employee. These laws usually
require the employer to compensate an injured worker for lost wages and to pay
all the costs of remedial medical care and treatment, including prescription
drugs, medical supplies and medical equipment. Employers provide these statutory
benefits to their employees through self-insurance, participation in state-run
funds or the purchase of insurance from commercial insurance companies.
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PCA's mail order pharmacy services include an on-line retail prescription
drug card, home delivery of prescription drugs, medical supplies and medical
equipment to long-term, high-cost, injured workers who are receiving workers'
compensation benefits, and an array of computer software solutions to reduce a
payor's administrative costs. PCA ships prescription drugs, medical supplies and
medical equipment, including orthotic and prosthetic devices, from a central
distribution and warehouse facility in Tampa, Florida to approximately 75,000
workers' compensation claimants located in all 50 states. For the year ended
December 31, 1996, approximately 17% of PCA's revenues were derived from the
mail service pharmacy.
Workers who suffer long-term injuries typically incur substantial
out-of-pocket expenses each month for prescription drugs, medical supplies and
medical equipment. Employers, insurance companies and other payors of workers'
compensation benefits seek ways to control the escalating volume and costs of
these workers' compensation claims. Although most states prohibit employers from
restricting a claimant's choice of healthcare provider, many states allow
employers to direct employees to a specific primary healthcare provider at the
onset of medical treatment, subject to the employee's right to change physicians
after a specified period of time. These restrictions have traditionally impeded
an employer's ability to use a health maintenance organization, preferred
provider organization or similar managed care arrangement. Additionally,
workers' compensation laws differ from state to state, making it difficult for
payors and multi-state employers to adopt uniform policies to manage, control
and administer medical and pharmacy benefits and their associated costs.
Consequently, managing the cost of workers' compensation requires methods that
must be tailored to each employer's applicable medical benefits and regulatory
environment.
PCA works directly with workers' compensation payors to provide their
claims representatives with the appropriate training and on-site assistance to
identify potential long-term, high-cost claimants. After identifying these
claimants, PCA coordinates with the claims representative, the claimant's
treating physician and (as appropriate) the claimant's attorney and
rehabilitation nurse to determine the prescription drugs, medical supplies and
medical equipment that are required for the care and treatment of the claimant's
injury and the requisite schedule for supplying those items.
PCA's retail prescription drug card service enables injured workers to
obtain prescription drugs at no cost from a network of over 30,000 participating
retail pharmacies throughout the country by presenting an identification card.
The card provides access to PCA's on-line system for adjudication of
prescription drugs. This service controls the injury compensability, type, cost,
quality and frequency of prescription drugs dispensed to an injured worker. PCA
negotiates volume discounts with participating pharmacies and passes the savings
on to the payors who use this service. Through this service and the home
delivery service, PCA provides the payor with comprehensive control over the
prescription drug program for workers' compensation claimants. For those
prescription drugs purchased outside PCA's network, PCA offers prescription
auditing services to reduce prices to applicable statutory fee schedules and to
prevent duplicate billing or over-utilization
Infusion Therapy Products and Services. PCA provides infusion therapy
services to its clients' long-term care facilities. Infusion therapy consists of
the intravenous delivery or administration by tube, catheter or IV, of
medication or introduction of parenteral and enteral nutritional formulas,
including nutrients and other fluids, to patients. Beverly management believes
that PCA was one of the first institutional pharmacies to furnish infusion
therapy services to long-term care residents, and that PCA's pharmacies were
among the first long-term care facility pharmacies to be accredited for home
infusion therapy by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"). See "-- Quality Assurance, Training and Education and
Technological Innovations".
Patients can receive infusion therapies at home or in a long-term or other
subacute care facility at a cost which is substantially less than hospital-based
care. The trend toward delivery of healthcare in the lowest cost setting and the
increasing ability to treat certain illnesses outside of hospitals or other
acute care settings represents an opportunity for long-term care facilities to
attract infusion therapy patients.
PCA prepares the product to be administered according to JCAHO standards,
delivers the product to the patient setting and trains nursing facility
personnel in administering infusion therapy. PCA does not itself administer such
therapy. PCA offers a full range of premixed, ready-to-handle solutions, and
related products,
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supplies and equipment, as well as a policy and procedure manual detailing
appropriate intravenous practices and clinical pharmacist support. These
infusion therapies include enteral nutrition therapy, parenteral nutrition
therapy, antibiotic infusion therapy and chemotherapy, AIDS therapy, pain
management and hydration therapy. PCA has established an infusion therapy
distribution network which allows next-day delivery and eliminates the need for
customer product storage.
The preparation of the product requires a trained and experienced
pharmacist working with the proper equipment in a sterile environment. The
administration of the product requires a nursing staff trained in the proper
infusion techniques and the care and use of infusion equipment (poles and pumps)
and supplies. The proper administration of infusion therapy requires a highly
trained nursing staff. Because the level of such training varies among nursing
facilities, PCA has developed a multi-tiered education and training program,
ranging from basic education and information to facility nurses already trained
in managing IV therapy patients to a complete range of skilled nursing services
made available to customers through contract infusion nurses who can provide
hands-on clinical support including patient assessment, advanced IV line
placement and dose administration.
Wholesale Medical Supplies/Medicare Part-B Billing. PCA distributes
disposable medical supplies, including urological, ostomy, nutritional support
and wound care products and other disposables needed in the long-term care
facility environment. In addition, PCA provides direct Medicare billing services
for certain of these product lines for patients eligible under the Medicare Part
B program (described below). As part of this service, PCA determines patient
eligibility, obtains certifications, orders products and maintains inventory on
behalf of the nursing facility. PCA also contracts to act as billing agent for
certain long-term care facilities that supply these products directly to the
patient.
Other Services. In certain markets, PCA provides respiratory therapy
products and durable medical equipment for its clients. PCA also offers its
customers a variety of computer-assisted medical records options, including
batch, pharmacy-based and in-house systems, in order to facilitate clear,
concise and up-to-date record keeping as well as flexibility. PCA continues to
review the expansion of these, as well as other, products and services that may
further enhance the ability of its long-term care facility clients to care for
their residents in a cost-effective manner.
MARKETING
PCA's business strategy includes marketing its pharmacy products and
services primarily to long-term care facility owners, operators, administrators
and directors of nursing, and managed care companies. PCA markets and sells
these products and services both to Beverly-owned or operated facilities and to
long-term care facilities owned or operated by others. Price, quality and range
of services offered are the primary factors in selection of a pharmacy provider.
Consequently, PCA seeks to provide a fully integrated package of high-quality,
cost-competitive services emphasizing careful attention to detail, accurate
handling and prompt delivery of pharmacy orders, sophisticated information
management technology and management reporting, and customized tailoring of
programs and services to each client's needs. After PCA has established a
relationship with a client, PCA then attempts to develop the relationship
further by expanding the range of services it provides to the client or the
patient by cross-marketing its other products and services.
PURCHASING
PCA purchases its pharmaceutical supplies from several wholesale
distributors, primarily Bergen Brunswig Corporation ("Bergen Brunswig"). PCA
typically evaluates its major purchasing contracts annually; such contracts
generally have a one-year term, although certain components may extend for as
long as three years. PCA has numerous sources of supply available to it and has
not experienced any difficulty in obtaining pharmaceuticals or other products
and supplies in the conduct of its business. In early 1997 PCA renegotiated its
primary wholesale drug purchasing contract with Bergen Brunswig to reduce the
cost of its drug and medical supply purchases.
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CUSTOMERS
PCA principally serves long-term care facilities and their residents,
subacute and transitional care units, long-term acute care hospitals, home care
providers, psychiatric facilities, correctional facilities, assisted living
facilities, retirement homes and workers' compensation payors such as insurance
companies and managed care organizations. As of March 31, 1997, PCA had
contracts to serve approximately 2,500 long-term care facilities with
approximately 190,000 beds.
Pharmacy services and products are currently provided to Beverly long-term
care facilities and their patients pursuant to certain contracts between PCA and
Beverly. Beverly facilities accounted for approximately 17%, 16%, 16% and 31% of
PCA's total net revenues for the three months ended March 31, 1997 and for the
years ended December 31, 1996, 1995 and 1994, respectively. Patients in Beverly
facilities accounted for approximately 16%, 15%, 20% and 32% of PCA's revenues
for the three months ended March 31, 1997 and for the years ended December 31,
1996, 1995 and 1994, respectively. PCA has traditionally entered into contracts
with Beverly long-term care facilities to provide pharmacy, pharmacy consulting
and infusion therapy services and healthcare products on a facility-by-facility
basis, with each facility largely determining for itself the extent and range of
pharmacy products and services to be supplied by PCA. See "Relationship Between
PCA and Beverly." Beverly and Capstone have agreed to negotiate a preferred
provider agreement pursuant to which the Surviving Corporation will provide
pharmacy products and related services to New Beverly facilities. See
"Post-Closing Arrangements -- Preferred Provider Agreement." Any material loss
of business from New Beverly would have a material adverse effect on the
Surviving Corporation.
COMPETITION
By its nature, the long-term care pharmacy business is highly regionalized
and within a given geographic region of operations, highly competitive. In the
geographic regions it serves, PCA competes with numerous local retail
pharmacies, local and regional institutional pharmacies, chain retail
pharmacies, and pharmacies owned by long-term care facilities (regional and
national) other than Beverly. PCA competes in this market on the basis of price
and cost-effectiveness as well as quality of service and the increasingly
comprehensive and specialized nature of its services along with the
pharmaceutical technology and professional support it offers. PCA believes that
it maintains its competitive advantage over most of its competitors due to its
ability to take advantage of high volume discount buying and thus compete on
price, its integrated systems, and its technological advancements.
REIMBURSEMENT AND BILLING
PCA's computerized billing system enables it to bill for products and
services in a variety of ways. Pharmacy services and supplies are billed to the
long-term care facility, directly to the patient or to a governmental agency or
other third party payor using itemized statements which detail patient charges.
PCA receives reimbursement from the Medicaid and Medicare programs, and
from nursing homes, individual residents (private pay), and other payors such as
third-party insurers. For the year ended December 31, 1996, PCA's payor mix was
approximately as follows: Medicaid -- 31%; Medicare -- 6%; nursing homes -- 39%;
private pay -- 4%; and insurers and others -- 20%.
Private Pay. For those patients who are not covered by
government-sponsored programs or private insurance, PCA generally directly bills
the patient or the patient's responsible party on a monthly basis. Depending
upon local market practices, PCA may alternatively bill private patients through
the nursing facility. Pricing for private pay patients is based on prevailing
regional market rates or "usual and customary" charges.
Medicaid. For patients eligible for Medicaid, PCA directly bills the
individual state Medicaid program. Medicaid programs are funded jointly by the
federal government and individual states and are administered by the states. The
reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by HCFA and applicable federal law.
Federal regulations and the regulations of certain states establish "upper
limits" for reimbursement for prescription drugs under Medicaid. In most states,
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pharmacy services are priced at the lower of "usual and customary" charges or
cost (which generally is defined as a function of average wholesale price and
may include a profit percentage) plus a dispensing fee. In addition, most states
establish a fixed dispensing fee which is adjusted to reflect associated costs
on an annual or less frequent basis. From January 1, 1991 through December 31,
1994, certain federal legislation prohibited states and HCFA from reducing
either the product cost component or the dispensing fee component of Medicaid
pharmacy reimbursement for drugs dispensed to Medicaid beneficiaries other than
under certain managed care arrangements. Although this legislation has expired,
certain states have begun to revise such regulations which, in the future, could
have a material adverse effect on PCA. To date, however, such revised state
regulations have not had such an effect on PCA.
State Medicaid programs generally have long-established programs for
reimbursement which have been revised and refined over time and have not had a
material adverse effect on the pricing policies or receivables collection for
nursing home pharmacy services. Any future changes in such reimbursement
programs or in regulations relating thereto, such as reductions in the allowable
reimbursement levels or the timing of processing of payments, could adversely
affect PCA's business.
Medicare Part A. Medicare Part A requires nursing facilities to submit all
of their costs for patient care, including pharmaceutical costs, in a unified
bill. Thus, fees for pharmaceuticals provided to Medicare Part A patients are
paid to PCA by the nursing facility on a monthly basis. Pricing is consistent
with that of private pay patients or is set between private pay rates and
Medicaid minimums. Medicare Part A has a cost-sharing arrangement under which
beneficiaries must pay a portion of their costs. These non-covered co-payments
are billed by the facility directly to patients, private insurance companies or
the state Medicaid plan, as the case may be.
Medicare Part B. Medicare Part B provides benefits covering, among other
things, outpatient treatment, physicians' services, durable medical equipment
("DME"), orthotics, prosthetic devices and medical supplies. Products and
services covered for Part B eligible residents in the nursing home include, but
are not limited to, enteral feeding products, ostomy supplies, urological
products, orthotics, prosthetics, surgical dressings, tracheotomy care supplies
and a limited number of other medical supplies. All claims for DME, prosthetics,
orthotics, prosthetic devices, including enteral therapy, and medical supplies
("DMEPOS") are submitted to and paid by four regional carriers known as Durable
Medical Equipment Regional Carriers ("DMERCs"). The DMERCs establish coverage
guidelines, allowable utilization frequencies, and billing procedures for
DMEPOS. Payment is based on a fee schedule, which varies depending on the state
in which the patient receiving the services resides. Payments for Medicare Part
B products to eligible suppliers, which include nursing facilities and suppliers
such as PCA, are made on a per-item basis directly to the supplier. Suppliers
eligible to receive Medicare Part B reimbursement must meet certain conditions
set by the federal government in order to be eligible to receive Medicare Part B
payments. PCA, as an eligible supplier, will either directly bill Medicare for
Part B covered products for each patient, or, alternatively, assist the
long-term care facility in meeting Part B eligibility requirements and prepare
bills on behalf of the facility. Medicare Part B also has an annual deductible
as well as a co-payment obligation on behalf of the patient and the portion not
covered by Medicare is billed directly to the patient or appropriate secondary
payor.
Third Party Insurance. Third-party insurance includes funding for patients
covered by private plans veterans' benefits, workers' compensation and other
programs. The patient's individual insurance plan is billed monthly, and rates
are consistent with those for other private pay patients.
Long-term Care Facilities. In addition to occasional private patient
billings and those related to drugs for Medicare eligible patients, long-term
care facilities are billed directly for consulting services, certain over-
the-counter medications and bulk house supplies.
For information concerning the impact of national healthcare reform on
reimbursement and billing, see "-- Governmental Regulation."
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QUALITY ASSURANCE, TRAINING AND EDUCATION AND TECHNOLOGICAL INNOVATIONS
Integral to maintaining its position as a leading institutional pharmacy
provider is PCA's commitment to the continuous improvement of its services by
maintaining its high professional and technological standards.
Quality Assurance. In 1990, PCA's pharmacies first received accreditation
from the JCAHO. JCAHO is a professional, nonprofit organization dedicated to
improving the quality of care provided in both healthcare facilities and in the
home. As of March 31, 1997, 37 of PCA's pharmacies had received JCAHO Long-Term
Care Pharmacy accreditation, and 15 pharmacies had applications pending to
receive such accreditation. PCA's pharmacies were among the first long-term care
pharmacies to be accredited by JCAHO. To attain and retain accreditation, PCA
pharmacies must be in constant compliance with JCAHO's stringent requirements.
In addition, PCA also conducts various seminars and professional enrichment
programs for its pharmacy managers, pharmacists and other members of PCA's
professional staff, including employees who are members of PCA's continuous
quality improvement teams mandated by JCAHO. PCA publishes a quarterly program
booklet detailing the scheduling of the programs, as well as a description of
the programs offered, which may include such programs as Patient/Client Pharmacy
Plan of Care, Business Ethics, Consultant Assistants: Training for Technicians,
Controlled Substances, Developing Collaborative Relationships, and Managing
within the Law. PCA utilizes its video-teleconferencing network to conduct its
professional enrichment programs in the 33 states in which it operates. PCA also
periodically conducts surveys of customers through outside survey consultants,
as well as directly soliciting customer evaluations regarding product and
service quality.
Training and Education. PCA believes that fundamental to the consultant
pharmacist services that it provides is the quality of the pharmacists employed
by PCA. PCA presents periodic information and training seminars for its
consultant pharmacists and other pharmacy employees. PCA's 187 pharmacist
consultants regularly participate in product education programs using PCA's
video-teleconferencing network. PCA's professional staff routinely participate
in a professional enrichment program, also using this network.
Technological Innovations. PCA believes that a more organized,
sophisticated and demanding market place makes competitive performance at the
pharmacy level even more critical. Accordingly, PCA has committed to improving
pharmacy performance through technological innovation and training, and by
improving the quality of its management information systems. The
video-teleconferencing network, installed in each of PCA's pharmacies,
facilitates company-wide training and enhanced communication, and lowers
travel-related costs. In its consultant pharmacist services, PCA has also
implemented a proprietary drug regimen review information management system,
entitled PCA Consultware(TM). This program assists the consultant pharmacist in
producing high quality, concise and updated drug therapy recommendations to
physicians and nurses, enables the consultant to track providers' responses to
recommendations, generates quality assurance reports for the customer on drug
usage sorted by facility, physician or certain drug classes and generates
internal reports for PCA management on the consultant's professional
performance. This program is linked to and usable with other software tools
available in the field to each consultant pharmacist, such as disease management
protocols, pharmacokinetic dosing formulas, data collection forms for drug usage
evaluation projects and reports to facilities and payors on reductions in drug
costs secondary to certain drug therapy recommendations.
GOVERNMENT REGULATION
Long-term care pharmacies, as well as the long-term care facilities they
serve, are subject to extensive federal, state and local laws and regulations.
These laws and regulations cover required qualifications, day-to-day operations,
reimbursement and the documentation of activities. PCA continuously monitors the
effects of regulatory activity on its operations.
Licensure, Certification and Regulation. States generally require that
companies operating a pharmacy within that state be licensed by the state board
of pharmacy. PCA currently has pharmacy licenses in each state in which it
operates a pharmacy. PCA's mail service pharmacy is licensed to dispense
medications and supplies in all 50 states. In addition, PCA's pharmacies are
registered with the appropriate state and federal authorities pursuant to
statutes governing the regulation of controlled substances.
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Long-term care facilities are also separately required to be licensed in
the states in which they operate and, if serving Medicare or Medicaid patients,
must be certified to be in compliance with applicable program participation
requirements. Long-term care facilities are also subject to the long-term care
facility reforms of OBRA, which impose strict compliance standards relating to
the quality of care for long-term care operations, including vastly increased
documentation and reporting requirements. In addition, pharmacists, nurses and
other health professionals who provide services on PCA's behalf are, in most
cases, required to obtain and maintain professional licenses and are subject to
state regulation regarding professional standards of conduct.
Federal and State Laws Affecting the Repackaging, Labeling and Interstate
Shipping of Pharmaceuticals. Federal and state laws impose certain repackaging,
labeling and package insert requirements on pharmacies that repackage
pharmaceuticals for distribution beyond the regular practice of dispensing or
selling drugs directly to patients at retail. A pharmaceutical repackager must
register with the FDA. Beverly management believes that PCA holds all required
registrations and licenses and that PCA's repackaging operations are in
compliance with applicable state and federal requirements.
Medicare and Medicaid. The long-term care facility pharmacy business
operates under regulatory and cost containment pressures from state and federal
legislation primarily affecting Medicaid and, to a lesser extent, Medicare.
The Medicare program establishes certain requirements for participation of
providers and suppliers in the Medicare program. Pharmacies are not subject to
such certification requirements. Skilled long-term care facilities and suppliers
of DMEPOS, however, are subject to specified standards. Failure to comply with
these requirements and standards may adversely affect an entity's ability to
participate in the Medicare program and receive reimbursement for services
provided to Medicare beneficiaries. See "-- Reimbursement and Billing."
Federal law and regulations contain a variety of requirements relating to
the furnishing of prescription pharmaceuticals under Medicaid. First, states are
given broad authority, subject to certain standards, to limit or to specify
conditions as to the coverage of particular drugs. Second, federal Medicaid law
establishes standards affecting pharmacy practice. These standards include
general requirements relating to patient counseling and drug utilization review
and more specific requirements for long-term care facilities relating to drug
regimen reviews for Medicaid patients in such facilities. Recent regulations
clarify that, under federal law, a pharmacy is not required to meet the general
standards for pharmaceuticals dispensed to long-term care facility residents if
the long-term care facility complies with the drug regimen review requirements.
However, the regulations indicate that states may nevertheless require
pharmacies to comply with the general standards, regardless of whether the
long-term care facility satisfies the drug regimen review requirements, and the
states in which PCA operates currently require its pharmacies to comply
therewith. Third, federal regulations impose certain requirements relating to
reimbursement for prescription pharmaceuticals furnished to Medicaid residents.
See "-- Reimbursement and Billing -- Medicaid."
In addition to requirements imposed by federal law, states have substantial
discretion to determine administrative, coverage, eligibility and payment
policies under their state Medicaid programs which may affect PCA's operations.
For example, some states have enacted "freedom of choice" requirements which
prohibit a long-term care facility from requiring its residents to purchase
pharmacy or other ancillary medical services or supplies from particular
providers that deal with the long-term care facility. Such limitations may
increase the competition which PCA faces in providing services to long-term care
facility patients.
Referral Restrictions. PCA is subject to federal and state laws which
govern financial and other arrangements between healthcare providers. These laws
include the federal anti-kickback statute, which was originally enacted in 1977
and amended in 1987, and which prohibits, among other things, knowingly and
willfully soliciting, receiving, offering or paying any remuneration directly or
indirectly in return for or to induce the referral of an individual to a person
for the furnishing of any item or service for which payment may be made in whole
or in part under Medicare or Medicaid. Many states have enacted similar statutes
which are not necessarily limited to items and services for which payment is
made by Medicare or Medicaid. Violations of these laws may result in fines,
imprisonment and exclusion from the Medicare and Medicaid programs or other
state-funded programs. Federal and state court decisions interpreting these
statutes are limited, but have
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generally construed the statutes to apply if "one purpose" of remuneration is to
induce referrals or other conduct within the statute.
Federal regulations establish "Safe Harbors," which grant immunity from
criminal or civil penalties to parties in good faith compliance. While the
failure to satisfy all the criteria for a specific Safe Harbor does not
necessarily mean that an arrangement violates the statute, the arrangement is
subject to review by the Office of Inspector General ("OIG") of the Department
of Health and Human Services, which is charged with administering the federal
anti-kickback statute. There are no procedures for obtaining binding
interpretations or advisory opinions from the OIG on the application of the
federal anti-kickback statute to an arrangement or its qualification for a Safe
Harbor upon which PCA can rely.
The OIG has issued "Fraud Alerts" identifying certain questionable
arrangements and practices which it believes may have implications under the
federal anti-kickback statute. The OIG has issued a Fraud Alert providing its
views on certain joint venture and contractual arrangements between healthcare
providers. The OIG has recently issued a Fraud Alert concerning prescription
pharmaceutical marketing practices that could potentially violate the federal
anti-kickback statute. Pharmaceutical marketing activities may implicate the
federal anti-kickback statute because drugs are often reimbursed under the
Medicaid program. According to the Fraud Alert, examples of practices that may
implicate the statute include certain arrangements under which remuneration is
made to pharmacists to recommend the use of a particular pharmaceutical product.
In addition, a number of states have recently undertaken enforcement
actions against pharmaceutical manufacturers involving pharmaceutical marketing
programs, including programs containing incentives to pharmacists to dispense
one particular product rather than another. These enforcement actions arise
under state consumer protection laws which generally prohibit false advertising,
deceptive trade practices and the like. Further, a number of the states involved
in these enforcement actions have requested that the Food and Drug
Administration ("FDA") exercise greater regulatory oversight in the area of
pharmaceutical promotional activities by pharmacists. It is not possible to
determine whether the FDA will act in this regard or what effect, if any, FDA
involvement would have on PCA's operations.
PCA believes its contract arrangements with other healthcare providers, its
pharmaceutical suppliers and its pharmacy practices are in compliance with these
laws. There can be no assurance that such laws will not, however, be interpreted
in the future in a manner inconsistent with PCA's interpretation and
application.
PROPERTIES
PCA's principal executive offices are presently located in approximately
15,000 square feet of leased office space in Tampa, Florida, at an annual rent
of approximately $149,000 adjusted bi-annually as provided for in the lease
until lease expiration in 2003. Its Longmont, Colorado office, where billing and
collection activities are conducted, consists of approximately 24,800 square
feet of leased office space, at an annual rent of approximately $204,000
adjusted annually based on consumer price index changes until lease expiration
in 1999.
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With respect to pharmacies, PCA typically leases space in industrial parks
with easy access to a given community's network of freeways and roads to
facilitate pharmacy delivery schedules. As of March 31, 1997, PCA operated 73
licensed pharmacies in 28 states, as listed below, with each noted city having
one pharmacy except where indicated otherwise:
<TABLE>
<S> <C> <C>
Birmingham, AL Smyrna,GA Columbus, OH
Daphne, AL Hilo, HI Twinsburg, OH
North Little Rock, AR Honolulu, HI(3) Oklahoma City, OK
Winslow, AZ Kahului, HI Tulsa, OK
Fresno, CA Kailua, HI Colmar, PA
Irvine, CA Kaneohe,HI Harrisburg, PA
Los Angeles, CA Kihei, HI Warwick, RI
Rancho Mirage, CA Waianae, HI Rapid City, SD(2)
Stockton, CA Wailuku, HI Sioux Falls, SD
Union City, CA Indianapolis, IN(2) Memphis, TN
Van Nuys, CA Lenexa, KS Austin, TX
Broomfield, CO Wichita, KS Beaumont, TX
Berlin, CT Louisville, KY Grand Prairie, TX
Boynton Beach, FL Brockton, MA Houston, TX(2)
Jacksonville, FL West Springfield, MA Irving, TX
Longwood, FL Beltsville, MD San Antonio, TX
Miami Lakes, FL Fridley, MN Tyler, TX
Naples, FL St. Louis, MO Waco, TX
Tallahassee, FL Jackson, MS Kent, WA
Tampa, FL(2) Greensboro, NC(2) Tri-Cities, WA
Augusta, GA Lincoln, NE Glendale, WI
Macon, GA Omaha, NE Madison, WI
</TABLE>
EMPLOYEES
As of March 31, 1997, PCA employed approximately 3,500 employees on a
full-time basis, including approximately 700 licensed pharmacists and 800
pharmacy technicians. Management believes that PCA's employees are highly
motivated and committed to PCA's key values, and that its relations with its
employees are excellent. None of PCA's employees are covered by a collective
bargaining agreement.
LEGAL PROCEEDINGS
There are various lawsuits and regulatory actions pending against PCA
arising in the normal course of business, some of which seek punitive damages.
PCA does not believe that the ultimate resolution of these matters will have a
material adverse effect on its consolidated financial position, results of
operations or cash flows.
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INFORMATION CONCERNING BEVERLY
BEVERLY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table of selected financial data should be read in
conjunction with Beverly's consolidated financial statements and related notes
thereto included elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AT OR FOR
THE THREE MONTHS ENDED AT OR FOR
MARCH 31, THE YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net operating revenues.......... $ 816,716 $ 811,047 $ 3,267,189 $ 3,228,553 $ 2,969,239 $ 2,884,451 $ 2,607,756
Interest income................. 3,565 3,460 13,839 14,228 14,578 15,269 14,502
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues.......... 820,281 814,507 3,281,028 3,242,781 2,983,817 2,899,720 2,622,258
Costs and expenses:
Operating and administrative:
Wages and related........... 449,782 449,995 1,819,500 1,736,151 1,600,580 1,593,410 1,486,191
Other....................... 289,930 293,484 1,139,442 1,224,681 1,114,916 1,069,536 921,750
Interest...................... 22,716 23,145 91,111 84,245 64,792 66,196 70,943
Depreciation and
amortization................ 27,081 25,056 105,468 103,581 88,734 82,938 80,226
Impairment of long-lived
assets:
Adoption of SFAS No. 121.... -- -- -- 68,130 -- -- --
Development and other
costs..................... -- -- -- 32,147 -- -- --
Restructuring costs........... -- -- -- -- -- -- 57,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total costs and
expenses.............. 789,509 791,680 3,155,521 3,248,935 2,869,022 2,812,080 2,616,110
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes,
extraordinary charge and
cumulative effect of change in
accounting for income taxes... 30,772 22,827 125,507 (6,154) 114,795 87,640 6,148
Provision for income taxes...... 12,309 9,131 73,481 1,969 37,882 29,684 4,203
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary charge and
cumulative effect of change in
accounting for income taxes... 18,463 13,696 52,026 (8,123) 76,913 57,956 1,945
Extraordinary charge, net of
income taxes of $1,099 in
1996, $1,188 in 1994, $1,155
in 1993 and $5,415 in 1992.... -- -- (1,726) -- (2,412) (2,345) (8,835)
Cumulative effect of change in
accounting for income taxes... -- -- -- -- -- -- (5,454)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............... $ 18,463 $ 13,696 $ 50,300 $ (8,123) $ 74,501 $ 55,611 $ (12,344)
=========== =========== =========== =========== =========== =========== ===========
Net income (loss) applicable to
common shares................. $ 18,463 $ 13,696 $ 50,300 $ (14,998) $ 66,251 $ 31,173 $ (13,344)
=========== =========== =========== =========== =========== =========== ===========
Income (loss) per share of
common stock:
Before redemption premium on
preferred stock,
extraordinary charge and
cumulative effect of change
in accounting for income
taxes....................... $ .19 $ .14 $ .52 $ (.16) $ .79 $ .66 $ .01
Redemption premium on
preferred stock............. -- -- -- -- -- (.25) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Before extraordinary charge
and cumulative effect of
change in accounting for
income taxes................ .19 .14 .52 (.16) .79 .41 .01
Extraordinary charge.......... -- -- (.02) -- (.03) (.03) (.11)
Cumulative effect of change in
accounting for income
taxes....................... -- -- -- -- -- -- (.07)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............. $ .19 $ .14 $ .50 $ (.16) $ .76 $ .38 $ (.17)
=========== =========== =========== =========== =========== =========== ===========
Shares used to compute per share
amounts....................... 99,411,000 99,978,000 99,646,000 92,233,000 87,087,000 81,207,000 77,685,000
CONSOLIDATED BALANCE SHEET DATA:
Total assets.................... $ 2,582,398 $ 2,510,446 $ 2,525,082 $ 2,506,461 $ 2,322,578 $ 2,000,804 $ 1,859,361
Current portion of long-term
obligations................... 36,361 37,447 38,826 84,639 60,199 43,125 30,466
Long-term obligations, excluding
current portion............... 1,119,865 1,083,775 1,106,256 1,066,909 918,018 706,917 712,896
Stockholders' equity............ 881,327 835,610 861,095 820,333 827,244 742,862 593,505
OTHER DATA:
Patient days.................... 5,667,000 6,046,000 23,670,000 25,297,000 26,766,000 29,041,000 29,341,000
Average occupancy percentage
(based on licensed beds)...... 86.6% 87.4% 87.4% 88.1% 88.5% 88.5% 88.4%
Number of nursing home beds..... 70,623 73,432 71,204 75,669 78,058 85,001 89,298
</TABLE>
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BEVERLY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Healthcare system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for both federal and state governments.
Although no comprehensive healthcare, Medicare or Medicaid reform legislation
has yet been implemented, pressures to contain costs and the active discussions
between the Clinton Administration, Congress and various other groups have
impacted the healthcare delivery system. Many states are experimenting with
alternatives to traditional Medicaid delivery systems through federal waiver
programs, and efforts to provide these services more efficiently will continue
to be a priority. In August 1996, Congress passed the Health Insurance
Portability and Accountability Act of 1996 which, among other things, provides
favorable changes in the tax treatment of long-term care insurance and allows
inclusion of long-term care insurance in medical savings accounts. Although
Beverly believes this legislation will have a favorable impact on the long-term
care industry, the full effect is not readily determinable. There can be no
assurances made as to the ultimate impact of this, or future healthcare reform
legislation, on Beverly's financial position, results of operations or cash
flows. However, future federal budget legislation and regulatory changes may
negatively impact Beverly.
During the first quarter of 1997, proposed rules were issued by the Health
Care Financing Administration of the Department of Health and Human Services
which, if implemented in their proposed form, would establish guidelines for
maximum reimbursement to skilled nursing facilities for contracted speech and
occupational therapy services, based on equivalent salary amounts for on-staff
therapists. In addition, these proposed rules would revise the salary
equivalency rules already in effect for physical therapy services. The full
effect of the new rules is not readily determinable as the details of the
proposal have not yet been finalized; however, Beverly does not expect this to
have a material adverse effect on its consolidated results of operations or cash
flows.
The federal government recently increased the minimum wage. This new
legislation is being rolled out in two phases. The initial increase took effect
October 1, 1996, and the final increase is scheduled to take effect September 1,
1997. This new legislation did not result in a material increase in Beverly's
wage rates in 1996, and Beverly does not anticipate a material impact on its
wage rates in 1997, since a substantial portion of Beverly's associates earn in
excess of the new minimum wage levels; however, Beverly believes there may
continue to be competitive pressures to increase the wage levels of associates
earning above the new minimum wage. The effect of the new minimum wage on
Beverly's future operations is not expected to be material as Beverly believes
that a significant portion of such increase will be reimbursed through Medicare
and Medicaid rate increases.
Beverly's future operating performance will continue to be affected by the
issues facing the long-term healthcare industry as a whole, including the
maintenance of occupancy, its ability to continue to expand higher margin
businesses, the availability of nursing, therapy and other personnel, the
adequacy of funding of governmental reimbursement programs, the demand for
nursing home care and the nature of any healthcare reform measures that may be
taken by the federal government, as discussed above, as well as by any state
governments. Beverly's ability to control costs, including its wages and related
expenses which continue to rise and represent the largest component of Beverly's
operating and administrative expenses, will also significantly impact its future
operating results.
As a general matter, increases in Beverly's operating costs result in
higher patient rates under Medicaid programs in subsequent periods. However,
Beverly's results of operations will continue to be affected by the time lag in
most states between increases in reimbursable costs and the receipt of related
reimbursement rate increases. Medicaid rate increases, adjusted for inflation,
are generally based upon changes in costs for a full calendar year period. The
time lag before such costs are reflected in permitted rates varies from state to
state, with a substantial portion of the increases taking effect up to 18 months
after the related cost increases.
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OPERATING RESULTS
First Quarter 1997 Compared to First Quarter 1996
Net income was $18,463,000 for the first quarter of 1997, as compared to
net income of $13,696,000 for the same period in 1996. Income before provision
for income taxes was $30,772,000 for the first quarter of 1997, as compared to
$22,827,000 for the same period in 1996. Beverly had an estimated annual
effective tax rate of 40% for the quarters ended March 31, 1997 and 1996.
Beverly's estimated annual effective tax rates for 1997 and 1996 were different
than the federal statutory rate primarily due to the impact of state income
taxes and amortization of nondeductible goodwill.
Net operating revenues increased approximately $5,700,000 for the first
quarter of 1997, as compared to the same period in 1996. This increase consists
of the following: increases of approximately $31,400,000 for facilities which
Beverly operated during each of the quarters ended March 31, 1997 and 1996
("same facility operations"); increases of approximately $19,600,000 related to
the acquisitions of eight nursing facilities in 1996, as well as certain
pharmacy, hospice and outpatient therapy businesses acquired in 1996 and 1997;
partially offset by decreases of approximately $45,300,000 due to the
disposition of, or lease terminations on, five nursing facilities in 1997 and 83
nursing facilities and Beverly's MedView Services unit ("MedView") in 1996.
Operating and administrative costs decreased approximately $3,800,000 for the
first quarter of 1997, as compared to the same period in 1996. This decrease
consists of the following: decreases of approximately $39,300,000 due to the
disposition of, or lease terminations on, certain nursing facilities and
MedView, as mentioned above; partially offset by increases of approximately
$17,900,000 for same facility operations and increases of approximately
$17,600,000 related to the acquisitions mentioned above.
The increase in net operating revenues for same facility operations for the
first quarter of 1997, as compared to the same period in 1996, was due to the
following: approximately $34,500,000 due primarily to increases in room and
board rates; and approximately $9,600,000 due primarily to increases in
pharmacy-related revenues and various other items. These increases in net
operating revenues were partially offset by approximately $7,100,000 due to a
decrease in same facility occupancy (based on operational beds) to 88.5% for the
first quarter of 1997, as compared to 89.8% for the same period in 1996; and
approximately $5,600,000 due to one less calendar day for the first quarter of
1997, as compared to the same period in 1996.
The increase in operating and administrative costs for same facility
operations for the first quarter of 1997, as compared to the same period in
1996, was due to the following: approximately $13,900,000 due to increased wages
and related expenses (excluding pharmacy) principally due to higher wages and
greater benefits required to attract and retain qualified personnel, the hiring
of therapists on staff as opposed to contracting for their services and
increased staffing levels in Beverly's nursing facilities to cover increased
patient acuity; approximately $6,600,000 due to increases in pharmacy-related
costs; approximately $2,100,000 due to increases in nursing supplies and other
variable costs; and approximately $6,400,000 due to various other items. These
increases in operating and administrative costs were partially offset by
approximately $11,100,000 due to a decrease in contracted therapy expenses as a
result of hiring therapists on staff as opposed to contracting for their
services.
Although depreciation and amortization expense increased only $2,000,000 as
compared to the same period in 1996, it was affected by the following:
approximately $3,000,000 increase primarily due to capital additions and
improvements, as well as, acquisitions; partially offset by a decrease of
approximately $1,000,000 related to the disposition of, or lease terminations
on, certain nursing facilities and MedView.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which is
required to be adopted in financial statements for periods ending after December
15, 1997. At that time, Beverly will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements, primary earnings per share will be renamed basic earnings per
share and will exclude the dilutive effect of stock options. The impact is not
expected to result in a change in Beverly's primary earnings per share or fully
diluted earnings per share (which will be renamed dilutive earnings per share)
for the three months ended March 31, 1997 and 1996.
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<PAGE> 139
1996 Compared to 1995
Net income was $50,300,000 for the year ended December 31, 1996, as
compared to a net loss of $8,123,000 for the same period in 1995. Net income for
1996 included a $1,726,000 extraordinary charge, net of income taxes, related to
the write-off of unamortized deferred financing costs related to certain
refinanced debt. Net loss for 1995 included a pre-tax charge of $100,277,000 for
impaired long-lived assets related primarily to the adoption of SFAS No. 121 (as
defined below) and the write-off of software and business development costs, as
well as a charge of $4,000,000 related to an overhead and staff reduction
program implemented during the fourth quarter of 1995.
Beverly had an annual effective tax rate of 59% for the year ended December
31, 1996, compared to a negative annual effective tax rate of 32% for the same
period in 1995. The annual effective tax rate in 1996 was different than the
federal statutory rate primarily due to the impact of nondeductible goodwill
associated with the sale of Beverly's MedView Services unit ("MedView"). In
addition, the annual effective tax rate in 1995 was different than the federal
statutory rate primarily due to the impact of nondeductible goodwill included in
the adjustments resulting from the adoption of SFAS No.121. At December 31,
1996, Beverly had general business tax credit carryforwards of $12,236,000 for
income tax purposes which expire in years 2005 through 2011. For financial
reporting purposes, the general business tax credit carryforwards have been
utilized to offset existing net taxable temporary differences reversing during
the carryforward periods.
Net operating revenues increased approximately $38,600,000 for the year
ended December 31, 1996, as compared to the same period in 1995. This increase
consists of the following: increases of approximately $62,300,000 for facilities
which Beverly operated during each of the years ended December 31, 1996 and 1995
("same facility operations"); increases of approximately $91,700,000 related to
the acquisition of PMSI in mid-1995, acquisitions of eight nursing facilities,
and certain pharmacy, hospice and outpatient therapy businesses during 1996 and
the expanded operations of American Transitional Hospitals, Inc. ("ATH");
partially offset by decreases of approximately $115,400,000 due to the
disposition of, or lease terminations on, 83 nursing facilities and MedView in
1996 and 29 nursing facilities in 1995. Operating and administrative costs
decreased approximately $1,900,000 for the year ended December 31, 1996, as
compared to the same period in 1995. This decrease consists of the following:
decreases of approximately $114,200,000 due to the disposition of, or lease
terminations on, 83 nursing facilities and MedView in 1996 and 29 nursing
facilities in 1995; offset by increases of approximately $39,000,000 for same
facility operations and increases of approximately $73,300,000 related to the
acquisition of PMSI in mid-1995, acquisitions of eight nursing facilities, and
certain pharmacy, hospice and outpatient therapy businesses during 1996 and the
expanded operations of ATH.
The increase in net operating revenues for same facility operations for the
year ended December 31, 1996, as compared to the same period in 1995, was due to
the following: approximately $110,500,000 due primarily to increases in room and
board rates; and approximately $5,600,000 due to one additional calendar day for
the year ended December 31, 1996, as compared to the same period in 1995. These
increases in net operating revenues were partially offset by approximately
$28,500,000 due to a decrease in same facility occupancy to 87.7% for the year
ended December 31, 1996, as compared to 88.9% for the same period in 1995;
approximately $19,700,000 due to decreases in ancillary revenues primarily due
to Beverly's continuing efforts to bring therapists on staff as opposed to
contracting for their services; and approximately $5,600,000 due to various
other items.
The increase in operating and administrative costs for same facility
operations for the year ended December 31, 1996, as compared to the same period
in 1995, was due to the following: approximately $109,000,000 due to increased
wages and related expenses (excluding pharmacy) principally due to higher wages
and greater benefits required to attract and retain qualified personnel, the
hiring of therapists on staff as opposed to contracting for their services and
increased staffing levels in Beverly's nursing facilities to cover increased
patient acuity; approximately $8,300,000 due to increases in nursing supplies
and other variable costs; and approximately $19,100,000 due to various other
items. These increases in operating and administrative costs were partially
offset by approximately $93,400,000 due to a decrease in contracted therapy
expenses
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<PAGE> 140
as a result of hiring therapists on staff as opposed to contracting for their
services; and approximately $4,000,000 due to an overhead and staff reduction
program implemented during the fourth quarter of 1995.
Interest expense increased approximately $6,900,000 as compared to the same
period in 1995 primarily due to the exchange of Preferred Stock into 5 1/2%
Convertible Subordinated Debentures in November 1995, the issuance and
assumption of approximately $40,000,000 of long-term obligations in conjunction
with certain acquisitions and the issuance of $25,000,000 of taxable revenue
bonds during 1995, partially offset by a reduction of approximately $52,800,000
of long-term obligations in conjunction with the disposition of certain
facilities. Although depreciation and amortization expense increased only
$1,900,000 as compared to the same period in 1995, it was affected by the
following: approximately $5,800,000 increase primarily due to capital additions
and improvements and, to a lesser extent, acquisitions; partially offset by a
decrease of approximately $3,900,000 related to the disposition of, or lease
terminations on, certain nursing facilities.
1995 Compared to 1994
Net loss was $8,123,000 for the year ended December 31, 1995, as compared
to net income of $74,501,000 for the same period in 1994. Net loss for 1995
included a pre-tax charge of $100,277,000 for impaired long-lived assets related
primarily to the adoption of SFAS No. 121 (as defined below) and the write-off
of software and business development costs, as well as a charge of $4,000,000
related to an overhead and staff reduction program implemented during the fourth
quarter of 1995. Net income for 1994 included a $2,412,000 extraordinary charge,
net of income taxes, related to the write-off of unamortized deferred financing
costs related to certain refinanced debt.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amounts. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount.
In the fourth quarter of 1995, Beverly recorded an impairment loss of
approximately $68,130,000 upon adoption of SFAS No. 121. Such loss primarily
related to certain nursing facilities, transitional hospitals, institutional
pharmacies and assisted living centers with current period operating losses.
Such current period operating losses, combined with a history of operating
losses and anticipated future operating losses, led management to believe that
impairment existed at such facilities. In addition, there were certain nursing
facilities for which management expected an adverse impact on future earnings
and cash flows as a result of recent changes in state Medicaid reimbursement
programs. Accordingly, management estimated the undiscounted future cash flows
to be generated by each facility. If the undiscounted future cash flow estimates
were less than the carrying value of the corresponding facility, management
estimated the fair value of such facility and wrote the carrying value down to
their estimate of fair value. Management calculated the fair value of the
impaired facilities by using the present value of estimated future cash flows,
or its best estimate of what such facility, or similar facilities in that state,
would sell for in the open market. Management believes it has the knowledge to
make such estimates of open market sales prices based on the volume of
facilities Beverly has purchased and sold in previous years.
In addition to the SFAS No. 121 charge, Beverly recorded a fourth quarter
impairment loss for other long-lived assets of approximately $32,147,000
primarily related to the write-off of software and business development costs.
During the fourth quarter of 1995, Beverly hired a new Senior Vice President of
Information Technology, who redirected Beverly's systems development
initiatives, causing a write-down, or a write-off, of certain software and
software development projects. In addition, Beverly wrote off certain business
development and other costs where Beverly believed the carrying amount was
unrecoverable.
Beverly had a negative annual effective tax rate of 32% for the year ended
December 31, 1995, compared to an annual effective tax rate of 33% for the same
period in 1994. The annual effective tax rate in 1995 was different than the
federal statutory rate primarily due to the impact of nondeductible goodwill
included in the adjustments resulting from the adoption of SFAS No. 121. In
addition, the 1994 annual effective tax rate was lower than the federal
statutory rate primarily due to the utilization of certain tax credit
carryforwards, partially offset by the impact of state income taxes. At December
31, 1995, Beverly had general business tax
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credit carryforwards of $20,784,000 for income tax purposes which expire in
years 2005 through 2009. For financial reporting purposes, the general business
tax credit carryforwards have been utilized to offset existing net taxable
temporary differences reversing during the carryforward periods. Due to taxable
losses in prior years, future taxable income was not assumed and a valuation
allowance of $198,000 for the year ended December 31, 1994 was recognized to
offset the deferred tax assets related to those carryforwards. The valuation
allowance was eliminated in 1995 due to the utilization of general business tax
credits.
Net operating revenues and operating and administrative costs increased
approximately $259,300,000 and $245,300,000, respectively, for the year ended
December 31, 1995, as compared to the same period in 1994. These increases
consist of the following: increases in net operating revenues and operating and
administrative costs for facilities which Beverly operated during each of the
years ended December 31, 1995 and 1994 ("same facility operations") of
approximately $157,600,000 and $148,900,000, respectively; increases in net
operating revenues and operating and administrative costs of approximately
$239,500,000 and $222,400,000, respectively, related to the expanded operations
of ATH and the acquisitions of Insta-Care and Synetic in late 1994 as well as
PMSI in mid-1995; and decreases in net operating revenues and operating and
administrative costs of approximately $137,800,000 and $126,000,000,
respectively, due to the disposition of, or lease terminations on, 29 facilities
in 1995 and 77 facilities in 1994.
The increase in net operating revenues for same facility operations for the
year ended December 31, 1995, as compared to the same period in 1994, was due to
the following: approximately $111,800,000 due primarily to increases in Medicaid
room and board rates, and to a lesser extent, private and Medicare room and
board rates; approximately $37,500,000 due primarily to increases in
pharmacy-related revenues; approximately $23,000,000 due to increased ancillary
revenues as a result of providing additional ancillary services to Beverly's
Medicare and private-pay patients; and approximately $8,300,000 due to various
other items. These increases in net operating revenues were partially offset by
approximately $23,000,000 due to a decrease in same facility occupancy to 88.5%
for the year ended December 31, 1995, as compared to 89.5% for the same period
in 1994.
The increase in operating and administrative costs for same facility
operations for the year ended December 31, 1995, as compared to the same period
in 1994, was due to the following: approximately $125,700,000 due to increased
wages and related expenses (excluding pharmacy) principally due to higher wages
and greater benefits required to attract and retain qualified personnel, the
hiring of therapists on staff as opposed to contracting for their services and
increased staffing levels in Beverly's nursing facilities to cover increased
patient acuity; approximately $4,000,000 due to an overhead and staff reduction
program implemented during the fourth quarter of 1995; approximately $38,100,000
due to increases in nursing supplies and other variable costs; and approximately
$38,800,000 due primarily to increases in pharmacy-related costs and various
other items. These increases in operating and administrative costs were
partially offset by approximately $57,700,000 due to a decrease in contracted
therapy expenses as a result of hiring therapists on staff as opposed to
contracting for their services.
Interest expense increased approximately $19,500,000 as compared to the
same period in 1994 primarily due to additional interest related to the issuance
of approximately $308,000,000 of long-term obligations during late 1994 and in
1995 primarily in conjunction with certain acquisitions. Depreciation and
amortization expense increased approximately $14,800,000 as compared to the same
period in 1994 primarily due to acquisitions, capital additions and improvements
and the opening of newly constructed facilities, partially offset by a decrease
due to the dispositions of, or lease terminations on, certain facilities.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Beverly had approximately $64,100,000 in cash and cash
equivalents and net working capital of approximately $327,300,000. Beverly
anticipates that approximately $19,600,000 of its existing cash at March 31,
1997, while not legally restricted, will be utilized to fund certain workers'
compensation and general liability claims, and Beverly does not expect to use
such cash for other purposes. Beverly had approximately $162,800,000 of unused
commitments under its Revolver/Letter of Credit Facility as of March 31, 1997.
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Net cash provided by operating activities for the first quarter of 1997 was
approximately $42,100,000, an increase of approximately $11,400,000 from the
prior year. Net cash used for investing activities and net cash provided by
financing activities were approximately $58,500,000 and $10,800,000,
respectively, for the first quarter of 1997. Beverly primarily used cash
generated from operations, borrowings under its Revolver/Letter of Credit
Facility, collections on notes receivable and cash on hand to fund capital
expenditures totaling approximately $37,600,000; to fund acquisitions of
approximately $30,800,000; and to repay approximately $16,400,000 of long-term
obligations.
In June 1997, Beverly sold 49 of its skilled nursing facilities in the
state of Texas to Complete Care Services, L.P. Beverly anticipates using the net
cash proceeds generated from the sale to repay indebtedness. The operations of
these facilities are immaterial to Beverly's consolidated financial position and
results of operations.
In April 1997, Beverly entered into a definitive agreement with Capstone to
combine PCA with Capstone to create the nation's largest independent
institutional pharmacy company. Beverly will receive approximately $275,000,000
of cash as partial repayment for PCA's intercompany debt, with any remaining
intercompany balance contributed to PCA's capital. Pursuant to the Merger
Agreement, at the Effective Time each share of Beverly Common Stock issued and
outstanding immediately prior to the Effective Time (other than fractional
shares) will be converted into the right to receive that number of newly issued
shares of Capstone Common Stock equal to the quotient, expressed to four decimal
points, of (a) 50,000,000 divided by (b) the number of shares of Beverly Common
Stock outstanding immediately prior to the Effective Time. The Merger, which is
subject to approvals by the stockholders of both Beverly and Capstone,
completion of the Distribution (as discussed below), and approvals by various
government agencies, is expected to close by year-end.
In connection with the restructuring, Beverly will transfer all of its
non-PCA assets and liabilities to New Beverly in exchange for the issuance of
New Beverly Common Stock. Beverly will then distribute such New Beverly common
stock to the then current shareholders of Beverly's Common Stock on a
one-for-one basis. In connection with the Distribution, Beverly will be required
to restructure, repay or otherwise renegotiate substantially all of its
outstanding debt instruments and renegotiate or make certain payments under
various employment agreements with officers of Beverly. Beverly has not yet
determined the impact this will have on its consolidated financial position,
results of operations or cash flows.
Beverly believes that its existing cash and cash equivalents, working
capital from operations, net cash proceeds from the Texas disposition,
borrowings under its banking arrangements, issuance of certain debt securities
and refinancings of certain existing indebtedness will be adequate to repay its
debts due within one year of approximately $36,400,000 (including scheduled
sinking fund redemption requirements with respect to Beverly's 7 5/8%
convertible subordinated debentures, which may be funded in whole or in part
from time to time through open market purchases of such debentures), to make
normal recurring capital additions and improvements for the twelve months ending
March 31, 1998 of approximately $138,000,000, to make selective acquisitions,
including the purchase of previously leased facilities, to construct new
facilities, and to meet working capital requirements.
As of March 31, 1997, Beverly had total indebtedness of approximately
$1,156,200,000 and total stockholders' equity of approximately $881,300,000. The
ability of Beverly to satisfy its long-term obligations will be dependent upon
its future performance, which will be subject to prevailing economic conditions
and to financial, business and other factors beyond Beverly's control, such as
federal and state healthcare reform. In addition, healthcare service providers,
such as Beverly, operate in an industry that is currently subject to significant
changes from business combinations, new strategic alliances, legislative reform,
increased regulatory oversight, aggressive marketing practices by competitors
and market pressures. In this environment, Beverly is frequently contacted by,
and otherwise engages in discussions with, other healthcare companies and
financial advisors regarding possible strategic alliances, joint ventures,
business combinations and other financial alternatives. The terms of
substantially all of Beverly's debt instruments require Beverly to repay or
refinance indebtedness under such debt instruments in the event of a change of
control. There can be no assurance that Beverly will have the financial
resources to repay such indebtedness upon a change of control. See
" -- General."
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BEVERLY BUSINESS
GENERAL
References herein to Beverly include Beverly Enterprises, Inc. and its
wholly-owned subsidiaries, including the Institutional Pharmacy Subsidiaries to
be combined with Capstone as a result of the Merger.
The business of Beverly consists principally of providing long-term
healthcare, including the operation of nursing facilities, acute long-term
transitional hospitals, institutional and mail service pharmacies,
rehabilitation therapy services, outpatient therapy clinics, assisted living
centers, hospices and home health care centers.
Beverly is the largest operator of nursing facilities in the United States.
At March 31, 1997, Beverly operated 627 nursing facilities with 70,623 licensed
beds. The facilities are located in 32 states and the District of Columbia, and
range in capacity from 20 to 355 beds. At March 31, 1997, Beverly also operated
73 pharmacies, 33 assisted living centers containing 869 units, 11 transitional
hospitals containing 578 beds, 34 outpatient therapy clinics, 19 hospices and
six home health care centers. Beverly's facilities had average occupancy of
86.6% for the three months ended March 31, 1997 and 87.4%, 88.1% and 88.5%
during the years ended December 31, 1996, 1995 and 1994, respectively. See
"-- Properties."
Healthcare service providers, such as Beverly, operate in an industry that
is currently subject to significant changes from business combinations, new
strategic alliances, legislative reform, aggressive marketing practices by
competitors and market pressures. In this environment, Beverly is 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.
OPERATIONS
Beverly is organized into four operating units, which support Beverly's
delivery of vertically integrated services to the long-term healthcare market:
(i) Beverly Health and Rehabilitation Services, Inc. ("BHRS") and its
subsidiaries provide long-term and subacute care through the operation of
nursing facilities, assisted living centers and hospices; (ii) Spectra Rehab
Alliance, Inc. ("Spectra") and its subsidiaries operate outpatient therapy
clinics and manage Beverly's rehabilitation services business; (iii) ATH and its
subsidiaries operate Beverly's transitional hospitals; and (iv) PCA and its
subsidiaries operate Beverly's institutional, mail service and other pharmacy
businesses. Each operating unit is headed by a President who is also a senior
officer of Beverly and reports directly to the President of Beverly. Each of the
four operating units also has a separate Board of Directors consisting of four
senior executives of Beverly and the President of the unit.
Long-Term Care. Beverly'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's
highly skilled staff also offers complex and intensive medical services to
patients with higher acuity disorders outside the traditional acute care
hospital setting.
Rehabilitation Therapies. Beverly has developed and expanded its healthcare
expertise in rehabilitation and provides skilled rehabilitation (occupational,
physical, speech and respiratory) therapies in substantially all of its nursing
facilities. Through Spectra, Beverly offers industrial rehabilitation,
outpatient therapy clinics, acute hospital therapy contracts and
management/consulting rehabilitation programs within Beverly's network of
facilities and to other healthcare providers.
Transitional Care. Beverly operates transitional hospitals which address
the needs of patients requiring intense therapy regimens, but not necessarily
the breadth of services provided within traditional acute care hospitals. The
typical ATH patient requires an average of six hours of nursing care per day for
30 to 45 days.
Pharmacy Services. PCA is one of the nation's largest institutional
pharmacies delivering drugs and related products and services, infusion therapy
and other healthcare products (enteral and urological) to nursing facilities,
acute care and transitional care hospitals, home care providers, psychiatric
facilities, correctional facilities, assisted living centers, retirement homes
and their patients. PCA also provides consultant pharmacist services, which
include evaluations of patient drug therapy, and drug handling,
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distribution and administration within a nursing facility as well as assistance
with state and federal regulatory compliance. PCA's mail service pharmacy
delivers drugs and medical equipment to workers' compensation payors, claimants
and employers. Pursuant to the Merger Agreement and the Distribution Agreement,
the Remaining Healthcare Business of Beverly will be transferred to New Beverly
and the Institutional Pharmacy Business, which will be the sole remaining asset
of Beverly, will be merged with and into Capstone. See "The Distribution And
Other Pre-Merger Transactions" and "The Merger."
Other Services. Beverly offers other healthcare related services to payors
and patients, including assisted living and home health care services, and
information and referral systems that link payors and employees to long-term
care providers.
Beverly has a Quality Management ("QM") program to help ensure that high
quality care is provided in each of its nursing, transitional and outpatient
facilities. Beverly's QM program has been a key factor in helping Beverly to
exceed the industry's nationwide average compliance statistics, as determined by
the Health Care Financing Administration of the Department of Health and Human
Services ("HCFA"). Beverly's nationwide QM network of healthcare professionals
includes physician Medical Directors, registered nurses, dieticians, social
workers and other specialists who work in conjunction with regional and facility
based QM professionals. Facility based QM is structured through Beverly's
Quality Assessment and Assurance committee. With a philosophy of quality
improvement, Company-wide clinical indicators are utilized as a database to set
goals and monitor thresholds in critical areas directly related to the delivery
of healthcare related services. These internal evaluations are used by local
quality improvement teams, which include QM advisors, to identify and correct
possible problems. The Senior Vice President of QM reports directly to the
President of Beverly and the QM Committee of Beverly's Board of Directors.
GOVERNMENTAL REGULATION AND REIMBURSEMENT
Beverly's nursing facilities are subject to compliance with various
federal, state and local healthcare statutes and regulations. Compliance with
state licensing requirements imposed upon all healthcare facilities is a
prerequisite for the operation of the facilities and for participation in
government-sponsored healthcare funding programs, such as Medicaid and Medicare.
Medicaid is a medical assistance program for the indigent, operated by
individual states with the financial participation of the federal government.
Medicare is a health insurance program for the aged and certain other
chronically disabled individuals, operated by the federal government. Changes in
the reimbursement policies of such funding programs as a result of budget cuts
by federal and state governments or other legislative and regulatory actions
could have a material adverse effect on Beverly's financial position, results of
operations and cash flows.
Beverly receives payments for services rendered to patients from (a) each
of the states in which its nursing facilities are located under the Medicaid
program; (b) the federal government under the Medicare program; and (c)private
payors, including commercial insurers and managed care payors, and Veterans
Administration ("VA"). The following table sets forth: (i) patient days derived
from the indicated sources of payment as a percentage of total patient days,
(ii) room and board revenues derived from the indicated sources of payment as a
percentage of net operating revenues, and (iii) ancillary and other revenues
derived from all sources of payment as a percentage of net operating revenues,
for the periods indicated:
<TABLE>
<CAPTION>
MEDICAID MEDICARE PRIVATE AND VA
------------------ ------------------ ------------------ ANCILLARY
ROOM AND ROOM AND ROOM AND AND
PATIENT BOARD PATIENT BOARD PATIENT BOARD OTHER
DAYS REVENUES DAYS REVENUES DAYS REVENUES REVENUES
------- -------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Three months ended:
March 31, 1997............ 68% 40% 13% 13% 19% 15% 32%
Year ended:
December 31, 1996......... 69% 42% 12% 12% 19% 14% 32%
December 31, 1995......... 68% 43% 12% 11% 20% 15% 31%
December 31, 1994......... 68% 47% 12% 11% 20% 16% 26%
</TABLE>
Consistent with the long-term care industry in general, changes in the mix
of Beverly's patient population among the Medicaid, Medicare and private
categories can significantly affect the revenue and profitability of
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Beverly's operations. Although the level of cost reimbursement for Medicare
patients typically generates the highest revenue per patient day, profitability
is not proportionally increased due to the additional costs associated with the
required higher level of nursing care and other services for such patients. In
most states, private patients are the most profitable, and Medicaid patients are
the least profitable.
Beverly has experienced significant growth in ancillary revenues over the
past several years. Ancillary revenues are derived from providing services to
residents beyond room, board and custodial care and include occupational,
physical, speech, respiratory and intravenous ("IV") therapy, as well as sales
of pharmaceuticals and other services. Such services are currently provided
primarily to Medicare and private pay patients, consistent with the trend in
healthcare of providing a broader range of services in a lower cost setting,
such as Beverly's nursing facilities. Beverly is pursuing further growth of
ancillary revenues, through acquisitions as well as internal expansion of
specialty services such as rehabilitation and sales of pharmaceuticals. Due to
Beverly's continuing efforts to bring therapists on staff as opposed to
contracting for their services, and the corresponding reduction in costs, the
overall rate of growth in ancillary revenues has been adversely impacted.
Medicaid programs are currently in existence in all of the states in which
Beverly 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 are
provided by the federal government under a matching program.
Medicare and most state Medicaid programs utilize a cost-based
reimbursement system for nursing facilities which reimburses facilities for the
reasonable direct and indirect allowable costs incurred in providing routine
patient care services (as defined by the programs) plus, in certain states,
efficiency incentives or a return on equity, subject to certain cost ceilings.
These costs normally include allowances for administrative and general costs as
well as the costs of property and equipment (e.g. depreciation and interest,
fair rental allowance or rental expense). In some states, cost-based
reimbursement is subject to retrospective adjustment through cost report
settlement. In other states, payments made to a facility on an interim basis
that are subsequently determined to be less than or in excess of allowable costs
may be adjusted through future payments to the affected facility and to other
facilities owned by the same owner. State Medicaid reimbursement programs vary
as to methodology used to determine the level of allowable costs which are
reimbursed to operators.
Arkansas, California, Louisiana and Texas provide for reimbursement at a
flat daily rate, as determined by the responsible state agency. In all other
states with a Medicaid program in which Beverly operates, payments are based
upon facility-specific cost reimbursement formulas established by the applicable
state. The Medicaid and Medicare programs each contain specific requirements
which must be adhered to by healthcare facilities in order to qualify under the
programs.
Governmental funding for healthcare programs is subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of which
may materially increase or decrease program reimbursement to healthcare
facilities. Healthcare system reform and concerns over rising Medicare and
Medicaid costs continue to be high priorities for both federal and state
governments. Although no comprehensive healthcare, Medicare or Medicaid reform
legislation has yet been implemented, pressures to contain costs and the active
discussions between the Clinton Administration, Congress and various other
groups have impacted the healthcare delivery system. Many states are
experimenting with alternatives to traditional Medicaid delivery systems through
federal waiver programs, and efforts to provide these services more efficiently
will continue to be a priority. In August 1996, Congress passed the Health
Insurance Portability and Accountability Act of 1996 which, among other things,
provides favorable changes in the tax treatment of long-term care insurance and
allows inclusion of long-term care insurance in medical savings accounts.
Although Beverly believes this legislation will have a favorable impact on the
long-term care industry, the full effect is not readily determinable. There can
be no assurances made as to the ultimate impact of this, or future healthcare
reform legislation, on Beverly's financial position, results of operations or
cash flows. However, future federal budget legislation and regulatory changes
may negatively impact Beverly.
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In addition to the requirements to be met by Beverly's facilities for
annual licensure renewal, Beverly'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, Beverly will be able to
maintain such licenses for its facilities or that Beverly will not be required
to expend significant sums in order to do so.
HCFA adopted survey, certification and enforcement procedures by
regulations effective July 1, 1995 to implement the Medicare and Medicaid
provisions of the Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987")
governing survey, certification and enforcement of the requirements for contract
participation by skilled nursing facilities under Medicare and nursing
facilities under Medicaid. Among the provisions that HCFA has adopted are
requirements that (i) surveys focus on residents' outcomes; (ii) all deviations
from the participation requirements will be considered deficiencies, but that
all deficiencies will not constitute noncompliance; and (iii) certain types of
deficiencies must result in the imposition of a sanction. The regulations also
identify alternative remedies and specify the categories of deficiencies for
which they will be applied. These remedies include: temporary management; denial
of payment for new admissions; denial of payment for all residents; civil money
penalties of $50 to $10,000 per day of violation; closure of facility and/or
transfer of residents in emergencies; directed plans of correction; and directed
in service training. The regulations also specify under what circumstances
alternative enforcement remedies or termination, or both, will be imposed on
facilities which are not in compliance with the participation requirements.
Beverly has undertaken an analysis of the procedures in respect of its programs
and facilities covered by the final HCFA regulations. While Beverly is unable to
predict with total accuracy the degree to which its programs and facilities will
be determined to be in compliance with regulations, compliance data for the past
year is available. Results of HCFA surveys for the past year determined that
approximately 96% of Beverly's facilities were in compliance with the HCFA
criteria. HCFA reports have determined that of the non-Company facilities
surveyed nationally, approximately 95% of such facilities were determined to be
in compliance with such HCFA criteria. Although Beverly could be adversely
affected if a substantial portion of its programs or facilities were eventually
determined not to be in compliance with the HCFA regulations, Beverly believes
its programs and facilities generally exceed industry standards.
Beverly believes that its facilities are in substantial compliance with the
various Medicaid and Medicare regulatory requirements currently applicable to
them. In the ordinary course of its business, however, Beverly receives notices
of deficiencies for failure to comply with various regulatory requirements.
Beverly reviews such notices and takes appropriate corrective action. In most
cases, Beverly and the reviewing agency will agree upon the steps to be taken to
bring the facility into compliance with regulatory requirements. In some cases
or upon repeat violations, the reviewing agency may take a number of adverse
actions against a facility. These adverse actions can include the imposition of
fines, temporary suspension of admission of new patients to the facility,
decertification from participation in the Medicaid or Medicare programs and, in
extreme circumstances, revocation of a facility's license.
The Medicaid and Medicare programs provide criminal penalties for entities
that knowingly and willfully offer, pay, solicit or receive remuneration in
order to induce business that is reimbursed under these programs. The illegal
remuneration provisions of the Social Security Act, also known as the
"anti-kickback" statute, prohibit the payment or receipt of remuneration
intended to induce the purchasing, leasing, ordering or arranging for any good,
facility, service or item paid by Medicaid or Medicare programs. The violation
of the illegal remuneration provisions is a felony and can result in the
imposition of fines of up to $25,000 per occurrence. In addition, certain states
in which Beverly's facilities are located have enacted statutes which prohibit
the payment of kickbacks, bribes and rebates for the referral of patients. The
Medicare program has published certain "Safe Harbor" regulations which describe
various criteria and guidelines for transactions which are deemed to be in
compliance with the anti-remuneration provisions. Although Beverly has
contractual arrangements with some healthcare providers, management believes it
is in compliance with the
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anti-kickback statute and other provisions of the Social Security Act and with
the applicable state statutes. However, there can be no assurance that
government officials responsible for enforcing these statutes will not assert
that Beverly or certain transactions in which it is involved are in violation of
these statutes. The Social Security Act also imposes criminal and civil
penalties for making false claims to the Medicaid and Medicare programs for
services not rendered or for misrepresenting actual services rendered in order
to obtain higher reimbursement.
The Medicare and Medicaid programs also provide for the mandatory and/or
permissive exclusion of providers of services who are convicted of certain
offenses or who have been found to have violated certain laws or regulations. In
certain circumstances, conviction of abusive or fraudulent behavior with respect
to one facility may subject other facilities under common control or ownership
to disqualification from participation in Medicaid and Medicare programs. In
addition, some federal and state regulations provide that all facilities under
common control or ownership licensed to do business within a state are subject
to delicensure if any one or more of such facilities is delicensed.
While federal regulations do not provide states with grounds to curtail
funding of their Medicaid cost reimbursement programs due to state budget
deficiencies, states have nevertheless curtailed funding in such circumstances
in the past. No assurance can be given that states will not do so in the future
or that the future funding of Medicaid programs will remain at levels comparable
to the present levels. The United States Supreme Court ruled in 1990 that
healthcare providers may bring suit in federal court to enforce the Medicaid Act
requirement that the states reimburse nursing facilities at rates which are
reasonable and adequate. Nursing facility operators, such as Beverly, have
utilized and should continue to be able to utilize the federal courts to require
states to comply with their legal obligation to adequately fund Medicaid
programs. However, certain of the legislative proposals discussed above contain
provisions which would repeal the provisions of the Medicaid Acts which require
states to pay reasonable and adequate rates and which would also eliminate the
right to judicial review of certain aspects of the reimbursement systems of
state Medicaid programs; therefore, there can be no assurance that nursing
facility operators will be able to utilize federal courts for such purposes in
the future.
COMPETITION
The long-term care industry is highly competitive. Beverly's competitive
position 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. Beverly's operations compete with services
provided by nursing facilities, acute care hospitals, subacute facilities,
transitional hospitals, rehabilitation facilities, institutional and mail
service pharmacies, hospices and home health care centers. Beverly 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 Beverly. There can be no assurance that
Beverly will not encounter increased competition which could adversely affect
its business, results of operations or financial condition.
EMPLOYEES
At March 31, 1997, Beverly had approximately 80,000 employees. Beverly is
subject to both federal minimum wage and applicable federal and state wage and
hour laws and maintains various employee benefit plans.
The federal government recently increased the minimum wage. This new
legislation is being rolled out in two phases. The initial increase took effect
October 1, 1996, and the final increase is scheduled to take effect September 1,
1997. This new legislation did not result in a material increase in Beverly's
wage rates in 1996, and Beverly does not anticipate a material impact on its
wage rates in 1997, since a substantial portion of Beverly's associates earn in
excess of the new minimum wage levels; however, Beverly believes there may
continue to be competitive pressures to increase the wage levels of associates
earning above the new minimum wage. The effect of the new minimum wage on
Beverly's future operations is not expected to be material as
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Beverly believes that a significant portion of such increase will be reimbursed
through Medicare and Medicaid rate increases.
In recent years, Beverly has experienced increases in its labor costs
primarily due to higher wages and greater benefits required to attract and
retain qualified personnel, increased staffing levels in its nursing facilities
due to greater patient acuity and the hiring of therapists on staff. Although
Beverly expects labor costs to increase in the future, it is anticipated that
any increase in costs will generally result in higher patient rates in
subsequent periods, subject to the time lag in most states, of up to 18 months,
between increases in reimbursable costs and the receipt of related reimbursement
rate increases. See "Beverly Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Operating Results."
In the past, the healthcare industry, including Beverly's long-term care
facilities, has experienced a shortage of nurses to staff healthcare operations,
and, more recently, the healthcare industry has experienced a shortage of
therapists. Beverly is not currently experiencing a nursing or therapist
shortage, but it competes with other healthcare providers for nursing and
therapist personnel and may compete with other service industries for persons
serving Beverly in other capacities, such as nurses' aides. A nursing, therapist
or nurse's aide shortage could force Beverly to pay even higher salaries and
make greater use of higher cost temporary personnel. A lack of qualified
personnel might also require Beverly to reduce its census or admit patients
requiring a lower level of care, both of which could adversely affect operating
results.
Approximately 100 of Beverly's facilities are represented by various labor
unions. Certain labor unions have publicly stated that they are concentrating
their organizing efforts within the long-term healthcare industry. Beverly,
being one of the largest employers within the long-term healthcare industry, has
been the target of a "corporate campaign" by two AFL-CIO affiliated unions
attempting to organize certain of Beverly's facilities. Although Beverly has
never experienced any material work stoppages and believes that its relations
with its employees (and the existing unions that represent certain of them) are
generally good, Beverly cannot predict the effect continued union representation
or organizational activities will have on Beverly's future activities. There can
be no assurance that continued union representation and organizational
activities will not result in material work stoppages, which could have a
material adverse effect on Beverly's operations.
Excessive litigation is a tactic common to "corporate campaigns" and one
that is being employed against Beverly and is expected to continue against New
Beverly. There have been several proceedings against facilities operated by
Beverly before the National Labor Relations Board ("NLRB"). These proceedings
consolidate individual cases from separate facilities and certain of these
proceedings are currently pending before the NLRB. Beverly has and New Beverly
will continue to vigorously defend these proceedings and believes that many of
the cases are without merit.
PROPERTIES
At March 31, 1997, Beverly operated 627 nursing facilities, 33 assisted
living centers, 11 transitional hospitals, 73 pharmacies, 34 outpatient therapy
clinics, 19 hospices and six home health care centers in 36 states and the
District of Columbia. Most of Beverly's 211 leased nursing facilities are
subject to "net" leases which require Beverly to pay all taxes, insurance and
maintenance costs. Most of Beverly's leases have original terms from ten to
fifteen years and contain at least one renewal option, which could extend the
original term of the leases by five to fifteen years. Many of Beverly's leases
also contain purchase options. Beverly 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 Beverly are included in the collateral securing the obligations under its
various debt agreements.
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<PAGE> 149
The following is a summary of Beverly's nationwide network of nursing
facilities, assisted living centers, transitional hospitals, pharmacies,
outpatient therapy clinics and hospices at March 31, 1997:
<TABLE>
<CAPTION>
OUTPATIENT
ASSISTED LIVING TRANSITIONAL THERAPY
NURSING FACILITIES CENTERS HOSPITALS PHARMACIES CLINICS HOSPICES
------------------- ---------------- ----------------- ---------- ---------- --------
TOTAL TOTAL
LICENSED TOTAL LICENSED
NUMBER BEDS NUMBER UNITS NUMBER BEDS NUMBER NUMBER NUMBER
------- --------- ------- ------ ------ -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOCATION:
Alabama................... 21 2,680 1 24 -- -- 2 -- --
Arizona................... 3 480 -- -- 2 78 1 -- --
Arkansas.................. 33 4,083 3 48 -- -- 1 -- 1
California................ 71 7,406 2 113 -- -- 7 -- 5
Colorado.................. -- -- -- -- -- -- 1 -- --
Connecticut............... 3 435 -- -- -- -- 1 -- --
District of Columbia...... 1 355 -- -- -- -- -- -- --
Florida................... 62 7,782 5 267 -- -- 8 -- --
Georgia................... 17 2,100 3 48 -- -- 3 16 1
Hawaii.................... 2 396 -- -- -- -- 10 -- --
Illinois.................. 3 275 -- -- -- -- -- -- --
Indiana................... 26 3,817 1 16 1 40 2 -- 1
Kansas.................... 33 2,146 3 39 -- -- 2 -- --
Kentucky.................. 8 1,047 -- -- -- -- 1 -- --
Louisiana................. 1 200 -- -- -- -- -- -- --
Maryland.................. 4 585 1 16 -- -- 1 -- --
Massachusetts............. 24 2,402 -- -- -- -- 2 -- --
Michigan.................. 2 206 -- -- -- -- -- -- --
Minnesota................. 36 3,230 2 28 -- -- 1 -- 1
Mississippi............... 21 2,456 -- -- -- -- 1 -- --
Missouri.................. 28 2,918 3 101 -- -- 1 -- 1
Nebraska.................. 24 2,205 1 16 -- -- 2 -- 2
New Jersey................ 1 120 -- -- -- -- -- -- --
North Carolina............ 11 1,398 1 16 -- -- 2 -- --
Ohio...................... 12 1,435 -- -- 1 44 2 3 --
Oklahoma.................. -- -- -- -- 2 64 2 -- --
Pennsylvania.............. 42 4,901 3 48 -- -- 2 -- 3
Rhode Island.............. -- -- -- -- -- -- 1 -- --
South Carolina............ 3 302 -- -- -- -- -- -- --
South Dakota.............. 17 1,232 -- -- -- -- 3 -- --
Tennessee................. 7 948 2 57 1 35 1 -- --
Texas (A)................. 49 6,061 -- -- 4 317 9 15 3
Virginia.................. 16 2,113 2 32 -- -- -- -- --
Washington................ 11 1,080 -- -- -- -- 2 -- --
West Virginia............. 3 310 -- -- -- -- -- -- --
Wisconsin................. 32 3,519 -- -- -- -- 2 -- 1
--- ------ -- --- -- --- -- -- --
627 70,623 33 869 11 578 73 34 19
=== ====== == === == === == == ==
CLASSIFICATION
Owned..................... 415 46,224 29 677 1 198 -- -- --
Leased.................... 211 24,324 4 192 10 380 65 34 19
Managed................... 1 75 -- -- -- -- 8 -- --
--- ------ -- --- -- --- -- -- --
627 70,623 33 869 11 578 73 34 19
=== ====== == === == === == == ==
</TABLE>
- ---------------
(A) See "Beverly Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for a discussion
regarding the disposition of such nursing facilities.
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<PAGE> 150
LEGAL PROCEEDINGS
There are various lawsuits and regulatory actions pending against Beverly
arising in the normal course of business, some of which seek punitive damages.
Beverly does not believe that the ultimate resolution of these matters will have
a material adverse effect on Beverly's financial position or results of
operations.
BEVERLY MANAGEMENT
The table below sets forth, as to each executive officer and director of
Beverly, such person's name, positions with Beverly and age. Each executive
officer and director of Beverly holds office until a successor is elected, or
until the earliest of death, resignation or removal. Each executive officer is
elected or appointed by the Board of Directors. The information below is given
as of May 29, 1997.
<TABLE>
<CAPTION>
NAME POSITION* AGE
---- --------- ---
<S> <C> <C>
David R. Banks....................... Chairman of the Board, Chief Executive Officer 60
and Director
Boyd W. Hendrickson.................. President, Chief Operating Officer and Director 52
William A. Mathies................... Executive Vice President and President of BHRS 37
T. Jerald Moore...................... Executive Vice President and President of ATH 56
Robert W. Pommerville................ Executive Vice President, General Counsel and 56
Secretary
C. Arnold Renschler, M.D. ........... Executive Vice President and President of PCA 55
Bobby W. Stephens.................... Executive Vice President -- Asset Management 52
Scott M. Tabakin..................... Executive Vice President and Chief Financial 38
Officer
Mark D. Wortley...................... Executive Vice President and President of 41
Spectra
Pamela H. Daniels.................... Vice President, Controller and Chief Accounting 33
Officer
Beryl F. Anthony, Jr................. Director 59
James R. Greene...................... Director 75
Edith E. Holiday..................... Director 45
Jon E. M. Jacoby..................... Director 59
Risa J. Lavizzo-Mourey, M.D.......... Director 42
Marilyn R. Seymann................... Director 54
</TABLE>
- ---------------
* It is anticipated that upon completion of the Merger, all persons listed
will continue to serve in the capacities indicated for New Beverly, with the
exception of Dr. Renschler who will become the President, Chief Executive
Officer and a director of Capstone.
Mr. Banks has been a director of Beverly since 1979 and has served as Chief
Executive Officer since May 1989 and Chairman of the Board since March 1990. Mr.
Banks was President of Beverly from 1979 to September 1995. Mr. Banks is a
director of Nationwide Health Properties, Inc., Ralston Purina Company,
Wellpoint Health Networks, Inc., and trustee for the University of the Ozarks
and Occidental College.
Mr. Hendrickson joined Beverly in 1988 as a Division President. He was
elected Vice President of Marketing in May 1989, Executive Vice President of
Operations and Marketing in February 1990, President of BHRS in January 1995 and
President, Chief Operating Officer and a director of Beverly in September 1995.
Mr. Mathies joined Beverly in 1981 as an Administrator in training. He was
an Administrator until 1986 at which time he became a Regional Manager. In 1988,
Mr. Mathies was elected Vice President of Operations for the California region
and was elected Executive Vice President of Beverly and President of BHRS in
September 1995.
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<PAGE> 151
Mr. Moore joined Beverly as Executive Vice President in December 1992 and
was elected President of ATH in June 1996. Mr. Moore was employed at Aetna Life
and Casualty from 1963 to 1992 and was elected Senior Vice President in 1990.
Mr. Pommerville first joined Beverly in 1970 and left in 1976. He rejoined
Beverly as Vice President and General Counsel in 1984 and was elected Secretary
in February 1990, Senior Vice President in March 1990 and Executive Vice
President and Acting Compliance Officer in February 1995.
Dr. Renschler joined Beverly in 1996 as Executive Vice President and
President of PCA. From 1990 to 1996, Dr. Renschler was Senior Vice President and
Chief Clinical Officer, as well as President of three operating divisions of
NovaCare, Inc. and a member of its board of directors. Prior to that time, he
held a series of key executive positions at Manor Healthcare Corp., including
President and Chief Operating Officer.
Mr. Stephens joined Beverly as a staff accountant in 1969. He was elected
Assistant Vice President in 1978, Vice President of Beverly and President of
Beverly's Central Division in 1980, and Executive Vice President in February
1990. Mr. Stephens is a director of City National Bank in Fort Smith, Arkansas,
Beverly Japan Corporation, and Harbortown Properties, Inc.
Mr. Tabakin joined Beverly in October 1992 as Vice President, Controller
and Chief Accounting Officer. He was elected Senior Vice President in May 1995,
Acting Chief Financial Officer in September 1995, and Executive Vice President
and Chief Financial Officer in October 1996. From 1980 to 1992, Mr. Tabakin was
with Ernst & Young LLP.
Mr. Wortley joined Beverly as Senior Vice President and President of
Spectra in September 1994 and was elected Executive Vice President in February
1996. From 1988 to 1994, Mr. Wortley was an officer of Therapy Management
Innovations.
Ms. Daniels joined Beverly in May 1988 as Audit Coordinator. She was
promoted to Financial Reporting Senior Manager in 1991 and Director of Financial
Reporting in 1992. She was elected Vice President, Controller and Chief
Accounting Officer in October 1996. From 1985 to 1988, Ms. Daniels was with
Price Waterhouse LLP.
Mr. Anthony served as a member of the United States Congress and was
Chairman of the Democratic Congressional Campaign Committee from 1987 through
1990. In 1993, he became a partner in the Winston & Strawn law firm. He has been
a director of Beverly since January 1993.
Mr. Greene's principal occupation has been that of a director and
consultant to various U.S. and international businesses since 1986. He is a
director of a number of mutual funds of Alliance Capital Management Corporation,
Buck Engineering Company and Bank Leumi. He has been a director of Beverly since
January 1991.
Ms. Holiday is an attorney. She served as White House Liaison for the
Cabinet and all federal agencies during the Bush administration. Prior to that,
Ms. Holiday served as General Counsel of the U.S. Treasury Department, as well
as its Assistant Secretary of Treasury for Public Affairs and Public Liaison.
She is a director of Amerada Hess Corporation, Hercules Incorporated and H. J.
Heinz Company and a director or trustee of various investment companies in the
Franklin Templeton Group of Funds. She has been a director of Beverly since
March 1995.
Mr. Jacoby is Executive Vice President, Chief Financial Officer and a
director of Stephens Group, Inc. Mr. Jacoby has held the indicated positions
with Stephens Group, Inc. since 1986, and prior to that time, served as Manager
of the Corporate Finance Department and Assistant to the President of Stephens
Inc. Mr. Jacoby is a director of the American Classic Voyages Company, Delta and
Pine Land Company, Inc. and Medicus Systems, Inc. He has been a director of
Beverly since February 1987.
Dr. Lavizzo-Mourey is Director of the Institute of Aging, Chief of the
Division of Geriatric Medicine and Associate Executive Vice President for health
policy at the University of Pennsylvania, Ralston-Penn Center. From 1992 to
1994, Dr. Lavizzo-Mourey was in the Senior Executive Service in the Agency for
Health Care Policy and Research, U.S. Public Health Service of the Department of
Health and Human Services. She is a
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<PAGE> 152
director of Medicus Systems, Inc. and Nellcor Puritan Bennett. She has been a
director of Beverly since March 1995.
Ms. Seymann is President and Chief Executive Officer of M One, Inc., a
management and information systems consulting firm specializing in the financial
services industry. From 1990 to 1993, Ms. Seymann was Director and Vice Chairman
of the Federal Housing Finance Board. Prior to that, she served as Managing
Director of Andersen Asset Based Services, a unit of Arthur Andersen LLP. From
1986 to 1990, Ms. Seymann was Executive Vice President of Chase Bank of Arizona
and served as President, Private Banking of Chase Trust Company from 1987 to
1990. She has been a director of Beverly since March 1995.
PRINCIPAL STOCKHOLDERS OF BEVERLY
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of March 31, 1997, relating
to the beneficial ownership of Common Stock by each person known by Beverly to
own beneficially more than 5% of the outstanding shares of Common Stock, based
solely upon filings made by such persons with the Securities and Exchange
Commission. Percentages in the table were calculated based on the number of
shares of Common Stock outstanding at March 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES OF TOTAL
NAME COMMON STOCK COMMON STOCK
- ---- ------------ ------------
<S> <C> <C>
FMR Corp.................................................... 7,894,799(1) 8.0%
("FMR")
82 Devonshire Street
Boston, MA 02109
Franklin Resources, Inc..................................... 8,417,800(2) 8.5%
("Franklin")
777 Mariners Island Blvd.
San Mateo, CA 94404
Loomis, Sales & Company, L.P................................ 6,213,650(3) 6.3%
("Loomis")
One Financial Center
Boston, MA 02111
Wellington Management Company............................... 6,463,419(4) 6.5%
("WMC")
75 State Street
Boston, MA 02109
</TABLE>
- ---------------
(1) Based on the latest schedule 13G, dated February 14, 1997, provided to
Beverly by FMR; FMR had sole voting power with regard to 746,928 shares and
sole dispositive power with respect to 7,894,799 shares.
(2) Based on the latest schedule 13G, dated February 12, 1997, provided to
Beverly by Franklin; Franklin had sole voting and dispositive power with
respect to 8,417,800 shares.
(3) Based on the latest schedule 13G, dated February 13, 1997, provided to
Beverly by Loomis; Loomis had sole voting power with respect to 2,176,125
shares and shared dispositive power with respect to 6,213,650 shares.
(4) Based on the latest schedule 13G, dated January 24, 1997, provided to
Beverly by WMC; WMC had shared voting power with respect to 1,663,574 shares
and shared dispositive power with respect to 6,463,419 shares.
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<PAGE> 153
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of March 31, 1997, the amount of Beverly
Common Stock beneficially owned by each of Beverly's directors, each executive
officer named in the Summary Compensation Table included in Beverly's Proxy
Statement for the Annual Meeting of Stockholders held on May 29, 1997, and all
directors and executive officers as a group based on information obtained from
such persons.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
-----------------------------------------------------------------
SOLE VOTING OPTIONS PERCENTAGE
AND EXERCISABLE OTHER OF
INVESTMENT WITHIN BENEFICIAL COMMON
POWER 60 DAYS OWNERSHIP TOTAL STOCK
----------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Beryl F. Anthony, Jr................... 0 20,000 0 20,000 *
David R. Banks(1)...................... 216,656 377,223 8,774(2) 602,653 *
James R. Greene........................ 500 20,000 0 20,500 *
Boyd W. Hendrickson(1)................. 142,153 159,000 0 301,153 *
Edith E. Holiday....................... 800 5,000 200(2) 6,000 *
Jon E. M. Jacoby....................... 0 20,000 0 20,000 *
Risa J. Lavizzo-Mourey, M.D............ 1,000 5,000 0 6,000 *
William A. Mathies(1).................. 76,373 62,500 2,986(2) 141,859 *
Louis W. Menk(3)....................... 0 5,000 0 5,000 *
C. Arnold Renschler, M.D. ............. 65,000 10,000 0 75,000 *
Marilyn R. Seymann..................... 1,000 5,000 0 6,000 *
Mark D. Wortley(1)..................... 66,530 33,750 0 100,280 *
All Directors and Executive Officers as
a Group (17 Persons)................. 1,082,897 1,022,029 19,896 2,124,822 2.1%
</TABLE>
- ---------------
* Percentage of Common Stock owned does not exceed 1%.
(1) Includes shares allocated to the employee through participation in Beverly's
Employee Stock Purchase Plan.
(2) Shares owned by family members.
(3) Mr. Menk retired from the Beverly Board of Directors in May 1997.
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<PAGE> 154
RELATIONSHIP BETWEEN PCA AND BEVERLY
GENERAL
PCA is currently a wholly-owned subsidiary of Beverly, and, as a result,
the parties have a variety of corporate relationships, some of which are in the
form of written agreements. Because of PCA's status as a wholly-owned subsidiary
of Beverly, these agreements are not the result of arm's length negotiations. A
number of these relationships will be terminated upon completion of the Merger.
See "The Distribution Agreement -- Terms of the Interim Services Agreement."
ADMINISTRATIVE SERVICES
Beverly currently provides a number of administrative services to PCA.
These services and functions include: (i) cash management; (ii) compensation and
benefits informational support; (iii) payroll processing; (iv) license and tax
reporting and payment; (v) human resources; (vi) risk management; and (vii)
legal services. Certain of these services are expected to be provided after the
Merger by New Beverly to the Surviving Corporation on an interim basis. See "The
Distribution Agreement -- Terms of the Interim Services Agreement."
Notwithstanding the provision of such services on an interim basis, the
Surviving Corporation will be responsible for such services after the Merger.
TAX ALLOCATIONS
Currently, PCA is part of a consolidated group, along with Beverly and
Beverly's subsidiaries involved in the Remaining Healthcare Business(the
"Beverly Tax Group"), for purposes of determining, allocating and paying
federal, state and local tax liabilities. Upon the consummation of the Merger,
PCA and the Beverly subsidiaries involved in the Remaining Healthcare Business
will no longer be part of the same consolidated filing group. In addition, as a
result of the Distribution and the Merger, the members of the Beverly Tax Group
and the tax liabilities of the Beverly Tax Group will be split among Beverly and
New Beverly. As a result, Beverly and New Beverly will enter into a Tax
Allocation and Indemnification Agreement prior to the Distribution with respect
to the treatment and allocation of such tax liabilities. See "The Distribution
Agreement -- Terms of the Tax Allocation and Indemnification Agreement."
PHARMACY, INFUSION THERAPY AND CONSULTING SERVICES
Currently, Beverly and PCA are parties to a number of agreements under
which PCA provides pharmacy-related services and products to Beverly facilities,
including long-term care facilities. The services and products provided to
Beverly or its facilities under these agreements include pharmacy dispensing and
consulting services, infusion therapy services and healthcare products. See
"Information Concerning PCA -- Business."
The existing agreements between PCA and Beverly long-term care facilities
are not standardized and include a number of different terms and provisions.
Pursuant to the Merger Agreement, Beverly and Capstone have agreed to enter into
an agreement or agreements to provide for the delivery of pharmacy services and
products and ancillary services and products by Capstone to Beverly long-term
care facilities that will be owned or operated by New Beverly after the
Effective Time of the Merger. See "The Merger Agreement -- Covenants" and
"Post-Closing Arrangements -- Preferred Provider Agreements." There can be no
assurance that such agreements, if entered into, will not be terminated by
either party in accordance with their respective terms.
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COMPARATIVE RIGHTS OF STOCKHOLDERS
GENERAL
Capstone is incorporated under the laws of the State of Delaware, and the
rights of Capstone stockholders are governed by Delaware law, including the
DGCL, the certificate of incorporation of Capstone (the "Capstone Certificate"),
and the bylaws of Capstone (the "Capstone Bylaws"). Beverly is also incorporated
under the laws of the State of Delaware, and the rights of Beverly stockholders
are governed by Delaware law, including the DGCL, the certificate of
incorporation of Beverly (the "Beverly Certificate") and the bylaws of Beverly
(the "Beverly Bylaws"). At the Closing, Beverly stockholders will become
stockholders in Capstone, and their rights as Capstone stockholders will
continue to be governed by Delaware law but will also be governed by the
Capstone Certificate and the Capstone Bylaws, which differ from the Beverly
Certificate and the Beverly Bylaws. Certain of these differences are summarized
below.
The following summary is not intended to be an exhaustive examination or a
detailed description of the differences between the rights of Capstone
stockholders and Beverly stockholders and is qualified in its entirety by
reference to Delaware law, the Capstone Certificate, the Capstone Bylaws, the
Beverly Certificate and the Beverly Bylaws. Beverly stockholders should
carefully review the information contained in such documents, all of which are
on file with the Commission. Copies of the Capstone Certificate and Capstone
Bylaws are available without charge, upon request, from Capstone. Copies of the
Beverly Certificate and the Beverly Bylaws are available without charge, upon
request, from Beverly.
DIRECTORS
Size of the Board of Directors. The Capstone Certificate provides that the
board of directors shall consist of at least three and no more than fifteen
directors, the exact number to be fixed pursuant to a resolution adopted by a
majority of the directors then in office. The size of the Capstone board of
directors may be increased beyond fifteen to reflect the rights of the holders
of preferred stock, if any. Capstone's board currently consists of nine members.
The Beverly Certificate states that the number of directors shall be set by
resolution of its Board of Directors. Beverly's Board of Directors currently
consists of eight members.
Meetings of the Board of Directors. The Capstone Bylaws require its Board
of Directors hold a meeting to elect the officers of Capstone immediately
following the adjournment of each annual meeting of stockholders. Special
meetings of the Board may be called by the Chairman, the President, or any two
directors. Special meetings of the Beverly Board of Directors may be called by
the Chairman, the President, any vice president, the secretary or any two
directors.
Removal of Directors. The Capstone Certificate provides that one or more
of the entire Board of Directors may be removed at any time for cause by the
affirmative vote of the holders of a majority of the outstanding shares of
capital stock entitled to vote generally in the election of directors
(considered for this purpose as one class). The Capstone Certificate defines
cause with respect to the removal of directors as any fraudulent or dishonest
act or activity by the director or behavior materially detrimental to the
business of Capstone. The Capstone Bylaws allow the removal of a director, with
or without cause, by a proper vote of the stockholders or with cause by a
majority of the entire Board of Directors. After the Effective Time, Capstone
will have a classified Board of Directors, and pursuant to the DGCL, Capstone's
directors will then be removable by the stockholders only for cause. See
"-- Classified Board of Directors." The Beverly Bylaws allow for the removal of
directors, with or without cause, by the affirmative vote of a majority of the
shares entitled to be voted, provided that directors entitled to be elected
pursuant to the Beverly Certificate by the holders of any class or series,
voting as a class or series, may only be removed by the applicable vote of the
holders of such class or series.
Filling Vacancies on the Board of Directors. Pursuant to the Capstone
Bylaws, newly created directorships resulting from an increase in the number of
directors, and vacancies occurring in any directorship for any reason, including
removal of a director, may be filled by the vote of a majority of the directors
remaining in office, even if no quorum exists. The Beverly Bylaws provide that
vacancies may be filled by a majority of the affirmative vote of a majority
entitled to vote thereon of the remaining directors in office,
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<PAGE> 156
except in the case of a vacancy created by the removal of a director by the
stockholders, which vacancy must be filled by the affirmative vote of a majority
of the shares entitled to vote represented at a duly held meeting.
Nomination of Directors. The Beverly Bylaws require that any stockholder
seeking to nominate an individual to serve as a director must deliver a written
notice of the nomination to the principal executive offices of Beverly at least
75 days prior to the meeting at which directors will be elected, unless Beverly
shall not have publicly announced the meeting at least 90 days prior to the
meeting, in which case the stockholder must provide the written notice not later
than the fifteenth day after the stockholders were notified of the meeting. The
Capstone Certificate and the Capstone Bylaws do not specify the procedure for
stockholder nominations of directors.
Classified Board of Directors. At the Closing, the Capstone Certificate
will be amended to provide for a staggered board of directors, divided into
three approximately equal classes. One class is elected at each annual meeting
of stockholders for a three-year term by a plurality vote. Pursuant to the DGCL,
directors serving on a classified board may only be removed by the stockholders
for cause, unless the certificate of incorporation provides otherwise. The
Capstone Certificate does not authorize the removal of directors by the
stockholders without cause. Neither Beverly nor Capstone currently has a
classified board of directors.
AMENDMENT OF CONSTITUENT DOCUMENTS
Certificate of Incorporation. The Capstone Certificate mandates that the
holders of two-thirds of the shares entitled to be voted and two-thirds of the
directors then in office must approve any amendment of the Capstone Certificate
concerning the vote required to: (i) amend the Capstone Certificate or Capstone
Bylaws; (ii) limit the personal liability of Capstone directors; (iii) modify
the indemnification of directors and officers; or (iv) modify the size of the
Board of Directors or remove directors.
The Beverly Certificate provides that the provisions therein establishing
the vote required for business combinations may not be amended without the
affirmative vote of the holders of 80% of the voting stock of Beverly, voting as
a single class.
Bylaws. The Capstone Bylaws may be amended, added to or repealed either by
(i) a majority vote of the shares represented at any duly constituted
stockholders' meeting, or (ii) by a majority vote of the Board of Directors. The
Beverly Bylaws may be amended or new bylaws adopted by the vote of a majority of
the outstanding shares entitled to be voted or by the board of directors.
STOCKHOLDERS
Stockholder Action by Written Consent. The DGCL provides that, unless a
corporation's certificate of incorporation provides otherwise, any action that
is required to be or may be taken at any annual or special meeting of the
stockholders may be taken by a written consent in lieu of a meeting. The Beverly
Certificate expressly prohibits Beverly stockholders from acting without a
meeting pursuant to a written consent. The Capstone Certificate does not
preclude stockholders from acting by a written consent in lieu of a meeting.
Notice of Stockholder Business. Pursuant to the Beverly Bylaws, only that
business properly presented may be considered at an annual meeting of
stockholders. A stockholder may present business for consideration at an annual
meeting of stockholders by providing the secretary of Beverly with a written
notice not less than 75 days prior to the meeting date, unless Beverly shall not
have publicly announced the meeting at least 90 days prior to the meeting, in
which case the stockholder must provide the written notice not later than the
fifteenth day after the stockholders were notified of the meeting. The Capstone
Bylaws do not specify the procedure by which a stockholder may present business
before an annual meeting.
Special Meetings of Stockholders. The Capstone Bylaws provide that a
special meeting of the stockholders may be called by the president, a majority
of the board of directors or by the holders of not less than one-tenth of all of
the shares entitled to vote at such special meeting. Contemporaneously with the
Closing, the Capstone Certificate will be amended to provide that special
meetings of the stockholders may only be called by a majority of the Capstone
Board of Directors or by holders of not less than 25% of all of the
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<PAGE> 157
shares entitled to be voted at such meeting. The Beverly Bylaws provide that
special meetings may be called only by the Chairman, the President or a majority
of the Beverly Board of Directors.
Proxies. The Capstone Bylaws provide that no proxy shall be valid after
the expiration of eleven months from the date of its execution, unless the proxy
expressly provides otherwise, while the Beverly Bylaws provide that a proxy
shall be valid for up to three years from the date of its execution, unless the
proxy expressly provides otherwise.
INDEMNIFICATION AND ELIMINATION OF DIRECTORS' MONETARY LIABILITY FOR BREACH OF
DUTY OF CARE
The constituent documents of Capstone and Beverly contain similar
provisions limiting the personal liability of directors and providing for the
indemnification and payment of expenses of directors and officers. See
"Information Concerning Capstone -- Description of Capstone Capital Stock."
ANTI-TAKEOVER MEASURES
Vote Required for Certain Business Combinations. For the adoption or
authorization of a Business Combination (as hereinafter defined), the Beverly
Certificate requires (i) the affirmative vote of at least 80% of the voting
shares of the Beverly; (ii) the determination of a majority of the Disinterested
Directors (as defined in the Beverly Certificate) that (x) the Interested
Stockholder (as hereinafter defined) is the beneficial owner of at least 80% of
the voting stock and has declared an intention to vote in favor of such Business
Combination or that (y) the fair market value of the consideration per share to
be received or retained by the holders of each class of stock of Beverly is at
least equal to the highest price per share paid by such Interested Stockholder
within the prior two years and the Interested Stockholder has not received
financial assistance from Beverly; or (iii) approval by a majority of the
Disinterested Directors.
The Beverly Certificate defines a Business Combination as (i) any merger or
consolidation of Beverly or any of its subsidiaries with or into an Interested
Stockholder, (ii) the disposition by Beverly or any of its subsidiaries of all
or a substantial part of Beverly's assets to an Interested Stockholder and
certain transfers of the assets of an Interested Stockholder to Beverly or a
Beverly subsidiary, (iii) certain issuances of the securities of Beverly or a
Beverly subsidiary to an Interested Stockholder, (iv) the adoption of any plan
of liquidation or dissolution of Beverly proposed by an Interested Stockholder,
(v) any transaction increasing the proportionate share by one percent or more of
any voting stock of Beverly beneficially owned by an Interested Stockholder, or
(vi) any arrangement providing for any of the foregoing transactions.
An Interested Stockholder is defined in the Beverly Certificate for
purposes of a Business Combination as (i) a person (other than Beverly or a
Beverly subsidiary) that is the beneficial owner, directly or indirectly, of ten
percent or more of the voting stock of Beverly or (ii) a person that, directly
or indirectly, controls or is controlled by, or under common control with,
Beverly and in the two years preceding the record date to vote on the Business
Combination was the beneficial owner, directly or indirectly, of ten percent or
more of the voting stock or at the completion of the Business Combination will
be the beneficial owner of ten percent or more of the voting stock.
The Beverly Certificate further requires that a specified proxy or
information statement be delivered to the stockholders if any vote of the
stockholders is required for the adoption or approval of any Business
Combination.
The Capstone Certificate contains no similar provisions.
Prevention of Greenmail and Self-Dealing Transactions. The Beverly
Certificate provides that any acquisition by Beverly of any voting stock of any
class from any Interested Stockholder (as hereinafter defined) at a price in
excess of the Market Price (as defined in the Beverly Certificate) requires the
affirmative vote of the holders of at least a majority of the combined voting
power of the voting stock, voting as a single class. The Beverly Certificate
exempts any acquisition of securities made as part of a tender or exchange offer
by Beverly to purchase securities of the same class made on the same terms to
all holders of such securities and complying with the securities laws or
pursuant to a publicly-announced share repurchase
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program, and the redemption of any shares of preferred stock pursuant to the
Beverly Certificate or any Certificate of Designation with respect to any series
of preferred stock.
Prevention of Self-Dealing Transactions. The Beverly Certificate requires
either (i) the approval of a majority of Disinterested Directors, or (ii) the
affirmative vote of the holders of at least a majority of the combined voting
power of the voting stock to approve or authorize any Self-Dealing Transaction
(as hereinafter defined). The Beverly Certificate defines a Self-Dealing
Transaction as: (i) any merger or consolidation of Beverly or any subsidiary
with any Interested Stockholder or any other corporation that is or after such
merger or consolidation would be an affiliate of an Interested Stockholder; (ii)
any disposition to or with any Interested Stockholder or any affiliate of any
Interested Stockholder of any assets of Beverly or any subsidiary having an
aggregate fair market value of $100 million or more or any financial assistance
to or with any Interested Stockholder or any affiliate of any Interested
Stockholder that involves a financial obligation or benefit of $100 million or
more; (iii) the issuance or transfer by Beverly or any subsidiary of any
securities of Beverly or any subsidiary to any Interested Stockholder or any
affiliate of any Interested Stockholder in exchange for cash, securities or
other property having an aggregate fair market value of $100 million or more;
(iv) the adoption of any plan or proposal for the liquidation or dissolution of
Beverly proposed by any Interested Stockholder or any affiliate of any
Interested Stockholder; or (v) any transaction that increases the proportionate
share by more than one percent of the outstanding shares of any class of voting
stock of Beverly or any subsidiary owned by any Interested Stockholder or any
affiliate of any Interested Stockholder.
With respect to the articles of the Beverly Certificate concerning
prevention of greenmail and self-dealing, an Interested Stockholder is defined
as any person (other than Beverly or any subsidiary) that is the beneficial
owner, directly and indirectly, of five percent or more of the outstanding
voting stock, or is an affiliate of Beverly and at any time within the two-year
period immediately prior to the date in question was the beneficial owner,
directly or indirectly, of five percent or more of the outstanding voting stock.
The Capstone Certificate contains no similar provisions.
Stockholder Rights Plan. Beverly has adopted a stockholder rights plan,
which provides for the distribution of Beverly Common Stock to its holders of
common stock in the event of certain takeover attempts ("Beverly Rights Plan").
The common stock purchase rights ("Rights") associated with the Beverly Rights
Plan will be exchanged by Beverly stockholders along with the associated Beverly
Common Stock in the event that the Merger is effected. In addition, New
Beverly's Board of Directors is adopting a new rights plan with respect to the
New Beverly Common Stock (the "New Beverly Stockholders' Rights Plan"). See
"Description of New Beverly Capital Stock -- New Beverly Common Stock Purchase
Rights" in the New Beverly Prospectus for an explanation of the stockholder
rights plan and the preferred stock of Beverly. Capstone has not designated any
series of preferred stock and has not adopted a stockholder rights plan.
Delaware Business Combination Statute. Beverly, pursuant to the Beverly
Bylaws, has elected not to be subject to Section 203 of the DGCL, the Delaware
Business Combination Statute, which prohibits certain business combinations
between a Delaware corporation and interested stockholders for a three-year
period. Neither the Capstone Certificate nor the Capstone Bylaws contain a
provision expressly electing that Capstone not be governed by Section 203 of the
DGCL, and, therefore, Capstone remains generally subject to the statute.
Other Measures. The Beverly Certificate abolishes stockholder ability to
act by written consent in lieu of a meeting and does not authorize stockholders
to call special meetings. Pursuant to the DGCL and the Capstone Certificate,
Capstone stockholders may act by written consent in lieu of a meeting, and
subsequent to the Closing, a special meeting may be called by holders of 25% or
more of the shares entitled to vote at such meeting. See
"-- Stockholders -- Stockholder Action by Written Consent" and
"-- Stockholders -- Special Meetings of Stockholders." Capstone, however, will
have a classified board of directors following the Closing, which may thwart or
delay any attempted takeover of Capstone. See "-- Directors -- Classified Board
of Directors."
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OTHER BEVERLY PROPOSALS
NEW BEVERLY 1997 LONG-TERM INCENTIVE PLAN
General
On May 29, 1997, the Board of Directors of New Beverly adopted the New
Beverly 1997 Long-Term Incentive Plan (the "New Beverly 1997 Incentive Plan").
On , 1997 the Beverly Board of Directors, its Compensation
Committee and Beverly, as sole stockholder of New Beverly prior to the
Distribution, approved the New Beverly 1997 Incentive Plan and recommended its
approval by Beverly stockholders at a meeting called to vote thereon. The
Compensation Committee and Board of Directors of Beverly have determined that it
is in the best interest of Beverly and its stockholders to seek approval from
the Beverly stockholders of the New Beverly 1997 Incentive Plan in view of the
federal tax provisions contained in Section 162(m) of the Code. Under Code
Section 162(m), New Beverly may be prohibited from deducting the expense of
compensation accrued or paid to its chief executive officer and its four (4)
other most highly-compensated officers ("Covered Participants") to the extent
such compensation to any Covered Participant exceeds $1 million for any taxable
year of New Beverly. An exception exists to this deduction limit for
performance-based compensation such as an award granted under the New Beverly
1997 Incentive Plan, if, among other conditions, the specific terms of the
performance-based compensation to such Covered Participants are disclosed to and
approved by the Beverly stockholders. Stockholder approval of the New Beverly
1997 Incentive Plan is sought in order that awards granted under the New Beverly
1997 Incentive Plan will not count toward the $1 million deductible compensation
limit under Code Section 162(m).
The purpose of the New Beverly 1997 Incentive Plan is to allow New Beverly
to attract and retain qualified officers, key employees and consultants and to
provide these individuals with an additional incentive to devote themselves to
the future success of New Beverly. Additionally, New Beverly believes that
awards under the New Beverly 1997 Incentive Plan will more closely align the
interests of its personnel with those of its stockholders. New Beverly will also
use the New Beverly 1997 Incentive Plan to fulfill its obligations under the
Employee Benefit Agreement with regards to Transferred Employees.
The following is a description of the New Beverly 1997 Incentive Plan. The
New Beverly 1997 Incentive Plan replaces Beverly's incentive plans that were
available for the grant of incentive awards to officers and key employees of
Beverly, pursuant to which awards were granted in the form of incentive and
non-qualified stock options, stock appreciation rights ("SARs") and shares of
restricted stock, all of which types of awards will continue to be available
under the 1997 Plan, as well as several other types of equity-based incentives
that were also available under Beverly's existing incentive plans, namely
performance units, performance shares, phantom stock, unrestricted bonus stock
and dividend equivalent rights. This description is qualified in its entirety by
reference to the New Beverly 1997 Long-Term Incentive Plan, a copy of which is
attached as Annex I.
The New Beverly 1997 Incentive Plan thus continues the approach used in the
adoption of Beverly's 1996 Long-Term Incentive Plan, and provides New Beverly
with flexibility in structuring equity-based incentive compensation by making
available types of incentive awards similar to those available under the prior
plan. The Compensation Committees and Boards of Directors of both Beverly and
New Beverly believe that a flexible plan is needed to continue providing
equity-based incentives consistent with New Beverly's philosophy of linking
executive compensation to total stockholder returns and the long-term financial
performance of New Beverly.
Plan Administration and Eligibility
The New Beverly 1997 Incentive Plan will be administered by the
Compensation Committee of New Beverly's Board of Directors (the "Committee")
which shall consist of two or more directors designated by the Board of
Directors, each of whom shall be a "Non-Employee Director" within the meaning of
Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act") or any similar rule which may subsequently be in effect ("Rule 16b-3") and
each of whom is an "outside director" within the meaning of Code Section
162(m)(4)(C)(i) and the regulations promulgated thereunder. Subject to the
provisions of the
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New Beverly 1997 Incentive Plan, the Committee has the power: (i) to determine
the terms and conditions upon which Awards may be made and exercised; (ii) to
determine all terms and provisions of each Agreement between New Beverly and any
Participant to which an Award has been granted, which Agreement need not be
identical for all types of Awards nor for the same type of Award to different
Participants; (iii) to construe and interpret the Agreements and such Plan; (iv)
to establish, amend or waive rules or regulations for such Plan's
administration; (v) to accelerate the exercisability of any Award, the length of
a Performance Period or the termination of any Period of Restriction and (vi) to
make all other determinations and take all other actions necessary or advisable
for the administration of the New Beverly 1997 Incentive Plan.
With the exception that no person owning more than 5% of the voting power
of New Beverly can participate in the New Beverly 1997 Incentive Plan, the
Committee shall have sole and complete discretion in determining those key
employees and other persons who shall participate in the New Beverly 1997
Incentive Plan. In addition, New Beverly options, restricted shares, performance
shares and phantom units will be granted to persons holding Beverly options,
restricted shares, performance shares or phantom units as the case may be, in
substitution therefor, in accordance with the terms of the Employee Benefit
Agreement. The Committee may delegate to the Chief Executive Officer of New
Beverly the authority to make Awards to Participants who are not Executive
Officers or Covered Participants (all as defined under the New Beverly 1997
Incentive Plan), subject to a fixed maximum award amount for such a group and a
maximum award amount for any one Participant, as determined by the Committee.
Shares Subject to the Plan
Subject to adjustment for changes in the capital structure of New Beverly
(such as stock dividends, stock splits, recapitalizations, mergers,
consolidations or reorganizations) the aggregate number of shares of Common
Stock of New Beverly (the "Shares") issuable as Awards under the New Beverly
1997 Incentive Plan is 11 million, provided, however, that no more than 5.5
million Shares may be issued pursuant to Awards of Restricted Stock, Restricted
Stock Units, Performance Shares, Performance Units, Bonus Stock or Other Stock
Unit Awards (all as defined under the New Beverly 1997 Incentive Plan). In
addition, the maximum Award that may be granted to any Covered Participant,
other than Options, Stock Appreciation Rights, Restricted Stock and Restricted
Stock Units, for any Performance Period is the lesser of 100% of the Covered
Participant's base salary as of the first day of the Performance Period or $1
million. The maximum number of Shares subject to Options, Stock Appreciation
Rights or Restricted Stock granted to any Covered Participant for any fiscal
year is 1.1 million. Shares may be made available from the authorized, but
unissued Shares or from Shares acquired by New Beverly including those purchased
on the open market. Except as set forth below, Shares issued in connection with
the exercise of, or as other payment for an Award will be charged against the
total number of Shares issuable under the New Beverly 1997 Incentive Plan. If
any option or other Award granted terminates, expires or lapses for any reason
other than as a result of being exercised, or if Shares issued pursuant to an
Award are forfeited, Shares subject to such Award will again be available for
grant under the New Beverly 1997 Incentive Plan, except that any such Awards can
not be used to increase the maximum Award available to any Covered Participant
hereunder. Subject to the requirements of Rule 16b-3, if a Participant pays the
Exercise Price (as defined in the New Beverly 1997 Incentive Plan) for an Option
or other Award through the delivery of previously acquired Shares, the number of
Shares available for Awards under the New Beverly 1997 Incentive Plan shall be
increased by the number of Shares surrendered by the Participant.
Options and Stock Appreciation Rights
The New Beverly 1997 Incentive Plan authorizes the Committee to grant
Options to Key Employees in the form of either ISOs (as defined in the New
Beverly 1997 Incentive Plan) or NQSOs (as defined in the New Beverly 1997
Incentive Plan). The New Beverly 1997 Incentive Plan gives the Committee sole
and complete discretion, subject to the ISO qualification requirements, in
determining: (i) the type of Option granted; (ii) the duration of the Option;
(iii) the number of Shares to which an Option pertains; (iv) any conditions
imposed on the exercisability of the Option; (v) the conditions under which the
Option may be terminated and (vi) any such other provisions as may be warranted
to comply with the laws or rules of any
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securities trading system or stock exchange. The Agreement shall specify whether
the Option is intended to be an ISO or NQSO. The Exercise Price for any Option
shall be determined by the Committee, at the time of grant, subject to the
limitation that the Exercise Price shall not be less than 100% of Fair Market
Value (as defined in the New Beverly 1997 Incentive Plan) on the Grant Date (as
defined in the New Beverly 1997 Incentive Plan). The latter limitation shall not
apply to options issued upon the assumption of or in substitution for options of
another company with which New Beverly participates in an acquisition,
separation, merger, or similar corporate transaction. Options granted under the
New Beverly 1997 Incentive Plan may not be exercised after the expiration of ten
years from the Grant Date.
The New Beverly 1997 Incentive Plan permits Participants, with certain
exceptions, to pay the Exercise Price in cash, delivery of Shares valued at Fair
Market Value at the time of exercise or by a combination of the foregoing.
Accordingly, a Participant who owns Shares may generally, and subject to the tax
withholding requirements discussed below, by using Shares in payment of the
Exercise Price, receive in one transaction or a series of essentially
simultaneous transactions, without any cash payment of the Exercise Price, (i)
Shares equivalent in value to the excess of the Fair Market Value over the
Exercise Price specified in the Option, plus (ii) a number of Shares equal to
that used to pay the Exercise Price. In addition, at the request of the
Participant and subject to applicable laws and regulations, New Beverly may (but
shall not be required to) cooperate in a broker-assisted exercise.
The New Beverly 1997 Incentive Plan also authorizes the Committee to grant
Stock Appreciation Rights to Key Employees. Stock Appreciation Rights may be
granted in tandem with an Option, in addition to an Option or free standing.
Stock Appreciation Rights granted under the New Beverly 1997 Incentive Plan may
not be exercised after the expiration of ten years from the Grant Date. The
Exercise Price of each Stock Appreciation Right (as defined in the New Beverly
1997 Incentive Plan) shall be determined on the Grant Date by the Committee,
subject to the limitation that the Exercise Price shall not be less than 100% of
Fair Market Value on the Grant Date.
Upon the exercise of a Stock Appreciation Right, the Participant is
entitled to receive an amount for each right equal to the excess of the Fair
Market Value of that number of Shares subject to the Stock Appreciation Right
over its Exercise Price on the date of exercise. Payment to a Participant upon
exercise of a Stock Appreciation Right shall be made in the form of cash, Shares
or a combination thereof as determined in the sole and complete discretion of
the Committee. If any payment in the form of Shares results in a fractional
share, such payment for a fractional share shall be made in cash.
Restricted Stock or Restricted Stock Units
The New Beverly 1997 Incentive Plan authorizes the Committee to grant
Restricted Stock and Restricted Stock Units to such Participants and in such
amounts and for such duration of the Period of Restriction and/or conditions of
removal of restrictions as it shall determine. Participants receiving Restricted
Stock and Restricted Stock Units are not required to pay New Beverly therefor
(except for applicable tax withholding). The Period of Restriction, the
conditions which must be satisfied prior to removal of the restriction, and the
number of Shares of Restricted Stock or the number of Restricted Stock Units to
be granted and such other provisions as the Committee shall determine shall be
evidenced by an Agreement. The Committee may specify, but is not limited to the
following types of restrictions in the Agreement: (i) restrictions on
acceleration or achievement of terms of vesting based on any one or more of the
following business or financial goals of New Beverly: absolute or relative
increases in total stockholder return, economic value added, return on capital
employed, revenues, sales, net income, earnings per share, return on equity,
cash flow, operating margin, or net worth of New Beverly, any of its
subsidiaries, divisions, or other areas of New Beverly (the "Performance
Goals"), and (ii) any further restrictions that may be advisable under the law
including requirements set forth in the Exchange Act, the Securities Act, any
securities trading system or stock exchange upon which such Shares are listed.
Except where performance-based conditions or restrictions are placed on the
grant, the minimum Period of Restriction shall be three (3) years, which Period
of Restriction would permit the removal of restrictions on no more than
one-third of the Restricted Stock or Restricted Stock Units at the end of the
first year following the Grant Date, and the removal of the restrictions on an
additional one-third at the end of each subsequent year. If there are
performance-based conditions
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placed on the grant of Restricted Stock or Restricted Stock Units, the total
Period of Restriction shall be no less than one year from the Grant Date. Except
in the event of the death or Disability (as defined in the New Beverly 1997
Incentive Plan) of the Participant, or a Change in Control (as defined in the
New Beverly 1997 Incentive Plan) of New Beverly, no restrictions may be removed
from Restricted Stock or Restricted Stock Units during the first year following
the Grant Date. Except as specifically provided in the New Beverly 1997
Incentive Plan, the Committee shall have no authority to reduce or remove the
restrictions or to reduce or remove the Period of Restriction without the
express consent of the stockholders of New Beverly. During the Period of
Restriction, Participants in whose name Restricted Stock is granted may exercise
full voting rights with respect to those Shares and are entitled to receive all
dividends and other distributions paid with respect to those Shares.
Performance Awards
The New Beverly 1997 Incentive Plan authorizes the Committee to grant
Performance Awards in the form of either Performance Units or Performance Shares
subject to such Performance Goals (as defined in the New Beverly 1997 Incentive
Plan) and Performance Period (as defined in the New Beverly 1997 Incentive Plan)
as the Committee shall determine. The Committee shall set Performance Goals at
its discretion for each Participant who is granted a Performance Award. The
extent to which such Performance Goals are met will determine the value of the
Performance Unit or Performance Share to the Participant. Such Performance Goals
may be particular to a Participant, may relate to the performance of the
subsidiary which employs him or her, may be based on the division which employs
him or her, may be based on the performance of New Beverly generally, or any
combination of the foregoing. Upon the completion of the Performance Period, the
Committee shall determine the value to the Participant of the Performance Unit
or Performance Shares based on the degree to which the Performance Goals have
been satisfied. Payment for the settlement of a Performance Award shall be made
in cash, Shares, or any combination thereof, as determined by the Committee.
Bonus Stock
The New Beverly 1997 Incentive Plan authorizes the Committee to grant
Shares of Bonus Stock (as defined in the New Beverly 1997 Incentive Plan) to Key
Employees without cash consideration. The Committee may grant Bonus Stock
unencumbered of any restrictions (other than those advisable to comply with law)
or subject to restrictions and limitations similar to those for Performance
Awards.
Other Stock Unit Awards
In order to enable the Committee to respond quickly to significant
developments and applicable tax or other legislation and regulations and
interpretations thereof and to develop compensation packages that it believes
will most effectively motivate and reward Key Employees, the New Beverly 1997
Incentive Plan permits the Committee to grant to Participants Awards of Shares
or other securities that are valued by reference to or otherwise are based, in
whole or in part, on the value of the underlying Shares or other securities. The
Committee may determine that an Award in the form of Other Stock Unit Awards or
awards otherwise granted pursuant to the New Beverly 1997 Incentive Plan may
provide the Participant (i) dividends or dividend equivalents and (ii) cash
payments in lieu of or in addition to an Award. The Committee, in its sole and
complete discretion, shall determine the terms, restrictions, conditions,
vesting requirements and payment provisions of the Award. Shares granted
pursuant to Other Stock Unit Awards may be issued for no cash consideration or
such minimum consideration as may be required by applicable law. The Committee
may establish Performance Goals that relate in whole or in part to receipt of
the Other Stock Unit Award and subject the Other Stock Unit Award to a deferred
payment schedule and/or vesting over a specified employment period. The
Committee, as a result of certain circumstances, may waive or otherwise remove,
in whole or in part, any restriction or condition imposed on an Other Stock Unit
Award on the Grant Date.
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Change in Control
For the purposes of the New Beverly 1997 Incentive Plan, a "Change in
Control" means the occurrence of any of the following events: (i) any person,
corporation or other entity or group including any "group" as defined in Section
13(d)(3) of the Exchange Act, becomes the beneficial owner of Shares having 30%
or more of the total number of votes to be cast for the election of directors of
New Beverly; or (ii) as a result of, or in connection with, any tender or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing (a "Transaction"), the
persons who were directors of New Beverly before the Transaction shall cease to
constitute a majority of the Board of Directors of New Beverly or any successor
to New Beverly or its assets; or (iii) if at any time, (1) New Beverly shall
consolidate with, or merge with, any other Person (within the meaning of Section
3(a)(9) of the Exchange Act) and New Beverly shall not be the continuing or
surviving corporation, (2) any Person shall consolidate with, or merge with, New
Beverly, and New Beverly shall be the continuing or survivor corporation and in
connection therewith all or part of the outstanding Stock shall be changed into
or exchanged for stock or other securities of any Person or cash or any other
property, (3) New Beverly shall be a party to a statutory share exchange with
any other Person after which New Beverly is a Subsidiary of any other Person or
(4) New Beverly shall sell or otherwise transfer 50% or more of the assets or
earnings power of New Beverly and its Subsidiaries (taken as a whole) to any
Person or Persons.
In the event of a Change in Control, the New Beverly 1997 Incentive Plan
permits the Committee to accelerate the payment or vesting of and release any
restrictions on any Awards.
Federal Income Tax Considerations
The discussion which follows is a summary, based on current law, of some of
the significant federal income tax considerations relating to Awards under the
New Beverly 1997 Incentive Plan. These rules are highly technical and subject to
change. The following discussion is limited to the Federal income and certain
employment tax rules relevant to New Beverly and to individuals who are citizens
or residents of the United States. The discussion does not address the State,
local or foreign income tax rules relevant to Awards or other U.S. tax
provisions such as estate and gift taxes. Participants are urged to consult
their personal tax advisors with respect to the federal, state, local and
foreign tax consequences relating to Awards.
Incentive Stock Options (ISOs). A Participant who is granted an ISO
recognizes no ordinary income upon grant or exercise of the ISO. However, the
excess of the Fair Market Value of the Shares on the date of exercise over the
Exercise Price is an item includable in the Participant's alternative minimum
taxable income. A Participant may be required to pay an alternative minimum tax
even though the Participant receives no cash upon exercise of the ISO with which
to pay such tax. If a Participant holds the Shares acquired upon exercise of the
ISO for at least two years from the date of grant of the ISO and at least one
year following the exercise (the "Statutory Holding Periods"), the Participant's
gain, if any, upon a subsequent disposition of such Shares, is taxed as
long-term capital gain. If a Participant disposes of the Shares acquired
pursuant to the exercise of an ISO before satisfying the Statutory Holding
Periods (a "Disqualifying Disposition"), the Participant will no longer be
entitled to favorable tax treatment under the ISO rules. The amount of
compensation income resulting from a Disqualifying Disposition generally equals
the excess of (i) the lesser of the amount realized on the disposition or the
Fair Market Value of the Shares on the exercise date over (ii) the Exercise
Price. The balance of the gain realized on such a disposition, if any, is a
long- or a short-term capital gain depending on whether the Shares have been
held for more than one year following the exercise of the ISO.
Special rules apply for determining a Participant's tax basis in and
holding period for Shares acquired on the exercise of an ISO if the Participant
pays the Exercise Price of the ISO in whole or in part with previously-owned
Shares. Under these rules, the Participant does not recognize any income or loss
from the delivery of Shares (other than Shares previously acquired through the
exercise of an ISO and not held for the Statutory Holding Periods) in payment of
the Exercise Price. The Participant's tax basis in and holding period for the
newly-acquired Shares will be determined as follows: (for capital gain, but not
Disqualifying Disposition purposes) as to the number of newly-acquired Shares
equal to the previously-owned Shares delivered, the
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Participant's tax basis in and holding period for the newly-acquired Shares will
be equal to that of the previously-owned Shares delivered; as to each remaining
newly-acquired Share, the Participant's basis will be zero (or, if part of the
Exercise Price is paid in cash, the amount of such cash divided by the number of
such remaining newly-acquired Shares) and the Participant's holding period will
begin on the date such Share is transferred. Under proposed regulations, any
Disqualifying Disposition is deemed made from Shares with the lowest basis
first. If a Participant pays the Exercise Price of an ISO, in whole or in part,
with previously-owned Shares that were acquired upon the exercise of an ISO and
that have not been held for the Statutory Holding Periods, the Participant will
recognize compensation income (but not capital gain) under the rules applicable
to Disqualifying Dispositions.
New Beverly is not entitled to any deduction with respect to the grant or
exercise of an ISO or the subsequent disposition by the Participant of the
Shares acquired if the Participant satisfies the Statutory Holding Periods. If
these holding periods are not satisfied, New Beverly is entitled to a deduction
in the year the Participant makes a Disqualifying Disposition of the Stock in an
amount equal to the Participant's compensation income.
Non-Qualified Stock Options (NQSOs). A Participant who is granted a NQSO
recognizes no income upon the grant of the NQSO. At the time of exercise,
however, the Participant recognizes compensation income equal to the difference
between the Exercise Price and the Fair Market Value of the Shares received on
the date of exercise. This income is subject to income and employment tax
withholding. New Beverly is entitled to an income tax deduction corresponding to
the compensation income recognized by the Participant.
When a Participant disposes of Stock received upon the exercise of a NQSO,
the Participant will recognize capital gain or loss equal to the difference
between the sales proceeds received and the Participant's basis in the Stock
sold. The Participant's capital gain or loss will be long-or short-term
depending on whether the Stock sold was held more than one year. New Beverly
will not receive a deduction for any capital gain recognized by the Participant.
If a Participant pays the Exercise Price for a NQSO entirely in cash, the
Participant's tax basis in the Stock received equals the Stock's Fair Market
Value on the Exercise Date, and the Participant's holding period begins on the
day after the Exercise Date. If however, a Participant pays the Exercise Price
of a NQSO, in whole or in part, with previously-owned Shares, then the
Participant's tax basis in and holding period for the newly-acquired Shares will
be determined as follows: as to the number of newly-acquired Shares equal to the
previously-owned Shares delivered, the Participant's basis in and holding period
for the previously-owned Shares will carry over to the newly-acquired Shares on
a share-for-share basis; as to each remaining newly-acquired Share, the
Participant's basis will be equal to the Share's value on the Exercise Date, and
the Participant's holding period will begin on the day after the Exercise Date.
Stock Appreciation Rights. A Participant who is granted a Stock
Appreciation Right recognizes no income upon the grant of the Stock Appreciation
Right. At the time of exercise, however, the Participant shall recognize
compensation income equal to the cash received and the Fair Market Value of any
Stock received. This income is subject to withholding. New Beverly is entitled
to an income tax deduction corresponding to the compensation income recognized
by the Participant. Any Shares received upon exercise of a Stock Appreciation
Right will have a tax basis equal to their Fair Market Value on the date
received.
Restricted Stock. A Participant who is granted Restricted Stock may file
a Section 83(b) Election with the IRS to have the grant taxed as compensation
income at the date of receipt, with the result that any future appreciation (or
depreciation) in the value of the Shares granted shall be taxed as capital gain
(or loss) on a subsequent sale of the Shares. However, if the Participant does
not make a Section 83(b) Election, then the grant shall be taxed as compensation
income at its Fair Market Value on the date that the restrictions imposed on the
Shares expire. Unless a Participant makes a Section 83(b) Election, any
dividends paid on the Stock subject to the restrictions is compensation income
to the Participant and is compensation expense to New Beverly. Any compensation
income a Participant recognizes from a grant of Restricted Stock is subject to
income and employment tax withholding. Subject to the limitations of Section
162(m), if applicable, New Beverly is generally entitled to an income tax
deduction for any amounts which are taxed as compensation income to the
Participant.
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<PAGE> 165
Performance Awards, Bonus Stock and Other Stock Unit Awards. The grant
of a Performance Award, Bonus Stock or an Other Stock Unit Award with
Performance Goals and a Performance Period does not generate taxable income to
the Participant or an income tax deduction to New Beverly. Upon achievement of
the Performance Goals and the passage of the Performance Period, any cash and
the Fair Market Value of any Stock received as payment in respect of a
Performance Award, Bonus Stock or Other Stock Unit Award will constitute
ordinary income to the Participant. The Participant's income is subject to
income and employment tax withholding. Subject to the limitations of Section
162(m), if applicable, New Beverly is generally entitled to an income tax
deduction for any amounts which are taxed as compensation income to the
Participant.
Deduction Limitations. Section 162(m) of the Internal Revenue Code
prohibits New Beverly from deducting annual compensation paid to any Covered
Participant in excess of $1,000,000, including the compensatory element of any
Awards granted or issued by New Beverly to its Covered Participants. However, an
exemption exists for qualified performance-based compensation, whereby such
compensation is exempt from the $1,000,000 limit, but only if (i) the
performance goals are determined by a compensation committee of the Board of
Directors which is comprised solely of two or more outside directors, (ii) the
material terms under which the remuneration is to be paid, including the
performance goals, are disclosed to stockholders and approved by a majority of
the vote in a separate stockholder vote before the payment of such remuneration
and (iii) before any payment of such remuneration, the compensation committee
referred to in (i) above certifies that the performance goals and any other
material terms were in fact satisfied. New Beverly believes that the New Beverly
1997 Incentive Plan and the grant of stock options, SAR's and certain
performance-based stock incentives granted thereunder will satisfy the
applicable requirements of the performance-based pay exemption of Section 162(m)
of the Code and that therefore payments under the New Beverly 1997 Incentive
Plan attributable to the exercise of stock options, SAR's and certain other
performance-based stock incentives will be exempt from the $1,000,000 deduction
limit.
In addition, if the individual Agreements pursuant to which the Committee
grants specific Awards provide for accelerated vesting, lapse of restrictions,
deemed satisfaction of performance goals, or payment of an Award in connection
with a Change in Control, then certain amounts with respect to such an Award may
constitute an "excess parachute payment" under the golden parachute provisions
of the Code. Pursuant to Section 4999 of the Code, a Participant will be subject
to a nondeductible 20 percent excise tax on any "excess parachute payment", and,
pursuant to Section 280G of the Code, New Beverly will be denied any deduction
with respect to such excess parachute payment. In addition, the $1,000,000
deduction limitation under Code Section 162(m) shall be reduced by any deduction
disallowed under the golden parachute rules.
THE BOARD OF DIRECTORS OF BEVERLY RECOMMENDS TO THE HOLDERS OF BEVERLY
COMMON STOCK THE ADOPTION AND APPROVAL OF THE NEW BEVERLY 1997 LONG-TERM
INCENTIVE PLAN.
NEW BEVERLY NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
General
On May 29, 1997, the New Beverly Board of Directors unanimously adopted the
New Beverly Non-Employee Directors Stock Option Plan (the "New Beverly Directors
Option Plan"). On , 1997 the Beverly Board of Directors and Beverly, as
the sole stockholder of New Beverly before the Distribution, approved the New
Beverly Directors Option Plan and recommended its approval by Beverly
stockholders at a meeting called to vote thereon. Non-Employee Directors are not
eligible to participate under the New Beverly 1997 Incentive Plan, which is also
being considered by Beverly stockholders.
The purpose of New Beverly Directors Option Plan is to build a proprietary
interest among the Non-Employee Directors on the New Beverly Board, and thereby
secure for New Beverly stockholders the benefits associated with stock ownership
by those who will oversee New Beverly's future growth and success. The major
provisions of the New Beverly Directors Option Plan are described below.
145
<PAGE> 166
The following description of the New Beverly Directors Option Plan is
qualified in its entirety by reference to the New Beverly Holdings, Inc.
Non-Employee Directors' Stock Option Plan, a copy of which is attached as Annex
J hereto.
Eligibility
Each member of the Board of Directors of New Beverly who is not an employee
of New Beverly, or any subsidiary or affiliate of New Beverly, will be eligible
to receive a grant of stock options under the New Beverly Directors Option Plan.
The eligible status of such a director will terminate as to future stock option
grants at the time the individual ceases to be a director, or the individual
becomes an employee of New Beverly, or any subsidiary or affiliate of New
Beverly.
Administration
The New Beverly Directors Option Plan will be administered by the Board of
Directors of New Beverly. The Board of Directors has full power to administer
and interpret the New Beverly Directors Option Plan to carry out its purpose. It
is expected that the Board of Directors will designate New Beverly personnel to
assist it in carrying out its responsibilities under the New Beverly Directors
Option Plan.
The members of the New Beverly Board of Directors will be indemnified by
New Beverly against liabilities and expenses, including attorneys' fees, which
they may reasonably incur in the defense of any action, suit or proceeding to
which they may be a party by reason of any action taken or failure to act under
the New Beverly Directors Option Plan.
Options; Exercise Price
Each eligible Non-Employee Director under the New Beverly Directors Option
Plan is automatically granted an option to purchase 2,500 shares of New Beverly
Common Stock on June 1 of each year during the term of the New Beverly Directors
Option Plan, with the first option grant scheduled for June 1, 1998. The maximum
number of shares available for grant and issuance under the New Beverly
Directors Option Plan is 300,000.
All options under the New Beverly Directors Option Plan are granted at 100
percent of the fair market value of New Beverly Common Stock on the relevant
grant date.
In the case of events such as stock dividend, stock splits,
recapitalizations, or other changes in New Beverly's capitalization, an
automatic adjustment will be made to the number of unexercised shares, the
number of shares to be granted in the future, and the aggregate number of shares
which are available for option grants under the New Beverly Directors Option
Plan. The automatic adjustment is designed to ensure that the eligible
Non-Employee Directors maintain the same proportionate position after the
particular event as before the event.
An option granted under the New Beverly Directors Option Plan may be
evidenced by a written instrument describing the terms and conditions of the
grant. Options granted under the New Beverly Directors Option Plan are not
assignable or transferable by the eligible Non-Employee Director, other than by
will or the laws of descent and distribution, or under a qualified domestic
relations order. During the Non-Employee Director's lifetime, an option is
exercisable only by the Non-Employee Director, or, in the case of an incapacity,
by a person properly appointed to act on the Non-Employee Director's behalf.
Vesting; Exercise of Options
Each option granted under the New Beverly Directors Option Plan becomes
exercisable on the June 1 following its grant. For example, options granted on
June 1, 1998 are scheduled to become exercisable on June 1, 1999.
146
<PAGE> 167
An option becomes immediately exercisable upon the death or disability of a
Non-Employee Director prior to the scheduled exercise date for the option. An
option becomes immediately exercisable in the event of a "Change in Control" of
New Beverly, which is defined in the New Beverly Directors Option Plan.
When the eligibility of a Non-Employee Director ceases for a reason other
than death, disability, or a Change in Control, options which are not
exercisable at that time are forfeited; and exercisable options must be
exercised within ninety days from the date the Non-Employee Director loses
eligible status.
Options may be exercised by the delivery of cash or shares of Common Stock
owned for more than six months, or any combination of such forms of payment.
Term of Plan and Option
Unless terminated earlier by the Board of Directors, the New Beverly
Directors Option Plan will terminate on December 31, 2007. Options granted prior
to such termination date continue to be exercisable in accordance with the terms
of the New Beverly Directors Option Plan.
Each option granted under the New Beverly Directors Option Plan will
automatically expire ten years from the date the option is granted.
Amendment and Termination of the Plan
The Board of Directors may amend, terminate, or modify the New Beverly
Directors Option Plan at any time without stockholder approval, including
amendments necessary to conform with Rule 16b-3, unless the particular amendment
or modification requires stockholder approval under Section 16 of the Exchange
Act, the Code, under the rules and regulations of the exchange or system on
which the Common Stock is listed or reported, or pursuant to other applicable
laws, rules or regulations.
FEDERAL INCOME TAX CONSEQUENCES
A Non-Employee Director who is granted a stock option under the New Beverly
Directors Option Plan will not recognize taxable income at the time of the
grant, but will generally recognize income upon the exercise of the stock
option. The amount of income recognized upon the exercise of the stock option
will be measured by the excess, if any, of the fair market value of the shares
of Common Stock at the time of exercise over the exercise price. New Beverly
will generally be entitled to a corresponding deduction for the amount of income
recognized by the Non-Employee Director.
The foregoing does not purport to be a complete summary of the federal
income tax considerations that are relevant to stock options granted under the
New Beverly Directors Option Plan. Additionally, the tax consequences under
applicable state, local or foreign tax laws may not be the same as under the
federal income tax laws.
THE BOARD OF DIRECTORS OF BEVERLY RECOMMENDS TO THE HOLDERS OF BEVERLY
COMMON STOCK THE ADOPTION AND APPROVAL OF THE NEW BEVERLY NON-EMPLOYEE DIRECTORS
STOCK OPTION PLAN.
147
<PAGE> 168
OTHER CAPSTONE PROPOSALS
AMENDMENT TO CERTIFICATE OF INCORPORATION (THE "AMENDMENT PROPOSAL")
On May 28, 1997, Capstone's Board of Directors unanimously approved the
adoption of an amendment to Capstone's Certificate of Incorporation (the
"Amendment") under which the number of authorized shares of Capstone's Common
Stock would be increased from 50 million to 300 million. In addition, the
Amendment provides for a "classified" or "staggered" Board of Directors pursuant
to which the Board will be divided into three classes as equal in number as
possible and one class of directors will be nominated and elected each year, to
hold office for three years. The amendment also increased to 25% the percentage
of outstanding shares of Capstone Common Stock that must be held by stockholders
calling for a special meeting of the Capstone stockholders and further provides
that business conducted at special meetings of the Capstone stockholders must be
limited to the business described in the notice of such meeting. The Capstone
Board of Directors determined that the Amendment is advisable and directed that
the Amendment be considered at the Capstone Special Meeting. A copy of the
proposed Amendment is attached hereto as Annex G.
Capstone's Certificate of Incorporation currently authorizes 50 million
shares of Capstone Common Stock. The Certificate of Incorporation does not
provide for cumulative voting, and there are no preemptive or other subscription
rights, conversion rights, or redemption or sinking fund provisions with respect
to the Capital Stock. If the Amendment is adopted, the Board of Directors of
Capstone will be permitted to issue the authorized shares of Capstone Common
Stock without further stockholder approval, except to the extent otherwise
required by law or by a stock exchange or stock market on which the Common Stock
is listed or traded at the time. The Capstone Common Stock is presently quoted
on the Nasdaq Stock Market. Additional shares of Capstone Common Stock for which
authorization is sought, when issued, would have the same rights and privileges
as the shares of Capstone Common Stock now outstanding.
As of May 28, 1997, there were 34,005,266 shares of Capstone Common Stock
issued and outstanding and an aggregate of 7,868,069 shares of Capstone Common
Stock reserved for issuance under Capstone's stock option and stock purchase
plans and pursuant to various warrants exercisable for Capstone Common Stock.
There are no shares of Preferred Stock issued and outstanding.
The Amendment is being made in connection with the Merger and will not
become effective even if approved by the Capstone stockholders unless the Merger
Proposal is approved and the Merger is consummated. The Board of Directors
recommends the increase in authorized shares of Capstone Common Stock in order
to issue the Capstone Common Stock in the Merger and to enable Capstone to have
greater flexibility to issue additional shares in connection with any future
stock splits; dividends; equity financings; business acquisitions; stock option,
stock purchase and other employee benefit plans; and general corporate purposes.
The additional authorized shares of Capstone Common Stock will be available
for issuance at such times and for such proper corporate purposes as the
Capstone Board of Directors may approve. Depending upon the nature and terms
thereof, such transactions could enable the Capstone Board to render more
difficult or discourage an attempt by a third party to obtain control of
Capstone. For example, the issuance of shares of Capstone Common Stock in a
public or private sale would increase the number of Capstone's outstanding
shares, thereby diluting the interest of a party seeking to acquire control of
Capstone. Issuances of additional shares, depending upon their timing and
circumstances, may dilute earnings per share and decrease the book value per
share of shares theretofore outstanding, and each stockholder's percentage
ownership of Capstone may be proportionately reduced.
A majority of the shares of Capstone Common Stock outstanding and entitled
to vote at the Capstone Special Meeting is required to amend Capstone's
Certificate of Incorporation. Counsel has agreed to vote all of its shares in
favor of the Amendment Proposal. THE CAPSTONE BOARD OF DIRECTORS HAS APPROVED
THE AMENDMENT TO CAPSTONE'S CERTIFICATE OF INCORPORATION AND RECOMMENDS THAT ALL
CAPSTONE STOCKHOLDERS VOTE IN FAVOR OF THE AMENDMENT PROPOSAL.
148
<PAGE> 169
ADOPTION OF 1997 STOCK INCENTIVE PLAN (THE "CAPSTONE PLAN PROPOSAL")
On May 28, 1997, the Board of Directors approved the adoption of Capstone's
1997 Stock Incentive Plan ("Capstone 1997 Incentive Plan") under which
nonqualified options to purchase shares of Capstone's Common Stock will be
available for grant to eligible directors and key employees of Capstone. It is
currently estimated that approximately 250 persons will be eligible to
participate following the Merger.
The Capstone 1997 Incentive Plan will reserve three million shares of
Capstone Common Stock for issuance as restricted stock, performance shares, and
phantom stock and pursuant to qualified and nonqualified stock options
(collectively, "Incentive Awards").
The Capstone 1997 Incentive Plan is designed to be primarily a stock option
plan, while enabling Capstone to assume/replace Beverly Incentive Awards
pursuant to the terms of the Merger. Capstone is obligated to issue up to
900,000 shares of Beverly Common Stock (subject to adjustment) in connection
with its assumption/replacement of certain Beverly incentive awards and such
incentive awards will have the same terms and conditions as the Beverly
incentive awards. It is presently estimated that options and performance awards
covering approximately 750,000 shares of Beverly Common Stock (subject to
adjustment) will be assumed by Capstone. A total of three million shares of
Capstone Common Stock are reserved for issuance pursuant to the Capstone 1997
Incentive Plan of which an estimated 1.1 million shares will be used for
performance shares and stock options assumed by Capstone in connection with the
Merger. The number of shares of Capstone Common Stock reserved under the
Capstone 1997 Incentive Plan is subject to adjustment in the event of stock
dividends, stock splits, recapitalization, and similar events.
The Capstone 1997 Incentive Plan is being created in connection with the
Merger and will not be implemented, even if approved by the Capstone
stockholders, unless the Merger Proposal is approved and the Merger is
consummated.
Except for options issued in connection with the assumption/replacement of
Beverly incentive awards, the following is a description of options to be
granted under the Capstone 1997 Incentive Plan. The term of options granted
under the Capstone 1997 Incentive Plan will be ten years. Options are to be
fully vested upon grant unless otherwise specified. Shares subject to options
granted under the plan which expire, terminate or are canceled without having
been exercised in full will become available again for grants. An option's
exercise price per share will be equal to the closing price of the Capstone
Common Stock as reported on the trading day prior to the date of grant. Payment
for shares of Capstone Common Stock to be issued upon exercise of an option may
be made in either cash, Capstone Common Stock or any combination thereof, at the
discretion of the option holder. Options are nontransferable, other than by
will, laws of descent or distribution, or pursuant to certain domestic relations
orders. In the event the option holder's services as a director are terminated
by reason of disability or death, the holder or his or her representative may
exercise an option for a period of 12 months following such termination. If the
service of the option holder is terminated as a director for "cause," as defined
in the Capstone 1997 Incentive Plan, an unexercised option will expire. In the
event the service of the option holder as a director is terminated for any other
reason, the holder may exercise his or her options for a period of three months
following termination, unless extended by the Capstone Board of Directors or an
appropriate committee in its sole discretion for a period of up to five years
following termination.
A copy of the proposed Capstone 1997 Incentive Plan is attached hereto as
Annex H.
A majority of the shares of Capstone Common Stock present or represented by
proxy at the Capstone Special Meeting and entitled to vote is required to adopt
the Capstone 1997 Incentive Plan. Counsel has expressed its intention to vote
all of its shares in favor of the Capstone Plan Proposal.
THE CAPSTONE BOARD OF DIRECTORS HAS APPROVED THE ADOPTION OF THE CAPSTONE
1997 INCENTIVE PLAN AND RECOMMENDS THAT ALL CAPSTONE STOCKHOLDERS VOTE IN FAVOR
OF ADOPTION OF THE CAPSTONE PLAN PROPOSAL.
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<PAGE> 170
LEGAL MATTERS
Certain legal matters in connection with the Capstone Common Stock being
offered hereby will be passed upon for Capstone by Harwell Howard Hyne Gabbert &
Manner, P.C., Nashville, Tennessee.
EXPERTS
The audited consolidated financial statements and schedule of Capstone as
of December 31, 1996 and 1995, and for the year ended December 31, 1996, the ten
months ended December 31, 1995 and the year ended February 28, 1995, and for
Dunnington Drug, Inc., Alliance Health Services, Inc. and Healthcare
Prescription Services, Inc. as of and for the year ended June 30, 1994, included
or incorporated by reference herein have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements and schedule of Pharmacy Corporation
of America at December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, which is referred to and made part of this Joint
Proxy Statement/Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements and schedule of Beverly Enterprises,
Inc. appearing in Beverly Enterprises, Inc.'s Annual Report (Form 10-K) for the
year ended December 31, 1996, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements and
schedule are incorporated herein by reference in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
150
<PAGE> 171
INDEX TO FINANCIAL STATEMENTS
The following financial statements are included herein:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CAPSTONE PHARMACY SERVICES, INC.
December 31, 1996
Report of Independent Public Accountants.................... F-3
Audited Financial Statements and Schedule:
Consolidated Balance Sheets as of December 31, 1996 and
1995................................................... F-4
Consolidated Statements of Operations for the year ended
December 31, 1996, the ten months ended December 31,
1995 and the year ended February 28, 1995.............. F-5
Consolidated Statements of Changes in Stockholders'
Equity, for the year ended December 31, 1996, the ten
months ended December 31, 1995 and the year ended
February 28, 1995...................................... F-6
Consolidated Statements of Cash Flows for the year ended
December 31, 1996, the ten months ended December 31,
1995 and the year ended February 28, 1995.............. F-7
Notes to Consolidated Financial Statements................ F-8
Schedule II -- Valuation and Qualifying Accounts.......... F-23
CAPSTONE PHARMACY SERVICES, INC.
March 31, 1997
Unaudited Financial Statements:
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996...................................... F-24
Consolidated Statements of Income for the three months
ended March 31, 1997 and 1996.......................... F-25
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1997.............. F-26
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996.......................... F-27
Notes to Consolidated Financial Statements................ F-28
PHARMACY CORPORATION OF AMERICA
December 31, 1996
Report of Ernst & Young LLP, Independent Auditors........... F-32
Audited Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and
1995................................................... F-33
Consolidated Statements of Income and Retained Earnings
for the years ended December 31, 1996, 1995 and 1994... F-34
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................... F-35
Notes to Consolidated Financial Statements................ F-36
Schedule II -- Valuation and Qualifying Accounts.......... F-46
PHARMACY CORPORATION OF AMERICA
March 31, 1997
Unaudited Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996.................................. F-47
Condensed Consolidated Statements of Income and Retained
Earnings for the three months ended March 31, 1997 and
1996................................................... F-48
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996............. F-49
Notes to Consolidated Financial Statements................ F-50
</TABLE>
F-1
<PAGE> 172
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INSTA-CARE HOLDINGS, INC.
Unaudited Financial Statements:
Consolidated Statement of Operations for the period from
January 1, 1994 through November 14, 1994.............. F-52
Consolidated Statement of Cash Flows for the period from
January 1, 1994 through November 14, 1994.............. F-53
Notes to Consolidated Statements of Operations and Cash
Flows.................................................. F-54
SYNETIC INSTITUTIONAL PHARMACY SUBSIDIARIES
Unaudited Financial Statements:
Combined Statement of Income for the period from July 1,
1994 through December 13, 1994......................... F-56
Combined Statement of Cash Flows for the period from July
1, 1994 through December 13, 1994...................... F-57
Notes to Combined Statements of Income and Cash Flows..... F-58
DUNNINGTON DRUG, INC., ALLIANCE HEALTH SERVICES, INC., AND
HEALTHCARE PRESCRIPTION SERVICES, INC.:
Report of Independent Public Accountants.................... F-60
Audited Financial Statements of Dunnington Drug, Inc.,
Alliance Health Services, Inc., and Healthcare
Prescription Services, Inc.:
Combined Balance Sheet as of June 30, 1994................ F-61
Combined Statement of Income and Retained Earnings for the
year ended June 30, 1994............................... F-62
Combined Statement of Cash Flows for the year ended June
30, 1994............................................... F-63
Notes to Combined Financial Statements.................... F-64
</TABLE>
F-2
<PAGE> 173
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Capstone Pharmacy Services, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Capstone
Pharmacy Services, Inc. (a Delaware corporation and formerly Choice Drug
Systems, Inc.) and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year ended December 31, 1996, the ten months ended
December 31, 1995 and the year ended February 28, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 financial position of Capstone
Pharmacy Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations, changes in stockholders' equity and their cash
flows for the year ended December 31, 1996, the ten months ended December 31,
1995 and the year ended February 28, 1995, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statement, and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
------------------------------------
Baltimore, Maryland
March 14, 1997 (except with respect
to the matters discussed in Note 18,
as to which the date is April 16,
1997)
F-3
<PAGE> 174
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 9,407,354 $ 2,763,416
Accounts receivable, net of allowance for doubtful
accounts of $5,778,000 and $1,294,000.................. 50,503,619 12,646,087
Inventories............................................... 13,541,511 5,023,008
Refundable income taxes................................... -- 828,628
Prepaid expenses and other current assets................. 1,523,194 688,549
Deferred tax asset........................................ 5,408,381 --
------------ ------------
Total Current Assets.............................. 80,384,059 21,949,688
Equipment and leasehold improvements, net................... 10,468,963 2,692,298
Goodwill, net of accumulated amortization of $4,074,000 and
$1,554,000................................................ 178,778,162 14,580,564
Advances to affiliates...................................... -- 2,242,841
Other assets................................................ 1,369,982 665,204
------------ ------------
Total Assets...................................... $271,001,166 $ 42,130,595
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 18,337,485 $ 6,137,272
Current portion of long-term debt......................... 3,557,199 4,222,608
Current portion of non-compete agreements................. 200,000 200,000
Accrued restructuring charges............................. 2,107,846 575,349
------------ ------------
Total Current Liabilities......................... 24,202,530 11,135,229
Deferred income taxes....................................... -- 542,787
Non-compete agreements, net of current portion.............. 200,000 400,000
Long-term debt, net of current portion...................... 39,165,739 2,692,202
Restructuring charges, net of current portion............... 2,687,068 520,640
------------ ------------
Total Liabilities................................. 66,255,337 15,290,858
============ ============
Commitments and Contingencies:
Stockholders' Equity
Common stock $.01 par value; 50,000,000 shares authorized
at December 31, 1996 and 30,000,000 shares authorized
at December 31, 1995; 31,134,221 shares issued and
30,795,769 outstanding as of December 31, 1996 and
13,610,810 issued and outstanding as of December 31,
1995................................................... 307,957 136,108
Additional paid-in capital................................ 213,593,829 38,985,006
Accumulated deficit....................................... (9,155,957) (12,281,377)
------------ ------------
Total Stockholders' Equity........................ 204,745,829 26,839,737
------------ ------------
Total Liabilities and Stockholders' Equity........ $271,001,166 $ 42,130,595
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
F-4
<PAGE> 175
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996, THE TEN MONTHS
ENDED DECEMBER 31, 1995, AND THE YEAR ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.............................................. $144,397,836 $48,841,443 $ 43,607,946
Cost of sales.......................................... 85,531,996 30,654,118 27,969,532
------------ ----------- ------------
Gross profit................................. 58,865,840 18,187,325 15,638,414
------------ ----------- ------------
Operating expenses:
Selling, general and administrative expenses......... 46,591,975 17,468,930 18,637,213
Depreciation and amortization........................ 4,633,787 1,102,892 988,974
Costs in connection with litigation.................. -- -- 4,389,163
Costs relating to pharmacy closure................... 246,446 -- --
Restructuring charges................................ 2,825,000 240,000 2,069,432
------------ ----------- ------------
Total operating expenses..................... 54,297,208 18,811,822 26,084,782
------------ ----------- ------------
Operating income (loss)...................... 4,568,632 (624,497) (10,446,368)
------------ ----------- ------------
Non-operating expense (income):
Interest expense, net................................ 1,899,784 677,009 905,404
Acquisition financing fees and expenses.............. 4,573,530 -- --
Other income, net.................................... (149,206) (431,900) (104,076)
------------ ----------- ------------
Total non-operating expense (income), net.... 6,324,108 245,109 801,328
------------ ----------- ------------
Loss from continuing operations before income taxes,
discontinued operations and extraordinary items... (1,755,476) (869,606) (11,247,696)
Benefit for income taxes............................... (5,120,857) (225,082) (466,214)
------------ ----------- ------------
Income (loss) from continuing operations before
discontinued operations and extraordinary items... 3,365,381 (644,524) (10,781,482)
Discontinued operations:
Gain (loss) from operations of discontinued business
segments.......................................... -- 18,667 (135,430)
Gain (loss) on disposal of business segments, net.... -- 564,844 (503,067)
------------ ----------- ------------
Net income (loss) before extraordinary items......... 3,365,381 (61,013) (11,419,979)
Extraordinary items:
Discount on repayment of vendor debt................... 283,364
Loss on extinguishment of debt, net of tax benefit of
$123,616............................................. (239,961) -- --
------------ ----------- ------------
Net income (loss)............................ $ 3,125,420 $ 222,351 $(11,419,979)
============ =========== ============
Earnings (loss) per common and common equivalent share:
Primary Continuing operations.......................... $ 0.15 $ (0.06) $ (1.67)
Discontinued operations.............................. -- 0.05 (0.10)
Extraordinary items.................................. (0.01) 0.03 --
------------ ----------- ------------
Net income (loss)............................ $ 0.14 $ 0.02 $ (1.77)
============ =========== ============
Fully diluted Continuing operations.................... $ 0.14 $ (0.05) $ (1.67)
Discontinued operations.............................. -- 0.05 (0.10)
Extraordinary items.................................. (0.01) 0.02 --
------------ ----------- ------------
Net income (loss)............................ $ 0.13 $ 0.02 $ (1.77)
============ =========== ============
Weighted average common and common equivalent shares
outstanding:
Primary................................................ 22,916,764 11,337,997 6,458,891
============ =========== ============
Fully diluted.......................................... 23,214,767 12,398,401 6,458,891
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<PAGE> 176
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996, THE TEN MONTHS ENDED
DECEMBER 31, 1995 AND THE YEAR ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, February 28, 1994................. 6,086,810 $ 60,868 $ 9,339,340 $ (1,083,749)
Issuance of common stock:
Stock issued to Counsel Corporation in
connection with stock purchase
agreement, net of related issuance
costs................................. 2,000,000 20,000 7,171,300 --
Stock issued in connection with exercise
of stock options...................... 34,000 340 89,410 --
Stock issued in connection with
settlement of litigation.............. -- -- 600,000 --
Net loss................................... -- -- -- (11,419,979)
---------- -------- ------------ ------------
Balance, February 28, 1995................. 8,120,810 81,208 17,200,050 (12,503,728)
Issuance of common stock:
Stock issued in connection with private
placements, net of related issuance
costs................................. 5,100,000 51,000 20,769,231 --
Stock issued in connection with the
acquisition of PremierPharmacy Inc.... 35,000 350 157,150 --
Stock issued in connection with exercise
of stock options...................... 355,000 3,550 858,575 --
Net income................................. -- -- -- 222,351
---------- -------- ------------ ------------
Balance, December 31, 1995................. 13,610,810 136,108 38,985,006 (12,281,377)
Issuance of common stock:
Stock issued in connection with private
placements, net of related issuance
costs................................. 3,147,490 31,475 33,350,784 --
Stock issued in connection with
settlement of litigation.............. 98,563 986 (986) --
Stock issued in connection with the
acquisitions of Symphony Pharmacy
Services, Inc., Geri-Care Systems,
Inc. and Scripts & Things, Inc........ 2,781,720 27,817 29,469,051 --
Stock issued in connection with
conversion of warrants................ 685,010 6,850 3,928,401 --
Stock issued in connection with public
offering.............................. 10,350,000 103,500 107,235,306 --
Stock issued in connection with exercise
of stock options, net................. 122,166 1,221 626,267 --
Net income................................. -- -- -- 3,125,420
---------- -------- ------------ ------------
Balance, December 31, 1996................. 30,795,759 $307,957 $213,593,829 $ (9,155,957)
========== ======== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 177
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996, THE TEN MONTHS ENDED
DECEMBER 31, 1995, AND THE YEAR ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 3,125,420 $ 222,351 $(11,419,979)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization......................... 7,316,345 1,145,669 988,974
Gain on sale of pharmacies............................ (150,267) -- --
(Gain) loss on disposal of business segments.......... -- (564,844) 503,067
Settlement of litigation.............................. -- -- 3,500,000
Change in assets and liabilities, net of effects of
acquisitions and dispositions:
(Increase) decrease in accounts receivable.......... (9,938,491) (2,644,719) 2,161,906
(Increase) decrease in inventories.................. (109,400) 357,029 1,297,829
Decrease (increase) in refundable income taxes...... 848,726 (238,168) (108,699)
(Increase) decrease in prepaid expenses and other
current assets................................... (508,342) (51,870) 779,825
Increase in deferred tax asset...................... (5,408,381) -- --
Increase in other assets............................ (439,468) (133,629) (333,011)
Decrease in accounts payable and accrued expenses... (3,734,342) (988,497) (145,061)
Increase (decrease) in accrued restructuring
charges.......................................... 2,098,925 (691,200) 1,652,033
------------- ------------ ------------
Net cash flows from operating activities......... (6,899,275) (3,587,878) (1,123,116)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements........ (2,643,629) (1,076,976) (252,943)
Proceeds from sale of equipment and leasehold
improvements.......................................... 230,960 -- --
Acquisitions, net of cash acquired...................... (158,702,741) (4,168,872) --
Proceeds from sale of business segment.................. -- 700,000 --
Advances to affiliates.................................. -- (2,242,841) --
Repayments of notes receivable.......................... 9,277 229,571 261,555
------------- ------------ ------------
Net cash flows from investing activities......... (161,106,133) (6,559,118) 8,612
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from commercial bank borrowings............ 82,173,525 11,600,000 --
Net repayments of commercial bank borrowings............ (46,922,852) (9,650,000) --
Net proceeds from acquisition bridge loan............... 100,000,000 -- --
Net repayments of acquisition bridge loan............... (100,000,000) -- --
Payment of acquisition financing costs.................. (2,500,000) -- --
Loan proceeds from affiliate............................ -- 1,268,250 --
Loan repayments to affiliate............................ -- (1,268,250) --
Non-compete agreement payments.......................... (200,000) (200,000) --
Repayments of other long-term debt...................... (2,753,210) (10,884,850) (5,902,723)
Principal payments of capital lease obligations......... (196,224) (183,992) (160,183)
Proceeds from issuance of common stock, net............. 145,048,107 21,682,356 7,281,050
------------- ------------ ------------
Net cash flows from financing activities......... 174,649,346 12,363,514 1,218,144
------------- ------------ ------------
Net increase in cash and cash equivalents................. 6,643,938 2,216,518 103,640
CASH AND CASH EQUIVALENTS, beginning of period............ 2,763,416 546,898 443,258
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.................. $ 9,407,354 $ 2,763,416 $ 546,898
============= ============ ============
Supplemental Disclosure of Cash Flows Information
Cash paid for:
Interest......................................... $ 3,678,922 $ 659,184 $ 887,691
============= ============ ============
Taxes............................................ $ 181,500 $ 144,149 $ 224,477
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 178
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND FEBRUARY 28, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Capstone Pharmacy Services, Inc., (formerly known as Choice Drug Systems,
Inc.) together with its subsidiaries (the "Company"), a Delaware Corporation, is
principally engaged in the business of providing pharmaceuticals and related
services to long-term care facilities, correctional institutions, hospitals and
health maintenance organizations.
On August 28, 1995, the Company changed its state of incorporation from New
York to Delaware. Effective October 2, 1995, the Company changed its name from
Choice Drug Systems, Inc. to Capstone Pharmacy Services, Inc. Additionally,
effective December 31, 1995, the Company changed its year-end from February 28
to December 31.
As of December 31, 1996, Counsel Corporation, an Ontario corporation
("Counsel"), owned approximately 6,020,000 shares of the Company's common stock
together with warrants to purchase approximately 2,337,000 additional shares.
Counsel is a management and business development company operating primarily in
the United States health care industry.
Principles of Consolidation
The consolidated financial statements include the accounts of Capstone
Pharmacy Services, Inc. and its wholly-owned subsidiaries. All material
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. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues,
expenses, gains and losses during the reporting periods. Actual results could
differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consist principally of purchased pharmaceuticals.
F-8
<PAGE> 179
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the following
estimated useful lives or with respect to leasehold improvements, over the term
of the lease if shorter.
<TABLE>
<S> <C>
Furniture, fixtures and equipment........................... 3-10 years
Automobiles and trucks...................................... 3-4 years
Leasehold improvements...................................... 5-10 years
Equipment under capital leases.............................. 3-5 years
</TABLE>
Equipment and leasehold improvements obtained in acquisitions of
subsidiaries are depreciated or amortized based on their remaining useful lives
at the acquisition date.
Goodwill
Costs in excess of fair values of businesses acquired are recorded as
goodwill and amortized using the straight-line method over periods of twenty to
forty years. Amortization of goodwill amounted to approximately $2,474,000,
$417,000, and $384,000 for the year ended December 31, 1996, the ten months
ended December 31, 1995 and the year ended February 28, 1995, respectively.
401(k) Benefit Plan
Effective May 22, 1995, employees of the Company may participate in a
supplemental retirement program established under Section 401(k) of the Internal
Revenue Code, as amended. Contributions by the Company may be made to the plan
subject to the discretion of the Board of Directors. No Company contribution was
made for the year ended December 31, 1996, or the ten months ended December 31,
1995.
Revenue Recognition
Revenues are recorded as products are shipped and services rendered. A
portion of the Company's sales are covered by various state and Federal
reimbursement programs, which are subject to review and/or audit. Reimbursement
programs are also subject to change from time to time.
Income Taxes
The Company files a consolidated Federal income tax return. Income tax
expense is based on reported earnings before income taxes. Deferred taxes on
income are provided for those items for which the reporting period and methods
used for income tax purposes differ from those used for financial statement
purposes, using the asset and liability method. Deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities.
Earnings Per Share
Net loss per common share for the year ended February 28, 1995, was
computed by dividing the net loss by the average weighted number of common
shares outstanding. For the ten months ended December 31, 1995, and the year
ended December 31, 1996, primary and fully diluted earnings per common share
were computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding. The amount of common
stock equivalents outstanding was computed using the treasury stock method.
F-9
<PAGE> 180
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
Acquisitions during the year ended December 31, 1996
In January 1996, the Company purchased Geri-Care Systems, Inc. and Scripts
& Things, Inc. ("Geri-Care") which provide institutional pharmacy services to
long-term care facilities in the New York metropolitan area. The purchase price
was approximately $6,000,000, payable $1,320,000 in cash and promissory notes,
with the remainder representing 669,230 shares of the Company's common stock.
The agreement also includes an additional 338,462 shares of the Company's common
stock held in escrow as a contingent incentive payment for certain new business
to be generated through 1998 by the selling shareholders of Geri-Care. Total
goodwill at the date of acquisition was $6,259,000.
In February 1996, the Company purchased IMD Corporation ("IMD") which
provides institutional pharmacy services to long-term care facilities in the
Chicago metropolitan area. The total purchase price was $15,882,000. Total
goodwill at the date of acquisition was $13,146,000.
In July 1996, the Company acquired DCMed, Inc. and its wholly-owned
subsidiary MediDyne Corporation (collectively, "MediDyne"), a provider of
Medicare Part B services, which consist of enteral nutrition and urologic
supplies, as well as counseling and assistance with regulatory compliance in
connection with such services. The total purchase price was $7,500,000. The
agreement also provides for an earn-out based on the future adjusted earnings of
the business, payable in cash. Total goodwill at the date of acquisition was
$7,667,000.
In July 1996, the Company acquired the institutional pharmacy business of
Symphony Pharmacy Services, Inc. ("Symphony"), a subsidiary of Integrated Health
Services, Inc. ("IHS"). Symphony provides institutional pharmacy services,
including infusion therapy and Medicare Part B services, to long-term care
facilities in eight states. The total purchase price was $150,000,000, including
$25,000,000 representing the issuance of 2,112,490 shares of the Company's
common stock. Total goodwill at the date of acquisition was $131,303,000.
In October 1996, the Company acquired the institutional pharmacy business
of Happy Harry's, Inc., a Delaware based retail drug store operator. The total
purchase price was $3,695,000. Total goodwill at the date of acquisition was
$2,407,000.
In December 1996, the Company purchased Institutional Pharmacy, Inc., which
provides institutional pharmacy services to long-term care facilities in the
state of Tennessee. The total purchase price was $4,839,000. Total goodwill at
the date of acquisition was $4,068,000.
Acquisitions During the Ten Months Ended December 31, 1995
In May 1995, the Company acquired PremierPharmacy, Inc. ("Premier"), which
provides pharmacy services to long-term care facilities located in the New York
metropolitan area and hospitals located in the southeastern United States. The
total purchase price was $4,250,000. Total goodwill at the date of acquisition
was $10,494,000.
All business acquisitions described above have been accounted for by the
purchase method of accounting with the assets and liabilities of the acquirees
recorded at their estimated fair market values at the date of acquisition. The
operations of the acquirees, since the dates of acquisition, are included in the
accompanying consolidated statements of operations. Goodwill for these business
acquisitions is being amortized over twenty to forty years.
F-10
<PAGE> 181
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma combined results of operations of the Company for the
year ended December 31, 1996, and the ten months ended December 31, 1995, are
presented below. Such pro forma presentation has been prepared assuming that the
acquisitions described above and in Note 17 have been made as of March 1, 1995
(in thousands, except per share data).
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net revenues............................................... $276,976 $236,224
Gross profit............................................... 117,524 101,486
Net income before extraordinary item....................... 8,557 3,013
Net income................................................. 8,317 2,793
Primary and fully diluted, net income per share............ $ 0.23 $ 0.08
======== ========
</TABLE>
The unaudited pro forma results include the historical accounts of the
Company and the acquired businesses adjusted to reflect (1) depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the acquisitions, (2) the interest expense resulting
from the financing of the acquisitions, (3) the per share effect of stock issued
as part of the acquisition and (4) the related income tax effects. The pro forma
results are not necessarily indicative of actual results which might have
occurred had the operations and management teams of the Company and the acquired
companies been combined in prior years.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31, 1996 and 1995, are
comprised of the following:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Leasehold improvements.................................... $ 474,546 $ 544,272
Furniture, fixtures and equipment......................... 12,471,101 3,945,149
Data processing equipment................................. 2,376,750 1,512,500
Automobiles and trucks.................................... 290,186 258,379
----------- ----------
15,612,583 6,260,300
Accumulated depreciation and amortization................. (5,143,620) (3,568,002)
----------- ----------
Equipment and leasehold improvements, net................. $10,468,963 $2,692,298
=========== ==========
</TABLE>
Depreciation and amortization of equipment and leasehold improvements
amounted to approximately $2,160,000, $686,000 and $605,000 for the year ended
December 31, 1996, the ten months ended December 31, 1995 and the year ended
February 28, 1995, respectively.
F-11
<PAGE> 182
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long term debt at December 31, 1996 and 1995, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Borrowings under a $125,000,000 revolving credit facility
with a group of five commercial banks, interest at varying
rates based on the type of borrowing, secured by
substantially all assets of the Company, due at scheduled
maturities through December 2001.......................... $37,200,000 $ --
Unsecured note payable to former owners of MediDyne,
non-interest bearing, payable quarterly based on
MediDyne's financial performance, due January 1998........ 1,651,086 --
Borrowings under a $10,000,000 revolving loan with
CreditAnstalt, interest at prime plus 0.5% secured by
substantially all assets of the Company, due on demand.... -- 1,950,000
Unsecured note payable to relative of former stockholder,
payable in quarterly installments with interest at 9%
through January 2000...................................... 215,319 297,938
Amounts due under a Medicare settlement with the United
States Government, payable in quarterly installments with
interest at 7.75% through 2001............................ 1,933,330 2,537,500
Unsecured notes payable to former stockholders of a Premier
subsidiary, interest at 6%, currently payable............. 1,000,000 1,000,000
Unsecured notes payable to former stockholders of a Premier
subsidiary, due in monthly installments of $14,898,
including interest at 6% through October 31, 1998......... 309,641 464,752
Unsecured note payable to a former stockholder of a Premier
subsidiary, interest at 7%, due August 11, 1996........... -- 153,334
Unsecured notes payable to former stockholders of a Premier
subsidiary, interest at 7%, due in annual installments of
$30,000 through June 30, 1999............................. 90,000 120,000
Capital lease obligations (Note 10)......................... 316,092 364,844
Other....................................................... 7,470 26,442
----------- -----------
42,722,938 6,914,810
Less: Current portion....................................... (3,557,199) (4,222,608)
----------- -----------
Long-term portion........................................... $39,165,739 $ 2,692,202
=========== ===========
</TABLE>
F-12
<PAGE> 183
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities of long-term debt, exclusive of capital lease obligations
at December 31, 1996, follow:
<TABLE>
<S> <C>
1997........................................................ $ 3,426,957
1998........................................................ 757,090
1999........................................................ 539,480
2000........................................................ 483,319
2001........................................................ 37,200,000
-----------
$42,406,846
===========
</TABLE>
To finance acquisitions, the Company extinguished its outstanding debt
under the revolving loan agreement with CreditAnstalt and replaced it with a
$125,000,000 revolving credit facility through a group of five commercial banks
("new credit facility") on December 6, 1996. Extinguishment of the existing debt
included payoff of the outstanding balance of $31,422,852 and an incurred loss
of $239,961, net of tax, resulting from the write-off of unamortized deferred
financing costs. The loss is recorded as an extraordinary item in the
accompanying consolidated statement of operations. The Company incurred
approximately $1,010,000 in debt acquisition costs associated with the new
credit facility, which are to be amortized over the life of the debt.
Under the new credit facility, the Company has the option to borrow under
base rate and eurodollar rate revolving loans, swing line loans, and letters of
credit. Interest rates on base rate and swing line loans are at the higher of
the prime rate or 0.5% in excess of the federal funds effective rate, plus an
applicable margin based on the Company's leverage ratio at the time of
borrowing. The swing line loans are also adjusted for a commitment fee
percentage tied to the Company's leverage ratio. Interest on base rate and swing
line loans is due quarterly in arrears. Interest rates on eurodollar rate loans
are calculated at the eurodollar rate plus an applicable margin based on the
Company's leverage ratio at the time of borrowing. Interest is due at the end of
the one, two, or three month interest period elected by the Company. If the
Company elects a six month eurodollar rate loan, interest is payable in arrears
at the end of the third and sixth month. Letter of credit fees are based on the
eurodollar loan margin, plus the greater of 0.25% of the maximum available to be
drawn for letters of credit, as defined in the agreement, or $500, and is to be
paid quarterly in arrears. As of December 31, 1996, the Company's outstanding
borrowings total $37,200,000 under a base rate loan at an effective interest
rate, including the amortization of deferred financing costs, of 8.29%.
Scheduled reductions of the $125,000,000 maximum balance allowed under the
new credit facility on December 1 of each year are as follows:
<TABLE>
<S> <C>
1997 $ --
1998 10,000,000
1999 35,000,000
2000 40,000,000
2001 40,000,000
------------
$125,000,000
============
</TABLE>
The new revolving credit facility is secured by substantially all assets of
the Company and stipulates certain covenants applicable to capital expenditures,
cash consideration on acquisitions, and sale of assets, as well as minimum
financial ratios. As of December 31, 1996, the Company is in compliance with all
debt covenants.
The average effective interest rate on amounts outstanding under the
CreditAnstalt agreement for the periods outstanding during 1996 and 1995 were
approximately 7.5% and 8.75%, respectively. A letter of credit fee at an annual
rate of 1.25% was paid on a monthly basis. Amounts available to be borrowed
under this
F-13
<PAGE> 184
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement were based upon levels of accounts receivable and inventories. The
weighted average and highest outstanding balance under this agreement for the
period outstanding through December 6, 1996 were $21,581,000 and $31,422,852,
respectively.
In connection with the Symphony acquisition, the Company entered into a
senior subordinated credit facility with a group of lenders pursuant to which
the lenders funded a $100 million bridge loan. The proceeds of the bridge loan
were used to pay a portion of the Symphony acquisition purchase price. The
bridge loan bore interest at a floating interest rate of LIBOR plus 6.01% to
6.25%. In connection with the bridge loan, the Company incurred a commitment fee
of $2,500,000, net of an early loan repayment discount. The bridge loan was
repaid in full by the Company on September 26, 1996, using the proceeds of the
September 1996 public offering.
Included as acquisition financing fees and expenses in the accompanying
consolidated statement of operations is the $2,500,000 commitment fee, bridge
loan interest of approximately $1,813,000 and bridge loan closing costs of
approximately $261,000. In connection with the acquisition of MediDyne (See Note
2), the Company incurred a $2,900,000 note payable to the former owners of
MediDyne in consideration for the purchase. The note is non-interest bearing and
is to be repaid quarterly based on MediDyne's earnings before taxes,
depreciation and amortization in excess of $600,000. As of December 31, 1996,
the outstanding balance of $1,651,084 is expected by management to be paid
within one year and, therefore, has been included in current portion of
long-term debt in the accompanying consolidated balance sheet.
On November 1, 1995, the Company elected not to make a scheduled
installment payment on a note payable to former stockholders of a Premier
subsidiary in the aggregate principal amount of $1,000,000, due to a dispute
with these former stockholders. This amount is recorded as current portion of
long-term debt in the accompanying consolidated balance sheets as of December
31, 1996 and 1995.
On October 31, 1994, the Company entered into an agreement with the United
States Government settling an investigation conducted by the U.S. Attorney for
the Eastern District of Pennsylvania into claims for reimbursement made by
certain of the Company's subsidiaries to the Medicare Program. The subject of
the investigation was the Company's claims documentation and Medicare
reimbursement practices for December 1993 and prior. Under the terms of the
settlement, without admitting any liability, the Company has agreed to repay, as
a return of revenue previously received, over a six-year period, $3,400,000 to
settle the Government's claims. Initially, $100,000 was paid upon the execution
of the agreement and $400,000 was paid on December 31, 1994. Thereafter,
$2,900,000 plus interest at an annual rate of 7.75% is payable in quarterly
installments over a six year period ending January 1, 2001. The full amount of
the settlement, including related legal fees, is included in costs in connection
with litigation in the accompanying consolidated statement of operations for the
year ended February 28, 1995.
Interest expense for the year ended December 31, 1996, the ten months ended
December 31, 1995, and the year ended February 28, 1995, was approximately
$3,713,000, $677,000 and $905,000, respectively. These amounts include
amortization of deferred financing costs of approximately $183,000, $43,000 and
$0, respectively.
Based on the borrowing rates currently available to the Company, the fair
value of long term debt, exclusive of capital lease obligations, as of December
31, 1996, is approximately $42,410,000.
5. PUBLIC STOCK OFFERING
In September 1996, the Company completed an offering of 10,350,000 shares
of common stock to the public at a price of $11.00 per share. Net proceeds of
approximately $107,235,000 were received, net of direct costs of approximately
$6,615,000. Direct costs included the underwriters discount, accounting and
legal fees, printing and marketing expenses and other miscellaneous costs.
F-14
<PAGE> 185
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PRIVATE PLACEMENTS
In December 1994, the Company entered into a Stock Purchase Agreement with
Counsel. Pursuant to the Stock Purchase Agreement, Counsel acquired 2,000,000
shares of the Company's common stock for net proceeds of approximately
$7,191,000. Counsel was also granted two three-year warrants, the first of which
grants Counsel the right to purchase up to 1,000,000 shares of the Company's
common stock at an exercise price of $4.50 per share, and the second of which
grants Counsel the right to acquire up to 800,000 shares of the Company's common
stock at an exercise price of $5.50 per share.
In May 1995, the Company completed a private placement of 1,600,000 units
(the "Units"). Each Unit consisted of one share of common stock, a three year
warrant to acquire 0.5 shares of common stock at the exercise price of $4.50 per
share, and a three year warrant to acquire 0.4 shares of common stock at the
exercise price of $5.50 per share. The offering of Units raised proceeds of
approximately $5,759,000, net of related costs, at a price of $3.65 per Unit.
The proceeds of the private placement were used to fund the acquisition of
Premier and to retire the debt to a major vendor in the amount of approximately
$1,776,000, resulting in a gain on the discount of debt of approximately
$283,000. The gain on the discount of debt is reflected in the accompanying
consolidated statement of operations for the ten months ended December 31, 1995,
as an extraordinary item.
In August 1995, the Company completed a second private placement of its
common stock. This offering consisted of 3,500,000 shares at a price of $4.38
per share. The net proceeds of this private placement were approximately
$15,061,000, net of related costs including placement commissions. There were no
warrants issued in connection with this second private placement. The proceeds
of this private placement were used to retire outstanding debt of $9,650,000 due
to CreditAnstalt and for general working capital purposes.
In April 1996, the Company completed a third private placement of its
common stock. This offering consisted of 1,035,000 shares at a price of $8.50
per share. The net proceeds of this private placement were $8,400,000, net of
related costs. The proceeds from this private placement were used to fund
acquisitions and provide general working capital for the Company.
In July 1996, the Company completed a private placement of its common stock
with Counsel. Counsel acquired 2,112,490 shares of common stock for proceeds of
$25,000,000. The proceeds from this private placement were used to fund the
acquisition of Symphony.
7. RESTRUCTURING CHARGES
In February 1995, the Company adopted a formal plan of restructuring in
order to realign and consolidate businesses, concentrate resources, and better
position itself to achieve its strategic growth objectives. This plan included
the termination and sale of the medical/surgical supply operations of a wholly
owned subsidiary, B.T. Smith, Inc., and the closing of the Company's long-term
care pharmacy operation in Missouri, Choice Drug Systems of Missouri, Inc., on
June 30, 1995.
Prior to the closing and ultimate sale of its medical/surgical supply
operations, the Company consolidated the medical/surgical operation of B.T.
Smith, Inc. with the medical/surgical supply division of J & J Drug & Medical
Services, Inc. in its Baltimore, Maryland pharmacy location. Accounting and
administration functions previously based at the Inwood, New York and Teaneck,
New Jersey pharmacy locations were also consolidated and moved to the Baltimore
office location. The effect of this consolidation was to refocus the Inwood and
Teaneck pharmacies on the core long-term care business; to consolidate the
Company's medical/ surgical supply business in one location in anticipation of
its sale; and to consolidate accounting functions at the Baltimore headquarters
location. The Company initiated these actions to streamline and reduce the cost
of operating its medical/surgical supply business and its accounting function
and to exit the unprofitable Missouri long-term care market.
F-15
<PAGE> 186
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded restructuring charges of $2,069,432 for the year ended
February 28, 1995, which includes the write-down of accounts receivable,
inventories and fixed assets to net realizable value and the accrual for the
termination of leases, employee severance costs, and the estimated
administrative costs of terminating operations. Also included in the
restructuring costs are amounts due to former executives of the Company under
consulting agreements which expire in May 1997 and other long-term contractual
obligations related to the restructured business. During the ten months ended
December 31, 1995, the Company recorded, as a change in estimate, an additional
$100,000 write-down of accounts receivable for the medical/surgical supply
operations.
The net sales and loss from continuing operations of the medical/surgical
supply operations and the Missouri location are as follows:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28,
1995 1995
------------ ------------
<S> <C> <C>
Net Sales................................................... $ 854,018 $ 3,983,533
========= ===========
Loss from continuing operations............................. $(157,218) $(2,406,438)
========= ===========
</TABLE>
In December 1995, the Company adopted a formal plan of restructuring in
order to consolidate certain of its satellite locations. The Company recorded
restructuring costs of $140,000 for the ten months ended December 31, 1995,
which includes the write-down of fixed assets to net realizable value, the
accrual for employee severance costs and the termination of leases.
In connection with the February 1995 restructuring, the Company made
severance payments of approximately $459,000 and $335,000 and paid other exit
costs of approximately $154,000 and $227,000 during the year ended December 31,
1996 and the ten months ended December 31, 1995, respectively.
During July 1996, in connection with the Symphony acquisition, the Company
adopted a plan to restructure its long-term care pharmacy operations in Los
Angeles by consolidating two of its existing facilities into a new, more
centralized location. The Company has assumed liabilities, included in the
acquisition cost allocation, of approximately $1,600,000 for costs to
involuntarily terminate employees of Symphony and to close the pharmacy
location.
During August 1996, the Company adopted a plan of restructuring to
consolidate its Aston, Pennsylvania and Baltimore, Maryland long-term care
pharmacies into one of its existing Mid-Atlantic pharmacies. The Company has
recorded restructuring costs of $450,000 for the year ended December 31, 1996
which includes employee severance costs and the termination of leases.
Also, during September 1996, the Company adopted a formal plan of
restructuring to close its Baltimore, Maryland corporate offices and
correctional pharmacies. The corporate offices will be relocated to Irving,
Texas and the correctional pharmacy will be relocated to another location in the
Baltimore area. The Company has recorded restructuring costs of $2,375,000 for
the year ended December 31, 1996, which primarily includes employee severance
costs and lease termination costs. The Company made severance payments related
to the corporate office restructuring of approximately $107,000 during the year
ended December 31, 1996.
8. DISCONTINUED OPERATIONS
In February 1995, in connection with adoption of its formal restructuring
plan, the Company decided to discontinue the operations of its mail order and
computerized health care software businesses. The mail order business was closed
effective August 1, 1995 and the assets of the computerized health care software
business were sold to an unrelated party on June 30, 1995 for $700,000, which
resulted in a gain in the amount of $564,844, net of related income taxes of
$38,000.
F-16
<PAGE> 187
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net gains or losses of these operations for the ten months ended
December 31, 1995 and the year ended February 28, 1995 are included in the
consolidated statements of operations under gain (loss) from operations of
discontinued business segments. The loss on disposal of $503,067 reflected in
the consolidated statement of operations for the year ended February 28, 1995,
includes the write-down of the assets of the mail order and computer software
businesses to estimated net realizable value and the estimated costs of
disposing of these operations, including a pro-rata share of the Company's
expense for office space in Baltimore.
The Company had net sales from discontinued operations of approximately
$909,000 and $2,731,000 for the ten months ended December 31, 1995 and the year
ended February 28, 1995, respectively.
9. INCOME TAXES
The benefit for income taxes consisted of the following:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current..................................... $ -- $(219) $(466)
Deferred.................................... (5,510) (46) --
------- ----- -----
(5,510) (265) (466)
State and local............................... 389 40 --
------- ----- -----
$(5,121) $(225) $(466)
======= ===== =====
</TABLE>
For the year ended December 31, 1996, the Federal benefit for income taxes
is primarily due to the reversal of the valuation allowance recorded on the
Company's deferred tax assets. Based on the current operating profitability of
the Company and budgeted taxable income for 1997, management believes that it is
now more likely than not that the Company's deferred tax assets will be
realized. As a result of this change in estimate, the valuation allowance of
$5,186,000 on deferred tax assets was reversed during the year ended December
31, 1996.
The actual income tax benefit for the year ended December 31, 1996, the ten
months ended December 31, 1995 and the year ended February 28, 1995 is different
from the amounts computed by applying the statutory Federal income tax rates to
losses from continuing operations before income taxes. The reconciliation of
these differences follow:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at statutory rate................. $ (597) $(296) $(3,824)
Additional funds received..................... -- (219) --
Increase resulting from:
State income taxes, net of federal income
tax effect............................... 257 26 --
Current loss not available for carryback.... -- 172 3,206
Tax effect of permanent differences......... 276 68 152
Reduction of valuation allowance............ (5,186) -- --
Other items, net............................ 129 24 --
------- ----- -------
Benefit for income taxes.................... $(5,121) $(225) $ (466)
======= ===== =======
</TABLE>
F-17
<PAGE> 188
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, the Company had a net operating loss carryforward of
approximately $16,663,000 for Federal income tax purposes, expiring in
increments through 2011. The utilization of approximately $11,106,000 of such
losses is restricted to offset only future taxable income generated by Choice
Maryland and Premier.
The tax effect of cumulative temporary differences at December 31, 1996 and
1995 follow:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current Deferred Tax Assets:
Tax carryforwards........................................... $ 5,665 $ 4,172
Accounts receivable allowances.............................. 85 413
Accrued litigation costs.................................... 657 1,255
Accrued restructuring charges............................... 1,104 536
Accrued liabilities......................................... 440 280
Other....................................................... 1,178 254
------- -------
9,129 6,910
Less: Valuation allowance................................... (1,724) (6,910)
------- -------
Net deferred tax asset............................ $ 7,405 $ --
======= =======
Deferred Tax Liabilities:
Puerto Rico withholding tax................................. $ 425 $ 425
Goodwill amortization....................................... 1,330 --
Depreciation and other...................................... 242 118
------- -------
Net deferred tax liability........................ $ 1,997 $ 543
======= =======
</TABLE>
10. COMMITMENTS
Leases
The Company leases office and warehouse space, automobiles and equipment.
Rental expense under these leases aggregated approximately $1,664,000, $781,000,
and $719,000 for the year ended December 31, 1996, the ten months ended December
31, 1995, and the year ended February 28, 1995, respectively.
Future minimum lease payments, follow:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ --------- ----------
<S> <C> <C>
1997................................................... $ 157,074 $1,741,995
1998................................................... 113,863 1,612,177
1999................................................... 74,538 1,411,448
2000................................................... 26,788 1,013,377
2001................................................... 6,571 933,803
2002 and Thereafter.................................... -- 1,938,370
--------- ----------
Total minimum lease payments................................ 378,834 $8,651,170
==========
Less: amount representing interest.......................... (62,742)
---------
Present value of net minimum lease payments............... 316,092
Less: current portion....................................... (130,242)
---------
Long-term portion........................................... $ 185,850
=========
</TABLE>
F-18
<PAGE> 189
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CONTINGENCIES
A lawsuit has been filed against the Company by the former shareholders of
a subsidiary of Premier. The plaintiffs sold their business to Premier in 1993
and claim that the company owes them approximately $1,000,000 under promissory
notes delivered to them as part of the consideration for their stock. (See Note
4). The plaintiffs also claim that the Company owes them an additional
$1,100,000 under an earn-out agreement. Finally, the plaintiffs claim the
Company is liable for tortiously interfering with their rights under the
purchase agreement and under the promissory notes. The plaintiffs seek total
judgments of $7,100,000, plus interest and costs against the Company. The
Company has answered the complaint and is vigorously contesting the plaintiff's
claims. In addition, the Company has filed a counterclaim against the plaintiffs
for breaches of certain representations and warranties in the agreement.
Management of the Company does not believe that this litigation is likely to
have a material adverse effect on its financial position and results of
operations.
The Company is subject to various claims and litigation in the ordinary
course of its business. In the opinion of management and outside counsel,
settlement of these claims and litigation will not have a material adverse
effect on the financial position or future operating results of the Company.
12. STOCKHOLDER'S EQUITY
Common Stock Authorized
On August 28, 1995, the Company's stockholders approved an increase in the
authorized common stock of the Company from 15,000,000 shares to 30,000,000
shares. On September 28, 1996 the Company's stockholders approved an increase in
the authorized common stock of the Company from 30,000,000 shares to 50,000,000
shares.
Stock Option Plans
The Company has eight stock option plans and an employee stock purchase
plan covering up to 3,029,168 shares of the Company's common stock, pursuant to
which officers, directors and employees of the Company are eligible to receive
either incentive or non-qualified options. Stock options generally expire five
or ten years from the date of grant. The exercise price of an incentive stock
option is equal to the fair market value of the Company's common shares on the
date such option was granted. The exercise price of non-qualified stock options
may be less than the fair market value on the date of grant.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its fixed stock option plans and its stock purchase plan. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ----------------
<S> <C> <C>
Net income:
As reported........................................... $ 3,125,420 $ 222,351
Pro forma............................................. (7,763,229) (3,155,567)
Primary Earnings per share:
As reported........................................... 0.14 0.02
Pro forma............................................. (0.34) (0.28)
Fully-diluted earnings per share:
As reported........................................... 0.13 0.02
Pro forma............................................. (0.33) (0.25)
</TABLE>
F-19
<PAGE> 190
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model.
A summary of option transactions during the year ended December 31, 1996,
the ten months ended December 31, 1995 and the year ended February 28, 1995
follow:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------------------------
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ---------------- ------------
<S> <C> <C> <C>
Shares under option at beginning of
period.................................. 1,564,000 1,094,500 918,500
Granted ($2.86-$11.25).................... 1,589,000 949,500 564,000
Canceled ($2.85-$6.00).................... (1,666) (125,000) (354,000)
Exercised ($1.88-$8.50)................... (122,166) (355,000) (34,000)
--------- --------- ---------
Options outstanding at end of period
($2.85-$11.25).......................... 3,029,168 1,564,000 1,094,500
========= ========= =========
Shares available for future grant......... 856,250 693,750 568,250
========= ========= =========
Options exercisable at end of period...... 1,828,149 1,289,000 994,500
========= ========= =========
Weighted average fair value of options
granted................................. $ 6.85 $ 3.56
========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1996 LIFE PRICE 1996 PRICE
-------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$2.85-$5.00........................... 1,052,334 7.8 Years $ 4.10 968,998 $ 4.08
$5.00-$7.50........................... 377,000 5.1 Years $ 5.65 350,332 $ 5.63
$7.50-$10.00.......................... 400,834 9.2 Years $ 8.45 134,158 $ 8.41
$10.00-$11.25......................... 1,199,000 9.9 Years $10.48 374,661 $10.55
$2.85-$11.25.......................... 3,029,168 8.5 Years $ 7.39 1,828,149 $ 6.02
</TABLE>
Warrants
During 1994, in exchange for consulting services, the Company issued
warrants exercisable for 40,000 shares of common stock with an exercise price of
$3.50.
In August 1995, the Company's Board of Directors extended the expiration
date of certain outstanding redeemable warrants issued as part of the Company's
initial public offering (The "IPO Warrants") to March 31, 1996, and subsequently
extended the expiration date to August 23, 1996. During August 1996, the Company
registered the shares underlying its outstanding Series A and B warrants. Series
A warrants representing 643,344 of a total of 650,000 shares of common stock
were exercised before expiring, at an exercise price of $6.00 per share. The
expiration date of the 643,344 Series B Warrants (which are exercisable at
$10.00 per share) issued upon exercise of the IPO Warrants is August 16, 1997.
In connection with the private placements discussed in Note 5, the Company
issued warrants to purchase 3,240,000 shares of stock at prices ranging from
$4.50 to $5.50 per share. These warrants expire through May 1998.
F-20
<PAGE> 191
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1995, as part of their debt agreement, the Company issued
warrants to CreditAnstalt which grants CreditAnstalt the right to purchase
15,000 shares of common stock at a price of $7.31 per share. These warrants
expire in December 2000.
In January 1996, as part of the acquisition of IMD Corporation, the Company
issued warrants to purchase 75,000 shares of common stock at a price of $7.50
per share. These warrants expire in January 1999.
Total warrants for 4,132,684 shares were outstanding at December 31, 1996,
including the IPO warrants, warrants issued in connection with private
placements and 100,000 warrants issued in connection with prior acquisitions, at
exercise prices ranging from $4.50 to $12.00 per share. 46,615 (excluding the
Series A warrants) warrants were exercised during the year, at exercise prices
ranging from $3.50 to $5.50 per share.
13. MAJOR VENDOR
The Company utilizes a primary supplier arrangement for its pharmaceutical
purchases. During both 1995 and 1996, the Company changed its primary supplier.
Purchases of inventory under primary supplier relationships during the year
ended December 31, 1996, the ten months ended December 31, 1995, and the year
ended February 28, 1995, were approximately 82%, 87% and 55% of total inventory
purchases, respectively.
14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Trade accounts payable..................................... $11,390,194 $4,671,435
Accrued salaries, payroll taxes and benefits............... 4,172,362 669,860
Miscellaneous accrued expenses............................. 2,385,929 795,977
----------- ----------
$17,948,485 $6,137,272
=========== ==========
</TABLE>
15. RELATED PARTIES
As a result of the Company's acquisition of Symphony (See Note 2),
Symphony's former parent company, IHS, is a significant Company stockholder. The
Company provides institutional pharmacy services to several long-term care
facilities owned and managed by IHS. Since the Company's acquisition of Symphony
during 1996, net revenues of approximately $8,139,000 have been generated from
sales to IHS owned and managed long-term care facilities. Amounts due from IHS
owned and managed long-term care facilities of approximately $6,983,000 at
December 31, 1996 are included in accounts receivable, net in the accompanying
consolidated balance sheet.
To facilitate the timely purchase of MediDyne, an interim purchase of
MediDyne was made by Counsel Corporation, a significant stockholder of the
Company. The terms of the agreement are described in Note 2.
The Company entered into arrangements with a company which owns long-term
care facilities in the state of Minnesota to provide pharmacy services and
certain administrative functions in exchange for a monthly management fee. These
management fees, totaling approximately $58,000, have been included in other
income in the accompanying consolidated statement of operations for the year
ended December 31, 1996. In addition, the Company has provided working capital
funding. At December 31, 1996, amounts due of approximately $661,000 are
included in the accompanying consolidated balance sheet.
F-21
<PAGE> 192
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 is effective
for financial statements with fiscal years beginning after December 15, 1995.
The adoption of SFAS No. 121 as of January 1, 1996 had no impact on the
Company's financial position or results of operations.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB No. 15, "Earnings Per Share." It
replaces the presentation of primary EPS with a presentation of basic EPS and
requires a reconciliation of the numerator and denominator of the basic EPS
calculation to the numerator and denominator of the diluted EPS calculation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant
to APB Opinion No. 15.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997,
and early adoption is not permitted. When adopted, it will require restatement
of prior years' EPS. When adopted for the year ended December 31, 1997, the
Company will report basic EPS instead of primary EPS. Basic EPS for the year
ended December 31, 1996 and the ten months ended December 31, 1995 is $0.16 and
$0.02, respectively.
17. SUBSEQUENT EVENTS
In January 1997, the Company entered into purchase agreements with Clinical
Care-SNF Pharmacy, Inc., Portaro Pharmacies, Inc. and Alger Health Services,
Inc. These three acquisitions expand the Company's presence in the State of
California and represent institutional pharmacy revenues of approximately
$15,000,000, $15,000,000 and $8,500,000, respectively.
The purchase price for Clinical Care-SNF Pharmacy, Inc. was $20,000,000,
payable $5,000,000 in cash and the remainder representing 1,354,402 shares of
the Company's common stock. The purchase price for Portaro Pharmacies, Inc. was
$20,000,000, payable $5,000,000 in cash and the remainder representing 1,354,402
shares of the Company's common stock. The purchase price for Alger Health
Services, Inc. was $4,200,000.
In March 1997, the Company acquired Pennsylvania Prescriptions, Inc., a
Harrisburg, Pennsylvania institutional and retail pharmacy doing business as
Emerald Drugs. The purchase price was $6,200,000 and includes an earn-out
provision.
In March 1997, the Company acquired Pharmacare, Inc., a Virginia-based
provider of institutional pharmacy services. The purchase price was
approximately $8,500,000.
18. SUBSEQUENT EVENT -- PROPOSED MERGER
In April 1997, the Company announced a proposed merger with Beverly
Enterprises, Inc.,'s ("Beverly") pharmacy unit, Pharmacy Corporation of America
(PCA). After receipt of shareholder and other required approvals, the Company
will issue approximately 50,000,000 shares to existing Beverly stockholders and
assume approximately $275,000,000 in debt. The Company anticipates that the
transaction will be finalized during the fourth quarter of 1997.
F-22
<PAGE> 193
SCHEDULE II
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE TEN MONTHS ENDED DECEMBER 31, 1995
AND THE YEAR ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO ADDITIONS BALANCE AT
BEGINNING COSTS AND THROUGH END OF
OF PERIOD EXPENSES ACQUISITIONS WRITE-OFFS PERIOD
---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowances for Doubtful Accounts:
Year Ended December 31, 1996....... $1,294,000 $1,222,000 $6,754,000 $3,492,000 $5,778,000
Ten Months Ended December 31,
1995............................ 1,561,000 778,000 242,000 1,287,000 1,294,000
Year Ended February 28, 1995....... 1,387,000 1,385,000 -- 1,211,000 1,561,000
</TABLE>
F-23
<PAGE> 194
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,308,190 $ 9,407,354
Accounts receivable, net of allowance for doubtful
accounts of $7,128,000 as of March 31, 1997, and
$5,778,000, as of December 31, 1996, respectively...... 63,401,985 50,503,619
Inventories............................................... 18,134,696 13,541,511
Prepaid expenses and other current assets................. 2,823,053 1,523,194
Deferred tax benefit...................................... 3,929,876 5,408,381
------------ ------------
Total Current Assets.............................. 98,597,800 80,384,059
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net................... 12,130,249 10,468,963
OTHER ASSETS................................................ 1,965,559 1,369,982
GOODWILL, net of accumulated amortization of $5,485,000 as
of March 31, 1997, and $4,074,000 as of December 31, 1996,
respectively.............................................. 236,024,195 178,778,162
------------ ------------
Total Assets...................................... $348,717,803 $271,001,166
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 17,859,814 $ 18,337,485
Current portion of long-term debt......................... 3,245,645 3,557,199
Current portion of non-compete agreements................. 200,000 200,000
Accrued restructuring charges............................. 2,007,545 2,107,846
------------ ------------
Total Current Liabilities......................... 23,313,004 24,202,530
NON-COMPETE AGREEMENTS, net of current portion.............. 200,000 200,000
LONG-TERM DEBT, net of current portion...................... 84,697,551 39,165,739
RESTRUCTURING CHARGES, net of current portion............... 2,608,055 2,687,068
------------ ------------
Total Liabilities................................. 110,818,610 66,255,337
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares authorized
at March 31, 1997, and December 31, 1996; 34,005,266
shares issued and 33,666,814 outstanding as of March
31, 1997, and 31,134,221 shares issued and 30,795,769
outstanding as of December 31, 1996.................... 336,668 307,957
Capital in excess of par.................................. 244,264,407 213,593,829
Accumulated deficit....................................... (6,701,882) (9,155,957)
------------ ------------
Total Stockholders' Equity........................ 237,899,193 204,745,829
------------ ------------
Total Liabilities and Stockholders' Equity........ $348,717,803 $271,001,166
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-24
<PAGE> 195
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
NET SALES................................................... $69,023,558 $22,027,865
COST OF SALES............................................... 38,690,339 13,575,566
----------- -----------
Gross profit...................................... 30,333,219 8,452,299
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 22,925,269 7,277,293
Depreciation and amortization............................. 2,357,234 569,057
----------- -----------
Total operating expenses.......................... 25,282,503 7,846,350
----------- -----------
Income from operations............................ 5,050,716 605,949
----------- -----------
NONOPERATING EXPENSE (INCOME):
Interest expense, net..................................... 1,155,359 263,188
Other income, net......................................... -- (46,528)
----------- -----------
Total nonoperating expense (income), net.......... 1,155,359 216,660
----------- -----------
Net income before income tax provision............ 3,895,357 389,289
INCOME TAX PROVISION........................................ 1,441,282 103,000
----------- -----------
Net income........................................ $ 2,454,075 $ 286,289
=========== ===========
EARNINGS PER SHARE:
Primary................................................... $ 0.07 $ 0.02
=========== ===========
Fully diluted............................................. $ 0.07 $ 0.02
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Primary................................................... 36,683,917 16,592,126
=========== ===========
Fully diluted............................................. 36,915,693 16,692,186
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-25
<PAGE> 196
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL
---------------------- IN EXCESS ACCUMULATED
SHARES AMOUNT OF PAR DEFICIT TOTAL
---------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996................... 30,795,759 $307,957 $213,593,829 $(9,155,957) $204,745,829
Common stock issued in
connection with the
exercise of stock
options............. 162,251 1,623 697,666 -- 699,289
Common stock issued in
connection with
acquisitions........ 2,708,804 27,088 29,972,912 -- 30,000,000
Net income for the
three months ended
March 31, 1997...... -- -- -- 2,454,075 2,454,075
---------- -------- ------------ ----------- ------------
BALANCE, March 31,
1997................... 33,666,814 $336,668 $244,264,407 $(6,701,882) $237,899,193
========== ======== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE> 197
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,454,075 $ 286,289
Adjustments to reconcile net income to net cash flows from
operating activities --
Depreciation and amortization.......................... 2,357,234 569,057
Change in assets and liabilities, net of effects from
acquisition/ disposal of businesses:
Increase in accounts receivable...................... (7,439,708) (787,308)
Increase in inventories.............................. (972,101) (491,121)
(Increase) decrease in prepaid expenses and other
current assets.................................... (996,406) 769,865
Decrease in deferred tax benefit..................... 1,478,506 --
Increase in other assets............................. (595,577) (9,759)
Decrease in accounts payable and accrued expenses.... (9,836,954) (1,955,338)
Decrease in pre-acquisition advances to affiliates,
net............................................... -- (427,086)
Decrease in accrued restructuring charges............ (179,314) (125,748)
------------ ------------
Net cash flows from operating activities.......... (13,730,245) (2,171,149)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements.......... (1,505,005) (328,652)
Acquisitions, net of cash acquired........................ (28,360,968) (17,048,672)
Repayments of notes receivable............................ -- 32,973
------------ ------------
Net cash flows from investing activities.......... (29,865,973) (17,344,351)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from commercial bank borrowings.............. 44,720,865 20,483,000
Repayment of subsidiary pre-acquisition indebtedness...... -- (1,800,000)
Proceeds from exercise of stock options................... 699,289 130,712
Repayment of other long-term debt, net.................... (923,100) (785,687)
------------ ------------
Net cash flows from financing activities.......... 44,497,054 18,028,025
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 900,836 (1,487,475)
CASH AND CASH EQUIVALENTS, beginning of period.............. 9,407,354 2,763,416
------------ ------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 10,308,190 $ 1,275,941
============ ============
SUPPLEMENTAL DISCLOSURE:
Cash paid for:
Interest............................................... $ 736,131 $ 82,671
============ ============
Taxes.................................................. $ 84,265 $ 68,296
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-27
<PAGE> 198
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PART 1: FINANCIAL INFORMATION
ITEM 1. 1. ORGANIZATION AND BUSINESS:
Capstone Pharmacy Services, Inc. and subsidiaries (a Delaware corporation),
together with its wholly-owned subsidiaries (the "Company") is principally
engaged in the business of providing institutional pharmacy services to
long-term care facilities, correctional institutions, hospitals and health
maintenance organizations throughout the United States.
ITEM 2. EARNINGS PER SHARE:
Earnings per share is based upon the weighted average number of the
Company's common and common equivalent shares outstanding for the three months
ended March 31, 1997 and 1996. The amount of common stock equivalents
outstanding was computed using the treasury stock method.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB No. 15, "Earnings Per Share." It
replaces the presentation of primary EPS with a presentation of basic EPS and
requires a reconciliation of the numerator and denominator of the basic EPS
calculation to the numerator and denominator of the diluted EPS calculation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant
to APB Opinion No. 15.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997,
and early adoption is not permitted. When adopted, it will require restatement
of prior years' EPS. When adopted for the year ended December 31, 1997, the
Company will report basic EPS instead of primary EPS. Basic EPS for the three
months ended March 31, 1997 and 1996 is $.07 and $0.02, respectively.
ITEM 3. BASIS OF PRESENTATION:
The interim condensed consolidated financial statements of the Company for
the three months ended March 31, 1997 and 1996, included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
accompanying unaudited interim consolidated financial statements reflect all
adjustments necessary to present fairly the financial position of the Company at
March 31, 1997 and 1996, and the results of its operations and cash flows for
the three months ended March 31, 1997 and 1996. Certain reclassifications have
been made to the prior period financial statements to conform to the current
period presentation.
The results of operations for the three months ended March 31, 1997 and
1996, are not necessarily indicative of results to be expected for the full
year. These interim condensed consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in the Company's annual report on Form 10-K, as filed with the Securities and
Exchange Commission for the year dated December 31, 1996. The balance sheet at
December 31, 1996, has been derived from the audited financial statements at
that date.
ITEM 4. ACQUISITIONS:
Acquisitions During the Year Ended December 31, 1996
In January 1996, the Company purchased Geri-Care Systems, Inc. and Scripts
& Things, Inc. ("Geri-Care"), which provides institutional pharmacy services to
long-term care facilities in the New York
F-28
<PAGE> 199
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
metropolitan area. The purchase price was approximately $6,000,000, payable
$1,320,000 in cash and promissory notes, with the remainder representing 669,230
shares of the Company's common stock. The agreement also includes an additional
338,462 shares of the Company's common stock held in escrow as a contingent
incentive payment for certain new business to be generated through 1998 by the
selling shareholders of Geri-Care. Total goodwill at the date of acquisition was
$6,259,000.
In February 1996, the Company purchased IMD Corporation ("IMD") which
provides institutional pharmacy services to long-term care facilities in the
Chicago metropolitan area. The total purchase price was $15,882,000. Total
goodwill at the date of acquisition was $13,146,000.
In July 1996, the Company acquired DCMed, Inc. and its wholly-owned
subsidiary MediDyne Corporation (collectively, "MediDyne"), a provider of
Medicare Part B services, which consist of enteral nutrition and urologic
supplies, as well as counseling and assistance with regulatory compliance in
connection with such services. The total purchase price was $7,500,000. The
agreement also provides for an earn-out based on the future adjusted earnings of
the business, payable in cash. Total goodwill at the date of acquisition was
$7,667,000.
In July 1996, the Company acquired the institutional pharmacy business of
Symphony Pharmacy Services, Inc. ("Symphony"), a subsidiary of Integrated Health
Services, Inc. ("IHS"). Symphony provides institutional pharmacy services,
including infusion therapy and Medicare Part B services, to long-term care
facilities in eight states. The total purchase price was $150,000,000, including
$25,000,000 representing the issuance of 2,112,490 shares of the Company's
common stock. Total goodwill at the date of acquisition was $131,303,000.
In October 1996, the Company acquired the institutional pharmacy business
of Happy Harry's, Inc. a Delaware-based retail drug store operator. The total
purchase price was $3,695,000. Total goodwill at the date of acquisition was
$2,407,000.
In December 1996, the Company purchased Institutional Pharmacy, Inc., which
provides institutional pharmacy services to long-term care facilities in the
state of Tennessee. The total purchase price was $4,839,000. Total goodwill at
the date of acquisition was $4,068,000.
Acquisitions During the Three Months Ended March 31, 1997
In January 1997, the Company entered into acquisition agreements with
Clinical Care-SNF Pharmacy, Inc., Portaro Pharmacies, Inc. and Alger Health
Services, Inc. These three acquisitions expand the Company's presence in the
state of California and represent institutional revenues of approximately
$15,000,000, $15,000,000 and $8,500,000, respectively. The purchase price for
Clinical Care-SNF Pharmacy, Inc. was $20,000,000, payable $5,000,000 in cash and
the remainder representing 1,354,402 shares of the Company's common stock. The
purchase price for Portaro Pharmacies, Inc. was $20,000,000, payable $5,000,000
in cash and the remainder representing 1,354,402 shares of the Company's common
stock. The purchase price for Alger Health Services, Inc. was $4,200,000. Total
goodwill at the date of acquisition for these acquisitions amounted to
$42,215,000.
In March 1997, the Company acquired Pennsylvania Prescriptions, Inc., a
Harrisburg, Pennsylvania, institutional and retail pharmacy doing business as
Emerald Drugs. The purchase price was $6,200,000 and includes an earn-out
provision. Total goodwill at the date of acquisition was $4,123,000.
In March 1997, the Company acquired Pharmacare, Inc., a Virginia-based
provider of institutional pharmacy services. The purchase price was
approximately $8,500,000. Total goodwill at the date of acquisition was
$7,826,000.
F-29
<PAGE> 200
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective March 1997, the Company acquired Macromed, a New York-based
provider of Medicare Part B services. The total purchase price was approximately
$2,800,000. Total goodwill at the date of acquisition approximated $2,900,000.
These acquisitions have been accounted for using the purchase method of
accounting, with the assets and liabilities of the acquired companies recorded
at their estimated fair market values at the dates of acquisition. Goodwill,
representing the excess of acquisition cost over the fair value of the net
assets acquired, is amortized over 40 years.
5. ACQUISITION PRO FORMA FINANCIAL STATEMENTS:
The results of operations of acquired businesses are included in the
Company's consolidated results from the date of acquisition. Had the
acquisitions discussed in Note 4 occurred on January 1, 1996, management
estimates that the unaudited pro forma results of operations for the three
months ended March 31, 1997 and 1996 ($000 omitted, except for per share data)
would have been:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
NET SALES................................................... $73,266 $70,069
COST OF SALES............................................... 41,300 39,363
------- -------
Gross profit...................................... 31,966 30,706
OPERATING EXPENSES.......................................... 26,506 26,916
NON-OPERATING EXPENSES, net................................. 1,481 1,649
------- -------
Income before income tax provision................ 3,979 2,141
INCOME TAX PROVISION........................................ 1,471 958
------- -------
Net income........................................ $ 2,508 $ 1,183
======= =======
Net income per share.............................. $ 0.07 $ 0.03
======= =======
</TABLE>
These pro forma operating results reflect certain adjustments, including
amortization of goodwill acquired, incremental interest expense and adjustments
for the provision of income taxes to reflect an effective tax rate of 37%. The
pro forma results are not necessarily indicative of the operating results that
would have occurred had the acquisitions been consummated on January 1, 1996,
nor are they necessarily indicative of future results.
6. CREDIT FACILITY:
The Company maintains a Revolving Credit Facility with a syndicate of five
commercial banks under which borrowings of up to $125 million are available.
Under the credit facility, the Company has the option to borrow under base rate
and eurodollar rate revolving loans, swing line loans and letters of credit.
Interest rates on base rate and swing line loans are at the higher of the prime
rate or 0.5% in excess of the federal funds effective rate, plus an applicable
margin based on the Company's leverage ratio at the time of borrowing. The swing
line loans are also adjusted for a commitment fee percentage tied to the
Company's leverage ratio. Interest on base rate and swing line loans is due
quarterly in arrears. Interest rates on eurodollar rate loans are calculated at
the eurodollar rate, plus an applicable margin based on the Company's leverage
ratio at the time of borrowing. Interest is due at the end of the one, two or
three-month interest period elected by the Company. If the Company elects a
six-month eurodollar rate loan, interest is payable in arrears at the end of the
third and sixth month. Letter of credit fees are based on the eurodollar loan
margin, plus the greater of 0.25% of the maximum available to be drawn for
letters of credit, as defined in the agreement, or $500, and is to be paid
quarterly in arrears.
F-30
<PAGE> 201
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled reductions of the $125,000,000 maximum balance allowed under the
Revolving Credit Facility on December 1 of each year are as follows:
<TABLE>
<S> <C>
1997 $ --
1998................................................. 10,000,000
1999................................................. 35,000,000
2000................................................. 40,000,000
2001................................................. 40,000,000
------------
$125,000,000
============
</TABLE>
The Revolving Credit Facility is secured by substantially all assets of the
Company and stipulates certain covenants applicable to capital expenditures,
cash consideration on acquisitions, and sale of assets, as well as minimum
financial ratios. As of March 31, 1997, the Company is in compliance with all
debt covenants.
7. RESTRUCTURING:
New York Pharmacy Consolidation
Effective June 30, 1996, the Company closed its Inwood, New York, long-term
care pharmacy and consolidated its operations with those of other of the
Company's long-term care pharmacies in the New York metropolitan area.
Long-Term Care Pharmacy
During August 1996, in connection with the Symphony acquisition, the
Company adopted a plan to restructure its long-term care pharmacy operations by
consolidating two of its existing California facilities into a new, more
centralized location and by consolidating its Aston, Pennsylvania, and
Baltimore, Maryland, long-term care pharmacies into one of its existing
mid-Atlantic pharmacies. In addition, the Company's restructuring plan includes
the relocation of its corporate headquarters.
The Company has recorded as a restructuring charge during the year ended
December 31, 1996, the estimated costs associated with the long-term care
pharmacy restructuring of $2,825,000. These costs include, among other items,
future lease obligations relating to facility closures and severance and other
costs relating to planned downsizing of the Company's work force.
8. MAJOR VENDOR:
The Company utilizes a primary supplier arrangement for its purchases of
pharmaceuticals. In light of the financial and operating significance of
purchases, the Company routinely monitors the performance of its primary
supplier and negotiates settlements and future service levels based thereon.
Anticipated settlement amounts are recorded based upon management's estimates.
The Company changed its primary supplier in December 1996.
9. SUBSEQUENT EVENTS:
In April 1997, the Company acquired Willowood Services, Inc., a
Massachusetts-based provider of institutional pharmacy services to approximately
750 beds. The purchase price was approximately $2,900,000.
In April 1997, the Company announced a proposed merger with Beverly
Enterprises, Inc.'s ("Beverly") pharmacy unit, Pharmacy Corporation of America
(PCA). The Company will issue approximately 50,000,000 shares to existing
Beverly stockholders and assume approximately $275,000,000 in debt. The Company
anticipates that the transaction will be finalized during the fourth quarter of
1997.
F-31
<PAGE> 202
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Pharmacy Corporation of America
We have audited the accompanying consolidated balance sheets of Pharmacy
Corporation of America as of December 31, 1996 and 1995, and the related
consolidated statements of income and retained earnings, and cash flows for each
of the three years in the period ended December 31, 1996. Our audits also
included the financial statement Schedule II -- Valuation and Qualifying
Accounts of Pharmacy Corporation of America. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Pharmacy Corporation of America at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
ERNST & YOUNG LLP
Little Rock, Arkansas
April 18, 1997
F-32
<PAGE> 203
PHARMACY CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,575 $ 3,315
Accounts receivable, less allowance for doubtful accounts:
1996 -- $13,070, 1995 -- $17,913....................... 93,078 84,651
Notes and other receivables, less allowance for doubtful
accounts: 1996 -- $820, 1995 -- $352................... 1,383 2,892
Inventory................................................. 22,025 25,175
Prepaid expenses and other................................ 335 298
-------- --------
Total current assets.............................. 124,396 116,331
Property and equipment, net (Note 3)........................ 32,698 28,551
Other assets:
Goodwill, net............................................. 276,430 277,360
Systems development, net.................................. 4,837 4,627
Other, net................................................ 3,215 2,003
-------- --------
Total other assets................................ 284,482 283,990
-------- --------
$441,576 $428,872
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,017 $ 25,039
Accrued wages and related liabilities..................... 6,656 4,212
Other accrued liabilities................................. 6,621 8,938
Current portion of long-term obligations (Note 4)......... 968 630
-------- --------
Total current liabilities......................... 32,262 38,819
Long-term obligations (Note 4).............................. 1,334 125
Deferred income taxes....................................... 3,980 --
Due to Parent (Notes 4, 6, 9 and 10)........................ 312,395 318,610
Commitments and contingencies (Note 5)
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding................................. 1 1
Additional paid-in capital................................ 3,866 3,866
Retained earnings......................................... 87,738 67,451
-------- --------
Total stockholder's equity........................ 91,605 71,318
-------- --------
$441,576 $428,872
======== ========
</TABLE>
See accompanying notes.
F-33
<PAGE> 204
PHARMACY CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Non-affiliates............................................ $434,317 $377,664 $170,299
Affiliates (Note 9)....................................... 82,083 74,021 77,213
-------- -------- --------
Total revenues.................................... 516,400 451,685 247,512
Cost of goods sold.......................................... 280,468 242,761 117,045
-------- -------- --------
Gross profit................................................ 235,932 208,924 130,467
Operating expenses:
Wages and related......................................... 118,888 106,742 61,619
Selling, general and administrative....................... 50,377 48,334 28,302
Provision for doubtful accounts........................... 13,500 17,679 7,388
Depreciation and amortization............................. 16,392 13,219 5,734
Management fees (Note 9).................................. 1,820 2,844 2,075
Impairment of long-lived assets (Note 1):
Adoption of SFAS No. 121............................... -- 5,392 --
Development costs...................................... -- 4,151 --
-------- -------- --------
Total operating expenses.......................... 200,977 198,361 105,118
-------- -------- --------
Income before provision for income taxes.................... 34,955 10,563 25,349
Provision for income taxes (Note 6)......................... 14,668 5,977 10,291
-------- -------- --------
Net income.................................................. 20,287 4,586 15,058
Retained earnings, beginning of year........................ 67,451 62,865 47,807
-------- -------- --------
Retained earnings, end of year.............................. $ 87,738 $ 67,451 $ 62,865
======== ======== ========
</TABLE>
See accompanying notes.
F-34
<PAGE> 205
PHARMACY CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 20,287 $ 4,586 $ 15,058
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 16,392 13,219 5,734
Impairment of long-lived assets........................ -- 9,543 --
Gain on dispositions of assets......................... (250) -- --
Provision for doubtful accounts........................ 13,500 17,679 7,388
Deferred income taxes (benefit)........................ 4,159 (909) 635
Change in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable.................................. (21,474) (22,489) (14,972)
Inventory............................................ 3,510 2,282 (1,173)
Prepaid expenses and other receivables............... (44) 614 147
Accounts payable and accrued expenses................ (7,498) (2,836) 6,595
-------- -------- ---------
Total adjustments................................. 8,295 17,103 4,354
-------- -------- ---------
Net cash provided by operating activities......... 28,582 21,689 19,412
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........... (10,835) (2,151) (223,435)
Proceeds from dispositions................................ 2,152 -- --
Capital expenditures...................................... (7,803) (10,497) (6,903)
Systems development....................................... (1,813) (2,601) (504)
Other, net................................................ 329 1,852 (11)
-------- -------- ---------
Net cash used for investing activities............ (17,970) (13,397) (230,853)
Cash flows from financing activities:
Advances (to) from Parent, net............................ (5,064) (9,716) 216,735
Proceeds from issuance of long-term obligations........... -- 143 --
Repayments of long-term obligations....................... (1,288) (877) (1,079)
-------- -------- ---------
Net cash provided by (used for) financing
activities...................................... (6,352) (10,450) 215,656
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 4,260 (2,158) 4,215
Cash and cash equivalents at beginning of year.............. 3,315 5,473 1,258
-------- -------- ---------
Cash and cash equivalents at end of year.................... $ 7,575 $ 3,315 $ 5,473
======== ======== =========
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest............................................... $ 11 $ 35 $ 517
</TABLE>
See accompanying notes.
F-35
<PAGE> 206
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pharmacy Corporation of America (the "Company") is a wholly-owned
subsidiary of Beverly Enterprises, Inc. ("Beverly"). The Company is one of the
nation's largest institutional pharmacies delivering drugs and related products
and services, infusion therapy and other healthcare products (enteral and
urological) to nursing facilities, acute care and transitional care hospitals,
home care providers, psychiatric facilities, correctional facilities, assisted
living centers, retirement homes and their patients. The Company also provides
consultant pharmacist services, which include evaluations of patient drug
therapy, and drug handling, distribution and administration within a nursing
facility as well as assistance with state and federal regulatory compliance. The
Company's mail service pharmacy delivers drugs and medical equipment to workers'
compensation payors, claimants and employers. As of December 31, 1996, the
Company operated 57 pharmacies and pharmacy-related outlets located in 25
states. All references to the Company shall mean Pharmacy Corporation of America
and its consolidated subsidiaries. All significant intercompany accounts and
transactions between the Company and its subsidiaries have been eliminated. (See
Note 10.)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits and certificates of deposit
with original maturities of three months or less.
INVENTORY
Inventory, consisting of pharmaceuticals and other products held for
resale, are carried primarily at the lower of cost (first-in, first-out) or
market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligation
less accumulated amortization. Depreciation and amortization are computed by the
straight-line method over the estimated useful lives of the assets.
INTANGIBLES
Goodwill (stated at cost less accumulated amortization of approximately
$17,865,000 and $10,586,000 in 1996 and 1995, respectively) is being amortized
over 40 years using the straight-line method.
Software development (stated at cost less accumulated amortization of
approximately $5,674,000 and $4,068,000 in 1996 and 1995, respectively) is being
amortized over five years using the straight-line method. Software development
costs consist of incremental costs for the development of software to be used in
the operations of the Company and the cost of any purchased software packages.
On an ongoing basis, the Company reviews the carrying value of its
intangible assets in light of any events or circumstances that indicate they may
be impaired or that the amortization period may need to be adjusted.
F-36
<PAGE> 207
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
If such circumstances suggest the intangible value cannot be recovered,
calculated based on undiscounted cash flows over the remaining amortization
period, the carrying value of the intangible will be reduced by such shortfall.
As of December 31, 1996, the Company does not believe there is any indication
that the carrying value or the amortization period of its intangibles needs to
be adjusted.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121")
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted future
cash flows are not sufficient to recover the assets' carrying amounts. The
impairment loss is measured by comparing the fair value of an asset to its
carrying amount.
In 1995, the Company recorded an impairment loss of approximately
$5,392,000 upon adoption of SFAS No. 121. The impairment indicators which led to
recording this loss were as follows: two pharmacies, purchased by the Company in
late 1994, had operating losses in 1995, and the Company anticipated future
operating losses for these facilities primarily related to Beverly's lack of
presence in the markets; one pharmacy, located in a state where Beverly had
recently sold all of its interest, began to lose the contracts that had been
assumed by the new owners, and it became apparent that the operations would not
recover to their previous level; and, lastly, the Company operates a medical
records servicing business which lost approximately half of its business in 1995
when Beverly pursued a different vendor for this service. Accordingly,
management estimated the undiscounted future cash flows to be generated by each
business. The undiscounted future cash flow estimates were less than the
carrying value of such businesses, so management estimated the fair value of
such businesses and wrote the carrying values down to their estimates of fair
value. Management calculated the fair values of the impaired businesses by using
the present values of estimated future cash flows.
In addition to the SFAS No. 121 charge, the Company recorded an impairment
loss in 1995 of approximately $4,151,000 primarily related to the write-off of
software costs. In conjunction with the Company's 1995 acquisition of
Prescription Management Services, Inc. ("PMSI") (see Note 2), PMSI's Vice
President of Management Information Systems assumed the management information
systems' functions for the Company and redirected the Company's systems
development initiatives, which caused a write-off of certain software and
systems development costs.
INSURANCE
The Company is insured for general liability and workers' compensation
risks through Beverly's self-insurance programs. Beverly allocates expense to
the Company based on the relative percentage of insurance costs incurred by
Beverly on behalf of the Company. Total insurance allocations to the Company
were approximately $1,829,000, $1,409,000 and $919,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Management believes these
charges represent a reasonable allocation of the costs incurred by Beverly on
behalf of the Company.
STOCK-BASED AWARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair
F-37
<PAGE> 208
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
value on the date of grant. The Company has elected to continue to account for
stock-based awards in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for stock option grants. See Note 7 for the pro forma
effects on the Company's reported net income assuming the election had been made
to recognize compensation expense on stock-based awards in accordance with SFAS
No. 123.
REVENUES
The Company's revenues are derived primarily from providing pharmaceuticals
and related healthcare products and services to long-term care facilities, acute
care and transitional care hospitals, home care providers, psychiatric
facilities, correctional facilities and their patients. The Company's mail
service pharmacy delivers drugs and medical equipment to workers' compensation
payors, claimants and employers. The Company records fees at the time the
services or products are provided. These revenues are reported at the estimated
net amounts to be received from individuals, third party payors, nursing
facilities and others. Approximately 37%, 41% and 41% of the Company's operating
revenues for 1996, 1995 and 1994, respectively, were derived from funds under
federal and state medical assistance programs, and approximately 43% of the
Company's net accounts receivable at December 31, 1996 and 1995 are due from
such programs.
Concentration of Credit Risk
The Company has significant accounts receivable whose collectibility or
realizability is dependent upon the performance of certain governmental
programs, primarily Medicaid and Medicare. These receivables represent the only
concentration of credit risk for the Company. The Company does not believe there
are significant credit risks associated with these governmental programs. The
Company believes that an adequate provision has been made for the possibility of
these receivables proving uncollectible and continually monitors and adjusts
these allowances as necessary. See also Note 9 for a discussion of business with
Beverly.
2. ACQUISITIONS
During 1996, the Company acquired three institutional pharmacies for cash
of approximately $10,835,000 and disposed of one institutional pharmacy for cash
proceeds of approximately $2,152,000. The acquisitions were accounted for as
purchases.
In June 1995, Beverly acquired Pharmacy Management Services, Inc. ("PMSI")
in exchange for approximately 12,361,000 shares of Beverly common stock, plus
closing and related costs. As a leading independent nationwide provider of
medical cost containment and managed care services to workers' compensation
payors and claimants, PMSI's services included, among others, pharmacy benefit
management through both a national retail pharmacy network and home delivery of
prescription drugs, medical supplies and medical equipment. The mail-service
portion of PMSI's business was assumed by the Company. This transaction was
accounted for as a purchase and resulted in additional goodwill for the Company
of approximately $ 83,800,000. The Company also purchased one institutional
pharmacy during 1995 for cash of approximately $2,492,000. This acquisition was
accounted for as a purchase.
In November 1994, the Company acquired Insta-Care Holdings, Inc.,
("Insta-Care") for cash of approximately $112,000,000 as well as other costs
incurred totaling approximately $8,600,000. Insta-Care provided pharmaceutical
dispensing services in six states to approximately 65,000 patients in nursing
homes and correctional facilities. In December 1994, the Company acquired three
institutional pharmacy subsidiaries of Synetic, Inc., ("Synetic") for cash of
approximately $107,300,000, as well as other costs incurred totaling
approximately $6,000,000. The Synetic businesses provided pharmaceutical
dispensing services in New
F-38
<PAGE> 209
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. ACQUISITIONS -- (CONTINUED)
England and Indiana to approximately 45,000 patients in various institutions,
including nursing homes, transitional care facilities, correctional facilities
and group homes. These acquisitions were accounted for as purchases and resulted
in additional goodwill for the Company of approximately $95,100,000 related to
Insta-Care and approximately $90,800,000 related to Synetic. The Company
consummated such transactions with funds provided by Beverly. Beverly borrowed
such funds through banking arrangements (see Note 4). The Company also purchased
one institutional pharmacy during 1994 for cash of approximately $782,000. This
acquisition was accounted for as a purchase.
Summarized below are the unaudited proforma consolidated results of
operations of the Company for the years ended December 31, 1995 and 1994,
assuming the PMSI, Insta-Care and Synetic transactions discussed above had
occurred as of January 1, 1994. The operations of all of the other pharmacies
acquired or disposed of during 1996, 1995 and 1994 were immaterial to the
Company's financial position and results of operations.
These unaudited proforma consolidated results of operations have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had those transactions been made at January 1, 1994, or
of results which may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994
-------- ------------------------
INSTA-CARE,
INSTA-CARE SYNETIC
PMSI & SYNETIC & PMSI
-------- ---------- -----------
<S> <C> <C> <C>
Revenues.................................................... $493,262 $421,379 $505,350
Income before provision for income taxes.................... 12,827 30,217 35,863
Net income.................................................. 5,567 17,950 21,304
</TABLE>
3. PROPERTY AND EQUIPMENT
Following is a summary of property and equipment and related accumulated
depreciation and amortization by major classifications at December 31 (in
thousands):
<TABLE>
<CAPTION>
TOTAL OWNED LEASED
----------------- ----------------- ---------------
1996 1995 1996 1995 1996 1995
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Leasehold improvements..................... $11,460 $ 9,941 $11,460 $ 9,941 $ -- $ --
Furniture and equipment.................... 44,156 34,859 39,764 33,146 4,392 1,713
Construction in progress................... 345 550 345 550 -- --
------- ------- ------- ------- ------ ------
55,961 45,350 51,569 43,637 4,392 1,713
Less: accumulated depreciation and
amortization......................... 23,263 16,799 21,238 15,456 2,025 1,343
------- ------- ------- ------- ------ ------
$32,698 $28,551 $30,331 $28,181 $2,367 $ 370
======= ======= ======= ======= ====== ======
</TABLE>
The estimated useful lives of the assets are as follows: leasehold
improvements 5 to 20 years or term of lease, if less; furniture and equipment 5
to 15 years. Capitalized lease assets are amortized over the initial terms of
the leases.
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1996, 1995 and 1994 was approximately $6,737,000,
$4,534,000 and $3,363,000, respectively.
F-39
<PAGE> 210
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Present value of capital lease obligations, at effective
interest rates of 6.25% to 9.25%.......................... $2,262 $412
Non-interest bearing note due July 1996..................... -- 250
Other notes payable......................................... 40 93
------ ----
2,302 755
Less amounts due within one year............................ 968 630
------ ----
$1,334 $125
====== ====
</TABLE>
Scheduled maturities of long-term obligations, including capital leases,
for the years ending December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 THEREAFTER TOTAL
------ ---- ---- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Future minimum lease payments................ $1,088 $983 $440 $4 $4 $1 $2,520
Less interest................................ 157 82 18 1 -- -- 258
------ ---- ---- -- -- --- ------
Net present value of future minimum lease
payments................................... 931 901 422 3 4 1 2,262
Notes payable................................ 37 3 -- -- -- -- 40
------ ---- ---- -- -- --- ------
$ 968 $904 $422 $3 $4 $1 $2,302
====== ==== ==== == == === ======
</TABLE>
Included in the Company's "Due to Parent" account at December 31, 1996 and
1995 is a $225,000,000 obligation to repay Beverly for certain bank debt, as
discussed below. Beverly executed a credit agreement on November 1, 1994, which
provided for, among other things, a $225,000,000 Term Loan (the "Term Loan").
The proceeds from the Term Loan were used to consummate the Insta-Care and
Synetic acquisitions (as previously discussed). No interest has been charged to
the Company related to this debt obligation or any other amounts included in the
"Due to Parent" account. In December 1996, Beverly repaid the Term Loan with the
net proceeds from a $375,000,000 Amended and Restated Credit Agreement. Such
credit agreement provides for a Revolver/Letter of Credit Facility (the
"Revolver/LOC Facility"). Borrowings under the Revolver/LOC Facility bear
interest at adjusted LIBOR plus .875%, the Prime Rate, as defined, or the
adjusted CD rate, as defined, plus 1%, at Beverly's option. Such interest rates
may be adjusted quarterly based on certain financial ratio calculations. The
Revolver/LOC Facility is secured by a security interest in the stock of the
Company and matures on December 31, 2001.
F-40
<PAGE> 211
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. COMMITMENTS AND CONTINGENCIES
The future minimum rental commitments required by noncancelable operating
leases on the Company's pharmacy locations with initial or remaining terms in
excess of one year as of December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997...................................................... $ 3,830
1998...................................................... 3,215
1999...................................................... 2,586
2000...................................................... 1,895
2001...................................................... 1,493
Thereafter................................................ 3,610
-------
$16,629
=======
</TABLE>
The Company leases all of its pharmacy locations and certain of its
equipment primarily under operating leases. Rent expense on operating leases for
the years ended December 31 was as follows: 1996 -- $12,142,000;
1995 -- $13,005,000; 1994 -- $8,037,000. Contingent rent, based primarily on
increases in the consumer price index, was approximately $343,000, $437,000 and
$511,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company's capital and operating leases primarily have initial terms of
five years with renewal options (which could extend the term of the leases by up
to five years), contain escalation clauses and have provisions for payments by
the Company of real estate taxes, insurance and maintenance costs.
The Company is contingently liable for Beverly's $180,000,000 of 9% Senior
Notes due February 15, 2006 (the "Senior Notes"). Beverly issued the Senior
Notes in February 1996 through a public offering and used the net cash proceeds
to repay indebtedness. The Senior Notes are unsecured obligations of Beverly,
guaranteed by substantially all of Beverly's present and future subsidiaries and
impose certain restrictive covenants.
There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
F-41
<PAGE> 212
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. INCOME TAXES
The Company joins with Beverly in the filing of consolidated income tax
returns. The consolidated tax provision of Beverly is allocated to its
subsidiaries on a separate company basis, as required. The resultant income
taxes payable to, or tax benefit receivable from, Beverly flows through the "Due
to Parent" account. Beverly accounts for income taxes using the liability method
required by Financial Accounting Standards Statement No. 109, "Accounting for
Income Taxes." The Company's provision for income taxes consists of the
following for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Federal:
Current.................................................. $ 8,649 $5,667 $ 7,946
Deferred................................................. 3,423 (748) 523
State:
Current.................................................. 1,860 1,219 1,710
Deferred................................................. 736 (161) 112
------- ------ -------
$14,668 $5,977 $10,291
======= ====== =======
</TABLE>
The Company's annual effective tax rate was approximately 42%, 56.6% and
40.6% for the years ended December 31, 1996, 1995 and 1994, respectively. A
reconciliation of the provision for income taxes, computed at the statutory
rate, to the Company's annual effective tax rate is summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------ ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate.................. $12,234 35.0 $3,697 35.0 $ 8,872 35.0
State tax provision.................... 1,688 4.8 688 6.5 1,185 4.7
Amortization of intangibles............ 561 1.6 1,519 14.4 182 0.7
Other.................................. 185 0.6 73 0.7 52 0.2
------- ---- ------ ---- ------- ----
$14,668 42.0 $5,977 56.6 $10,291 40.6
======= ==== ====== ==== ======= ====
</TABLE>
In accordance with Statement No. 109, deferred income taxes for 1996, 1995
and 1994 reflect the impact of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The tax effects of temporary differences
giving rise to the Company's deferred tax assets and liabilities at December 31,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
ASSET LIABILITY ASSET LIABILITY
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Provision for bad debts...................... $5,014 $ -- $6,582 $ --
Uniform capitalization of inventory.......... 363 -- 363 --
Depreciation and amortization................ -- 9,569 -- 7,230
Other........................................ 212 -- 464 --
------ ------ ------ ------
$5,589 $9,569 $7,409 $7,230
====== ====== ====== ======
</TABLE>
Due to Parent includes cumulative amounts for current and deferred income
taxes as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Current taxes payable....................................... $56,700 $46,191
Deferred taxes payable (receivable)......................... 3,980 (179)
------- -------
$60,680 $46,012
======= =======
</TABLE>
F-42
<PAGE> 213
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. STOCK-BASED AWARDS
The Company accounts for stock-based awards granted to its employees by
Beverly in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
Interpretations because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") requires use of
option valuation models that were not developed for use in valuing employee
stock options. Since the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized for employee stock options under APB No. 25.
The Company recognizes compensation expense for its restricted stock grants,
performance unit grants (when the performance targets are achieved) and other
stock unit awards. The total charges to the Company's consolidated statements of
income and retained earnings for the years ended December 31, 1996, 1995 and
1994 related to these stock-based awards were approximately $24,000, $616,000
and $104,000, respectively.
Pro forma information regarding net income is required by SFAS No. 123, and
has been determined as if the Company had accounted for its 1996 and 1995 stock
option and performance unit grants under the fair value method as prescribed by
such statement. The fair value for stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the years ended December 31, 1996 and 1995,
respectively: risk-free interest rates of 6.5% and 6.0%; volatility factors of
the expected market price of Beverly's common stock of .34 and .35; and a
weighted-average expected life of the option of 10 years. Beverly does not
currently pay cash dividends on its common stock and no future dividends are
currently planned. Such weighted-average assumptions resulted in a weighted
average fair value of options granted during 1996 and 1995 of $7.11 per share
and $7.31 per share, respectively. The fair value of the performance unit grants
was based on the market value of Beverly's common stock on the date of grant.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Beverly's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of employee
stock options and performance units granted by Beverly to employees of the
Company is amortized to expense over their respective vesting periods. Pro forma
net income, assuming the Company had elected to account for these stock option
and performance unit grants in accordance with SFAS No. 123, would have been
approximately $19,987,000 and $4,577,000 for the years ended December 31, 1996
and 1995, respectively. Such pro forma effects are not necessarily indicative of
the effects on future years.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Statement No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the
F-43
<PAGE> 214
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
instrument. Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments. The carrying amount of cash
and cash equivalents reported in the consolidated balance sheets approximates
its fair value. The fair value of notes receivable, net, which are included in
the consolidated balance sheet captions "Notes and other receivables" and
"Other, net" was estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. The fair value of long-term obligations was estimated
using discounted cash flow analyses based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents.......................... $7,575 $7,575 $3,315 $3,315
Notes receivable, net.............................. 1,163 1,163 1,735 1,701
Long-term obligations.............................. 2,302 2,274 755 730
</TABLE>
It was not practicable to estimate the fair value of the "Due to Parent"
account as no formal agreement exists for repayment of the balance. It was also
not practicable to estimate the fair value of the Company's off-balance sheet
guarantee of Beverly's Senior Notes (see Note 4) since the Company did not
charge a fee for entering into this agreement and contracting with a financial
institution to estimate such amount could not be done without incurring
excessive costs.
9. RELATED PARTY TRANSACTIONS
The Company provides its pharmaceutical dispensing, infusion therapy
products and services and its pharmacy and nursing consulting services to
nursing facilities operated by Beverly, and to the residents of Beverly
facilities. Revenues from sales directly to Beverly nursing facilities were
approximately $82,083,000, $74,021,000 and $77,213,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Revenues from sales to residents
of Beverly facilities, which are not considered by the Company to be revenues
from affiliates, are estimated to be approximately $78,000,000, $89,000,000 and
$80,000,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Beverly provides certain administrative services to the Company. These
services have included, among others, cash management, finance, legal, tax,
financial reporting, executive management, payroll and payables processing and
employee benefit plans maintenance. The responsibility for certain of these
services, including finance, tax and payables processing was transferred to the
Company in mid-1996 as part of a consolidation and reorganization of the
Company's accounting and related functions. Substantially all cash received by
the Company is deposited daily and wired to Beverly's corporate cash account. In
turn, all of the Company's operating expenses, capital expenditures and other
cash needs are paid by Beverly, and charged back to the Company along with a
management fee for handling such services. Fees for these services amounted to
approximately $1,820,000, $2,844,000 and $2,075,000 for the years ended December
31, 1996, 1995, and 1994, respectively. See Note 1 for a description of the
charges for insurance. The Company believes that the charges for services
provided by Beverly to the Company are a reasonable allocation of the costs
incurred by Beverly
F-44
<PAGE> 215
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. RELATED PARTY TRANSACTIONS -- (CONTINUED)
on behalf of the Company in providing these services; however, such costs are
not necessarily indicative of the costs that would have been incurred if the
Company operated as a stand-alone entity.
The net result of all intercompany transactions between the Company and
Beverly are recorded in the "Due to Parent" account in the accompanying
consolidated balance sheets. There are currently no required repayment terms for
this account nor do such amounts bear interest.
10. SUBSEQUENT EVENTS
In January 1997, the Company purchased 12 pharmacies from Interstate
Pharmacy Corporation for cash of approximately $19,800,000. The acquisition was
accounted for as a purchase and was not material to the Company's financial
position or results of operations.
In April 1997, Beverly signed a definitive agreement to combine the Company
with Capstone Pharmacy Services, Inc. ("Capstone"), which will create the
nation's largest independent institutional pharmacy company. Capstone will issue
approximately 50,000,000 shares of its common stock to Beverly stockholders and
Beverly will be repaid approximately $275,000,000 of the Company's "Due to
Parent," with any remaining balance contributed to capital. Beverly stockholders
will own approximately 57% of the combined pharmacy company after the
combination; however, Beverly will not retain any ownership interest. The exact
conversion ratio of Beverly to Capstone shares will be determined based on the
total number of shares of Beverly stock outstanding on the record date of this
transaction. The record date has not yet been set. The transaction is subject to
approval by the stockholders of both Beverly and Capstone, as well as to
approvals by various government agencies. It is expected to close by year-end
1997.
F-45
<PAGE> 216
PHARMACY CORPORATION OF AMERICA
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
DUE TO
BALANCE AT ACQUISITIONS BALANCE
BEGINNING CHARGED TO AND AT END
DESCRIPTION OF YEAR OPERATIONS WRITE-OFFS, NET DISPOSITIONS OTHER OF YEAR
----------- ---------- ---------- --------------- ------------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts:
Accounts
receivable -- patient....... $17,913 $12,840 $(17,304) $ (8) $(371) $13,070
Notes and other receivables... 995 660 (371) 0 371 1,655*
------- ------- -------- ------ ----- -------
$18,908 $13,500 $(17,675) $ (8) $ 0 $14,725
======= ======= ======== ====== ===== =======
Year ended December 31, 1995:
Allowance for doubtful accounts:
Accounts
receivable -- patient....... $11,469 $17,679 $(10,966) $ 459 $(728) $17,913
Notes and other receivables... 92 -- 175 -- 728 995*
------- ------- -------- ------ ----- -------
$11,561 $17,679 $(10,791) $ 459 $ 0 $18,908
======= ======= ======== ====== ===== =======
Year ended December 31, 1994:
Allowance for doubtful accounts:
Accounts
receivable -- patient....... $ 2,671 $ 7,362 $ (6,453) $7,949 $ (60) $11,469
Notes and other receivables... 66 26 (60) -- 60 92*
------- ------- -------- ------ ----- -------
$ 2,737 $ 7,388 $ (6,513) $7,949 $ 0 $11,561
======= ======= ======== ====== ===== =======
</TABLE>
- ---------------
* Includes amounts classified in long-term other assets as well as current
assets.
F-46
<PAGE> 217
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,671 $ 7,575
Accounts receivable, less allowance for doubtful accounts:
1997 -- $13,429; 1996 -- $13,070....................... 100,696 93,078
Notes and other receivables, less allowance for doubtful
accounts: 1997 -- $823; 1996 -- $820................... 1,297 1,383
Inventory................................................. 23,682 22,025
Prepaid expenses and other................................ 424 335
-------- --------
Total current assets.............................. 131,770 124,396
Property and equipment, net of accumulated depreciation and
amortization: 1997 -- $25,316; 1996 -- $23,263............ 34,579 32,698
Other assets:
Goodwill, net............................................. 288,086 276,430
Systems development, net.................................. 4,891 4,837
Other, net................................................ 7,357 3,215
-------- --------
Total other assets................................ 300,334 284,482
-------- --------
$466,683 $441,576
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 21,367 $ 18,017
Accrued wages and related liabilities..................... 6,029 6,656
Other accrued liabilities................................. 5,965 6,621
Current portion of long-term obligations.................. 1,078 968
-------- --------
Total current liabilities......................... 34,439 32,262
Long-term obligations....................................... 1,442 1,334
Deferred income taxes payable............................... 5,026 3,980
Due to Parent............................................... 326,343 312,395
Commitments and contingencies
Stockholder's equity:
Common stock, 1,000 shares issued......................... 1 1
Additional paid-in capital................................ 3,866 3,866
Retained earnings......................................... 95,566 87,738
-------- --------
Total stockholder's equity........................ 99,433 91,605
-------- --------
$466,683 $441,576
======== ========
</TABLE>
NOTE: The balance sheet at December 31, 1996 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes.
F-47
<PAGE> 218
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Non-affiliates........................ $122,390 $105,221
Affiliates............................ 25,202 19,155
-------- --------
Total revenues................ 147,592 124,376
Cost of goods sold...................... 80,087 65,672
-------- --------
Gross profit............................ 67,505 58,704
Costs and expenses:
Wages and related..................... 32,033 29,614
Selling, general and administrative... 14,204 12,355
Provision for doubtful accounts....... 2,371 2,189
Depreciation and amortization......... 4,826 3,807
Management fees....................... 667 529
-------- --------
Total costs and expenses...... 54,101 48,494
-------- --------
Income before provision for income
taxes................................. 13,404 10,210
Provision for income taxes.............. 5,576 4,284
-------- --------
Net income.............................. $ 7,828 $ 5,926
======== ========
</TABLE>
See accompanying notes.
F-48
<PAGE> 219
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 7,828 5,926
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 4,826 3,807
Provision for reserves on accounts, notes and other
receivables, net...................................... 2,371 2,189
Deferred taxes......................................... 1,046 1,214
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable.................................. (7,349) (3,122)
Inventory............................................ (318) 1,650
Prepaid expenses and other........................... (60) (24)
Accounts payable and other accrued expenses.......... 2,067 (7,435)
-------- -------
Total adjustments................................. 2,583 (1,721)
-------- -------
Net cash provided by operating activities......... 10,411 4,205
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........... (22,144) (110)
Capital expenditures...................................... (2,809) (1,638)
Systems development....................................... (462) (332)
Other, net................................................ (439) 693
-------- -------
Net cash used for investing activities............ (25,854) (1,387)
Cash flows from financing activities:
Advances (to) from Parent, net............................ 13,852 (5,622)
Repayments of long-term obligations....................... (313) (108)
-------- -------
Net cash provided by (used for) financing
activities....................................... 13,539 (5,730)
-------- -------
Net decrease in cash and cash equivalents................... (1,904) (2,912)
Cash and cash equivalents at beginning of period............ 7,575 3,315
-------- -------
Cash and cash equivalents at end of period.................. $ 5,671 403
======== =======
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest............................................... $ 93 6
</TABLE>
See accompanying notes.
F-49
<PAGE> 220
PHARMACY CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(i) The condensed consolidated financial statements included herein have
been prepared by Pharmacy Corporation of America (the "Company"), without audit,
and include all adjustments of a normal recurring nature which are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the three months ended March 31, 1997 and 1996 pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures in these condensed consolidated financial
statements are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the Company's December 31, 1996 consolidated financial statements and the notes
thereto. The results of operations for the three months ended March 31, 1997 are
not necessarily indicative of the results for a full year. Unless the context
indicates otherwise, the Company means Pharmacy Corporation of America and its
consolidated subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
(ii) The provisions for income taxes for the three months ended March 31,
1997 and 1996 were based on estimated annual effective tax rates of 41.6% and
42.0%, respectively. The Company's estimated annual effective tax rates for 1997
and 1996 are different than the federal statutory rate primarily due to the
impact of state income taxes and amortization of nondeductible goodwill. The
provisions for income taxes consist of the following for the three months ended
March 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Federal:
Current.................................................. $3,728 $2,527
Deferred................................................. 861 999
State:
Current.................................................. 802 543
Deferred................................................. 185 215
------ ------
$5,576 $4,284
====== ======
</TABLE>
(iii) During the three months ended March 31, 1997, the Company purchased
14 pharmacies, for approximately $22,100,000 cash. The operations of these
pharmacies were immaterial to the Company's consolidated financial position and
results of operations.
In April 1997, Beverly Enterprises, Inc. ("Beverly") entered into a
definitive agreement with Capstone Pharmacy Services, Inc. ("Capstone") to
combine the Company, a wholly-owned subsidiary of Beverly, with Capstone (the
"Merger") to create the nation's largest independent institutional pharmacy
company. Beverly will receive approximately $275,000,000 of cash as partial
repayment for the Company's intercompany debt, with any remaining intercompany
balance contributed to the Company's capital. In addition, Capstone will issue
approximately 50,000,000 shares of its common stock to Beverly's stockholders.
Beverly's stockholders are expected to receive approximately .44 shares of
Capstone common stock for each share of Beverly's Common Stock outstanding,
based on the fully diluted number of shares of Beverly's Common Stock
F-50
<PAGE> 221
PHARMACY CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
outstanding at March 31, 1997, and will own approximately 57% of the combined
pharmacy company after the combination. The exact conversion ratio of Beverly's
Common Stock to Capstone common shares will be determined based on the total
number of shares of Beverly's Common Stock outstanding on the effective date of
the Merger. In connection with the Merger, Beverly will transfer all of its
non-Company assets and liabilities to New Beverly Holdings, Inc. ("New
Beverly"), in exchange for the issuance of New Beverly common stock. Beverly
will then distribute (the "Distribution") such New Beverly common stock to the
then current stockholders of Beverly's Common Stock on a one-for-one basis. The
Merger, which is subject to approvals by the stockholders of both Beverly and
Capstone, completion of the Distribution, and approvals by various government
agencies, is expected to close by year-end.
(iv) There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
(v) The Company provides its pharmaceutical dispensing, infusion therapy
products and services and its pharmacy and nursing consulting services to
nursing facilities operated by Beverly, and to the residents of Beverly
facilities. Revenues from sales directly to Beverly nursing facilities were
approximately $25,202,000 and $19,155,000 for the three months ended March 31,
1997 and 1996, respectively. Revenues from sales to residents of Beverly
facilities, which are not considered by the Company to be revenues from
affiliates, are estimated to be approximately $24,000,000 and $21,000,000 for
the three months ended March 31, 1997 and 1996, respectively.
Beverly provides certain administrative services to the Company. These
services have included, among others, cash management, finance, legal, tax,
financial reporting, executive management, payroll and payables processing and
employee benefit plans maintenance. The responsibility for certain of these
services, including finance, tax and payables processing was transferred to the
Company in mid-1996 as part of a consolidation and reorganization of the
Company's accounting and related functions. Substantially all cash received by
the Company is deposited daily and wired to Beverly's corporate cash account. In
turn, all of the Company's operating expenses, capital expenditures and other
cash needs are paid by Beverly, and charged back to the Company along with a
management fee for handling such services. Fees for these services amounted to
approximately $667,000 and $529,000 for the three months ended March 31, 1997
and 1996, respectively. The Company believes that the charges for services
provided by Beverly to the Company are a reasonable allocation of the costs
incurred by Beverly on behalf of the Company in providing these services;
however, such costs are not necessarily indicative of the costs that would have
been incurred if the Company operated as a stand-alone entity.
The net result of all intercompany transactions between the Company and
Beverly is recorded in the "Due to Parent" account in the accompanying
consolidated balance sheets. There are currently no required repayment terms for
this account nor do such amounts bear interest.
F-51
<PAGE> 222
INSTA-CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 14, 1994
(UNAUDITED)
<TABLE>
<S> <C>
Net operating revenues...................................... $ 97,806
Cost of sales............................................... 55,716
--------
Gross profit...................................... 42,090
Operating expenses:
Wages and related......................................... 19,716
Selling, general and administrative....................... 13,914
Provision for doubtful accounts........................... 6,640
Interest expense, net..................................... 1,812
Depreciation and amortization............................. 1,565
--------
Total operating expenses.......................... 43,647
--------
Net loss before benefit from income taxes................... (1,557)
Benefit from income taxes................................... (165)
--------
Net loss.......................................... $ (1,392)
========
</TABLE>
See accompanying notes.
F-52
<PAGE> 223
INSTA-CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 14, 1994
(UNAUDITED)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.............................. $(1,392)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization...... 1,565
Provision for doubtful accounts.... 6,640
Changes in operating assets and
liabilities:
Accounts receivable.............. (3,462)
Inventory........................ (758)
Accounts payable and accrued
expenses........................ (1,073)
Other, net....................... 176
-------
Net cash provided by operating
activities.................... 1,696
Cash flows from investing activities:
Capital expenditures.................. (996)
Repayments of notes receivable........ 665
Other, net............................ (426)
-------
Net cash used in investing
activities.................... (757)
Cash flows from financing activities:
Increase in due to parent............. 893
Repayments of long-term obligations... (2,836)
-------
Net cash used in financing
activities.................... (1,943)
-------
Net increase in cash and cash
equivalents........................... (1,004)
Cash and cash equivalents at beginning
of period............................. 2,801
-------
Cash and cash equivalents at end of
period................................ $ 1,797
=======
</TABLE>
See accompanying notes.
F-53
<PAGE> 224
INSTA-CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 14, 1994
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Insta-Care, Inc. and subsidiaries (the "Company") is one of the largest
independent institutional pharmacy companies in the United States, serving
approximately 63,000 beds in long-term care facilities and 3,000 beds in
correctional institutions. The Company is a wholly-owned subsidiary of Eckerd
Corporation ("Eckerd") and offers a broad range of services that includes: (i)
purchasing, repackaging and dispensing pharmaceutical products, (ii) consultant
pharmacist services such as drug regimen review and monitoring the control,
distribution and administration of drugs within the long-term care facility, and
(iii) sophisticated information systems to facilitate patient record keeping,
cost containment efforts and compliance with increasingly complex state and
federal regulations. The Company currently provides these services from 15
pharmacies located in Massachusetts, Texas, Florida, Georgia, Louisiana and
Connecticut. The Company also offers infusion therapy services and medical
supplies to nursing agencies, residents in its client long-term care facilities.
All significant intercompany accounts have been eliminated in consolidation.
On September 12, 1994, Eckerd entered into a Stock Purchase Agreement with
Pharmacy Corporation of America to sell all of the authorized, issued, and
outstanding shares of common stock of the Company.
Cash and Cash Equivalents
The Company considers all liquid investment instruments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets. The
principal lives used to compute depreciation are:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture, fixtures and equipment........................... 3-10
Leasehold improvements...................................... 5-10
====
</TABLE>
Income Taxes
Insta-Care, Inc. and subsidiaries income taxes are included in Eckerd's
consolidated federal income tax return. All amounts allocated to the Company
from Eckerd for its share of consolidated income taxes are computed by Eckerd
and approximate the Company's taxes computed on a separate return basis. The
Company files separate state income tax returns, except for the State of
Florida.
Goodwill
Goodwill results from the excess of cost over net assets of acquired
businesses and is amortized on a straight-line basis over twenty years.
(2) RELATED PARTY TRANSACTIONS
Amounts due to parent bear interest at Eckerd's bank rates which ranged
from 6% to 9% during the period. In addition, the Company is charged by its
parent for certain insurance and other direct expenses. There is no fixed
repayment schedule.
F-54
<PAGE> 225
INSTA-CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS
AND CASH FLOWS -- (CONTINUED)
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 14, 1994
(UNAUDITED)
(2) RELATED PARTY TRANSACTIONS -- (CONTINUED)
Substantially all of the Company's inventories and accounts receivable have
been pledged under debt agreements of its parent.
(3) CONVERTIBLE DEBENTURES AND MANAGEMENT NOTES
On May 1, 1990, certain members of management purchased $1,142,390
principal amount of 9% convertible debentures in exchange for promissory notes.
The debentures are convertible at any time after issuance at an exchange of
approximately $.71 per share of common stock. In connection with the Stock
Purchase Agreement, all outstanding convertible debentures were converted, and
the Company bought back all converted shares of common stock on November 14,
1994. Similarly, all management notes were repaid to the Company on November 14,
1994.
(4) LEASES
The Company leases its pharmacy locations under operating leases which
require minimum payments. Certain of these leases provide for the payment by the
Company of taxes and maintenance costs. The Company also leases certain vehicles
and other equipment under operating leases. Total rental expense for the period
from January 1, 1994 through November 14, 1994 was approximately $1,208,000.
(5) PROFIT SHARING PLAN
The Company has in effect a noncontributory profit sharing plan which
covers all regular, full-time employees. The Company makes annual contributions
to the Plan at the discretion of the Company's Board of Directors.
(6) STOCK OPTION PLAN
During 1990, the Company adopted a nonqualified stock option plan (First
Employees Stock Option Plan) whereby incentive stock options and nonqualified
stock options can be granted to key employees and non-employee directors. The
Company has reserved 300,000 shares for issuance under the plan. The option
price is determined by the Company's Board of Directors, and approximates fair
market value. Generally, commencing three years after the date of grant, all
options are exercisable to the extent of 50%, with and additional 25%
exercisable after each of the next two successive years. Unexercised options
expire ten years after the date of grant. On January 15, 1992, the Company
granted nonqualified options to purchase 125,000 common shares at $.92 per
share, of which 65,000 were outstanding at November 14, 1994. Between April 1
and December 31, 1992, the Company granted nonqualified options to purchase
114,000 common shares at $1.03 per share, of which 84,000 were outstanding at
November 14, 1994. During 1993, the Company granted nonqualified options to
purchase 29,000 common shares at prices ranging from $1.03 to $1.18, of which
26,000 were outstanding at November 14, 1994. During 1994, the Company granted
nonqualified options to purchase 19,000 common shares at $1.27 per share, of
which 17,000 were outstanding at November 14, 1994.
F-55
<PAGE> 226
SYNETIC INSTITUTIONAL PHARMACY SUBSIDIARIES
COMBINED STATEMENT OF INCOME
PERIOD FROM JULY 1, 1994 THROUGH DECEMBER 13, 1994
(UNAUDITED)
<TABLE>
<S> <C>
Net operating revenues...................................... $37,090
Cost of sales............................................... 21,424
-------
Gross profit...................................... 15,666
Operating expenses:
Wages and related......................................... 9,185
Selling, general and administrative....................... 3,050
Provision for doubtful accounts........................... 278
Depreciation and amortization............................. 710
-------
Total operating expenses.......................... 13,223
-------
Income before provision for income taxes.................... 2,443
Provision for income taxes.................................. 928
-------
Net income........................................ $ 1,515
=======
</TABLE>
See accompanying notes.
F-56
<PAGE> 227
SYNETIC INSTITUTIONAL PHARMACY SUBSIDIARIES
COMBINED STATEMENT OF CASH FLOWS
PERIOD FROM JULY 1, 1994 THROUGH DECEMBER 13, 1994
(UNAUDITED)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 1,515
Adjustments to reconcile net income to net cash provided
by operating activities; Depreciation and
amortization........................................... 710
Provision for doubtful accounts........................ 278
Changes in operating assets and liabilities:
Accounts receivable.................................. (2,483)
Inventory............................................ (46)
Accounts payable and accrued expenses................ 39
Other, net........................................... 317
-------
Net cash provided by operating activities......... 330
Cash flows from investing activities:
Capital expenditures...................................... (577)
Other, net................................................ (773)
-------
Net cash used in investing activities............. (1,350)
Cash flows from financing activities:
Increase in due to affiliates............................. 1,143
-------
1,143
-------
Net increase in cash and cash equivalents................... 123
Cash and cash equivalents at beginning of period............ 689
-------
Cash and cash equivalents at end of period.................. $ 812
=======
</TABLE>
See accompanying notes.
F-57
<PAGE> 228
SYNETIC INSTITUTIONAL PHARMACY SUBSIDIARIES
NOTES TO COMBINED STATEMENTS OF INCOME AND CASH FLOWS
PERIOD FROM JULY 1, 1994 THROUGH DECEMBER 13, 1994
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
On May 24, 1994, Merck & Co., Inc. ("Merck") and Synetic, Inc. ("Synetic")
entered into an agreement for the sale by Merck of all of the shares of Synetic
common stock owned by Merck. As a condition to such sale, Synetic agreed to
dispose of its institutional pharmacies business. On December 13, 1994, Synetic
sold its institutional pharmacy business to Pharmacy Corporation of America, a
wholly-owned subsidiary of Beverly Enterprises, Inc. (such sale is referred to
herein as the "Divestiture") for approximately $107,300,000 in cash, subject to
certain post closing adjustments.
The accompanying Combined Statement of Income and Combined Statement of
Cash Flows reflect the combined accounts of Dunnington Drug, Inc. and its
subsidiaries ("Dunnington"), Alliance Health Services, Inc. and its subsidiaries
("Alliance") and Healthcare Prescription Services, Inc. ("HPS") (collectively,
the "Companies"). These Companies, which comprise the institutional pharmacies
business, were wholly-owned subsidiaries of Synetic until the Divestiture.
Dunnington, Alliance and HPS are providers of institutional pharmacy services to
nursing homes and other similar long-term care facilities in Massachusetts,
Rhode Island, Connecticut and Indiana. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
The Companies consider all liquid investment instruments with an original
maturity of three months or less to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. For financial reporting
purposes, depreciation is provided principally on the straight-line method over
the estimated useful lives of the assets. Annual depreciation rates range from
10% to 33% for machinery and equipment and furniture and fixtures. Leasehold
improvements are amortized on a straight-line basis over the shorter of their
useful lives or the lives of the respective leases. For income tax purposes,
certain assets are depreciated using accelerated methods. Expenditures for
maintenance, repair and renewals of minor items are charged to operations as
incurred. Major betterments are capitalized.
Income Taxes
The Companies are currently included in the consolidation federal income
tax return of Synetic. The Companies record amounts equal to their federal and
state liabilities on a separate company basis. The income tax balance payable
represents tax liabilities accrued in excess of amounts paid to Synetic.
(2) COMMITMENTS AND CONTINGENCIES
Customer Contracts
The Companies are parties to vending and consulting contracts with various
long-term health care facilities. The purpose of these contracts is to formalize
terms of service, billing and payment. Typically, these contracts may be
terminated by either party with a 30 day notice. Therefore, revenue under these
contracts is recognized as it is earned in the current period.
F-58
<PAGE> 229
SYNETIC INSTITUTIONAL PHARMACY SUBSIDIARIES
NOTES TO COMBINED STATEMENTS OF INCOME AND CASH FLOWS -- (CONTINUED)
PERIOD FROM JULY 1, 1994 THROUGH DECEMBER 13, 1994
(UNAUDITED)
(2) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Leases
The Companies lease their warehouses and office facilities, equipment and
automobiles under various noncancelable operating leases. Rent expense was
approximately $575,000 for the period from July 1, 1994 through December 13,
1994.
Legal Proceedings
In the normal course of business, the Companies are involved in various
claims and legal proceedings. While the ultimate resolution of these matters has
yet to be determined, the Companies do not believe that their outcome will have
a material adverse effect on their financial position.
(3) RELATED PARTY TRANSACTIONS
Alliance leases corporate offices and distribution space from a partnership
in which the prior shareholders of Reliance are also the sole partners. Under
the lease, all maintenance, insurance, property taxes and other expenses related
to the premises are borne by Alliance. The lease requires annual rental payments
of $144,000, payable monthly, and has been extended to August 31, 1995.
Synetic has provided, at no cost to the Companies, various services
including employee benefit administration (primarily health and 401(k)
administration), tax return preparation, legal services and insurance
administration. The Companies have no formal service agreements pursuant to
which these services are provided by Synetic. The costs of these services are
not material.
F-59
<PAGE> 230
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Synetic, Inc.:
We have audited the accompanying combined balance sheet of Dunnington Drug,
Inc., Alliance Health Services, Inc., and Healthcare Prescription Services, Inc.
as of June 30, 1994, and the related combined statements of income and retained
earnings, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Dunnington Drug,
Inc., Alliance Health Services, Inc., and Healthcare Prescription Services, Inc.
as of June 30, 1994, and the combined results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN & CO.
New York, New York
August 5, 1994
F-60
<PAGE> 231
DUNNINGTON DRUG, INC., ALLIANCE HEALTH SERVICES, INC., AND HEALTHCARE
PRESCRIPTION SERVICES, INC.
COMBINED BALANCE SHEET
JUNE 30, 1994
(IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 689
Accounts receivable, net of allowances for doubtful
accounts of $1,528..................................... 15,534
Inventories............................................... 5,629
Other current assets...................................... 843
Due from parent........................................... 173
--------
Total current assets.............................. 22,868
--------
PROPERTY, PLANT AND EQUIPMENT:
Machinery and equipment................................... 3,148
Furniture and fixtures.................................... 1,402
Leasehold improvements.................................... 1,701
--------
6,251
Less: accumulated depreciation and amortization........... (1,481)
--------
Property, plant and equipment, net................ 4,770
--------
$ 27,638
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,828
Accrued liabilities....................................... 1,666
Income taxes payable to parent............................ 2,859
--------
Total current liabilities......................... 7,353
--------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY (NOTE 6)............................... 20,285
--------
$ 27,638
========
</TABLE>
The accompanying notes are an integral part of this combined balance sheet.
F-61
<PAGE> 232
DUNNINGTON DRUG, INC., ALLIANCE HEALTH SERVICES, INC., AND HEALTHCARE
PRESCRIPTION SERVICES, INC.
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED JUNE 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Net sales................................................... $78,705
-------
Costs and expenses:......................................... 44,668
Cost of sales............................................. 28,978
-------
Operating expense......................................... 73,646
-------
Operating income............................................ 5,059
-------
Other income, net........................................... 406
-------
Income before provision for income taxes.................... 5,465
Provision for income taxes.................................. 2,226
-------
Net income.................................................. $ 3,239
Retained earnings, beginning of year........................ 4,898
-------
Retained earnings, end of year.............................. $ 8,137
=======
</TABLE>
The accompanying notes are integral part of this combined statement.
F-62
<PAGE> 233
DUNNINGTON DRUG, INC., ALLIANCE HEALTH SERVICES, INC., AND HEALTHCARE
PRESCRIPTION SERVICES, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 3,239
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization.......................... 1,058
Changes in operating assets and liabilities:
Accounts receivable, net............................. (195)
Inventories.......................................... (580)
Other assets......................................... (1,125)
Accounts payable..................................... (137)
Accrued liabilities.................................. 203
Income taxes payable................................. 1,556
Intercompany payable to Parent....................... (2,318)
-------
Net cash provided by operating activities......... 1,701
-------
Cash flows from investing activities:
Capital expenditures, net................................. (2,753)
-------
Net cash used for investing activities............ (2,753)
-------
Net decrease in cash and cash equivalents................... (1,052)
Cash and cash equivalents, beginning of period.............. 1,741
-------
Cash and cash equivalents, end of period.................... $ 689
=======
Supplemental cash flow information:
Income taxes paid......................................... $ 872
Interest paid............................................. --
</TABLE>
The accompanying notes are an integral part of this combined statement.
F-63
<PAGE> 234
DUNNINGTON DRUG, INC., ALLIANCE HEALTH SERVICES, INC., AND
HEALTHCARE PRESCRIPTION SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) FINANCIAL STATEMENTS PRESENTATION:
On May 24, 1994, Merck & Co., Inc. ("Merck") and Synetic, Inc. ("Synetic")
entered into an agreement for the sale by Merck of all of the shares of Synetic
common stock owned by Merck. As a condition to such sale, Synetic agreed to
dispose of its institutional pharmacies business. The sale of Merck's interest
in Synetic will, among other matters, require the approval of two-thirds of
Synetic's unaffiliated stockholders.
The accompanying financial statements reflect the combined accounts of
Dunnington Drug, Inc. and its subsidiaries ("Dunnington"), Alliance Health
Services, Inc. and its subsidiaries ("Alliance") and Healthcare Prescription
Services, Inc. ("HPS") (collectively, the "Companies") and have been prepared to
facilitate the sale of these businesses in accordance with the agreement. These
Companies, which comprise the institutional pharmacies business, are
wholly-owned subsidiaries of Synetic which is a 58.7% owned subsidiary of Medco
Containment Services, Inc. ("Medco"). Medco is a wholly-owned subsidiary of
Merck. All significant intercompany accounts and transactions have been
eliminated.
In September 1991, Synetic acquired the assets and assumed certain
liabilities of the Institutional Division of Rix Dunnington, Inc. and Dunnington
Super Drug, Inc. for 849,304 newly-issued shares of Synetic's common stock
valued at $11,500,000 and certain contingent consideration with an original
value of $4,500,000. Synetic is obligated to pay such additional consideration,
in cash or additional shares of Synetic's common stock, at its option, upon the
achievement by Dunnington of certain financial targets for the two fiscal years
ended June 30, 1993.
In February 1992, Synetic acquired assets and assumed certain liabilities
of Allcare Medication Services, Inc. ("Allcare") for 452,338 newly-issued shares
of Synetic's common stock and certain contingent consideration valued at
$10,000,000 and $5,000,000, respectively. Synetic is obligated to pay such
additional consideration, in cash or additional shares of Synetic's common
stock, at its option, upon the achievement by Allcare of certain financial
targets for the three calendar years ending December 31, 1995.
In October 1992, Synetic acquired the assets and assumed certain
liabilities of HPS for 599,626 shares of Synetic's common stock valued at
$10,977,000.
In February 1993, Synetic acquired Reliance Health Services ("Reliance")
for 678,356 shares of Synetic's common stock and certain contingent
consideration valued at $12,538,000 and $6,000,000, respectively. Synetic is
obligated to pay such additional consideration, in cash or additional shares of
Synetic's common stock, at its option, upon the achievement by Reliance of
certain financial targets for the three calendar years ending December 31, 1995.
The Allcare and Reliance operations were merged on September 1, 1993 and
currently operate as Alliance. Dunnington, Alliance and HPS are providers of
institutional pharmacy services to nursing homes and other similar long-term
care facilities in Massachusetts, Rhode Island, Connecticut and Indiana.
The accompanying combined financial statements have been adjusted to
reflect the transfer to Synetic of certain costs and expenses provided for in
connection with the acquisition of the Companies. For the year ended June 30,
1994, these expenses related primarily to the costs of closing down duplicate
facilities in Connecticut and the discontinuance of certain operations of HPS.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents --
The Company considers all liquid investment instruments with an original
maturity of three months or less to be the equivalent of cash for purposes of
balance sheet presentation. These short-term investments are stated at cost,
which approximates market.
F-64
<PAGE> 235
DUNNINGTON DRUG, INC., ALLIANCE HEALTH SERVICES, INC., AND
HEALTHCARE PRESCRIPTION SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories --
Inventories are stated at the lower of (first-in, first-out) cost or
market.
Property, Plant and Equipment --
Property, plant and equipment are stated at cost. For financial reporting
purposes, depreciation is provided principally on the straight-line method over
the estimated useful lives of the assets. Annual depreciation rates range from
10% to 33% for machinery and equipment and furniture and fixtures. Leasehold
improvements are amortized on a straight-line basis over the shorter of their
useful lives or the lives of the respective leases. For income tax purposes,
certain assets are depreciated using accelerated methods. Expenditures for
maintenance, repair and renewals of minor items are charged to operations as
incurred. Major betterments are capitalized.
(3) INCOME TAXES
The Companies are currently included in the consolidated federal income tax
return of Synetic. The Companies record amounts equal to their federal and state
liabilities on a separate company basis. The income tax balance payable
represents tax liabilities accrued in excess of amounts paid to Synetic.
(4) COMMITMENTS AND CONTINGENCIES
Customer Contracts --
The Companies are parties to vending and consulting contracts with various
long-term health care facilities. The purpose of these contracts is to formalize
terms of service, billing and payment. Typically, these contracts may be
terminated by either party with a 30 day notice. Therefore, revenue under these
contracts is recognized as it is earned in the current period.
Employment Agreements --
The Companies have entered into employment agreements with several key
employees, which in the aggregate, provide for annual compensation payments as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR
ENDING
JUNE 30,
- --------
<S> <C>
1995........................................................ $966
1996........................................................ 650
1997........................................................ 81
Thereafter.................................................. --
</TABLE>
F-65
<PAGE> 236
DUNNINGTON DRUG, INC., ALLIANCE HEALTH SERVICES, INC., AND
HEALTHCARE PRESCRIPTION SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Leases --
The Companies lease their warehouses and office facilities, equipment and
automobiles under various noncancelable operating leases. The minimum aggregate
rental commitments under noncancelable leases, excluding renewal options, are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR
ENDING
JUNE 30,
- --------
<S> <C>
1995........................................................ $843
1996........................................................ 257
1997........................................................ 93
1998........................................................ 91
1999........................................................ 95
Thereafter.................................................. --
</TABLE>
Rent expense was $1,211,000 for the year ended June 30, 1994.
Legal Proceedings --
In the normal course of business, the Companies are involved in various
claims and legal proceedings. While the ultimate resolution of these matters has
yet to be determined, the Companies do not believe that their outcome will have
a material adverse effect on their financial position.
F-66
<PAGE> 237
DUNNINGTON DRUG, INC., ALLIANCE HEALTH SERVICES, INC., AND
HEALTHCARE PRESCRIPTION SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(5) RELATED PARTY TRANSACTIONS
Three officers of Rix Dunnington, Inc. are beneficial owners of trusts
which own land and buildings which contain the Massachusetts pharmacy,
professional service facility and a warehouse of Dunnington. The lease for these
facilities requires annual rental payments of $130,000, payable monthly. These
lease payments are included in the Companies' operating expenses. The lease
terminates in September 1994, and the facility was vacated in June 1994 when
Dunnington relocated to a new facility.
Alliance leases corporate offices and distribution space from a partnership
in which the prior shareholders of Reliance are also the sole partners. Under
the lease, all maintenance, insurance, property taxes and other expenses related
to the premises are born by Alliance. The leases requires annual rental payments
of $144,000, payable monthly, and has been extended to August 31, 1995.
Synetic has provided, at no cost to the Companies, various services
including employee benefit administration (primarily health and 401(k)
administration). The Companies have no formal service agreements pursuant to
which these services are provided by Synetic. The costs of these services are
not material.
Synetic and the Companies are covered by insurance under Medco insurance
policies, which include coverage for general liability, umbrella, property,
workers compensation, automobile, travel and accident and crime liability. For
the year ended June 30, 1994, insurance expense was $542,000 for these
coverages, based on a mutually agreed upon allocation method.
(6) STOCKHOLDERS' EQUITY
Stockholders' equity presented in the accompanying combined balance sheet
represents the aggregate amount of the Companies individual equity account
balances at June 30, 1994, as detailed below (in thousands):
<TABLE>
<CAPTION>
DUNNINGTON ALLIANCE HPS TOTAL
---------- -------- ------ -------
<S> <C> <C> <C> <C>
Capital stock and paid-in capital............... $ 5,230 $5,035 $1,883 $12,148
Retained earnings............................... 4,775 2,528 834 8,137
------- ------ ------ -------
$10,005 $7,563 $2,717 $20,285
======= ====== ====== =======
</TABLE>
F-67
<PAGE> 238
ANNEX A
PROSPECTUS
RELATING TO
NEW BEVERLY
COMMON STOCK
TO BE ISSUED
IN THE DISTRIBUTION
<PAGE> 239
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED JUNE 4, 1997
NEW BEVERLY HOLDINGS, INC.
COMMON STOCK PAR VALUE $0.10 PER SHARE
This Prospectus covers up to 110,424,677 shares of common stock, par value
$.10 per share ("New Beverly Common Stock"), of New Beverly Holdings, Inc., a
Delaware corporation ("New Beverly"). This Prospectus is being furnished to the
stockholders of Beverly Enterprises, Inc., a Delaware corporation ("Beverly"),
the sole stockholder of New Beverly, in connection with the proposed
distribution (the "Distribution") to Beverly's stockholders of all the
outstanding shares of New Beverly Common Stock, pursuant to the terms of an
Agreement and Plan of Distribution, dated as of April 15, 1997, by and between
Beverly, New Beverly and Capstone Pharmacy Services, Inc., a Delaware
corporation ("Capstone") (the "Distribution Agreement"). A copy of the
Distribution Agreement is attached as Annex C to the Joint Proxy
Statement/Prospectus (the "Joint Proxy Statement/ Prospectus") of Beverly and
Capstone relating to the solicitation of proxies in order to obtain stockholder
approval of the Distribution and Merger (as defined below) which accompanies
this Prospectus. Beverly is proposing to make the Distribution in connection
with and as part of a proposed reorganization that also involves the merger of
Beverly with and into Capstone (the "Merger"), with Capstone remaining as the
surviving corporation ("Surviving Corporation"), the Merger to take place
immediately following the Distribution, pursuant to an Agreement and Plan of
Merger by and between Capstone and Beverly dated as of April 15, 1997 (the
"Merger Agreement"), a copy of which is attached as Annex B to the Joint Proxy
Statement/Prospectus. Immediately following the Merger, New Beverly will change
its name to "Beverly Enterprises, Inc." The consummation of the Merger is
conditioned upon the successful completion of the Distribution. The completion
of the Merger (and, in the case of Beverly, the Distribution) is subject to the
approval of the stockholders of both Beverly and Capstone.
One share of New Beverly Common Stock will be distributed for each share of
common stock of Beverly, par value $.10 per share (the "Beverly Common Stock"),
issued and outstanding on the date established by the Board of Directors of
Beverly for determining stockholders of record entitled to receive New Beverly
Common Stock in the Distribution (the "Distribution Record Date").
At the time of the Distribution, New Beverly will own all of Beverly's
businesses and assets other than Beverly's institutional pharmacy business (the
"Institutional Pharmacy Business"), currently operated through Beverly's
wholly-owned subsidiary Pharmacy Corporation of America, a California
corporation ("PCA"). The businesses to be owned and operated by New Beverly
include Beverly's nursing facilities, acute long-term transitional hospitals,
rehabilitation therapy services, outpatient therapy clinics, assisted living
centers, hospices, home healthcare centers and other healthcare and related
services and businesses, other than the Institutional Pharmacy Business
(collectively, the "Remaining Healthcare Business"), which will be transferred
to New Beverly or one or more direct or indirect subsidiaries of New Beverly.
No consideration will be paid by Beverly's stockholders for the shares of
New Beverly Common Stock to be received by them in the Distribution. There is
currently no public trading market for the shares of New Beverly Common Stock.
New Beverly intends to list the New Beverly Common Stock for trading on the New
York Stock Exchange ("NYSE") and the Pacific Stock Exchange ("PSE") under the
trading symbol "BEV," which is currently used by Beverly.
The consummation of the Distribution is a condition to, among other things,
Beverly's and Capstone's respective obligations to consummate the Merger.
STOCKHOLDERS OF BEVERLY SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER THE CAPTION "RISK FACTORS" ON PAGE 6 HEREOF WITH RESPECT TO THE SECURITIES
BEING OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997.
<PAGE> 240
NEW BEVERLY HOLDINGS, INC. PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
AVAILABLE INFORMATION....................................... i
CAUTIONARY STATEMENTS....................................... ii
PROSPECTUS SUMMARY.......................................... 1
Overview.................................................. 1
New Beverly............................................... 1
The Transactions.......................................... 1
The Distribution Agreement................................ 2
Certain Tax Considerations................................ 2
New Beverly Stock Option Plans............................ 3
Effect of the Transactions on Employees and Employee
Benefits............................................... 4
Expenses.................................................. 4
Risk Factors.............................................. 4
SUMMARY CONSOLIDATED FINANCIAL DATA......................... 5
RISK FACTORS................................................ 6
Substantial Indebtedness.................................. 6
Uncertainty Associated with Healthcare Reform............. 6
Risk Involved with Reimbursement by Third Party Payors.... 6
Government Regulation..................................... 7
Increased Labor Costs and Availability of Personnel....... 8
Dependence on Key Personnel............................... 8
Competition............................................... 8
Absence of Prior Trading Market........................... 8
Certain Indemnification Obligations....................... 9
Non-competition Agreement with Capstone................... 9
USE OF PROCEEDS............................................. 10
CAPITALIZATION.............................................. 11
UNAUDITED PRO FORMA NEW BEVERLY FINANCIAL STATEMENTS........ 13
NEW BEVERLY HOLDINGS, INC. PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997................. 14
NEW BEVERLY HOLDINGS, INC. PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AS OF MARCH 31, 1997........................ 16
THE DISTRIBUTION............................................ 18
Terms of the Distribution Agreement....................... 18
Restructuring and Contribution of Remaining Healthcare
Business to New Beverly................................ 18
Consummation of the Distribution; Treatment of Beverly
Stock Options, Phantom Shares, Performance Shares and
Shares of Restricted Stock............................. 19
Manner of Effecting the Distribution; Consummation of the
Distribution........................................... 20
Listing of New Beverly Common Stock; Restrictions on
Resale................................................. 21
Treatment of Indebtedness................................. 21
Expenses.................................................. 22
Conditions................................................ 22
Settlement of Intercompany Accounts....................... 22
Indemnification and Insurance............................. 23
Terms of the Employee Benefit Agreement................... 23
Terms of the Non-competition Agreement.................... 27
Terms of the Interim Services Agreement................... 27
Terms of the Tax Allocation and Indemnification
Agreement.............................................. 27
Preferred Provider Agreement.............................. 29
</TABLE>
<PAGE> 241
<TABLE>
<CAPTION>
<S> <C>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................... 30
The Distribution.......................................... 30
The Merger................................................ 31
Possible Future Legislation............................... 32
Back-up Withholding Requirements.......................... 33
TREATMENT OF BEVERLY INDEBTEDNESS........................... 34
General................................................... 34
Existing Credit Facility.................................. 34
9% Senior Notes........................................... 35
Subordinated Debentures................................... 35
Industrial Revenue Bonds.................................. 36
First Mortgage Bonds...................................... 37
8.75% Notes............................................... 37
Medium Term Notes......................................... 37
REIT Promissory Notes..................................... 38
Bank Loans, Mortgages and Notes Payable................... 38
INFORMATION CONCERNING BEVERLY.............................. 39
Selected Historical Consolidated Financial Data........... 39
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 40
General................................................... 40
Operating Results......................................... 41
Liquidity and Capital Resources........................... 47
BUSINESS.................................................... 48
General................................................... 48
Operations................................................ 49
Governmental Regulation and Reimbursement................. 50
Competition............................................... 54
Employees................................................. 54
Properties................................................ 55
Legal Proceedings......................................... 57
Management................................................ 57
Dividend Policy........................................... 59
PRINCIPAL STOCKHOLDERS OF NEW BEVERLY....................... 60
Security Ownership of Certain Beneficial Owners........... 60
Security Ownership of Management.......................... 61
EXECUTIVE AND DIRECTOR COMPENSATION......................... 62
Executive Compensation.................................... 62
Option/SAR Grants in Last Fiscal Year..................... 65
Compensation of Directors and Other Information Concerning
the Board and its Committees........................... 66
The Beverly Non-Employee Director Deferred Compensation
Plan................................................... 67
Compensation Committee Report on Executive Compensation... 68
Compensation Philosophy................................... 68
Competitive Market Evaluation............................. 68
Base Salary............................................... 69
Annual Incentives......................................... 69
Long-term Incentives...................................... 69
Stock Ownership Guideline................................. 70
$1 Million Limit on Compensation.......................... 70
Other Matters............................................. 70
Compensation Committee.................................... 70
Compensation Committee Interlocks and Insider
Participation.......................................... 71
Performance Graph......................................... 71
Other Plans............................................... 71
</TABLE>
<PAGE> 242
<TABLE>
<CAPTION>
<S> <C>
New Beverly 1997 Long-Term Incentive Plan................. 74
Certain Transactions with Management and Others........... 74
DESCRIPTION OF NEW BEVERLY CAPITAL STOCK.................... 75
Authorized Capital Stock.................................. 75
New Beverly Preferred Stock............................... 75
New Beverly Common Stock.................................. 75
New Beverly Common Stock Purchase Rights.................. 76
The Charter and Bylaws of New Beverly..................... 77
SHARES ELIGIBLE FOR FUTURE SALES............................ 78
LEGAL MATTERS............................................... 78
EXPERTS..................................................... 78
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES....................................... F-1
</TABLE>
<PAGE> 243
AVAILABLE INFORMATION
New Beverly has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of New Beverly Common Stock described in this
Prospectus. This Prospectus, which is a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement or
the exhibits and schedules thereto, certain portions having been omitted
pursuant to the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract or other document are not
necessarily complete with respect to each such contract or other document filed
with the Commission as an exhibit to the Registration Statement. Reference is
made to such exhibits for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
The Registration Statement and the exhibits and schedules thereto filed
with the Commission may be inspected and copied (at prescribed rates) at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York, 10048,
and The Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois
60661-2511. Such reports and other information can be reviewed through the
Commission's Electronic Data Gathering Analysis and Retrieval System, which is
publicly available through the Commission's Web site (http://www.sec.gov).
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NEW BEVERLY, BEVERLY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES MADE UNDER THIS PROSPECTUS
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF NEW BEVERLY OR BEVERLY SINCE THE DATE OF THIS
PROSPECTUS.
i
<PAGE> 244
CAUTIONARY STATEMENTS
This Prospectus contains statements relating to future results of New
Beverly and Beverly (including certain projections and business trends) that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties, including, but not limited to,
changes in political and economic conditions, regulatory conditions, government
healthcare spending, integration of acquisitions and competitive pricing
pressures, all as detailed from time to time in the filings of New Beverly and
Beverly made with the Commission.
When used in this Prospectus with respect to New Beverly and Beverly the
words "estimate," "project," "intend," "expect" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those contemplated in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Such risks and uncertainties include those
risks, uncertainties and risk factors identified in this Prospectus under the
headings "Risk Factors," "The Distribution," "Certain Federal Income Tax
Consequences," "Treatment of Beverly Indebtedness" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." New Beverly and
Beverly do not undertake any obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
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PROSPECTUS SUMMARY
This Prospectus is being furnished to stockholders of Beverly together with
the Joint Proxy Statement/ Prospectus. The following summary is qualified in its
entirety by the more detailed information and financial statements, including
the notes thereto, appearing elsewhere in this Prospectus and the Joint Proxy
Statement/ Prospectus. Beverly stockholders are urged to read this Prospectus,
the Joint Proxy Statement/Prospectus, and the Annexes thereto in their entirety.
Except where otherwise indicated, the description of New Beverly and its
businesses contained herein assumes the completion of the Distribution and the
Merger.
OVERVIEW
Prior to the Merger, Beverly's Remaining Healthcare Business will be
transferred or contributed to New Beverly, a wholly-owned subsidiary of Beverly,
and all of the New Beverly Common Stock will be distributed to the stockholders
of Beverly at the rate of one share of New Beverly Common Stock per share of
Beverly Common Stock held as of the Distribution Record Date. Beverly's only
remaining business then will be the Institutional Pharmacy Business operated
through PCA, which will be combined with Capstone's institutional pharmacy
business upon the Merger of Beverly with and into Capstone. All outstanding
shares of Beverly Common Stock and the associated Rights (as defined in the
Joint Proxy Statement/Prospectus under the caption "Comparative Rights of
Stockholders -- Anti Takeover Measures," will be converted into a right to
receive an aggregate of 50 million shares of common stock, $.01 par value per
share, of Capstone (the "Capstone Common Stock"). Capstone will be the Surviving
Corporation in the Merger and will continue its corporate existence under the
laws of the State of Delaware. In connection with the Merger, Capstone will
assume approximately $275 million in debt incurred by PCA in connection with the
Transactions, the proceeds of which are to be paid to Beverly prior to the
Distribution Date (as defined below). Capstone will also assume options and
incentive stock awards covering an aggregate of approximately 750,000 shares
(subject to adjustment) of Beverly Common Stock. As a result of the
Distribution, New Beverly will be an independent, publicly-traded company
engaged in the Remaining Healthcare Business and owned by the stockholders of
Beverly as of the Distribution Record Date. Immediately following the Merger,
the name of New Beverly will be changed to "Beverly Enterprises, Inc."
NEW BEVERLY
New Beverly is currently a wholly-owned subsidiary of Beverly incorporated
under the laws of the State of Delaware. By virtue of the restructuring of
Beverly as part of the Distribution, all of the Remaining Healthcare Business of
Beverly, other than the Institutional Pharmacy Business, will be contributed to
New Beverly prior to the Merger of Beverly with and into Capstone. The mailing
address of Beverly's principal executive offices is 5111 Rogers Avenue, Suite
40-A, Fort Smith, Arkansas 72919-0155, and the telephone number at such address
is (501) 452-6712. Following the Distribution, New Beverly's principal executive
offices and phone number will be the same as Beverly's present address and
number, indicated above. New Beverly will make application to list the New
Beverly Common Stock for trading on the NYSE and PSE under the symbol "BEV,"
currently used by Beverly.
New Beverly will be the largest operator of nursing facilities in the
United States, with its business consisting principally of providing long-term
healthcare, including the operation of nursing facilities, acute long-term
transitional hospitals, rehabilitation therapy services, outpatient therapy
clinics, assisted living centers, hospices and home healthcare centers. At March
31, 1997, Beverly operated 627 nursing facilities with 70,623 licensed beds. The
facilities are located in 32 states and the District of Columbia, and range in
capacity from 20 to 355 beds. At March 31, 1997, Beverly also operated 73
pharmacies through PCA, 33 assisted living centers containing 869 units, 11
transitional hospitals containing 578 beds, 34 outpatient therapy clinics, 19
hospices and six home healthcare centers. Beverly's facilities had average
occupancy of 86.6%, 87.4%, 88.1% and 88.5% during the three months ended March
31, 1997 and the years ended December 31, 1996, 1995, and 1994, respectively.
THE TRANSACTIONS
Restructuring. Prior to the Distribution Record Date, Beverly will complete
an internal restructuring pursuant to which all the assets and liabilities
relating to the Remaining Healthcare Business will be transferred or contributed
to New Beverly in one or more transactions expected to receive tax-free
treatment.
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Upon completion of the restructuring, the Remaining Healthcare Business will be
conducted by New Beverly and the Institutional Pharmacy Business conducted by
PCA will remain with Beverly. See "The Distribution -- Restructuring and
Contribution of Remaining Healthcare Business to New Beverly."
Distribution. The Distribution will be effected immediately prior to the
Merger. On the Distribution Date, Beverly will distribute to Beverly
stockholders as of the Distribution Record Date, shares of New Beverly Common
Stock. Each stockholder of Beverly as of the Distribution Record Date will
receive one share of New Beverly Common Stock per share of Beverly Common Stock
held as of the Distribution Record Date. The Distribution will not take place
unless all of the conditions to effecting the Merger (other than the completion
of the Distribution) have been fulfilled. Beverly's transfer agent, The Bank of
New York, will act as the Distribution Agent for the Distribution and will
deliver certificates for New Beverly Common Stock as soon as practicable to
holders of record of Beverly Common Stock as of the close of business on the
Distribution Record Date. All shares of New Beverly Common Stock will be fully
paid and nonassessable and the holders thereof will not be entitled to
preemptive rights. Immediately following the completion of the Distribution, New
Beverly will be an independent, publicly-traded company, and it is contemplated
that the shares of New Beverly Common Stock will be listed on the NYSE and PSE.
See "The Distribution -- Consummation of the Distribution; Treatment of Beverly
Stock Options, Phantom Shares, Performance Shares and Shares of Restricted
Stock."
Merger. Following the approval and adoption of the Merger Agreement by the
requisite vote of the stockholders of Beverly and Capstone and the satisfaction
or waiver of the other conditions to the Merger, Beverly will be merged with and
into Capstone, with Capstone continuing as the Surviving Corporation. The Merger
will become effective upon filing with the Secretary of State of the State of
Delaware a duly executed Certificate of Merger, in the form required by and in
accordance with the Delaware General Corporation Law ("DGCL"), or at such time
thereafter as is provided in the Certificate of Merger.
Pursuant to the Merger Agreement, at the effective time of the Merger
("Effective Time") each share of Beverly Common Stock, and associated Rights (as
defined in "The Merger Agreement" in the Joint Proxy Statement/Prospectus),
issued and outstanding immediately prior to the Effective Time (other than
fractional shares) will be converted into the right to receive that number of
duly authorized, validly issued, fully paid and nonassessable shares of Capstone
Common Stock equal to the quotient, expressed to four decimal places, of (a)
50,000,000 divided by (b) the number of shares of Beverly Common Stock
outstanding immediately prior to the Effective Time (the "Conversion Number").
THE DISTRIBUTION AGREEMENT
The Distribution Agreement provides a general framework for allocating
Beverly's assets and liabilities pursuant to the Internal Beverly Restructuring
Plan (attached as Exhibit A to the Distribution Agreement which is attached as
Annex C to the Joint Proxy Statement/Prospectus). The Internal Beverly
Restructuring Plan will segregate the Remaining Healthcare Business from the
Institutional Pharmacy Business prior to the date, as determined by the Beverly
Board of Directors, on which the Distribution shall be effected (the
"Distribution Date"). The Distribution Agreement also sets forth the general
terms on which Beverly will conduct its business prior to the Distribution Date,
as well as the terms regarding certain relationships between Capstone and New
Beverly following the Distribution. The Distribution Agreement provides that the
Distribution will be effected by distributing to each holder of Beverly Common
Stock as of the close of business on the Distribution Record Date, one share of
New Beverly Common Stock per share of Beverly Common Stock held by such holder
as of such time.
CERTAIN TAX CONSIDERATIONS
Beverly has requested a private letter ruling (the "Private Letter Ruling")
from the Internal Revenue Service ("IRS") substantially to the effect that,
among other things, the Distribution will qualify as a reorganization under
Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the
"Code"), and that neither Beverly, New Beverly nor their stockholders will
recognize any gain or loss (i) in connection with such reorganization (as more
fully described below), (ii) upon the receipt by New Beverly of
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the Remaining Healthcare Business from Beverly in exchange for the New Beverly
Common Stock, or (iii) upon receipt by Beverly stockholders of the New Beverly
Common Stock in the Distribution. As an alternative to obtaining the Private
Letter Ruling, at Beverly's election, Beverly may request the opinion of Caplin
& Drysdale, Chartered or Ernst & Young LLP to the same effect. Tax opinions are
not binding on the IRS or any court. Receipt of either the Private Letter Ruling
or a favorable tax opinion is a condition to the respective obligations of
Beverly and Capstone to consummate the Merger. See "The Merger -- Conditions to
Closing" in the Joint Proxy Statement/Prospectus.
It is expected that the Distribution will qualify as a tax-free
reorganization under Section 368 of the Code. Assuming that the Distribution so
qualifies, (i) the holders of Beverly Common Stock will not recognize gain or
loss upon receipt of shares of New Beverly Common Stock, (ii) each holder of
Beverly Common Stock will allocate his, her or its aggregate tax basis in the
Beverly Common Stock immediately before the Distribution among the Beverly
Common Stock and New Beverly Common Stock in proportion to their respective fair
market values, (iii) the holding period of each holder of Beverly Common Stock
for the New Beverly Common Stock will include the holding period for his, her or
its Beverly Common Stock, provided that the Beverly Common Stock is held as a
capital asset at the time of the Distribution, and (iv) Beverly will not
recognize any gain or loss on its distribution of the New Beverly Common Stock
to its stockholders. See "Certain Federal Income Tax Consequences."
It is also expected that the Merger will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Code. Assuming the
Merger so qualifies, (i) the holders of Beverly Common Stock will not recognize
gain or loss upon the receipt of Capstone Common Stock in exchange for their
shares of Beverly Common Stock, (ii) each holder of Beverly Common Stock will
carry over his, her or its tax basis in the Beverly Common Stock (as determined
immediately following the Distribution) to the Capstone Common Stock, (iii) the
holding period for each holder of Beverly Common Stock will carry over to the
Capstone Common Stock, provided that the Beverly Common Stock is held as a
capital asset immediately prior to the Effective Time of the Merger, and (iv)
any holder of Beverly Common Stock receiving cash in lieu of fractional shares
will recognize capital gain or loss (provided the shares of Beverly Common Stock
surrendered are held as capital assets immediately prior to the Effective Time
of the Merger) equal to the difference between the amount of cash received and
the portion of such holder's basis in the shares of Beverly Common Stock
allocable to such fractional share interests, and such capital gain or loss will
be long-term capital gain or loss if the holding period for such shares is more
than one year. See "Certain Federal Income Tax Consequences."
Beverly and Capstone will also receive, prior to the Effective Time of the
Merger, the opinion of Caplin & Drysdale, Chartered or Ernst & Young LLP to the
effect that: (i) the Merger will qualify as a reorganization within the meaning
of Section 368(a) of the Code; (ii) no gain or loss will be recognized by
Capstone or Beverly as a result of the Merger; and (iii) no gain or loss will be
recognized by Beverly's stockholders upon the receipt of Capstone Common Stock
solely in exchange for Beverly Common Stock in connection with the Merger
(except with respect to cash received in lieu of a fractional interest in
Capstone Common Stock). Tax opinions are not binding on the IRS or any court.
Moreover, the tax opinions are based upon, among other things, certain
representations as to factual matters made by Beverly and Capstone, which
representations, if incorrect or incomplete in certain material respects, would
jeopardize the conclusions reached in the opinions. See "Certain Federal Income
Tax Consequences."
NEW BEVERLY STOCK OPTION PLANS
New Beverly will have one or more employee benefit plans pursuant to which
shares or options to purchase shares of New Beverly Common Stock or other stock
incentives will be issued or issuable to or for the benefit of employees, former
employees and directors. See "The Distribution -- Consummation of the
Distribution; Treatment of Beverly Stock Options, Phantom Shares, Performance
Shares and Shares of Restricted Stock." On May 29, 1997, the New Beverly Board
of Directors adopted the New Beverly 1997 Long-Term Incentive Plan (the "New
Beverly 1997 Incentive Plan"), pursuant to which New Beverly will be able to
make stock incentive awards to its directors, officers, key employees and other
persons on a going-forward basis. On , 1997, the New Beverly 1997
Incentive Plan was adopted by the Board of
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Directors and Compensation Committee of Beverly, and was approved by Beverly as
the sole stockholder of New Beverly prior to the Distribution. In addition, it
is expected that a total of shares will be reserved for issuance by
New Beverly to current holders of options to purchase Beverly Common Stock ("the
Beverly Options") in connection with the Distribution. See "Executive and
Director Compensation -- Executive Compensation." New Beverly has reserved 11
million shares of New Beverly Common Stock for issuance under the New Beverly
1997 Incentive Plan. The New Beverly 1997 Incentive Plan will be submitted for
the approval of the stockholders of Beverly in connection with the Joint Proxy
Statement/Prospectus. Approximately shares are expected to be the
subject of options granted to officers and key employees shortly after the date
of the Distribution.
The New Beverly Board of Directors has also adopted the New Beverly
Non-Employee Directors Stock Option Plan (the "New Beverly Directors Option
Plan"), pursuant to which New Beverly will be able to make stock incentive
awards to its non-employee directors on a going-forward basis. On ,
1997, the New Beverly Directors Option Plan was adopted by the Board of
Directors and Compensation Committee of Beverly, and was approved by Beverly as
the sole stockholder of New Beverly prior to the Distribution. In addition, it
is expected that a total of shares will be reserved for issuance to
current grantees under the corresponding Beverly plan in connection with the
Distribution. See "Executive and Director Compensation -- Compensation of
Directors and Other Information Concerning the Board and its Committees." New
Beverly has reserved 300,000 shares of New Beverly Common Stock under the New
Beverly Directors Option Plan. The New Beverly Directors Option Plan will be
submitted for the approval of stockholders of Beverly in connection with the
Joint Proxy Statement/Prospectus. See "Other Beverly Proposals -- New Beverly
Directors Option Plan" in the Joint Proxy Statement/Prospectus.
EFFECT OF THE TRANSACTIONS ON EMPLOYEES AND EMPLOYEE BENEFITS.
Beverly employees that provide services in connection with the
Institutional Pharmacy Business (together with current and former employees and
current and former independent contractors of the Institutional Pharmacy
Business, the "Retained Employees") are expected to become Capstone employees
following the Merger, while all other Beverly employees (together with current
and former employees and current and former independent contractors of the
Remaining Healthcare Business, the "Transferred Employees") are expected to
become New Beverly employees following the Distribution. Capstone will assume
liabilities and obligations regarding the Retained Employees and New Beverly
will assume liabilities and obligations regarding the Transferred Employees, in
accordance with an Employee Benefit Matters Agreement between Beverly, New
Beverly and Capstone (the "Employee Benefit Agreement"). Pursuant to the
Employee Benefit Agreement, certain adjustments will be made to shares of
Beverly Common Stock underlying options, phantom shares, restricted shares and
performance shares held by Retained Employees and Transferred Employees,
provided that the employees release Beverly, New Beverly and Capstone from
liability under the current Beverly employee benefit plans. See "The
Distribution -- Consummation of the Distribution; Treatment of Beverly Stock
Options, Phantom Shares, Performance Shares and Shares of Restricted Stock" and
"-- Terms of Employee Benefit Agreement."
EXPENSES.
Each of Capstone, on the one hand, and Beverly and New Beverly, on the
other hand, will incur significant expenses in connection with the Transactions.
The fees and expenses of Beverly and New Beverly are currently estimated to be
approximately $20 million with respect to the Distribution and approximately $8
million with respect to the Merger. A significant portion of the estimated
Beverly and New Beverly expenses with respect to the Distribution are expected
to arise in connection with restructuring, modifying or replacing Beverly's
existing indebtedness in connection with the Distribution. See "Treatment of
Beverly Indebtedness."
RISK FACTORS
New Beverly stockholders should carefully consider certain risks in
evaluating the New Beverly Common Stock to be received in the Distribution. See
"Risk Factors."
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary historical consolidated financial data of Beverly has
been derived from the historical financial statements and should be read in
conjunction with such financial statements and notes thereto, which are included
elsewhere herein. Beverly data for the three months ended March 31, 1997 and
1996 have been derived from and should be read in conjunction with the unaudited
condensed consolidated financial statements which are also included elsewhere
herein. The pro forma condensed consolidated financial data gives retroactive
effect to (i) the disposition of Beverly's 49 nursing facilities in Texas and
the use of the net proceeds therefrom; (ii) the Merger; (iii) the
recapitalization/reorganization of Beverly, into New Beverly; and (iv) the
receipt by Beverly of $275,000,000 as a partial repayment of its intercompany
receivable from PCA and the contribution to PCA's capital of Beverly's remaining
receivable from PCA. The pro forma condensed consolidated statement of
operations data gives effect to the transactions as if they occurred on January
1, 1996. The pro forma condensed consolidated balance sheet data gives effect to
the transactions as if they occurred on March 31, 1997. The pro forma data
should be read in conjunction with the unaudited pro forma condensed
consolidated New Beverly financial statements, and notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
AT AND FOR THE
THREE MONTHS ENDED AT AND FOR THE
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net operating revenues................ $ 816,716 $ 811,047 $3,267,189 $3,228,553 $2,969,239 $2,884,451 $2,607,756
Depreciation and amortization......... 27,081 25,056 105,468 103,581 88,734 82,938 80,226
Interest expense, net................. 19,151 19,685 77,272 70,017 50,214 50,927 56,441
Income (loss) from continuing
operations before income taxes...... 30,772 22,827 125,507 (6,154) 114,795 87,640 6,148
Income (loss) from continuing
operations.......................... 18,463 13,696 52,026 (8,123) 76,913 57,956 1,945
Earnings per share 0.19 0.14 0.52 (0.16) 0.79 0.41 0.01
CONSOLIDATED BALANCE SHEET DATA:
Working capital....................... 327,316 260,701 318,215 243,047 242,712 154,419 137,026
Total assets.......................... 2,582,398 2,510,446 2,525,082 2,506,461 2,322,578 2,000,804 1,859,361
Current portion of long-term
obligations......................... 36,361 37,447 38,826 84,639 60,199 43,125 30,466
Long-term obligations, excluding
current portion..................... 1,119,865 1,083,775 1,106,256 1,066,909 918,018 706,917 712,896
Stockholders' equity.................. 881,327 835,610 861,095 820,333 827,244 742,862 593,505
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net operating revenues...................................... $656,025 $2,679,467
Depreciation and amortization............................... 20,822 83,571
Interest expense, net....................................... 9,909 39,048
Income from continuing operations before provision for
income taxes.............................................. 22,741 118,427
Income from continuing operations........................... 13,858 48,464
Earnings per share.......................................... 0.13 0.44
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
<S> <C>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $ 195,820
Total assets................................................ 1,984,983
Current portion of long-term obligations.................... 20,382
Long-term obligations, excluding current portion............ 612,082
Stockholders' equity........................................ 855,937
</TABLE>
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating New Beverly
before making any investment decisions with respect to the New Beverly Common
Stock to be received in the Distribution.
SUBSTANTIAL INDEBTEDNESS
New Beverly, as a result of the Distribution, will assume substantial
indebtedness from Beverly. Although the indebtedness of Beverly to be assumed by
New Beverly in connection with the Transactions will be reduced and
restructured, the amount of indebtedness ultimately assumed by New Beverly will
continue to be substantial. See "Treatment of Beverly Indebtedness." As of March
31, 1997, Beverly had total indebtedness of approximately $1,156,200,000. In
addition to such indebtedness, Beverly has substantial obligations under
operating leases which will be assumed by New Beverly. For the three months
ended March 31, 1997 and the year ended December 31, 1996, Beverly's rent
expense was approximately $28,800,000 and $116,718,000, respectively. The
ability of New Beverly to satisfy its debt and operating lease obligations will
be dependent upon its future operating performance, which will be subject to
prevailing economic conditions and to financial, business and other factors,
including factors beyond New Beverly's control such as federal and state
healthcare reform. New Beverly's level of debt, and the covenants contained in
the debt instruments governing such obligations might impair New Beverly's
ability to take certain actions (including the incurrence of additional debt and
the acquisition or the disposition of assets).
UNCERTAINTY ASSOCIATED WITH HEALTHCARE REFORM
In addition to extensive government healthcare regulation, there are
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of healthcare services. It is not
clear at this time what proposals, if any, will be adopted or, if adopted, what
effect such proposals may have on New Beverly's future business. Certain aspects
of these healthcare proposals, such as cutbacks in Medicare and Medicaid
programs, containment of healthcare costs on an interim basis by means that
could include a short-term freeze on rates paid to healthcare providers and
permitting greater flexibility to the states in the administration of Medicaid,
could adversely affect New Beverly. See "-- Risks Involved with Reimbursement by
Third-Party Payors." There can be no assurance that currently proposed or future
healthcare legislation or other changes in the administration or interpretation
of governmental healthcare programs will not have an adverse effect on New
Beverly. Concern about the potential effects of the proposed reform measures has
contributed to the volatility of stock prices of companies in healthcare and
related industries, including Beverly, and may similarly affect the price of the
New Beverly Common Stock in the future.
RISKS INVOLVED WITH REIMBURSEMENT BY THIRD PARTY PAYORS
For the years ended December 31, 1996, 1995 and 1994 Beverly derived
approximately 75%, 77% and 80%, respectively, of its net operating revenues from
funds under federal and state medical assistance programs, and it is expected
that New Beverly will continue to derive a significant portion of its revenue
from such federal and state reimbursement programs. There can be no assurance
that New Beverly will achieve or improve its payor mix. Both governmental and
private payor sources have instituted cost containment measures designed to
limit payments made to long-term care providers, and there can be no assurance
that future measures will not adversely affect both the timing and amount of
reimbursement to New Beverly. Furthermore, government reimbursement programs are
subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which could
materially decrease the rates paid to New Beverly for its future services or the
services for which New Beverly is able to seek reimbursement. There have been,
and New Beverly expects that under the current and future presidential
administrations there will continue to be, a number of proposals to limit
Medicare and Medicaid reimbursement for long-term healthcare services. New
Beverly cannot predict at this time whether any of these proposals will be
adopted or, if adopted and implemented, what effect such proposals would have on
New Beverly. There can be no assurance that payments under state or federal
governmental programs will remain at
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levels comparable to present levels or will be sufficient to cover the costs
allocable to patients eligible for reimbursement pursuant to such programs,
particularly with respect to individual, state-administered Medicaid programs,
which generally provide lower reimbursement rates than does the Medicare
program. In addition, there can be no assurance that the facilities to be
operated by New Beverly and the services and supplies to be provided by New
Beverly will meet or continue to meet the requirements for participation in such
programs.
Federal law requires state Medicaid programs to reimburse long-term care
facilities for the costs that are incurred by efficiently and economically
operated providers in order to meet quality and safety standards. Long-term care
facilities may seek to enforce this requirement in the state or federal courts.
Nevertheless, there can be no assurance that budget constraints or other factors
will not cause states to reduce Medicaid reimbursement to long-term care
facilities or that litigation to prevent such reductions will be successful. As
a result, there can be no assurance that states in which New Beverly will
operate will continue to meet their Medicaid obligations on a timely basis. Any
failure by such states to meet their Medicaid obligations on a timely basis
could have a material adverse effect on New Beverly.
In addition, several states are considering various healthcare reforms,
including reforms through Medicaid managed care demonstration projects. Several
states in which Beverly operates and in which New Beverly will operate have
applied for, or received, approval from the U.S. Department of Health and Human
Services for waivers from certain Medicaid requirements which are generally
required for managed care projects. Although these demonstration projects
generally exempt institutional care, including long-term care facilities, no
assurance can be given that these waiver projects ultimately will not change the
reimbursement system for long-term care from fee-for-service to managed care
negotiated or capitated rates. It is not possible to predict which reforms of
the healthcare system will be adopted and the effect, if any, the reforms will
have on New Beverly's business.
GOVERNMENT REGULATION
The federal government and all states in which New Beverly will operate
regulate various aspects of the Remaining Healthcare Business to be operated by
New Beverly. In particular, the operation of long-term care facilities and the
provision of specialty medical services are subject to federal, state and local
laws relating to the adequacy of medical care, equipment, personnel, operating
policies, fire prevention, zoning, rate-setting and compliance with building
codes and environmental and other laws. The facilities to be operated by New
Beverly are subject to periodic inspection by governmental and other regulatory
authorities to assure continued compliance with various standards and to provide
for their continued licensing under state law and certification under the
Medicare and Medicaid programs. Should New Beverly receive notifications of
deficiency in the future, New Beverly expects to implement plans of correction
with respect to any such statement to address any alleged deficiencies. While
New Beverly will endeavor to comply with federal, state and local regulatory
requirements for the maintenance and operation of its facilities, there can be
no assurance that all facilities will always be operated in full compliance. The
failure to obtain or renew any required regulatory approvals or licenses could
adversely affect New Beverly's operations.
New Beverly will also be subject to federal and state laws that govern
financial and other arrangements between healthcare providers. These laws often
prohibit certain direct and indirect payments or fee-splitting arrangements
between healthcare providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. Such laws include the anti-kickback provisions of
the federal Medicare and Medicaid Patients and Program Protection Act of 1987.
These provisions prohibit, among other things, the offer, payment, solicitation
or receipt of any form of remuneration in return for the referral of Medicare
and Medicaid patients. In addition, many states prohibit business corporations
from providing, or holding themselves out as a provider of, medical care. These
laws vary from state to state and have seldom been interpreted by the courts or
regulatory agencies. Additionally, federal enactments that expand the list of
healthcare services subject to existing federal referral prohibitions became
effective on January 1, 1995. See "Business -- Government Regulation and
Reimbursement."
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INCREASED LABOR COSTS AND AVAILABILITY OF PERSONNEL
In recent years, Beverly has experienced increases in its labor costs
primarily due to higher wages and greater benefits required to attract and
retain qualified personnel, increased staffing levels in its nursing facilities
due to greater patient acuity and the hiring of therapists on staff. Although
New Beverly expects labor costs to continue to increase in the future, it is
anticipated that any increase in costs will generally result in higher patient
rates in subsequent periods, subject to the time lag in most states of up to 18
months between increases in reimbursable costs and the receipt of related
reimbursement rate increases. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
In the past, the healthcare industry, including Beverly's long-term care
facilities, has experienced a shortage of nurses to staff healthcare operations,
and, more recently, the healthcare industry in general has experienced a
shortage of therapists. While Beverly is not currently experiencing a nursing or
therapist shortage, it competes with other healthcare providers for nursing and
therapist personnel and may compete with other service industries for persons
serving Beverly in other capacities, such as nurses' aides. A shortage of
nursing therapists or nurse's aides could force New Beverly to pay even higher
salaries and make greater use of higher cost temporary personnel. A lack of
qualified personnel might also require New Beverly to reduce its census or admit
patients requiring a lower level of care, both of which could adversely affect
operating results.
DEPENDENCE ON KEY PERSONNEL
New Beverly's operations are dependent on the efforts, ability and
experience of its key executive officers. New Beverly's continued growth and
success depends on its ability to attract and retain skilled employees and on
the ability of its officers and key employees to successfully manage New
Beverly's expansion of service beyond the traditional long-term care services
provided by Beverly. The loss of some or all of these key executive officers and
skilled employees could have a material adverse impact on New Beverly's future
results of operations.
COMPETITION
The long-term care industry is highly competitive. New Beverly will compete
with other providers on the basis of the breadth and quality of its services,
the quality of its facilities and, to a limited extent, price. New Beverly will
also compete with other providers in the acquisition and development of
additional facilities and healthcare services. New Beverly's long-term care
competitors will include national, regional and local operators of long-term
care facilities, acute care hospitals, rehabilitation hospitals, subacute
facilities, transitional hospitals, assisted living facilities, hospices, home
healthcare centers, healthcare therapy clinics, and similar institutions, many
of which have significantly greater financial and other resources than New
Beverly. In addition, New Beverly will compete with a number of tax-exempt
nonprofit organizations which can finance acquisitions and capital expenditures
on a tax-exempt basis or receive charitable contributions unavailable to New
Beverly. There can be no assurance that New Beverly will not encounter increased
competition which could adversely affect its business, results of operations or
financial condition.
ABSENCE OF PRIOR TRADING MARKET
There is no existing trading market for the New Beverly Common Stock to be
received by Beverly's stockholders in the Distribution and there can be no
assurance as to the establishment of an active trading market. New Beverly
expects to list its common stock on the NYSE and the PSE. New Beverly's
management expects that approximately 110,424,677 shares of New Beverly Common
Stock will be outstanding after the Distribution. New Beverly Common Stock may
experience price volatility following the Distribution until trading values
become established. As a result, it could be difficult to make purchases or
sales of New Beverly Common Stock in the market at any particular time. There
can be no assurance as to either the price at which New Beverly Common Stock
will trade following the consummation of the Distribution and the Merger or
whether such price will be significantly below the book value per share of New
Beverly Common Stock.
8
<PAGE> 253
CERTAIN INDEMNIFICATION OBLIGATIONS
Pursuant to the Distribution Agreement and the Tax Allocation and
Indemnification Agreement, New Beverly has agreed to indemnify Capstone with
respect to certain losses, damages, claims and liabilities which may arise from
the consummation of the Transactions described herein, the conduct of the
Remaining Healthcare Business prior to the Distribution Date and certain tax
liabilities. See "The Distribution -- Indemnification and Insurance" and
"-- Terms of the Tax Allocation and Indemnification Agreement."
NON-COMPETITION AGREEMENT WITH CAPSTONE
Following the Distribution and Merger, New Beverly will be prohibited from
competing with Capstone in the Institutional Pharmacy Business in certain
defined geographical areas for a period of five years. See "The
Distribution -- Terms of the Non-competition Agreement." In the past, a
significant portion of Beverly's net income has been derived from the
Institutional Pharmacy Business. In 1996, Beverly derived approximately 39% of
its net income from the Institutional Pharmacy Business. The Non-competition
Agreement will therefore restrict New Beverly's ability to pursue a line of
business that has historically contributed a significant portion of Beverly's
net income.
9
<PAGE> 254
USE OF PROCEEDS
Pursuant to the Distribution, Beverly will transfer the Remaining
Healthcare Business to New Beverly or one or more of its subsidiaries and
receive from New Beverly shares of New Beverly Common Stock. Such shares of New
Beverly Common Stock will be distributed in a manner expected to receive
tax-free treatment to Beverly stockholders as of the Distribution Record Date,
and no consideration will be paid by such stockholders in the Distribution.
Therefore, there will be no proceeds from the issuance of the New Beverly Common
Stock.
In connection with the Distribution and the Merger, Beverly expects to
receive $275,000,000 as a partial repayment of PCA's intercompany balance owed
to Beverly. Beverly intends to use: (i) approximately $67,882,000 of such net
proceeds to repay Revolver borrowings under its Existing Credit Facility (as
defined); (ii) approximately $62,480,000 to repay the remaining outstanding
balance under the 7 5/8% Debentures (as defined); (iii) approximately
$24,805,000 to repay the 8.75% Notes (as defined); and (iv) the remaining net
proceeds to repay certain other notes and mortgages. Beverly intends to pay the
estimated Transaction costs of $28,000,000 from existing cash and cash
equivalents and cash from operations.
In addition, in June 1997, Beverly sold its 49 skilled nursing facilities
in Texas for net cash proceeds of approximately $115,700,000. Beverly intends to
use: (i) approximately $1,195,000 of such net proceeds to repay its zero coupon
notes; (ii) approximately $2,387,000 to repay notes payable on certain Texas
facilities; and (iii) the remaining net proceeds to repay Revolver borrowings
under its Existing Credit Facility. Revolver borrowings bear interest at a
floating rate (which was approximately 6.5% at March 31, 1997). See "Treatment
of Beverly Indebtedness."
10
<PAGE> 255
CAPITALIZATION
Following the Distribution and the Merger, New Beverly will change its name
to Beverly Enterprises, Inc. and will be treated as the continuation of Beverly
for financial reporting purposes. See "Unaudited Pro Forma New Beverly Financial
Statements" and the consolidated financial statements of Beverly and notes
thereto included elsewhere herein. The following table sets forth Beverly's
historical capitalization at March 31, 1997, and pro forma to reflect receipt
and application of net proceeds of approximately $115,700,000, as well as
recording of the estimated gain, from the sale of Beverly's Texas nursing
facilities, completed in June 1997 and pro forma, as adjusted, to reflect the
Distribution and the Merger:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-----------------------------------------
PRO FORMA,
ACTUAL PRO FORMA(1) AS ADJUSTED
---------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.......................... $ 64,136 $ 64,136 $ 49,923(2)(3)
========== ========== ==========
Short-term borrowings and current portion of
long-term debt................................... $ 36,361 $ 35,051 $ 20,382(2)(3)
========== ========== ==========
Long-term debt, net of current portion:
Revolver borrowings.............................. $ 180,000 $ 67,882 $ --(3)
Industrial revenue bonds......................... 197,927 197,927 193,493(3)
Notes and mortgages.............................. 219,503 217,231 155,536(3)
First Mortgage Bonds............................. 46,917 46,917 18,762(3)
8.75% Notes...................................... 24,805 24,805 --(3)
9% Senior Notes.................................. 180,000 180,000 180,000
7 5/8% Debentures................................ 54,980 54,980 --(3)
5 1/2% Debentures................................ 150,000 150,000 --(5)
Medium term notes................................ 50,000 50,000 50,000
Capital lease obligations........................ 15,733 15,733 14,291(2)
---------- ---------- ----------
Total long-term debt..................... 1,119,865 1,005,475 612,082
Stockholders' equity:
Preferred stock, 25,000,000 shares authorized.... -- -- --
Common stock, $0.10 par value; 300,000,000 shares
authorized; 104,595,272 shares issued;
99,171,864 shares outstanding; pro forma as
adjusted 110,424,677 shares issued and
outstanding................................... 10,460 10,460 11,042(5)(6)(7)
Additional paid-in capital....................... 776,424 776,424 867,865(5)(6)
Retained earnings (deficit)...................... 152,420 155,598 (22,970)(2)(4)
Treasury stock, at cost; 5,423,408 shares........ (57,977) (57,977) --(6)
---------- ---------- ----------
Total stockholders' equity............... 881,327 884,505 855,937
---------- ---------- ----------
Total capitalization..................... $2,001,192 $1,889,980 $1,468,019
========== ========== ==========
</TABLE>
- ---------------
(1) Reflects repayment of (a) $1,195,000 of Beverly's zero coupon notes due
September 30, 1997, (b) $2,387,000 ($115,000 current and $2,272,000
long-term) of notes payable on certain Texas nursing facilities and (c)
$112,118,000 of Revolver borrowings with the net cash proceeds from the sale
of Beverly's Texas nursing facilities.
(2) Reflects the following adjustments to eliminate PCA's historical amounts (in
thousands):
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 5,671
Current portion of long-term debt........................... 1,078
Capital leases, net of current portion...................... 1,442
Retained earnings........................................... 99,433
</TABLE>
11
<PAGE> 256
(3) Reflects repayment of approximately $255,542,000 of debt with the
$275,000,000 of net proceeds to be received by Beverly as a partial
repayment of PCA's intercompany balance in conjunction with the Transactions
with the remaining net proceeds of approximately $19,458,000 used for
working capital, and payment of approximately $28,000,000 of transaction
costs.
(4) Reflects the contribution to PCA's capital (after the repayment of
$275,000,000 (See Note 3 above)) of the remaining $51,343,000 of PCA's
intercompany balance, which will not be repaid to Beverly.
(5) Reflects conversion of 5 1/2% Debentures (as defined) into 11,252,813 shares
of Beverly Common Stock.
(6) Reflects cancellation and retirement of Beverly Common Stock held in
treasury at the Effective Time of the Merger.
(7) Reflects a one-for-one distribution of New Beverly Common Stock for each
share of Beverly Common Stock held by a Beverly stockholder as of the
Distribution Record Date.
- ---------------
See "Unaudited Pro Forma New Beverly Financial Statements."
12
<PAGE> 257
UNAUDITED PRO FORMA NEW BEVERLY FINANCIAL STATEMENTS
Under the Distribution Agreement and the Merger Agreement: (1) Beverly's
Remaining Healthcare Business is to be reorganized into New Beverly with all of
the shares of New Beverly Common Stock to be distributed to Beverly's
stockholders in a tax-free reorganization; (2) Beverly (then consisting solely
of the Institutional Pharmacy Business operated by PCA and its subsidiaries) is
to be acquired by and merged with and into Capstone through a tax-free exchange
of shares of Capstone Common Stock for shares of Beverly Common Stock; and (3)
New Beverly will become an independent, publicly-traded company upon the
completion of the Distribution and the Merger. New Beverly will immediately
change its name to Beverly Enterprises, Inc., will be treated as the
continuation of Beverly for financial reporting purposes and will continue to
reflect Beverly's historical cost basis of assets and liabilities. Closing under
the Merger Agreement is subject to a number of conditions, including, among
other things, the approval of the Merger and the Distribution by Beverly's
stockholders, and approval of the Merger by Capstone's stockholders. The
accompanying unaudited pro forma condensed consolidated balance sheet reflects
the historical balance sheets of Beverly and PCA and as adjusted to give effect
to (i) the receipt and application of net proceeds of approximately $115,700,000
from the sale of Beverly's Texas nursing facilities, completed in June, 1997 and
(ii) the Distribution and the Merger, as if all of such events occurred at such
date. The accompanying unaudited pro forma condensed consolidated statements of
income for the year ended December 31, 1996 and for the three months ended March
31, 1997 give effect to such transactions as if they occurred on January 1,
1996. The unaudited pro forma condensed consolidated financial statements are
not necessarily indicative of the operating results that would have been
achieved had the sale of the Texas facilities, the Distribution and the Merger
been consummated as of those dates, nor are they necessarily indicative of
future operating results. The unaudited pro forma condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements of Beverly and PCA, and the related notes thereto, included
elsewhere in this Prospectus.
13
<PAGE> 258
NEW BEVERLY HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
PRO FORMA
TEXAS TRANSACTION NEW
BEVERLY PCA(1) ADJUSTMENTS(2) ADJUSTMENTS BEVERLY
---------- --------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net operating revenues.................... $3,267,189 $(516,400) (153,405) $82,083(3) $2,679,467
Interest income........................... 13,839 (177) (6) -- 13,656
---------- --------- -------- ------- ----------
Total revenues................... 3,281,028 (516,577) (153,411) 82,083 2,693,123
Costs and expenses:
Operating and administrative:
Wages and related..................... 1,819,500 (118,888) (86,697) -- 1,613,915
Other................................. 1,139,442 (346,331) (50,688) 82,083(3) 824,506
Interest................................ 91,111 (11) (9,181) (29,215)(4) 52,704
Depreciation and amortization........... 105,468 (16,392) (5,505) -- 83,571
---------- --------- -------- ------- ----------
Total costs and expenses......... 3,155,521 (481,622) (152,071) 52,868 2,574,696
---------- --------- -------- ------- ----------
Income (loss) from continuing operations
before provision for income taxes....... 125,507 (34,955) (1,340) 29,215 118,427
Provision for income taxes................ 73,481 (14,668) (536) 11,686(5) 69,963
---------- --------- -------- ------- ----------
Income from continuing operations......... $ 52,026 $ (20,287) $ (804) $17,529 $ 48,464
========== ========= ======== ======= ==========
Per share data (primary):
Earnings per share from continuing
operations............................ $ 0.52 $ 0.44
========== ==========
Weighted average shares outstanding..... 99,646 110,899
========== ==========
Per share data (fully diluted):
Earnings per share from continuing
operations............................ $ 0.50 $ 0.44
========== ==========
Weighted average shares outstanding..... 111,002 111,002
========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-------------------------------------------------------------------
PRO FORMA
TEXAS TRANSACTION NEW
BEVERLY PCA(1) ADJUSTMENTS(2) ADJUSTMENTS BEVERLY
---------- --------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net operating revenues.................... $ 816,716 $(147,592) (38,301) $25,202(3) $ 656,025
Interest income........................... 3,565 (47) (2) -- 3,516
---------- --------- -------- ------- ----------
Total revenues................... 820,281 (147,639) (38,303) 25,202 659,541
Costs and expenses:
Operating and administrative:
Wages and related..................... 449,782 (32,033) (20,582) -- 397,167
Other................................. 289,930 (97,283) (12,463) 25,202(3) 205,386
Interest................................ 22,716 (93) (2,154) (7,044)(4) 13,425
Depreciation and amortization........... 27,081 (4,826) (1,433) -- 20,822
---------- --------- -------- ------- ----------
Total costs and expenses......... 789,509 (134,235) (36,632) 18,158 636,800
---------- --------- -------- ------- ----------
Income (loss) from continuing operations
before provision for income taxes....... 30,772 (13,404) (1,671) 7,044 22,741
Provision for income taxes................ 12,309 (5,576) (668) 2,818(5) 8,883
---------- --------- -------- ------- ----------
Income from continuing operations......... $ 18,463 $ (7,828) $ (1,003) $ 4,226 $ 13,858
========== ========= ======== ======= ==========
Per share data (primary):
Earnings per share from continuing
operations.......................... $ 0.19 $ 0.13
========== ==========
Weighted average shares outstanding... 99,411 110,664
========== ==========
Per share data (fully diluted):
Earnings per share from continuing
operations.......................... $ 0.18 $ 0.13
========== ==========
Weighted average shares outstanding... 110,688 110,688
========== ==========
</TABLE>
14
<PAGE> 259
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(1) Reflects the historical stand-alone amounts of PCA which are eliminated to
arrive at New Beverly.
(2) Reflects the disposition of 49 Texas nursing facilities and the reduction in
interest expense related to the repayment of certain long-term obligations
with the net cash proceeds from such disposition. See "Use of Proceeds" and
"Capitalization."
(3) Reflects add-back of intercompany revenues and costs of sales of PCA which
are eliminated in Beverly historical amounts.
(4) Reduction of interest expense related to debt paydowns described in Note 3
to the Unaudited Pro Forma Condensed Consolidated Balance Sheet.
(5) Income tax effect of pro forma adjustments using a 40% statutory rate.
- ---------------
Note: Nonrecurring Transaction costs of approximately $26 million, net of tax,
will be charged to the operations of New Beverly but are not reflected in
the pro forma condensed consolidated statements of income.
15
<PAGE> 260
NEW BEVERLY HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
TEXAS TRANSACTION NEW
BEVERLY PCA(1) ADJUSTMENTS(2) ADJUSTMENTS BEVERLY
---------- --------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $ 64,136 $ (5,671) $ -- $ 19,458(3) $ 49,923
(28,000)(4)
Accounts receivable -- patient, less
allowance for doubtful accounts....... 522,415 (100,696) (24,900) -- 396,819
Accounts receivable -- nonpatient, less
allowance for doubtful accounts....... 11,628 (161) -- -- 11,467
Notes receivable........................ 10,572 (1,136) -- -- 9,436
Operating supplies...................... 56,661 (23,682) (2,624) -- 30,355
Deferred income taxes................... 13,320 -- -- -- 13,320
Prepaid expenses........................ 42,505 (424) -- -- 42,081
---------- --------- --------- --------- ----------
Total current assets............. 721,237 (131,770) (27,524) (8,542) 553,401
Property and equipment, net............... 1,262,671 (34,579) (84,883) -- 1,143,209
Other assets:
Notes receivable, less allowance for
doubtful notes........................ 29,206 (509) -- -- 28,697
Designated and restricted funds......... 81,346 -- -- -- 81,346
Goodwill, net........................... 372,637 (288,086) (5,915) -- 78,636
Other, net.............................. 115,301 (11,739) (882) (2,986)(3) 99,694
---------- --------- --------- --------- ----------
Total other assets............... 598,490 (300,334) (6,797) (2,986) 288,373
---------- --------- --------- --------- ----------
Total assets..................... $2,582,398 $(466,683) $(119,204) $ (11,528) $1,984,983
========== ========= ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 122,467 $ (21,367) $ 600 $ -- $ 101,700
Accrued wages and related liabilities... 136,863 (6,029) -- -- 130,834
Accrued interest........................ 13,714 -- -- -- 13,714
Other accrued liabilities............... 84,516 (5,965) 12,400 -- 90,951
Current portion of long-term
obligations........................... 36,361 (1,078) (1,310) (13,591)(3) 20,382
---------- --------- --------- --------- ----------
Total current liabilities........ 393,921 (34,439) 11,690 (13,591) 357,581
Long-term obligations..................... 1,119,865 (1,442) (114,390) (241,951)(3) 612,082
(150,000)(5)
Deferred income taxes payable............. 87,980 (5,026) (19,682) (1,194)(3) 60,078
(2,000)(4)
Other liabilities and deferred items...... 99,305 -- -- -- 99,305
Due to Parent............................. -- (326,343) -- 326,343(3) --
Stockholders' equity:
Common stock............................ 10,460 (1) -- 1(6) 11,042(7)
(543)(8)
1,125(5)
Additional paid-in capital.............. 776,424 (3,866) -- 3,866(6) 867,865
148,875(5)
(57,434)(8)
Retained earnings (deficit)............. 152,420 (95,566) 3,178 (51,343)(3) (22,970)
(1,792)(3)
(3,867)(6)
(26,000)(4)
Treasury stock, at cost................. (57,977) -- -- 57,977(8) --
---------- --------- --------- --------- ----------
Total stockholders' equity....... 881,327 (99,433) 3,178 70,865 855,937
---------- --------- --------- --------- ----------
Total liabilities and
stockholders' equity........... $2,582,398 $(466,683) $(119,204) $ (11,528) $1,984,983
========== ========= ========= ========= ==========
</TABLE>
16
<PAGE> 261
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) Reflects the historical stand-alone amounts of PCA which are eliminated to
arrive at New Beverly.
(2) Reflects the disposition of 49 Texas nursing facilities and the reduction in
long-term obligations with the net cash proceeds.
(3) Reflects (i) repayment of approximately $255,542,000 of long-term
obligations with the $275,000,000 of net proceeds to be received as partial
repayment of PCA's intercompany balance owed to Beverly, with the remaining
net proceeds used for working capital (ii) write-off of deferred financing
costs on such repaid long-term obligations and (iii) reduction in equity for
the remaining intercompany balance owed by PCA which will not be repaid.
(4) Reflects payment of estimated Merger and Distribution costs as follows
(assuming $5,000,000 of such costs are deductible for income tax purposes)
(in thousands):
<TABLE>
<S> <C>
Estimated Merger costs:
Investment banker fees.................................... $ 5,200
Professional fees and other Merger-related costs.......... 2,800
-------
Total estimated Merger costs...................... 8,000
Estimated Distribution costs:
Consent fees to debt and lease holders.................... $10,200
Employee incentives and other related costs............... 7,500
Professional fees and other Distribution-related costs.... 2,300
-------
Total estimated Distribution costs................ 20,000
-------
Total estimated Transaction costs................. 28,000
Less: Estimated tax effect at a 40% statutory
rate............................................ (2,000)
-------
$26,000
=======
</TABLE>
(5) Reflects conversion of $150,000,000 principal amount of 5 1/2% Debentures
(as defined) into 11,252,813 shares of Beverly Common Stock.
(6) Reflects add-back of common stock and additional paid-in capital of PCA
which are eliminated in Beverly historical amounts.
(7) Reflects a one-for-one distribution of New Beverly Common Stock for each
share of Beverly Common Stock held by a Beverly stockholder as of the
Distribution Record Date.
(8) Reflects cancellation and retirement of Beverly Common Stock held in
treasury at the Effective Time of the Merger.
17
<PAGE> 262
THE DISTRIBUTION
The following information describes certain aspects of the proposed
restructuring of Beverly and the Distribution as well as certain contractual
arrangements that will exist between New Beverly and Capstone following the
completion of the Distribution and the Merger. For information describing
certain aspects of the Merger, see "Certain Conditions Related to the
Transactions" and "The Merger" in the Joint Proxy Statement/Prospectus. The
descriptions of the various agreements contained herein, including, without
limitation, the Distribution Agreement, the Employee Benefit Agreement, the
Non-competition Agreement, the Interim Services Agreement and the Tax Allocation
and Indemnification Agreement (each as defined below), do not purport to be
complete and are qualified in their entirety by reference to forms of such
agreements which are attached either as annexes to the Joint Proxy
Statement/Prospectus or filed as an exhibit to the registration statement of
which this Prospectus is a part, which such annexes and exhibits, as the case
may be, are incorporated herein by reference. All Beverly Stockholders are urged
to read such agreements in their entirety.
TERMS OF THE DISTRIBUTION AGREEMENT
Simultaneously with the execution of the Merger Agreement, Beverly, New
Beverly and Capstone executed the Distribution Agreement. Following the Merger,
Capstone will succeed to Beverly's obligations arising pursuant to the
Distribution Agreement by operation of law following the Merger. The
Distribution Agreement provides a general framework for allocating Beverly's
assets and liabilities pursuant to the Internal Beverly Restructuring Plan
(attached as Exhibit A to the Distribution Agreement which is attached as Annex
C to the Joint Proxy Statement/Prospectus), to segregate the Remaining
Healthcare Business from the Institutional Pharmacy Business prior to the
Distribution Date in preparation for the Distribution and the Merger. The
Distribution Agreement also sets forth the general terms on which Beverly will
conduct its business prior to the Distribution Date, as well as the terms
regarding certain relationships between Capstone and New Beverly following the
Distribution.
The Distribution Agreement provides that the Distribution will be effected
by distributing to each holder of Beverly Common Stock as of the close of
business on the Distribution Date certificates representing one share of New
Beverly Common Stock for each share of Beverly Common Stock held by such holder
as of such time. See "-- Manner of Effecting the Distribution."
RESTRUCTURING AND CONTRIBUTION OF REMAINING HEALTHCARE BUSINESS TO NEW BEVERLY
New Beverly, which is a wholly-owned subsidiary of Beverly, was recently
organized for purposes of the Transactions. Until shortly before the Merger, New
Beverly will own no material assets and will conduct no business activities
other than in preparation for the Transactions. Consummation of the Distribution
is a condition to the Merger.
Prior to the Distribution Record Date, Beverly will complete an internal
restructuring pursuant to which all the assets and liabilities relating to the
Remaining Healthcare Business will be transferred or contributed to New Beverly
in one or more tax-free transactions such that upon completion of such
restructuring, the Remaining Healthcare Business will be conducted by New
Beverly, a direct subsidiary of Beverly, and various direct and indirect
subsidiaries of New Beverly. At the same time, any assets and liabilities of
Beverly relating primarily to the Institutional Pharmacy Business which are not
already in the Pharmacy Subsidiaries (as defined in the Distribution Agreement)
will be transferred to such Pharmacy Subsidiaries so that upon completion of
such restructuring the Institutional Pharmacy Business will be conducted by PCA,
a direct subsidiary of Beverly, and various direct and indirect subsidiaries of
PCA.
In connection with the consummation of the transactions contemplated by the
Distribution Agreement and the Merger Agreement, Beverly, New Beverly, and
Capstone will enter into additional agreements and arrangements designed to
complete the separation of Beverly's Remaining Healthcare Business from its
Institutional Pharmacy Business and to define certain intercompany relationships
subsequent to the completion of the Merger. Among these agreements are: (i) the
Employee Benefit Matters Agreement (the "Employee Benefit Agreement") between
Beverly, New Beverly, and Capstone; (ii) the Tax Allocation and
18
<PAGE> 263
Indemnification Agreement (the "Tax Allocation and Indemnification Agreement")
between Beverly and New Beverly; (iii) the Non-competition Agreement (the
"Non-competition Agreement") between Capstone and New Beverly; (iv) the Interim
Services Agreement (the "Interim Services Agreement") between New Beverly and
Beverly; and (v) the Affiliate Agreement (the "Affiliate Agreement") between
Capstone and certain individuals who may be deemed affiliates of Beverly.
As provided in the Distribution Agreement, prior to the consummation of the
Distribution, Beverly will take certain actions as the sole stockholder of New
Beverly or will ratify action taken by officers and directors of New Beverly in
connection with establishing New Beverly as an independent company, including:
(i) incorporating New Beverly under the laws of the state of Delaware; (ii)
adopting the Certificate of Incorporation and Bylaws of New Beverly to be in
effect at the Time of Distribution (as defined in the Distribution Agreement);
(iii) electing directors of New Beverly and causing the appointment of officers
of New Beverly to serve in such capacities following the Distribution; and (iv)
adopting various incentive compensation plans for the benefit of directors,
officers, and employees of New Beverly to be in effect following the
Distribution. For information concerning the Certificate of Incorporation and
Bylaws of New Beverly, see "Description of New Beverly Capital Stock -- The
Charter and Bylaws of New Beverly." For information concerning the individuals
who may serve as directors and executive officers of New Beverly following the
Distribution and certain compensatory arrangements for their benefit, including
stock incentive plans, see "Executive and Director Compensation."
Pursuant to the Distribution Agreement, New Beverly will acquire the right
to use the name "Beverly" in connection with continuing the conduct of the
Remaining Healthcare Business. It is anticipated that immediately following the
Merger, New Beverly will change its name to "Beverly Enterprises, Inc."
CONSUMMATION OF THE DISTRIBUTION; TREATMENT OF BEVERLY STOCK OPTIONS, PHANTOM
SHARES, PERFORMANCE SHARES AND SHARES OF RESTRICTED STOCK
The Distribution will be effected immediately prior to the Merger. However,
the Distribution will not be effected unless both the proposal to approve the
Distribution and the proposal to merge Beverly with and into Capstone are
approved by Beverly's stockholders. Stockholder approval of the Distribution and
the Merger are being sought pursuant to the requirements of the Merger
Agreement. The Board of Directors of Beverly has not yet established the
Distribution Record Date, although it is anticipated that the Distribution
Record Date will be the date on which the Distribution occurs and will be
immediately prior to the Effective Time of the Merger.
On the Distribution Date Beverly's Board of Directors will cause Beverly to
distribute to Beverly Stockholders, as of the Distribution Record Date, shares
of New Beverly Common Stock. Each stockholder of Beverly as of the Distribution
Record Date will receive one share of New Beverly Common Stock for each share of
Beverly Common Stock held as of the Distribution Record Date. Immediately
following the completion of the Distribution, New Beverly will be an
independent, publicly-traded company and it is contemplated that the shares of
New Beverly Common Stock will be listed on the NYSE and the PSE under the
trading symbol "BEV". See "-- Listing of New Beverly Common Stock; Restrictions
on Resale."
Following the completion of the Distribution, Beverly will merge with and
into Capstone with Capstone being the Surviving Corporation in the Merger. At
such time, except insofar as fractional shares are concerned, each share of
Beverly Common Stock issued and outstanding immediately prior to the Effective
Time, (except for shares owned by Beverly as treasury stock, shares owned by
Capstone or any Subsidiary of Beverly) together with the associated Rights (as
defined in the Merger Agreement) shall be converted into the right to receive a
number of shares of Capstone Common Stock equal to the Conversion Number. In the
event of any change in Capstone Common Stock or Beverly Common Stock by reason
of any stock split, readjustment, stock dividend, exchange of shares,
reclassification, recapitalization or otherwise (other than the Distribution),
the Conversion Number shall be correspondingly adjusted. Each holder of shares
of Beverly Common Stock who, upon surrender of Beverly stock certificates ("The
Certificates"), would be entitled to receive a fraction of a share of Capstone
Common Stock shall receive, in lieu of such fractional share, cash in an amount
equal to such fraction multiplied by the Average Market Value. "Average Market
Value" means
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the arithmetic average of the last reported sale price per share of Capstone
Common Stock as reported on the National Association of Securities Dealers
Automated Quotation System ("Nasdaq") for the fifteen (15) consecutive trading
days ending with the last trading day prior to the scheduled date of the Beverly
Special Meeting specified in the Joint Proxy Statement/Prospectus.
As a consequence of the Distribution, options to purchase shares of Beverly
Common Stock that are outstanding under the applicable Beverly employee benefit
plans immediately prior to the Time of Distribution (as defined in the
Distribution Agreement), whether or not exercisable, and which have been granted
to each person employed or formerly employed by Beverly or any subsidiary of
Beverly other than an employee or former employee of any of the Pharmacy
Subsidiaries, and any other person who becomes an employee of New Beverly
immediately after the Time of Distribution (the "Transferred Employees"), will
be assumed by New Beverly in accordance with the Employee Benefit Agreement and
such shares shall be exercisable upon the same terms and conditions as under the
applicable Beverly employee benefit plan and the applicable option agreement
issued thereunder, except that (i) the number of shares of New Beverly Common
Stock for which such options may be converted and (ii) the option exercise price
per share of such options, shall be adjusted in accordance with the Employee
Benefit Agreement. See "-- Terms of the Employee Benefit Agreement."
The exercise price and number of shares subject to purchase under each
outstanding Beverly Option shall be adjusted pursuant to the Employee Benefit
Agreement to reflect the Distribution for each holder of such an option who
executes a Consent and Release (as defined in the Employee Benefit Agreement)
approved by Beverly. See "-- Terms of the Employee Benefit Agreement."
As of the Time of Distribution, by virtue of the Distribution and without
any action on the part of the holders thereof, New Beverly shall assume each
unvested Beverly phantom share held by Transferred Employees, and each Beverly
performance share and share of Beverly restricted stock that is outstanding
under the applicable Beverly employee benefit plan immediately prior to the Time
of Distribution, giving effect to the adjustments provided for in the Employee
Benefit Agreement, and shall substitute for each such share, a new unvested
phantom share, performance share or restricted share of New Beverly Common Stock
upon the same terms and conditions, including vesting requirements (as adjusted
to take into account the transactions referred to in the Distribution Agreement,
including the requirement that employment services be performed for New Beverly
or one of its subsidiaries) as applied to the Beverly phantom share, Beverly
performance share or share of Beverly restricted stock for which it has been
substituted. See "-- Terms of the Employee Benefit Agreement."
The number of Beverly shares subject to each outstanding Beverly phantom
share, Beverly performance share and share of Beverly restricted Stock shall be
adjusted pursuant to the Employee Benefit Agreement to reflect the Distribution
for each holder of such share who executes a Consent and Release approved by
Beverly. See "-- Terms of the Employee Benefit Agreement."
Prior to the Effective Time, Beverly shall (i) obtain any consents from
holders of Beverly phantom shares, performance shares or shares of restricted
stock and outstanding options to purchase Beverly Common Stock, granted under
the applicable Beverly employee benefit plans; and (ii) make any amendments to
the terms of the applicable Beverly employee benefit plans or any award granted
thereunder that, in the case of either (i) or (ii), are necessary to give effect
to the transactions contemplated under this caption. See "-- Terms of the
Employee Benefit Agreement."
MANNER OF EFFECTING THE DISTRIBUTION; CONSUMMATION OF THE DISTRIBUTION
The Beverly Board of Directors will determine the Distribution Date and it
is expected that the Distribution will be made on the Distribution Date to
stockholders of record of Beverly Common Stock as of the Distribution Record
Date. The Merger is expected to take place promptly following the satisfaction
of certain conditions set forth in the Merger Agreement and is expected to occur
in the fourth quarter of 1997. The Distribution will not take place unless all
of the conditions to effecting the Merger (other than the completion of the
Distribution) have been fulfilled, and there can be no assurance as to the
timing or consummation of the Distribution. Beverly's transfer agent, The Bank
of New York, will act as the
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Distribution Agent for the Distribution and will deliver certificates for New
Beverly Common Stock as soon as practicable to holders of record of Beverly
Common Stock as of the close of business on the Distribution Record Date on the
basis of one share of New Beverly Common Stock for every one share of Beverly
Common Stock held on the Distribution Record Date. All shares of New Beverly
Common Stock will be fully paid and nonassessable and the holders thereof will
not be entitled to preemptive rights. See "Description of New Beverly Capital
Stock." Following the completion of the Distribution, New Beverly will operate
as an independent, publicly-traded company.
YOU WILL NOT BE REQUIRED TO PAY ANY CASH OR OTHER CONSIDERATION FOR THE
SHARES OF NEW BEVERLY COMMON STOCK RECEIVED IN THE DISTRIBUTION NOR WILL YOU
NEED TO SURRENDER YOUR BEVERLY COMMON STOCK CERTIFICATES IN ORDER TO RECEIVE
SHARES OF NEW BEVERLY COMMON STOCK IN THE DISTRIBUTION. THE DISTRIBUTION AGENT
WILL SEND YOU YOUR NEW BEVERLY STOCK CERTIFICATES FOLLOWING THE CONSUMMATION OF
THE DISTRIBUTION.
LISTING OF NEW BEVERLY COMMON STOCK; RESTRICTIONS ON RESALE
New Beverly will apply for listing the New Beverly Common Stock on the NYSE
and PSE under the symbol "BEV," currently used by Beverly. The New Beverly
Common Stock received pursuant to the Distribution will be freely transferable
under the Securities Act, except for shares of New Beverly Common Stock received
by any person who may be deemed to be an "affiliate" of New Beverly within the
meaning of Rule 144 promulgated under the Securities Act. Persons who may be
deemed to be affiliates of New Beverly after the Distribution generally include
individuals or entities that control, are controlled by, or are under common
control with New Beverly, and may include the directors and executive officers
of New Beverly. Persons who are affiliates of New Beverly will be permitted to
sell their New Beverly Common Stock received pursuant to the Distribution only
pursuant to an effective registration statement under the Securities Act or
pursuant to an exemption from the registration requirements of the Securities
Act. The Registration Statement of which this Prospectus is a part will not
cover resales of New Beverly Common Stock by affiliates of New Beverly. See
"Shares Eligible for Future Sale."
TREATMENT OF INDEBTEDNESS
The Distribution Agreement provides that Beverly and New Beverly will take
all commercially reasonable action to cause New Beverly or an appropriate
subsidiary of New Beverly, to assume all of the items of Beverly's consolidated
indebtedness other than (i) the Assumed Pharmacy Indebtedness and related
Accrued Interest Cost, (ii) the Closing Debt, (iii) other permitted indebtedness
constituting Institutional Pharmacy Liabilities (as defined in the Distribution
Agreement), and (iv) certain capital leases and other items relating to the
Institutional Pharmacy Business.
Prior to the Time of Distribution, Beverly, and after the Time of
Distribution, New Beverly is required to pay or cause to be paid, or otherwise
provide for by appropriate assurances (in each case satisfactory to Capstone),
to the extent Beverly or New Beverly is unable to effect releases of Beverly and
the Pharmacy Subsidiaries from liability thereunder, all Beverly or New Beverly
indebtedness or other non-contingent liabilities as to which Beverly or any of
the Pharmacy Subsidiaries is a direct obligor, other than the Assumed Pharmacy
Indebtedness and Institutional Pharmacy Liabilities.
Beverly has agreed to use its reasonable best efforts to cause its
outstanding indebtedness for borrowed money to be restructured, modified or
amended, as appropriate, to cause such indebtedness to be assumed by New Beverly
prior to the Effective Time, and to obtain all necessary consents, approvals,
waivers or other agreements by the holders of such indebtedness and other fixed
obligations of Beverly as may be required in order to effect the assignment to
and assumption by New Beverly of, and release of Beverly from, liability with
respect to, such obligations (collectively, the "Beverly Debt Restructuring").
Further, Beverly and Capstone have agreed to use all commercially reasonable
efforts to cause Beverly's Pharmacy Subsidiaries to borrow $275 million from
third party lenders on terms mutually agreeable to Beverly and Capstone for the
purpose of repaying such amount to Beverly prior to the Distribution in
settlement of the Assumed Pharmacy
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Indebtedness (as defined in the Distribution Agreement), which borrowing shall
continue after the Effective Time as an obligation of the Surviving Corporation.
See "Treatment of Beverly Indebtedness."
EXPENSES
In accordance with the terms of the Merger Agreement, Capstone, on the one
hand, and Beverly (before the Distribution) and New Beverly (after the
Distribution), on the other hand, shall bear their own respective expenses
incurred in connection with the Merger and the Distribution, including, without
limitation, the preparation, execution and the performance of the Merger
Agreement, the Distribution Agreement and the transactions contemplated thereby,
and all fees and expenses of investment bankers, finders, brokers, agents,
representatives, counsel and accountants. Expenses incurred in printing, mailing
and filing (including without limitation, SEC filing fees, fees related to any
state securities or "blue sky" laws and stock exchange listing application
fees), (i) as to the Joint Proxy Statement/Prospectus and related Registration
Statement, shall be paid by Capstone and (ii) as to the New Beverly Prospectus
and related Registration Statement shall be paid by New Beverly. Beverly
estimates that its (or New Beverly's, as the case may be) transaction expenses
will approximate $28 million, including approximately $10.2 million expected to
be incurred in connection with the Beverly Debt Restructuring.
CONDITIONS
The Merger Agreement requires, as a condition to the consummation of the
Merger, Beverly stockholders' approval of the Distribution. The completion of
the Distribution is also a condition to the consummation of the Merger, and
Beverly does not presently intend to consummate the Distribution unless and
until all of the conditions to the consummation of the Merger (other than the
completion of the Distribution) have been satisfied. The consummation of the
Merger is subject to a number of conditions set forth in the Merger Agreement.
See "The Merger -- Conditions to Closing" in the Joint Proxy
Statement/Prospectus.
SETTLEMENT OF INTERCOMPANY ACCOUNTS
The Distribution Agreement provides that prior to the Distribution Date and
after settlement of the Assumed Pharmacy Indebtedness and the related Accrued
Interest Cost all intercompany accounts existing between Beverly and any of its
subsidiaries (other than the Pharmacy Subsidiaries), on the one hand, and the
Pharmacy Subsidiaries, on the other hand, will be netted out, in each case in
such manner and amount as may be agreed to in writing by duly authorized
representatives of Beverly, Capstone and New Beverly; and (i) the resulting net
balance due, if any, from the Pharmacy Subsidiaries to Beverly and any of its
subsidiaries (other than the Pharmacy Subsidiaries) shall be contributed to the
appropriate Pharmacy Subsidiaries as additional capital; and (ii) the resulting
net balance due, if any, from Beverly and any of its subsidiaries (other than
the Pharmacy Subsidiaries) to the Pharmacy Subsidiaries will be distributed to
Beverly as a dividend.
Further, New Beverly shall provide an accounting to Capstone of the
settlement of the intercompany accounts described above as soon as reasonably
practicable following the Effective Time of the Merger. To the extent that the
aggregate cash collected by Beverly from the Pharmacy Subsidiaries during the
period from the date of the Distribution Agreement to the Distribution Date, is
greater than the sum of (i) the Assumed Pharmacy Indebtedness and the related
Accrued Interest Cost, (ii) Beverly's normal management fees collected from the
Pharmacy Subsidiaries during such period in amounts consistent with past
practices in the ordinary course of business, and (iii) the Closing Debt (as
defined below, and collectively, the "Beverly Interim Period Cash
Entitlements"), then New Beverly shall reimburse Capstone for the amount in
excess of the Beverly Interim Period Cash Entitlements. To the extent that the
amount of Beverly Interim Period Cash Entitlements is in excess of the aggregate
cash collected by Beverly from the Pharmacy Subsidiaries during the period from
the date of the Distribution Agreement to the Distribution Date, Capstone shall
reimburse New Beverly for the amount of such difference. "Closing Debt" is
defined as the amount of Beverly's indebtedness incurred in connection with the
acquisition of institutional pharmacy businesses approved by Capstone during the
period commencing at the time of execution of the Distribution Agreement and
ending at the Distribution Date, which amount shall be in addition to the
Assumed Pharmacy Indebtedness. New Beverly shall be reimbursed for the Closing
Debt pursuant and subject to the provisions described above.
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INDEMNIFICATION AND INSURANCE
The Distribution Agreement provides that from and after the Distribution
Date, Capstone will indemnify, defend and hold harmless New Beverly and its
subsidiaries, as well as the directors and officers of New Beverly and the
various New Beverly subsidiaries (collectively, the "New Beverly Indemnitees")
from and against all losses arising out of or relating to (i) the Institutional
Pharmacy Liabilities, (ii) any breach, whether before or after the Distribution
Date, by Beverly or the Pharmacy Subsidiaries of any provision of the
Distribution Agreement or any Ancillary Agreement and (iii) liabilities related
to the operation of Capstone.
New Beverly will, following the Distribution Date, indemnify, defend and
hold harmless, Beverly (and Capstone as its successor), each Pharmacy
Subsidiary, and the directors and officers of Beverly and the Pharmacy
Subsidiaries from and against losses arising out of or resulting from (i) the
Remaining Healthcare Liabilities (as defined in the Distribution Agreement),
(ii) the breach, whether before or after the Distribution Date, by New Beverly
or any New Beverly subsidiary, of any provision of the Distribution Agreement or
any Ancillary Agreement, (iii) any claims arising out of this Prospectus or the
Registration Statement pertaining hereto and (iv) the failure to qualify as a
tax-free reorganization. See "-- Terms of the Tax Allocation and Indemnification
Agreement" and "The Merger -- Indemnification and Insurance" in the Joint Proxy
Statement/Prospectus for information regarding Capstone's indemnification
obligations arising pursuant to the Merger Agreement.
For a period of six years following the anniversary of the Distribution
Date, Capstone will maintain in effect in such manner as is contemplated by the
Merger Agreement policies of directors' and officers' liability insurance with
respect to claims against present or former officers or directors of Beverly and
its subsidiaries arising from facts or events occurring prior to the Effective
Time of the Merger. The cost of maintaining such coverage in effect shall be
shared as follows: (i) for the first three years after the Distribution Date,
New Beverly and Capstone shall each bear 50% of the premium cost of maintaining
said insurance policies or any applicable runoff policy in substitution or
replacement thereof; and (ii) for the following three years after the
Distribution Date, New Beverly shall bear 70% of such premium cost, and Capstone
shall bear 30% of such premium cost.
Following the Distribution Date, Capstone shall be responsible for
providing such insurance coverage as it may deem appropriate with respect to the
assets and business of the Institutional Pharmacy Business. Similarly, New
Beverly shall be responsible for maintaining such insurance coverage as it deems
appropriate with respect to the assets and business of the Remaining Healthcare
Business. Notwithstanding the above, Capstone and Beverly, pursuant to the terms
of the Merger Agreement, have agreed to use their joint best efforts to
expeditiously obtain a commitment for retroactive insurance coverage, which
shall be reasonably acceptable to Beverly, with respect to both known
liabilities and unreported losses which are related to the Institutional
Pharmacy Business which may have occurred or may occur at any time prior to the
Effective Time. Capstone has agreed that at the Effective Time, it will, at its
expense, cause such retroactive insurance coverage to be in effect.
TERMS OF THE EMPLOYEE BENEFIT AGREEMENT
Beverly, New Beverly and Capstone will execute the Employee Benefit
Agreement on or prior to the Distribution Date to allocate responsibilities and
obligations between Beverly and the Surviving Corporation for various employee
and employer benefit matters, including the rights and claims of employees of
the Institutional Pharmacy Business, who will remain with Beverly and become
employees of Capstone after the Merger (and, where appropriate, also covering
former employees and current and former independent contractors of the
Institutional Pharmacy Business who provide or previously provided services
primarily in connection with the Institutional Pharmacy Business) (collectively,
"Retained Employees"), and the rights and claims of employees of the Remaining
Health Care Business, who will transfer to and become employees of New Beverly
(and where appropriate, also covering former employees and current and former
independent contractors of the Remaining Healthcare Business who provide or
previously provided services primarily in connection with the Remaining
Healthcare Business) (collectively, "Transferred Employees"). The Employee
Benefit Agreement allocates such responsibilities and obligations with respect
to salary, wages and
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related benefits, as well as benefits under the current Beverly stock plans,
non-tax qualified benefit plans, employee welfare benefit plans and
tax-qualified defined contribution plans.
Beverly and New Beverly intend to transfer the Transferred Employees to the
employ of New Beverly or one of its subsidiaries, as appropriate, immediately
prior to the Distribution. With respect to the Transferred Employees, New
Beverly will assume the liabilities and obligations regarding, and will continue
to be responsible for, all claims made by or on behalf of Transferred Employees
concerning salary, wages, benefits, stock-based compensation, non-qualified
plans, qualified plans, welfare plans, severance pay, salary continuation and
post-employment obligations. With respect to Retained Employees, Beverly will
retain and Capstone shall assume all such liabilities and obligations with
respect to and concerning Retained Employees except for certain benefits of
Retained Employees provided under certain non-tax qualified benefit plans that
are to be maintained for such Retained Employees by New Beverly. Beverly and
Capstone will, however, retain liability for such benefits of Retained
Employees, and will indemnify New Beverly to the extent of the net cost to New
Beverly of providing such benefits.
All of the employee welfare benefit plans maintained by Beverly will be
assumed, along with any underlying assets held for such plans, by New Beverly.
New Beverly's assumption of liability for the provision of benefits under these
plans will cover all liabilities with respect to Transferred Employees and will
cover all liabilities for Retained Employees arising with respect to claims
incurred up to the Distribution. However, Beverly will retain and Capstone will
assume all coverage and benefit liabilities for Retained Employees as of the
Distribution. Beverly's and Capstone's obligations with respect to Retained
Employees as of the Distribution under COBRA will be administered and paid for
by New Beverly, with Beverly and Capstone providing reimbursement to New Beverly
for all costs incurred.
Effective as of the Distribution, New Beverly will assume the Beverly
Enterprises 401(k) Savings Plus Plan, taking on all of its assets and
liabilities. New Beverly will continue to maintain that plan for the benefit of
the Transferred Employees. The Retained Employees will cease to participate in
that plan. New Beverly will cause the assets held in that plan for the benefit
of the Retained Employees to be transferred in a trustee-to-trustee transfer to
another tax-qualified plan of which the Surviving Corporation is sponsor. The
transferee plan will be designated by the Surviving Corporation. The Pharmacy
Corporation of America Retirement Savings Plan will be amended to provide for
its assumption by Capstone. The Beverly Enterprises, Inc. 1988 Stock Purchase
Plan will be amended and assumed by New Beverly and Retained Employees will
cease to participate in that plan. Retained Employees will receive a cash
distribution of any remaining balance held in that plan to the extent it has not
been used to purchase stock.
Beverly, New Beverly and Capstone shall cooperate to amend the existing
Beverly stock plans prior to the Distribution to provide for the assumption of
such plans and certain options, restricted shares, performance shares and
phantom shares granted thereunder. In addition, prior to the Distribution, New
Beverly shall adopt one or more stock option plans, the participants in which
initially shall be all Transferred Employees who hold Beverly options,
restricted shares, performance shares and/or phantom shares, which benefits
shall be subject to accelerated vesting and other adjustments for those
Transferred Employees who, as applicable, have agreed to release Beverly, New
Beverly and Capstone from any and all liability under the existing Beverly stock
plans, including any liability that would arise by virtue of a change in control
arising under any such plan or under any option or shares granted thereunder in
connection with the Distribution, the Merger or the additional transactions
contemplated thereby, as described more fully below (the "Consent and Release").
For all Retained Employees and Transferred Employees who have executed a
Consent and Release, (i) each option to purchase Beverly Common Stock then
outstanding will become fully vested and exercisable, (ii) all restrictions on
outstanding restricted shares will lapse and each such share shall become fully
vested, (iii) each outstanding award of phantom shares shall become fully
vested, and (iv) each outstanding performance share of Beverly Common Stock
shall become vested to the extent of 50% of such share. For all Retained
Employees and Transferred Employees who fail to execute and deliver to Beverly a
Consent and Release, no such vesting shall occur.
Effective immediately after the Distribution, New Beverly will substitute
for each outstanding Beverly option held by a Transferred Employee, subject to
the optionee's consent to the extent required, a New
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Beverly option to acquire shares of New Beverly Common Stock, which option shall
be of the same character and subject to substantially the same terms and
conditions, including the vesting schedule, as the Beverly option for which it
is substituted, provided, however, that solely with respect to the Transferred
Employees who have executed and delivered to Beverly a Consent and Release: (i)
the exercise price per share of New Beverly Common Stock for which the option
may be exercised shall be an amount equal to the product of (x) the per share
exercise price under the Beverly option immediately prior to the Distribution,
and (y) the fraction representing the Fair Market Value (defined as the last
reported sales price per share of the Beverly Common Stock as reported on the
New York Stock Exchange composite tape for the valuation date in question) of a
share of New Beverly Common Stock immediately after the Distribution (which, for
purposes of this determination, shall mean such value of a share of New Beverly
Common Stock, trading on a "when issued" basis, on the Ex-Dividend Date as
defined below) divided by the Fair Market Value of a share of Beverly Common
Stock immediately before the Distribution (which, for purposes of this
determination, means the last trading day before the Ex-Dividend Date) (the
"Distributed Stock Fraction"), and (ii) the number of New Beverly shares for
which the option may be exercised shall be an amount equal to the quotient of
(x) the number of shares of Beverly stock for which the Beverly option could
have been exercised, had it been fully vested, immediately prior to the
Distribution, divided by (y) the Distributed Stock Fraction. No such adjustment
to the exercise price and number of New Beverly shares for which the option may
be exercised shall apply to options held by Transferred Employees who have
declined to execute and deliver to Beverly a Consent and Release. The
Ex-Dividend Date means the date on which shares of Beverly Common Stock will
commence trading on the NYSE on an ex-dividend basis (i.e., shares purchased on
or after such date will not entitle the holder to receive shares of New Beverly
Common Stock in the Distribution).
New Beverly will also substitute, with the grantee's consent to the extent
required, (i) for each then outstanding unvested phantom share granted with
respect to Beverly Common Stock and held by a Transferred Employee, new unvested
phantom shares which shall be granted with respect to New Beverly Common Stock,
and (ii) for each then outstanding unvested performance share or restricted
share of Beverly Common Stock held by either (A) a Transferred Employee or (B) a
Retained Employee who declines to execute and deliver to Beverly a Consent and
Release, new unvested performance shares or restricted shares of New Beverly
Common Stock, as the case may be. With respect to a Transferred Employee who has
executed and delivered to Beverly a Consent and Release, the number of New
Beverly phantom or performance shares, as the case may be, substituted for each
phantom or performance share of Beverly Common Stock, shall be equal to the
quotient of one divided by the Distributed Stock Fraction; but no such
adjustment to the number of phantom, performance or restricted shares of New
Beverly Common Stock shall be made with respect to any such shares held by
persons, whether Transferred Employees or Retained Employees, who have declined
to execute and deliver to Beverly a Consent and Release. With respect to a
Retained Employee who has executed and delivered to Beverly a Consent and
Release, no new phantom, performance or restricted shares of New Beverly Common
Stock shall be issued in substitution for outstanding unvested phantom,
performance or restricted shares of Beverly Common Stock. In all other respects,
all such shares shall be subject to the same terms and conditions, including
vesting requirements (as adjusted to take into account the Distribution and all
transactions related thereto, including the requirement that employment services
be provided for New Beverly or its subsidiaries), as the phantom, performance or
restricted share, as the case may be, for which they have been substituted.
For each Retained Employee who has executed and delivered a Consent and
Release, Beverly shall adjust each outstanding Beverly option held by a Retained
Employee so as to preserve the terms and conditions of the Beverly option,
except that (i) the exercise price per share of Beverly Common Stock for which
the option may be exercised shall be an amount equal to the product of (x) the
per share exercise price under the Beverly option immediately prior to the
Distribution, and (y) the fraction representing the Fair Market Value of a share
of Beverly Common Stock immediately after the Distribution (which, for purposes
of this determination, shall mean such value on the Ex-Dividend Date) divided by
the Fair Market Value of such share immediately before the Distribution (which,
for purposes of this determination, shall mean such value on the last trading
day before the Ex-Dividend Date) (the "Retained Stock Fraction"), and (ii) the
number of shares of Beverly Common Stock for which the option may be exercised
shall be an amount equal to the quotient of (x) the number of shares of Beverly
Common Stock for which the Beverly Option could have been
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exercised, had it been fully vested, immediately prior to the Distribution,
divided by (y) the Retained Stock Fraction. No such adjustment to the exercise
price and number of shares of New Beverly Common Stock for which the option may
be exercised shall apply to options held by Retained Employees who have failed
to execute and deliver to Beverly a Consent and Release.
For each Retained Employee who has executed and delivered a Consent and
Release, the number of shares of Beverly Common Stock represented by each
outstanding unvested performance or phantom share of Beverly Common Stock shall
be equal to the quotient of one divided by the Retained Stock Fraction; but no
such adjustment to the number of unvested restricted, performance or phantom
shares of Beverly Common Stock shall be made with respect to Retained Employees
who have declined to execute and deliver to Beverly a Consent and Release. With
respect to each Transferred Employee who has executed and delivered to Beverly a
Consent and Release, all outstanding unvested phantom, performance and
restricted shares of Beverly Common Stock shall be canceled or forfeited, as the
case may be.
Capstone has agreed to assume the Beverly stock plans and each Beverly
option granted thereunder that is held by a Retained Employee, and each such
option so assumed shall be exercisable upon the same terms and conditions as
under the applicable Beverly stock plan and the applicable option agreement
issued thereunder, except that (i) each such option shall be exercisable for
that number of shares of Capstone Common Stock into which the number of shares
of Beverly Common Stock subject to such option immediately prior to the
Effective Time of the Merger, but after giving effect to the adjustments
described above, would have been converted pursuant to the Merger Agreement if
such option, had it been fully vested, had been exercised immediately prior to
the Effective Time of the Merger and (ii) the exercise price per share of
Capstone Common Stock for which the option may be exercised, determined after
giving effect to the adjustments described above, shall be an amount equal to
the quotient of (x) such adjusted exercise price per share of Beverly Common
Stock for which the option could have been exercised, had it been fully vested,
immediately prior to the Effective Time of the Merger, divided by (y) the
Conversion Number. See "The Merger Agreement" in the Joint Proxy
Statement/Prospectus.
As of the Effective Time of the Merger, Capstone shall assume each
outstanding unvested phantom share granted with respect to Beverly Common Stock
held by a Retained Employee, and each outstanding unvested performance share
and/or restricted share of Beverly Common Stock held by either a Transferred
Employee or Retained Employee, in each instance after giving effect to the
adjustments described above, and shall substitute (i) for each such phantom
share new unvested phantom shares which shall be granted with respect to
Capstone Common Stock, and (ii) for each such performance share or restricted
share, as the case may be, new unvested performance shares or restricted shares
of Capstone Common Stock; provided, however, that, the number of new phantom,
performance or restricted shares of Capstone Common Stock substituted for each
phantom, performance or restricted share of Beverly Common Stock, as the case
may be, shall be equal to the Conversion Number. With respect to each
Transferred Employee who has executed and delivered to Beverly a Consent and
Release, all outstanding unvested phantom, performance and restricted shares of
Beverly Common Stock shall be canceled or forfeited, as the case may be, and no
new phantom, performance or restricted shares of Capstone Common Stock shall be
issued in substitution therefor. In the case of any such assumption and
substitution, in all other respects, all such shares shall be subject to the
same terms and conditions, including vesting requirements (as adjusted to take
into account the Merger and all transactions related thereto, including the
requirement that employment services be provided for Capstone or its
subsidiaries), as the phantom, performance or restricted share, as the case may
be, for which it has been substituted.
Capstone's obligation under the Employee Benefit Agreement to assume
Beverly options, phantom shares, restricted shares and performance shares held
by Retained Employees (the "Retained Benefits"), will not be subject to any
provision of the Merger Agreement limiting to 50 million the maximum number of
shares of Capstone Common Stock which may be issued pursuant to the Merger
Agreement. Capstone's obligation with respect to the Retained Benefits is,
however, limited to up to 900,000 shares of Beverly Common Stock subject to the
adjustments described below. The Retained Benefits will be adjusted (i) after
the Distribution to reflect the change in market value of Beverly following the
Distribution, and (ii) in connection with the Merger to apply the Conversion
Number. As a result, the actual number of shares of
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Capstone Common Stock into which the Retained Benefits will convert cannot be
determined until the Effective Time of the Merger. Assuming the closing prices
of Beverly's Common Stock and Capstone's Common Stock on the applicable
adjustment dates are the same as such prices on May 28, 1997, the companies
estimate that the Retained Benefits will convert into approximately 1.1 million
shares of Capstone Common Stock. New Beverly will indemnify Capstone against
costs incurred as a result of claims relating to such options and phantom shares
in excess of Capstone's obligation described above. To the extent there are any
forfeitures of restricted or performance stock after the date of the
Transactions under the terms of any of the Stock Plans, the forfeited shares
will revert back to the issuer and will not become the property of any other
party to the Transactions.
Prior to the Distribution, Beverly, New Beverly and Capstone shall
cooperate to amend all of Beverly's existing non-tax qualified benefit plans,
employee welfare benefit plans and tax-qualified defined contribution plans,
consistent with the transactions described above, and to provide generally for
(i) the assumption of such plans by New Beverly, (ii) the ongoing participation
in such plans by all Transferred Employees, (iii) the cessation of participation
in such plans as of the Distribution by all Retained Employees and (iv) taking
such other steps as may be necessary to prevent the consummation of the Merger,
the Distribution and the transactions contemplated thereby from causing,
resulting in, or being treated as a termination of employment, cessation of
service or a change of control with respect to such plans.
TERMS OF THE NON-COMPETITION AGREEMENT
In connection with the Distribution and the Merger, Beverly, Capstone and
New Beverly will enter into a Non-competition Agreement whereby New Beverly will
agree not to engage in the institutional pharmacy business (as defined in the
Non-competition Agreement) within a 120-mile radius of any pharmacy included in
the Institutional Pharmacy Business or operated by Capstone during the five-year
term of such agreement, except that the Non-competition Agreement shall not
restrict or impair any activities of New Beverly or any of its subsidiaries as
currently provided in connection with the provision of any healthcare services
or products in certain defined settings and in other settings where long-term
healthcare is not the primary service furnished.
If New Beverly, during the term of the Non-competition Agreement, acquires
a pharmacy dispensing services business as part of the acquisition of a larger
business where the pharmacy dispensing services business does not constitute the
principal part of the larger business, New Beverly has agreed to offer to sell
such pharmacy dispensing services business to Capstone within six months of the
purchase of such business. The purchase price of any such pharmacy dispensing
services business which Capstone elects to acquire under the Non-competition
Agreement will be determined based upon an appraisal of an independent business
appraisal firm.
TERMS OF THE INTERIM SERVICES AGREEMENT
Prior to the Distribution Date, New Beverly and Beverly will execute the
Interim Services Agreement which establishes a framework for New Beverly to
provide to Capstone, as the successor to Beverly following the Effective Time of
the Merger, certain services as may be requested by Capstone to ensure an
orderly transition of the Institutional Pharmacy Business. The contemplated
services may include those services that have been historically provided by
Beverly on a centralized basis to the Institutional Pharmacy Business such as
cash management, compensation and benefits administrative assistance, management
information systems and legal services. The term of the Interim Services
Agreement extends through April 30, 1998, or as otherwise mutually agreed by the
parties. New Beverly shall be reimbursed for all direct and indirect costs and
expenses incurred in connection with providing any services, as well as the
allocated portion of the base salaries of the New Beverly employees actually
providing services; provided that in no event shall the amount to be reimbursed
to New Beverly for such services be less than the fair market value for such
services.
TERMS OF THE TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
Prior to the Distribution, Beverly and New Beverly shall enter into a Tax
Allocation and Indemnification Agreement (the "Tax Allocation and
Indemnification Agreement"). This agreement sets forth each party's
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rights and obligations with respect to the allocation and payment of tax
liabilities and entitlements to refunds, if any, for any federal, state or local
taxes for periods before and after the Effective Time of the Merger. The Tax
Allocation and Indemnification Agreement also addresses related matters such as
the allocation of responsibility in connection with the preparation and filing
of any tax returns, the conduct of proceedings related to taxes, cooperation of
the parties with respect to certain tax matters and the indemnification of the
parties against certain liabilities allocated under the Tax Allocation and
Indemnification Agreement.
In general, under the Tax Allocation and Indemnification Agreement, New
Beverly will be responsible for (i) all tax liabilities of Beverly not allocable
to the Pharmacy Subsidiaries (ii) any tax liability of New Beverly for periods
beginning after the date of the Merger, and (iii) except as otherwise described
in this section, any tax liability of Beverly resulting from the failure of the
restructuring and the Distribution to qualify as transactions described in
Sections 351 and 355 of the Code, and/or as a "reorganization" under Section
368(a)(1)(D) of the Code, or the Merger to qualify as a "reorganization" under
Section 368(a)(1)(A) of the Code. New Beverly will also be entitled to any
refunds that relate to those liabilities.
Under the Tax Allocation and Indemnification Agreement, the Surviving
Corporation will generally be responsible for (i) all tax liabilities allocable
to the Pharmacy Subsidiaries, and (ii) any tax liability of Capstone.
If the tax return for the Beverly consolidated group (the "Group Tax
Return") for taxable year 1996 is filed before the Distribution, Beverly shall
be responsible for preparing and filing such Group Tax Return in a manner which
fairly reflects the interests of Beverly and New Beverly. If the Group Tax
Return for taxable year 1996 is filed after the Distribution, New Beverly shall
be responsible for preparing such Group Tax Return in a manner which fairly
reflects the interests of Beverly and for furnishing the completed Group Tax
Return to Beverly in time to permit the timely signing and filing of such Group
Tax Return by Beverly. Beverly will be responsible for preparing and filing the
Group Tax Return for taxable year 1997 in a manner which fairly reflects the
interests of New Beverly. New Beverly will be responsible for providing to
Beverly for taxable year 1997 the information relating to New Beverly which is
needed for the preparation of the taxable year 1997 Group Tax Return. All Group
Tax Returns filed after the date of the Merger shall be prepared on a basis
consistent with the elections, accounting methods, conventions and principles of
taxation used for the most recent taxable periods for which Group Tax Returns
have been filed.
If the consolidated federal income tax liability reported on the Group Tax
Return (the "Group Tax Liability"), if any, for any relevant tax period includes
alternative minimum tax imposed by section 55 of the Code, the total amount of
such alternative minimum tax shall be allocated to New Beverly. The remaining
portion of the Group Tax Liability (after reduction for alternative minimum tax)
will be apportioned between Beverly and New Beverly. The amount apportioned to
Beverly will be based upon a determination of the tax liability of the
Institutional Pharmacy Business had such business filed a federal income tax
return on a stand-alone basis, and the amount apportioned to New Beverly will be
the remaining portion of the Group Tax Liability, excluding any portion
attributable to Capstone.
For any tax period for which a Group Tax Return is filed after April 15,
1997, New Beverly shall be liable for the amount of taxes allocated to New
Beverly reduced by the excess of (a) the total amount of estimated federal
income taxes paid by Beverly with respect to any portion of such tax period
which occurs on or before the Distribution, over (b) the amount included as a
payable to Beverly for current federal income taxes with respect to such tax
period on the audited financial statements of PCA determined as of April 15,
1997. If the amount allocated to New Beverly for any tax period with a reduction
as provided above is a positive number, such net amount shall be a joint and
several liability of New Beverly and its subsidiaries enforceable by Beverly and
its subsidiaries under the terms of the Tax Allocation and Indemnification
Agreement. If the amount allocated to New Beverly for any tax period reduced as
provided above is a negative number, Beverly and its subsidiaries shall be
jointly and severally liable for the payment of an amount equal to such negative
number to New Beverly.
If, as a result of any filing of an amended return or claim for refund,
final determination or settlement with the IRS, or court decision, relating to a
Group Tax Return for any tax period, there is an increase in the Group Tax
Liability, then each of Beverly and New Beverly will be allocated the portion of
the increase in the
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Group Tax Liability that is attributable to it under the apportionment method
described above, plus any allocable interest and penalties. If there is a
reduction in the Group Tax Liability, then each of Beverly and New Beverly will
be allocated the portion of the refund from such reduction in the Group Tax
Liability that is attributable to it under the apportionment method described
above, plus any allocable interest.
Each party to the agreement agrees to pay and be responsible for, and will
indemnify, defend and hold harmless all other parties from and against all
liabilities allocated to it under the Tax Allocation and Indemnification
Agreement. If any party pays or has paid any Group Tax Liability or state or
local income or franchise tax liability for which another party is or becomes
liable pursuant to the terms of the Tax Allocation and Indemnification
Agreement, appropriate reimbursement shall be made no later than ten days after
demand for such reimbursement is made. The portion of any refund, rebate or
reimbursement received by any party to which another party is entitled pursuant
to the Tax Allocation and Indemnification Agreement will be paid over within ten
days. Any payments required to be made between the parties that are not made in
a timely fashion will bear interest calculated at the rate specified under
Section 6621(a)(2) of the Code from the date such payment is due to the date the
payment is made.
Beverly agrees to (i) retain all Group Tax Returns, related schedules and
workpapers, and all material records and other documents as required under
Section 6001 of the Code and the regulations promulgated thereunder existing on
the date of the Tax Allocation and Indemnification Agreement or relating to tax
periods ending with the Distribution, for seven years following the
Distribution, or such longer period as a tax deficiency may be assessed or a
refund claim filed under applicable periods of limitation, and (ii) allow New
Beverly and its representatives (and representatives of any of its affiliates),
at times and dates reasonably acceptable to Beverly, to inspect, review and make
copies of such records, and have access to such employees, as New Beverly may
reasonably deem necessary or appropriate from time to time.
PREFERRED PROVIDER AGREEMENTS
Beverly and Capstone have agreed to negotiate one or more agreements to
provide for, among other things, the delivery of pharmacy services and products
and ancillary services and products after the Effective Time of the Merger by
Capstone, to currently operated or subsequently acquired New Beverly long-term
healthcare facilities. The parties intend to complete their negotiations prior
to June 30, 1997.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the material federal income tax
consequences of the Distribution and the Merger. This summary is for general
informational purposes only and is not intended as a complete description of all
of the tax consequences of the Distribution and the Merger and does not discuss
tax consequences under the laws of state or local governments or of any other
jurisdiction. Moreover, the tax treatment of a stockholder may vary depending
upon his, her or its particular situation. In this regard, certain stockholders
(including (i) insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, and persons who are not citizens or residents of
the United States or who are foreign corporations, foreign partnerships or
foreign trusts or estates as defined for United States federal income tax
purposes, and (ii) stockholders that hold shares as part of a position in a
"straddle" or as part of a "hedging" or "conversion" transaction for United
States federal income tax purposes and stockholders with a "functional currency"
other than the United States dollar) may be subject to special rules not
discussed below. In addition, this summary applies only to shares which are held
as capital assets. The following discussion may not be applicable to a
stockholder who acquired his or her shares pursuant to the exercise of stock
options or otherwise as compensation.
THE FOLLOWING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE
CODE, TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND
COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE WHICH MAY OR MAY NOT
BE RETROACTIVE, AND ANY SUCH CHANGES COULD AFFECT THE TAX CONSEQUENCES DESCRIBED
HEREIN. SEE "POSSIBLE FUTURE LEGISLATION" BELOW.
EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE TRANSACTION DESCRIBED
HEREIN, INCLUDING, THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND THE POSSIBLE EFFECTS OF CHANGES OF APPLICABLE TAX LAWS.
THE DISTRIBUTION
On May 17, 1997, Beverly requested the Private Letter Ruling from the IRS
substantially to the effect that, among other things, the Distribution will
qualify as a reorganization within Section 368(a)(1)(D), and that neither
Beverly, New Beverly nor their stockholders will recognize any gain or loss (i)
in connection with such reorganization transaction (as more fully described
below), (ii) upon the receipt by New Beverly of the Remaining Health Care Assets
from Beverly in exchange for the New Beverly Common Stock, or (iii) upon receipt
by Beverly stockholders of the New Beverly Common Stock in the Distribution.
Receipt of the Private Letter Ruling, or an opinion to the effect as set forth
below, at the election of Beverly, is a condition to the respective obligations
of Beverly and Capstone to consummate the Merger. Beverly does not expect to
have the Private Letter Ruling request acted upon prior to the third quarter of
1997. See "The Merger -- Conditions to Closing" in the Joint Proxy
Statement/Prospectus.
As an alternative to obtaining the Private Letter Ruling, at Beverly's
option, Beverly and Capstone have the right to receive the opinion of Caplin &
Drysdale, Chartered or Ernst & Young LLP to the effect that:
(1) the transfer by Beverly to New Beverly of the Remaining Healthcare
Assets, solely in exchange for New Beverly Common Stock, and the
assumption by New Beverly of the Remaining Healthcare Liabilities of
Beverly, followed by Beverly's distribution of the New Beverly Common
Stock to Beverly's stockholders, will constitute a reorganization
within the meaning of Section 368(a)(1)(D) of the Code;
(2) Beverly will recognize no gain or loss in connection with the
transactions described in (1) above, except to the extent that gain or
loss is required to be recognized on intercompany transactions;
(3) New Beverly will recognize no gain or loss upon the receipt of the
Remaining Healthcare Assets from Beverly in exchange for the New
Beverly Common Stock; and
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(4) Beverly's stockholders will recognize no gain or loss (and no amount
will be included in the income of Beverly's stockholders) upon the
receipt of the New Beverly Common Stock in the Distribution.
Tax opinions are not binding on the IRS or any court. Moreover, the tax
opinions are based upon, among other things, certain representations as to
factual matters made by Beverly and Capstone, which representations if incorrect
or incomplete in certain material respects, would jeopardize the conclusions
reached in the opinions.
It is expected that the Distribution will qualify as a tax-free
reorganization under Section 368 of the Code. Assuming that the Distribution so
qualifies, (i) the holders of Beverly Common Stock will not recognize gain or
loss upon receipt of shares of New Beverly Common Stock, (ii) each holder of
Beverly Common Stock will allocate his, her or its aggregate tax basis in the
Beverly Common Stock immediately before the Distribution among the Beverly
Common Stock and New Beverly Common Stock in proportion to their respective fair
market values, (iii) the holding period of each holder of Beverly Common Stock
for the New Beverly Common Stock will include the holding period for his, her or
its Beverly Common Stock, provided that the Beverly Common Stock is held as a
capital asset at the time of the Distribution, and (iv) Beverly will not
recognize any gain or loss on its distribution of the New Beverly Common Stock
to its stockholders, except to the extent that gain or loss is required to be
recognized on intercompany transactions.
No fractional shares of New Beverly Common Stock will be distributed in the
Distribution. A holder of Beverly Common Stock who, pursuant to the
Distribution, receives cash in lieu of fractional shares of New Beverly Common
Stock will be treated as having received such fractional shares of New Beverly
Common Stock pursuant to the Distribution and then as having received such cash
in a sale of such fractional shares of New Beverly Common Stock. Such holder
will generally recognize capital gain or loss pursuant to such demand sale equal
to the difference between the amount of cash received and such holder's adjusted
tax basis in the fractional share of New Beverly Common Stock received. Such
gain or loss will be capital (provided the Beverly Common Stock is held as a
capital asset at the time of the Distribution) and will be treated as a long-
term capital gain or loss if the holding period for the fractional shares of New
Beverly Common Stock deemed to be received and then sold is more than one year.
If the Distribution does not qualify as a tax-free reorganization under
Section 368 of the Code, then each holder of Beverly Common Stock who received
shares of New Beverly Common Stock in the Distribution will be treated as if
such holder received a taxable distribution in an amount equal to the fair
market value of the New Beverly Common Stock received. Such distribution will be
treated as (i) a dividend to the extent paid out of Beverly's current and
accumulated earnings and profits, then (ii) a reduction in such holder's basis
in Beverly Common Stock to the extent the amount received exceeds the amount
referenced in clause (i), and then (iii) a gain from the sale or exchange of
Beverly Common Stock to the extent the amount received exceeds the sum of the
amounts referenced in clauses (i) and (ii). Each holder's basis in the New
Beverly Common Stock would be equal to the fair market value of such stock at
the time of the Distribution. In addition, if the Distribution were not to
qualify as a tax-free reorganization under Section 368 of the Code, then, in
general, a corporate level federal income tax would be payable by the
consolidated group of which Beverly is the common parent, which tax would be
based upon the gain (computed as the difference between the fair market value of
the stock distributed and the distributing corporation's adjusted basis in such
stock) realized by Beverly upon its distribution of the stock of New Beverly to
its stockholders in the Distribution, and New Beverly would be liable for the
payment of such tax pursuant to the terms of the Tax Allocation and
Indemnification Agreement.
THE MERGER
In addition to the tax treatment with respect to the Distribution, as set
forth above, Beverly and Capstone shall receive, prior to the Effective Time of
the Merger, the opinion of Caplin & Drysdale, Chartered or Ernst & Young LLP
with respect to the Merger, to the effect that:
(1) the Merger will qualify as a reorganization within the meaning of
Section (368)(a) of the Code;
(2) no gain or loss will be recognized by Capstone or Beverly as a result
of the Merger; and
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(3) no gain or loss will be recognized by Beverly's stockholders upon the
receipt of Capstone Common Stock solely in exchange for Beverly Common
Stock in connection with the Merger (except with respect to cash
received in lieu of a fractional interest in Capstone Common Stock).
Tax opinions are not binding on the IRS or any court. Moreover, the tax
opinions are based upon, among other things, certain representations as to
factual matters made by Beverly and Capstone, which representations if incorrect
or incomplete in certain material respects, would jeopardize the conclusions
reached in the opinions.
It is expected that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code. If the Merger so qualifies, (i) the
holders of Beverly Common Stock will not recognize gain or loss upon the receipt
of Capstone Common Stock in exchange for their shares of Beverly Common Stock,
(ii) each holder of Beverly Common Stock will carry over his, her or its tax
basis in the Beverly Common Stock (as determined immediately following the
Distribution) to the Capstone Common Stock, (iii) the holding period for each
holder of Beverly Common Stock will carry over to the Capstone Common Stock,
provided that the Beverly Common Stock is held as a capital asset immediately
prior to the Effective Time of the Merger, and (iv) any holder of Beverly Common
Stock receiving cash in lieu of fractional shares will recognize capital gain or
loss (provided the shares of Beverly Common Stock surrendered are held as
capital assets immediately prior to the Effective Time of the Merger) equal to
the difference between the amount of cash received and the portion of such
holder's basis in the shares of Beverly Common Stock allocable to such
fractional share interests, and such capital gain or loss will be long-term
capital gain or loss if the holding period for such shares is more than one
year.
If the Merger does not qualify as a reorganization within the meaning of
Section 368(a) of the Code, then each holder of Beverly Common Stock will
recognize gain or loss upon the receipt of the Capstone Common Stock in exchange
for such Beverly Common Stock equal to the difference between the fair market
value of the Capstone Common Stock received and such holder's basis in Beverly
Common Stock. In this regard, the failure of the Merger to qualify as a
reorganization within the meaning of Code Section 368(a) of the Code may also
cause the Distribution to not qualify as a tax-free reorganization under Section
368 of the Code, in which case (as described in "-- The Distribution" above)
each holder of Beverly Common Stock who receives shares of New Beverly Common
Stock in the Distribution, will be treated as if such holder received a taxable
distribution in an amount equal to the fair market value of the New Beverly
Common Stock received. Such distribution would be treated as (i) a dividend to
the extent paid out of Beverly's current and accumulated earnings and profits,
then (ii) a reduction in such holder's basis in Beverly Common Stock to the
extent the amount received exceeds the amount referenced in clause (i), and then
(iii) gain from the sale or exchange of Beverly Common Stock to the extent the
amount received exceeds the sum of the amounts referenced in clauses (i) and
(ii). Each holder's basis in the New Beverly Common Stock would be equal to the
fair market value of such stock at the time of the Distribution.
In addition, if the Merger were not to qualify as a tax-free reorganization
under Section 368 of the Code, then, in general, a corporate level federal
income tax would be payable by the consolidated group of which Beverly is the
common parent, which tax would be based upon the gain (computed as the
difference between the fair market value of the PCA stock exchanged in the
Merger and Beverly's adjusted basis in such stock) realized by Beverly upon the
consummation of the Merger.
POSSIBLE FUTURE LEGISLATION
On April 17, 1997 proposed legislation was introduced in the U.S. Congress
which, if enacted in its initial form, would provide that in certain corporate
business transactions where a pre-arranged plan exists involving a distribution
or "spin-off" to stockholders of portions of a business enterprise, accompanied
by a merger or acquisition of a specific unit of the enterprise involving a
third party acquiror, the transaction would cease to receive tax-free treatment
under the Code and would result in the imposition of taxable gain at the
corporate level as of the date of the distribution to stockholders. Acquisitions
occurring within the four-year period beginning two years prior to the date of
distribution to stockholders would be presumed to be pursuant to a pre-arranged
plan. Whether a corporation is "acquired" would be determined under rules
similar to those of
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present Section 355(d) of the Code. Thus, an acquisition would occur if a person
acquired more than 50% of the vote or value of the stock of the controlled or
distributing corporation pursuant to a plan or arrangement. As introduced, the
legislation would take effect for distributions occurring after April 16, 1997
unless, among other things, the distribution is made pursuant to a written
agreement which, subject to customary conditions, was binding on such date and
at all times thereafter, or such distribution is described on or before such
date in a public announcement or in a filing with the Securities and Exchange
Commission required solely by reason of the distribution. Capstone and Beverly
believe the Distribution and the Merger are not subject to the provisions of the
proposed legislation described above, since (i) Beverly stockholders are
expected to own more than 50% of the common stock of Capstone after the Merger;
(ii) the Transactions were the subject of a binding contract entered into prior
to April 16, 1997 and (iii) the Transactions were described in public
announcements by Beverly and Capstone on April 16, 1997. There can be no
assurance, however, that the proposed legislation, if enacted, will be enacted
in the form proposed on April 17, 1997, or that the transition rules described
above will not be changed in a manner adverse to the parties engaged in the
Transactions.
BACK-UP WITHHOLDING REQUIREMENTS
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of Beverly Common Stock, unless
the stockholder (i) is a corporation or comes with certain other exempt
categories, and, when required, demonstrates these facts, or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A stockholder who does not supply Beverly with
his, her or its correct taxpayer identification number may be subject to
penalties imposed by the IRS. Any amount withheld under these rules will be
refunded or credited against the stockholder's federal income tax liability.
Stockholders should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption. If information reporting requirements apply to a stockholder, the
amount of dividends paid with respect to such shares will be reported annually
to the IRS and to such stockholder.
These back-up withholding tax and information reporting rules currently are
under review by the United States Treasury Department and proposed Treasury
Regulations issued on April 15, 1996 would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules may be changed.
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TREATMENT OF BEVERLY INDEBTEDNESS
GENERAL
The Merger Agreement provides, among other things, that it is a condition
to Capstone's obligations to consummate the Merger, and Beverly has agreed that
prior to the Distribution and the Merger it will amend, modify or replace
substantially all of its existing indebtedness so that upon closing the Merger,
Beverly will have been released from liability under all its existing
indebtedness for borrowed money, except for the Institutional Pharmacy
Liabilities and certain other pharmacy-related obligations. Accordingly, Beverly
will be obligated to seek modifications or amendments to numerous credit or
lending agreements, leases and other instruments with third parties for the
purpose of causing New Beverly to be substituted as the obligor in Beverly's
place, and obtaining the release of Beverly from liability thereunder. To the
extent that Beverly is not able to obtain releases from such liabilities or able
to refinance the same, Capstone may not be obligated to consummate the Merger,
or if it elects to consummate the Merger, to reduce the amount of Assumed
Pharmacy Indebtedness which PCA is obligated to repay Beverly, by the amount of
any such indebtedness as to which Beverly has not obtained a release for itself.
Set forth below is a summary of the principal obligations of Beverly
whereunder it is either the primary obligor or guarantor, and Beverly's present
plans with respect to satisfaction of its covenant and the condition in the
Merger Agreement with respect to obtaining a release from liability. In one or
more cases Beverly may not be able to effect appropriate modifications to the
debt instruments and release of Beverly from liability thereunder, and
accordingly Beverly may be required to refinance or pay off such indebtedness or
terminate such leases, under terms and conditions which may be less favorable
than presently exist, and there is no assurance that Beverly will be able to
successfully refinance any such indebtedness. For information with respect to
anticipated one-time transactional costs associated with Beverly's effecting
debt amendments, modifications or replacements, see "Unaudited Pro Forma
Combined Condensed Financial Statements."
EXISTING CREDIT FACILITY
Beverly currently has in place a letter of credit/revolving credit facility
which permits borrowings of up to $375 million (the "Existing Credit Facility").
The Existing Credit Facility was established pursuant to an Amended and Restated
Credit Agreement dated as of December 20, 1996 (as heretofore amended, the
"Existing Credit Agreement") by and among Beverly, as borrower, and Morgan
Guaranty Bank of New York, as Issuing Bank, and as Agent for a lending bank
group. The Existing Credit Agreement terminates on December 31, 2001.
The obligations of Beverly under the Existing Credit Facility are
guaranteed by Beverly's active, direct and indirect subsidiaries other than
Beverly Funding Corporation and Beverly Indemnity, Ltd. (including Beverly's
Pharmacy Subsidiaries) and are secured by a pledge of all of the capital stock
of PCA and certain of Beverly's other Pharmacy Subsidiaries (the "Pledged
Stock").
The Existing Credit Agreement contains representations and warranties,
affirmative covenants, reporting covenants, negative covenants and events of
default customary for similar financing transactions. Covenants include but are
not limited to certain restrictions on investments, debt incurrence, contingent
obligations, liens, consolidations, mergers and asset sales, payment of
dividends and the purchase or redemption of capital stock. In addition, Beverly
is required to comply with certain financial covenants governing, among other
things, minimum consolidated net worth, fixed charge coverage ratio, and the
ratio of adjusted consolidated debt to consolidated net worth.
In order to effect the Distribution, Beverly will be required to amend the
Existing Credit Agreement and the Existing Credit Facility (as amended and
described below, the "New Beverly Credit Agreement" and the "New Beverly Credit
Facility", respectively) to provide, among other things: substitution of New
Beverly as the borrower and release of Beverly from its obligations thereunder;
release of the Pledged Stock and substitution therefor of the capital stock of
certain direct or indirect subsidiaries of Beverly engaged in the Remaining
Healthcare Business and having a fair market value substantially equivalent to
the fair market value of the Pledged Stock; release of all Pharmacy Subsidiaries
(as defined in the Distribution Agreement)
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as guarantors; and adjustment of the covenants to reflect the effect of the
Distribution and the Merger. Beverly has initiated informal discussions with the
Existing Credit Facility lenders regarding the foregoing matters, but no binding
commitments have yet been sought or obtained.
9% SENIOR NOTES
As of March 31, 1997 there was outstanding $180 million principal amount of
9% senior notes due 2006 (the "9% Senior Notes") that were issued pursuant to an
indenture dated as of February 1, 1996 (the "9% Indenture") between Beverly and
The Chase Manhattan Bank, as trustee (the "9% Senior Note Trustee") for the
holders of the 9% Senior Notes. The 9% Senior Notes are senior in right of
payment to all subordinated indebtedness of Beverly (including the convertible
debentures, discussed below). The 9% Senior Notes are not redeemable prior to
February 15, 2001. The 9% Indenture contains affirmative covenants, reporting
covenants, negative covenants and events of default customary for similar public
debt financing transactions. Covenants include but are not limited to certain
restrictions on: investments; liens; debt incurrence; issuance of preferred
stock; consolidations, mergers and asset sales; payment of dividends and the
purchase or redemption of capital stock and subordinated indebtedness. Many of
these limitations relate to certain financial tests or ratios which include but
are not limited to minimum consolidated net worth, debt to consolidated cash
flow and fixed charge coverage.
In order that the 9% Senior Notes be assigned to and assumed by New
Beverly, and Beverly be released from liability thereunder, Beverly intends to
solicit the consent of holders of a majority of the principal amount outstanding
of the 9% Senior Notes (the "Consent Solicitation") to the following matters:
(i) waiver of the consolidated net worth test in connection with the
Distribution; (ii) substitution of New Beverly as the "Company" for all purposes
of the 9% Indenture and the release of Beverly and the Pharmacy Subsidiaries
from all liability and obligations thereunder and (iii) waiver of the limitation
on redemption of subordinated debentures to permit Beverly to redeem the
subordinated debentures, as discussed below. If the consent of the required
holders is obtained, Beverly and the 9% Senior Note Trustee will enter into a
supplemental indenture to substitute New Beverly as primary obligor thereunder,
release Beverly and the Pharmacy Subsidiaries from further liability under the
9% Senior Notes and permit the redemption of the subordinated debentures.
There can be no assurance given that Beverly will be successful in
obtaining the consent of the required majority 9% Senior Note holders. If it is
not successful in the Consent Solicitation, Beverly anticipates it or New
Beverly will make an exchange offer whereby holders of the 9% Senior Notes would
be offered in exchange for the 9% Senior Notes a New Beverly debt security
without the limitation on redemption of subordinated debentures and without a
guarantee from the Pharmacy Subsidiaries (the "New Beverly Notes"). It is
expected that the New Beverly Notes will, except as noted above, contain
covenants similar to the 9% Senior Notes but there can be no assurance that any
New Beverly Notes issued pursuant to an exchange offer will not have higher
coupon rates, be issued at a discount or contain covenants more onerous or
restrictive than those in the 9% Indenture or 9% Senior Notes.
SUBORDINATED DEBENTURES
5 1/2% Debentures
As of March 31, 1997, there was outstanding $150 million aggregate
principal amount of 5 1/2% convertible subordinated debentures ("5 1/2%
Debentures"). The 5 1/2% Debentures bear interest at a rate of 5 1/2% per annum,
mature August 1, 2018 and are redeemable at a redemption price of 103.85% of
principal amount plus accrued and unpaid interest thereon until August 1, 1997
at which time the redemption price is reduced to 103.30% of principal plus
accrued and unpaid interest. The 5 1/2% Debentures are convertible into Beverly
Common Stock at the option of the holder at any time prior to close of business
on July 31, 2018 but if the 5 1/2% Debentures are called for redemption, holders
must convert them prior to the close of business on the business day immediately
preceding the redemption date. The conversion price currently in effect is
$13.33 per share.
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The 9% Indenture contains a covenant that restricts Beverly's ability to
redeem or repurchase subordinated debt such as the 5 1/2% Debentures unless the
redemption is accomplished with the net cash proceeds from an incurrence of
subordinated indebtedness of a longer term and no more than the principal amount
of the subordinated indebtedness being redeemed.
Beverly intends to proceed with one or more of the following alternatives:
(i) in order to make the redemption of the 5 1/2% Debentures permissible, seek,
as part of the Consent Solicitation, consent from the holders of 9% Notes to
permit the redemption of the 5 1/2% Debenture, commence an exchange with such
holders whereby the 9% Senior Notes would be replaced by New Beverly Notes or
negotiate a stand-by commitment for the issuance of subordinated indebtedness,
whose net cash proceeds would qualify under the restrictive covenant contained
in the 9% Indenture to be used to redeem the 5 1/2% Debentures, and, once the
redemption is permissible; call the 5 1/2% Debentures for redemption after
August 1, 1997; (ii) solicit the consent of the holders of the 5 1/2% Debentures
to the following matters: (a) substitution of New Beverly for Beverly; (b)
assumption by New Beverly of the obligations of Beverly and (c) release of
Beverly from its obligations under the 5 1/2% Debentures or (iii) commence an
exchange offer or other refinancing to pay off the 5 1/2% Debentures. In the
event of a call for redemption, Beverly anticipates that if the price of the
Beverly Common Stock is more than 3.30% above the conversion price of $13.33
immediately prior to the redemption date, the holders will be likely to convert
their 5 1/2% Debentures to Beverly Common Stock. Conversion of all or
substantially all of the 5 1/2% Debentures into Beverly Common Stock prior to
the Effective Time of the Merger would cause an increase in the number of
outstanding shares of Beverly Common Stock and would result in holders of
Beverly Common Stock receiving a comparatively smaller number of shares of
Capstone Common Stock in the Merger.
7 5/8% Debentures
As of March 31, 1997 there was outstanding approximately $62.5 million
aggregate principal amount of 7 5/8% convertible subordinated debentures
("7 5/8% Debentures"). The 7 5/8% Debentures bear interest at a rate of 7 5/8%
per annum, mature March 15, 2003, are presently redeemable at a redemption price
of 100% of principal amount plus accrued and unpaid interest thereon and are
subject to an annual sinking fund redemption of $7.5 million. The 7 5/8% Bonds
are convertible into Beverly Common Stock at the option of the holder at any
time prior to the close of business on March 14, 2003 but if the 7 5/8% Bonds
are called for redemption, holders must convert them prior to the close of
business on the business day immediately preceding the redemption date. The
conversion price currently in effect is $20.47 per share.
Beverly intends to proceed with one or more of the following alternatives:
(i) in order to make the redemption of the 7 5/8% Debentures permissible, seek,
as part of the Consent Solicitation, consent from the holders of the 9% Senior
Notes to permit the redemption of the 7 5/8% Debentures or commence an exchange
offer with such holders whereby the 9% Senior Notes would be replaced by New
Beverly Notes and once the redemption is permissible, call the 7 5/8% Debentures
for redemption, (ii) solicit the consent of the holders of the 7 5/8% Debentures
to the following matters: (a) substitution of New Beverly for Beverly; (b)
assumption by New Beverly of the obligations of Beverly and (c) release of
Beverly from its obligations under the 7 5/8% Debentures or (iii) commence an
exchange offer or other refinancing to pay off the 7 5/8% Debentures. In the
event of a call for redemption, Beverly does not presently anticipate that the
price of Beverly Common Stock will be above the conversion price of $20.47 to
the expected redemption date in late 1997, and therefore Beverly anticipates
that all of the 7 5/8% Debentures will be redeemed.
INDUSTRIAL REVENUE BONDS
As of March 31, 1997, Beverly has guaranteed the obligations of various
subsidiaries and others on 104 issues of industrial revenue bonds in various
states and local jurisdictions, totalling an aggregate principal amount of
approximately $298.3 million (individually an "IRB" and collectively the
"IRBs"). A total of 89 issues with an aggregate principal amount of
approximately $208.6 million involve Beverly guarantees of the obligations of
Beverly subsidiaries operating the Remaining Healthcare Business, while 15
issues with an aggregate principal amount of approximately $89.7 million
involved guarantees of the obligations of third parties that have acquired
facilities from subsidiaries of Beverly subject to IRBs. The IRBs bear interest
at
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rates ranging from 3.6% to 11.5% per annum, mature from December 31, 1997 to
December 1, 2019, and are not redeemable until from June 1, 1997 to June 1,
2013. Beverly's obligations are set forth in a guaranty agreement for each issue
(individually a "Guaranty Agreement" and collectively the "Guaranty
Agreements"). The Guaranty Agreements have been entered into by Beverly and 21
respective trustees (individually an "IRB Trustee" and collectively the "IRB
Trustees"). In order to effect the Distribution, Beverly intends to request each
IRB Trustee to enter into appropriate assumption, substitution and release
documents to, among other things: (i) substitute New Beverly as the guarantor,
assuming all of Beverly's obligations under the relevant Guaranty Agreement and
(ii) release Beverly from all obligations under the Guaranty Agreement. While
Beverly will seek the assumption, substitution and release from the IRB
Trustees, there can be no assurance given that one or more IRB Trustees will not
require that the holders of the IRBs consent to the proposed changes. If
consents from the IRB holders are required, Beverly anticipates promptly seeking
such consents. There remains the possibility that one or more IRB holders may
not enter into a consent agreement and if such consent is not obtained from all
IRB holders Beverly proposes to refinance or pay off that portion of the IRBs
with respect to which consents have not been obtained.
FIRST MORTGAGE BONDS
As of March 31, 1997, there was outstanding approximately $48.4 million
aggregate principal amount of first mortgage bonds (the "First Mortgage Bonds")
in two series: Series A ("Series A Bonds") and Series B ("Series B Bonds"). The
Series A Bonds bear interest at a rate of 8 3/4% per annum, mature July 1, 2008
and are redeemable after July 1, 1997 at a redemption price of 105% of the
principal amount plus accrued and unpaid interest thereon. The Series B Bonds
bear interest at a rate of 8 5/8% per annum, mature October 1, 2008 and are not
redeemable prior to October 1, 1997. After October 1, 1997, the Series B Bonds
are redeemable at a redemption price of 105% of the principal amount plus
accrued and unpaid interest thereon.
The First Mortgage Bonds were issued pursuant to an indenture dated as of
April 1, 1993 (as supplemented the "First Mortgage Bond Indenture") between
Beverly and First Union Bank of Connecticut, as trustee (the "First Mortgage
Bond Trustee") for the holders of such bonds. The First Mortgage Bond Indenture
permits the substitution of New Beverly for Beverly, the assumption by New
Beverly of the obligations of Beverly under the First Mortgage Bond Indenture
and the First Mortgage Bonds and the release of Beverly from such obligations,
upon the condition that (a) New Beverly executes documents necessary to evidence
the assumption; (b) such transaction will not disturb the continuance of the
lien of the First Mortgage Bond Indenture on the property mortgaged and pledged
as collateral and (c) immediately after giving effect to the transaction, no
default or event of default will occur.
In order to effect the Distribution, Beverly, New Beverly and the First
Mortgage Bond Trustee will execute and enter into a supplemental indenture and
other documents necessary to provide for the (i) substitution of New Beverly for
Beverly, (ii) assumption by New Beverly of the obligations of Beverly and (iii)
release of Beverly from its obligations under the First Mortgage Bond Indenture
and the First Mortgage Bonds.
8.75% NOTES
As of March 31, 1997, there was outstanding approximately $24.8 million
aggregate principal amount of 8.75% Notes ("8.75% Notes"), which were issued
pursuant to an indenture dated as of December 30, 1993 (as supplemented, the
"8.75% Note Indenture"), between Beverly and Boatman's Trust Company as trustee
for the holders of such notes. The 8.75% Notes bear interest at a rate of 8.75%
per annum, mature December 31, 2003, and are redeemable at a redemption price of
100% of the principal amount plus accrued and unpaid interest thereon. Beverly
intends to call the 8.75% Notes for redemption prior to the Distribution.
MEDIUM TERM NOTES
As of March 31, 1997 there was outstanding $50.0 million aggregate
principal amount of medium term notes (the "Medium Term Notes"), which were
issued by Beverly Funding Corporation ("BFC"), a wholly-owned subsidiary of
Beverly, pursuant to an indenture dated as of December 1, 1994 (the "Medium Term
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Note Indenture") between BFC and The Chase Manhattan Bank, as trustee (the
"Medium Term Note Trustee") for the holders of such notes. The Medium Term Notes
bear interest at LIBOR (as defined in the Medium Term Note Indenture) plus 0.35%
and mature on June 15, 2000. The Medium Term Notes are secured by a security
interest in patient accounts receivable generated by subsidiaries of Beverly and
sold to BFC.
The Medium Term Notes were issued in a private placement to The Long Term
Credit Bank of Japan, Los Angeles Agency ("LTCB") as holder of the entire amount
of notes issued.
Beverly has agreed to certain covenants pursuant to the First Amendment and
Restatement to Master Sales and Servicing Agreement (the "Servicing Agreement")
dated as of December 1, 1994. In order to effect the Distribution, Beverly will
seek the consent of LTCB as the sole holder of the Medium Term Notes to permit
the following under the Servicing Agreement and the Medium Term Note Indenture:
(i) substitution of New Beverly for Beverly for all purposes of such
instruments; (ii) assumption by New Beverly of the obligations of Beverly and
(iii) release of Beverly from its obligations under the Servicing Agreement and
the Medium Term Note Indenture. Although no binding commitments have yet been
requested or obtained, based upon informal discussions between the parties,
Beverly anticipates that prior to the Distribution Beverly, New Beverly, the
Medium Term Note Trustee, and LTCB will enter into appropriate documents to
reflect these consents and agreements.
REIT PROMISSORY NOTES
As of March 31, 1997 there was outstanding approximately $42.2 million
aggregate principal amount of promissory notes due to real estate investment
trusts ("REIT Promissory Notes"). The REIT Promissory Notes, which were executed
by subsidiaries of Beverly that are part of the Remaining Healthcare Business
that will transfer to New Beverly as part of the Distribution bear interest at
rates ranging from 9.95% to 11.80% and mature from July 1, 2003 to May 1, 2010.
Health Care Property Investors ("HCPI") holds approximately $34.3 million of the
REIT Promissory Notes, which may not be prepaid until 2005. Nationwide Health
Properties ("NHP") holds approximately $7.9 million of the REIT Promissory
Notes, which have no prepayment rights. Beverly guarantees the performance under
the REIT Promissory Notes by the obligors, pursuant to one or more guaranty
agreements (individually a "Guaranty Agreement" and collectively the "Guaranty
Agreements").
Prior to the Distribution, Beverly intends to seek the consent of both HCPI
and NHP to permit the following under the Guaranty Agreements and the REIT
Promissory Notes: (i) substitution of New Beverly for Beverly; (ii) assumption
by New Beverly of the obligations of Beverly and (iii) release of Beverly from
its obligations. Although there have been preliminary discussions between
Beverly and representatives of the holders of the REIT Promissory Notes, the
terms on which a consent may be granted by the holders of the REIT Promissory
Notes remain uncertain.
BANK LOANS, MORTGAGES AND NOTES PAYABLE
As of March 31, 1997, there was outstanding approximately $127.5 million
aggregate principal amount of certain bank loans, mortgages and notes payable
representing financings by various subsidiaries of Beverly engaged in the
Remaining Healthcare Business that will be transferred to New Beverly as part of
the Distribution (the "Miscellaneous Debt Obligations"). The Miscellaneous Debt
Obligations represent obligations ranging from $10.3 million to $25 million in
outstanding principal amount, bear interest at rates ranging from 5.75% to 9.08%
per annum, mature at various dates from August 7, 1999 to September 30, 2006 and
are prepayable at various dates from September 1, 1997 to June 1, 2000. The
Miscellaneous Debt Obligations are guaranteed by Beverly, and certain of them
contain financial and other covenants related to Beverly.
Prior to the Distribution, Beverly intends to seek amendments of the
Miscellaneous Debt Obligations to provide, among other things: (i) substitution
of New Beverly as guarantor in place of Beverly; (ii) assumption by New Beverly
of the obligations of Beverly; (iii) release of Beverly from its obligations and
(iv) adjustment of certain covenants to reflect the effects of the Distribution
and the Merger. To the extent Beverly is unable to cause appropriate amendments
to be made in the Miscellaneous Debt Obligations to effect the foregoing,
Beverly expects the Miscellaneous Debt Obligations will be paid off or
refinanced with other lenders.
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INFORMATION CONCERNING BEVERLY
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data and
selected consolidated balance sheet data for the periods ended and as of
December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from the
consolidated financial statements of Beverly and should be read in conjunction
with the financial statements and notes thereto included herein. The
consolidated statements of operations data and selected balance sheet data for
the three months ended and as of March 31, 1997 and 1996 have been derived from
the unaudited condensed consolidated financial statements and should be read in
conjunction with those financial statements and related notes included herein.
Operating results for the three months ended March 31, 1997 are not necessarily
indicative of results that may be expected for the full calendar year ending
December 31, 1997.
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net operating revenues.......... $ 816,716 $ 811,047 $ 3,267,189 $ 3,228,553 $ 2,969,239 $ 2,884,451 $ 2,607,756
Interest income................. 3,565 3,460 13,839 14,228 14,578 15,269 14,502
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues.......... 820,281 814,507 3,281,028 3,242,781 2,983,817 2,899,720 2,622,258
Costs and expenses:
Operating and administrative:
Wages and related........... 449,782 449,995 1,819,500 1,736,151 1,600,580 1,593,410 1,486,191
Other....................... 289,930 293,484 1,139,442 1,224,681 1,114,916 1,069,536 921,750
Interest...................... 22,716 23,145 91,111 84,245 64,792 66,196 70,943
Depreciation and
amortization................ 27,081 25,056 105,468 103,581 88,734 82,938 80,226
Impairment of long-lived
assets:
Adoption of SFAS No. 121.... -- -- -- 68,130 -- -- --
Development and other
costs..................... -- -- -- 32,147 -- -- --
Restructuring costs........... -- -- -- -- -- -- 57,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total costs and
expenses.............. 789,509 791,680 3,155,521 3,248,935 2,869,022 2,812,080 2,616,110
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes,
extraordinary charge and
cumulative effect of change in
accounting for income taxes... 30,772 22,827 125,507 (6,154) 114,795 87,640 6,148
Provision for income taxes...... 12,309 9,131 73,481 1,969 37,882 29,684 4,203
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary charge and
cumulative effect of change in
accounting for income taxes... 18,463 13,696 52,026 (8,123) 76,913 57,956 1,945
Extraordinary charge, net of
income taxes of $1,099 in
1996, $1,188 in 1994, $1,155
in 1993 and $5,415 in 1992.... -- -- (1,726) -- (2,412) (2,345) (8,835)
Cumulative effect of change in
accounting for income taxes... -- -- -- -- -- -- (5,454)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............... $ 18,463 $ 13,696 $ 50,300 $ (8,123) $ 74,501 $ 55,611 $ (12,344)
=========== =========== =========== =========== =========== =========== ===========
Net income (loss) applicable to
common shares................. $ 18,463 $ 13,696 $ 50,300 $ (14,998) $ 66,251 $ 31,173 $ (13,344)
=========== =========== =========== =========== =========== =========== ===========
Income (loss) per share of
common stock:
Before redemption premium on
preferred stock,
extraordinary charge and
cumulative effect of change
in accounting for income
taxes....................... $ .19 $ .14 $ .52 $ (.16) $ .79 $ .66 $ .01
Redemption premium on
preferred stock............. -- -- -- -- -- (.25) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Before extraordinary charge
and cumulative effect of
change in accounting for
income taxes................ .19 .14 .52 (.16) .79 .41 .01
Extraordinary charge.......... -- -- (.02) -- (.03) (.03) (.11)
Cumulative effect of change in
accounting for income
taxes....................... -- -- -- -- -- -- (.07)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............. $ .19 $ .14 $ .50 $ (.16) $ .76 $ .38 $ (.17)
=========== =========== =========== =========== =========== =========== ===========
Shares used to compute per share
amounts....................... 99,411,000 99,978,000 99,646,000 92,233,000 87,087,000 81,207,000 77,685,000
CONSOLIDATED BALANCE SHEET DATA:
Total assets.................... $ 2,582,398 $ 2,510,446 $ 2,525,082 $ 2,506,461 $ 2,322,578 $ 2,000,804 $ 1,859,361
Current portion of long-term
obligations................... $ 36,361 $ 37,447 $ 38,826 $ 84,639 $ 60,199 $ 43,125 $ 30,466
Long-term obligations, excluding
current
portion....................... $ 1,119,865 $ 1,083,775 $ 1,106,256 $ 1,066,909 $ 918,018 $ 706,917 $ 712,896
Stockholders' equity............ $ 881,327 $ 835,610 $ 861,095 $ 820,333 $ 827,244 $ 742,862 $ 593,505
OTHER DATA:
Patient days.................... 5,667,000 6,046,000 23,670,000 25,297,000 26,766,000 29,041,000 29,341,000
Average occupancy percentage
(based on licensed beds)...... 86.6% 87.4% 87.4% 88.1% 88.5% 88.5% 88.4%
Number of nursing home beds..... 70,623 73,432 71,204 75,669 78,058 85,001 89,298
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is based upon and should be read in conjunction
with the Selected Historical Consolidated Financial Data, the Unaudited Pro
Forma Condensed Consolidated Financial Statements and the historical
consolidated financial statements of Beverly and the notes thereto, included
elsewhere herein.
GENERAL
Healthcare system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for both federal and state governments.
Although no comprehensive healthcare, Medicare or Medicaid reform legislation
has yet been implemented, pressures to contain costs and the active discussions
between the Clinton Administration, Congress and various other groups have
impacted the healthcare delivery system. Many states are experimenting with
alternatives to traditional Medicaid delivery systems through federal waiver
programs, and efforts to provide these services more efficiently will continue
to be a priority. In August 1996, Congress passed the Health Insurance
Portability and Accountability Act of 1996 which, among other things, provides
favorable changes in the tax treatment of long-term care insurance and allows
inclusion of long-term care insurance in medical savings accounts. Although
Beverly believes this legislation will have a favorable impact on the long-term
care industry, the full effect is not readily determinable. There can be no
assurances made as to the ultimate impact of this, or future healthcare reform
legislation, on New Beverly's financial position, results of operations or cash
flows. However, future federal budget legislation and regulatory changes may
negatively impact New Beverly.
During the first quarter of 1997, proposed rules were issued by the Health
Care Financing Administration of the Department of Health and Human Services
which, if implemented in their proposed form, would establish guidelines for
maximum reimbursement to skilled nursing facilities for contracted speech and
occupational therapy services, based on equivalent salary amounts for on-staff
therapists. In addition, these proposed rules would revise the salary
equivalency rules already in effect for physical therapy services. The full
effect of the new rules is not readily determinable as the details of the
proposal have not yet been finalized; however, New Beverly does not expect this
will have a material adverse effect on its consolidated results of operations or
cash flows.
The federal government recently increased the minimum wage. This new
legislation is being rolled out in two phases. The initial increase took effect
October 1, 1996, and the final increase is scheduled to take effect September 1,
1997. This new legislation did not result in a material increase in Beverly's
wage rates in 1996, and Beverly does not anticipate a material impact on its
wage rates in 1997, since a substantial portion of Beverly's associates earn in
excess of the new minimum wage levels; however, Beverly believes there may
continue to be competitive pressures to increase the wage levels of associates
earning above the new minimum wage. The effect of the new minimum wage on New
Beverly's future operations is not expected to be material as New Beverly
believes that a significant portion of such increase will be reimbursed through
Medicare and Medicaid rate increases.
New Beverly's future operating performance will be affected by the issues
facing the long-term healthcare industry as a whole, including the maintenance
of occupancy, its ability to continue to expand higher margin businesses, the
availability of nursing, therapy and other personnel, the adequacy of funding of
governmental reimbursement programs, the demand for nursing home care and the
nature of any healthcare reform measures that may be taken by the federal
government, as discussed above, as well as by any state governments. New
Beverly's ability to control costs, including its wages and related expenses
which continue to rise and will represent the largest component of New Beverly's
operating and administrative expenses, will also significantly impact its future
operating results.
As a general matter, increases in operating costs of New Beverly will
result in higher patient rates under Medicaid programs in subsequent periods.
However, New Beverly's results of operations will continue to be affected by the
time lag in most states between increases in reimbursable costs and the receipt
of related reimbursement rate increases. Medicaid rate increases, adjusted for
inflation, are generally based upon changes in costs for a full calendar year
period. The time lag before such costs are reflected in permitted rates
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varies from state to state, with a substantial portion of the increases taking
effect up to 18 months after the related cost increases.
OPERATING RESULTS
First Quarter 1997 Compared to First Quarter 1996
Beverly's net income was $18,463,000 for the first quarter of 1997, as
compared to net income of $13,696,000 for the same period in 1996. Beverly's
income before provision for income taxes was $30,772,000 for the first quarter
of 1997, as compared to $22,827,000 for the same period in 1996. Beverly had an
estimated annual effective tax rate of 40% for the quarters ended March 31, 1997
and 1996. Beverly's estimated annual effective tax rates for 1997 and 1996 were
different than the federal statutory rate primarily due to the impact of state
income taxes and amortization of nondeductible goodwill.
Excluding the Institutional Pharmacy Business, net income for the first
quarter of 1997 would have been $10,635,000 as compared to net income of
$7,770,000 for the same period in 1996. Income before provision for income taxes
for the first quarter of 1997, excluding the Institutional Pharmacy Business,
would have been $17,368,000, as compared to $12,617,000 for the same period in
1996. Excluding the Institutional Pharmacy Business, Beverly's estimated annual
effective tax rate for the quarters ended March 31, 1997 and 1996 would have
been 38.8% and 38.4%, respectively.
Beverly's net operating revenues increased approximately $5,700,000 for the
first quarter of 1997, as compared to the same period in 1996. This increase
consisted of the following: increases of approximately $31,400,000 for
facilities which Beverly operated during each of the quarters ended March 31,
1997 and 1996 ("same facility operations"); increases of approximately
$19,600,000 related to the acquisitions of eight nursing facilities in 1996, as
well as certain pharmacy, hospice and outpatient therapy businesses acquired in
1996 and 1997; partially offset by decreases of approximately $45,300,000 due to
the disposition of, or lease terminations on, five nursing facilities in 1997
and 83 nursing facilities and Beverly's MedView Services unit ("MedView") in
1996. Beverly's operating and administrative costs decreased approximately
$3,800,000 for the first quarter of 1997, as compared to the same period in
1996. This decrease consists of the following: decreases of approximately
$39,300,000 due to the disposition of, or lease terminations on, certain nursing
facilities and MedView, as mentioned above; partially offset by increases of
approximately $17,900,000 for same facility operations and increases of
approximately $17,600,000 related to the acquisitions mentioned above.
Excluding the Institutional Pharmacy Business, net operating revenues would
have decreased approximately $11,500,000 for the first quarter of 1997, as
compared to the same period in 1996. This decrease consisted of the following: a
decrease of approximately $45,300,000 due to certain dispositions, as noted
above; partially offset by increases of approximately $22,300,000 for same
facility operations and increases of approximately $11,500,000 related to
acquisitions of nursing facilities, hospices and outpatient therapy clinics.
Excluding the Institutional Pharmacy Business, operating and administrative
costs would have decreased approximately $16,600,000 for the first quarter of
1997, as compared to the same period in 1996. This decrease consisted of the
following: decreases of approximately $39,300,000 due to certain dispositions,
as noted above; partially offset by increases of approximately $12,100,000 for
same facility operations and increases of approximately $10,600,000 related to
acquisitions of nursing facilities, hospices and outpatient therapy clinics.
The increase in Beverly's net operating revenues for same facility
operations for the first quarter of 1997, as compared to the same period in
1996, was due to the following: approximately $34,500,000 due primarily to
increases in room and board rates; and approximately $9,600,000 due primarily to
increases in pharmacy-related revenues and various other items. These increases
in Beverly's net operating revenues were partially offset by approximately
$7,100,000 due to a decrease in same facility occupancy to 88.5% for the first
quarter of 1997, as compared to 89.8% for the same period in 1996 based on
operational beds; and approximately $5,600,000 due to one less calendar day for
the first quarter of 1997, as compared to the same period in 1996.
Excluding the Institutional Pharmacy Business, the increase in net
operating revenues for same facility operations for the first quarter of 1997,
as compared to the same period in 1996, was due to the following:
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approximately $34,500,000 due primarily to increases in room and board rates and
approximately $500,000 due to various other items; partially offset by
approximately $7,100,000 due to a decrease in same facility occupancy, and
approximately $5,600,000 due to one less calendar day for the first quarter of
1997, as compared to the same period in 1996.
The increase in Beverly's operating and administrative costs for same
facility operations for the first quarter of 1997, as compared to the same
period in 1996, was due to the following: approximately $13,900,000 due to
increased wages and related expenses (excluding pharmacy) principally due to
higher wages and greater benefits required to attract and retain qualified
personnel, the hiring of therapists on staff as opposed to contracting for their
services and increased staffing levels in Beverly's nursing facilities to cover
increased patient acuity; approximately $6,600,000 due to increases in
pharmacy-related costs; approximately $2,100,000 due to increases in nursing
supplies and other variable costs; and approximately $6,400,000 due to various
other items. These increases in Beverly's operating and administrative costs
were partially offset by approximately $11,100,000 due to a decrease in
contracted therapy expenses as a result of hiring therapists on staff as opposed
to contracting for their services.
Excluding the Institutional Pharmacy Business, the increase in operating
and administrative costs for same facility operations for the first quarter of
1997, as compared to the same period in 1996, was due to the following:
approximately $13,900,000 due to increased wages and related expenses;
approximately $2,100,000 due to increases in nursing supplies and other variable
costs; and approximately $7,200,000 due to various other items; partially offset
by approximately $11,100,000 due to a decrease in contracted therapy expenses.
Although Beverly's depreciation and amortization expense increased only
$2,000,000 as compared to the same period in 1996, it was affected by the
following: approximately $3,000,000 increase primarily due to capital additions
and improvements, as well as, acquisitions; partially offset by a decrease of
approximately $1,000,000 related to the disposition of, or lease terminations
on, certain nursing facilities and MedView.
The Institutional Pharmacy Business had an immaterial effect on the change
in depreciation and amortization for the quarter ended March 31, 1997, as
compared to the same period in 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which is
required to be adopted in financial statements for periods ending after December
15, 1997. At that time, New Beverly will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements, primary earnings per share will be renamed basic
earnings per share and will exclude the dilutive effect of stock options. The
impact is not expected to result in a change in New Beverly's primary earnings
per share or fully diluted earnings per share (which will be renamed dilutive
earnings per share) for the three months ended March 31, 1997 and 1996.
1996 Compared to 1995
Beverly's net income was $50,300,000 for the year ended December 31, 1996,
as compared to a net loss of $8,123,000 for the same period in 1995. Beverly's
net income for 1996 included a $1,726,000 extraordinary charge, net of income
taxes, related to the write-off of unamortized deferred financing costs related
to certain refinanced debt. Beverly's net loss for 1995 included a pre-tax
charge of $100,277,000 for impaired long-lived assets related primarily to the
adoption of SFAS No. 121 (as defined below) and the write-off of software and
business development costs, as well as a charge of $4,000,000 related to an
overhead and staff reduction program implemented during the fourth quarter of
1995.
Excluding the Institutional Pharmacy Business, net income for the year
ended December 31, 1996 would have been $31,739,000 as compared to a net loss of
$12,709,000 for the same period in 1995. Excluding the Institutional Pharmacy
Business, the net loss for 1995 would have included a pre-tax charge of
$90,734,000 for impaired long-lived assets related primarily to the adoption of
SFAS No. 121 and the write-off of software costs as well as the $4,000,000
overhead and staff reduction charge, as mentioned above.
Beverly had an annual effective tax rate of 59% for the year ended December
31, 1996, compared to a negative annual effective tax rate of 32% for the same
period in 1995. Beverly's annual effective tax rate in
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1996 was different than the federal statutory rate primarily due to the impact
of nondeductible goodwill associated with the sale of MedView. In addition,
Beverly's annual effective tax rate in 1995 was different than the federal
statutory rate primarily due to the impact of nondeductible goodwill included in
the adjustments resulting from the adoption of SFAS No. 121. At December 31,
1996, Beverly had general business tax credit carryforwards of $12,236,000 for
income tax purposes which expire in years 2005 through 2011. For financial
reporting purposes, the general business tax credit carryforwards have been
utilized to offset existing net taxable temporary differences reversing during
the carryforward periods.
Excluding the Institutional Pharmacy Business, Beverly would have had an
annual effective tax rate of 64.9% for the year ended December 31, 1996, as
compared to an annual effective tax rate of 24% for the same period in 1995.
Beverly's net operating revenues increased approximately $38,600,000 for
the year ended December 31, 1996, as compared to the same period in 1995. This
increase consisted of the following: increases of approximately $62,300,000 for
facilities which Beverly operated during each of the years ended December 31,
1996 and 1995 ("same facility operations"); increases of approximately
$91,700,000 related to the acquisition of Pharmacy Management Services, Inc.
("PMSI") in mid-1995, acquisitions of eight nursing facilities, and certain
pharmacy, hospice and outpatient therapy businesses during 1996 and the expanded
operations of American Transitional Hospitals, Inc. ("ATH"); partially offset by
decreases of approximately $115,400,000 due to the disposition of, or lease
terminations on, 83 nursing facilities and MedView in 1996 and 29 nursing
facilities in 1995. Beverly's operating and administrative costs decreased
approximately $1,900,000 for the year ended December 31, 1996, as compared to
the same period in 1995. This decrease consisted of the following: decreases of
approximately $114,200,000 due to the disposition of, or lease terminations on,
83 nursing facilities and MedView in 1996 and 29 nursing facilities in 1995;
offset by increases of approximately $39,000,000 for same facility operations
and increases of approximately $73,300,000 related to the acquisition of PMSI in
mid-1995, acquisitions of eight nursing facilities, and certain pharmacy,
hospice and outpatient therapy businesses during 1996 and the expanded
operations of ATH.
Excluding the Institutional Pharmacy Business, net operating revenues would
have decreased approximately $18,000,000 for the year ended December 31, 1996,
as compared to the same period in 1995. This decrease consisted of the
following: a decrease of approximately $115,400,000 due to certain dispositions,
as noted above; partially offset by increases of approximately $57,800,000 for
same facility operations; and increases of approximately $39,600,000 related to
acquisitions of nursing facilities, hospices and outpatient therapy clinics, the
acquisition of MedView in mid-1995 and the expanded operations of ATH. Excluding
the Institutional Pharmacy Business, operating and administrative costs would
have decreased approximately $40,500,000 for the year ended December 31, 1996,
as compared to the same period in 1995. This decrease consisted of the
following: decreases of approximately $114,200,000 due to certain dispositions,
as noted above; partially offset by increases of approximately $39,500,000 for
same facility operations and increases of approximately $34,200,000 related to
acquisitions of nursing facilities, hospices and outpatient therapy clinics, the
acquisition of MedView in mid-1995 and the expanded operation of ATH.
The increase in Beverly's net operating revenues for same facility
operations for the year ended December 31, 1996, as compared to the same period
in 1995, was due to the following: approximately $110,500,000 due primarily to
increases in room and board rates; and approximately $5,600,000 due to one
additional calendar day for the year ended December 31, 1996, as compared to the
same period in 1995. These increases in Beverly's net operating revenues were
partially offset by approximately $28,500,000 due to a decrease in same facility
occupancy to 87.7% for the year ended December 31, 1996, as compared to 88.9%
for the same period in 1995; approximately $19,700,000 due to decreases in
ancillary revenues primarily due to Beverly's continuing efforts to bring
therapists on staff as opposed to contracting for their services; and
approximately $5,600,000 due to various other items.
Excluding the Institutional Pharmacy Business, the increase in net
operating revenues for same facility operations for the year ended December 31,
1996, as compared to the same period in 1995, was due to the following:
approximately $110,500,000 due primarily to increases in room and board rates;
and approximately $5,600,000 due to one additional calendar day for the year
ended December 31, 1996, as compared to the
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same period in 1995. These increases in net operating revenues were partially
offset by approximately $28,500,000 due to a decrease in same facility
occupancy; approximately $19,700,000 due to a decrease in ancillary revenues
primarily due to bringing therapists on staff; and approximately $10,100,000 due
to various other items.
The increase in Beverly's operating and administrative costs for same
facility operations for the year ended December 31, 1996, as compared to the
same period in 1995, was due to the following: approximately $109,000,000 due to
increased wages and related expenses (excluding pharmacy) principally due to
higher wages and greater benefits required to attract and retain qualified
personnel, the hiring of therapists on staff as opposed to contracting for their
services and increased staffing levels in Beverly's nursing facilities to cover
increased patient acuity; approximately $8,300,000 due to increases in nursing
supplies and other variable costs; and approximately $19,100,000 due to various
other items. These increases in Beverly's operating and administrative costs
were partially offset by approximately $93,400,000 due to a decrease in
contracted therapy expenses as a result of hiring therapists on staff as opposed
to contracting for their services; and approximately $4,000,000 due to an
overhead and staff reduction program implemented during the fourth quarter of
1995.
Excluding the Institutional Pharmacy Business, the increase in operating
and administrative costs for same facility operations for the year ended
December 31, 1996, as compared to the same period in 1995, was due to the
following: approximately $109,000,000 due to increased wages and related
expenses; approximately $8,300,000 due to increases in nursing supplies and
other variable costs; and approximately $15,600,000 due to various other items.
These increases in operating and administrative costs were partially offset by
approximately $93,400,000 due to a decrease in contracted therapy expenses.
Beverly's interest expense increased approximately $6,900,000 as compared
to the same period in 1995 primarily due to the exchange of Preferred Stock into
5 1/2% Debentures in November 1995, the issuance and assumption of approximately
$40,000,000 of long-term obligations in conjunction with certain acquisitions
and the issuance of $25,000,000 of taxable revenue bonds during 1995, partially
offset by a reduction of approximately $52,800,000 of long-term obligations in
conjunction with the disposition of certain facilities. Although Beverly's
depreciation and amortization expense increased only $1,900,000 as compared to
the same period in 1995, it was affected by the following: approximately
$5,800,000 increase primarily due to capital additions and improvements and, to
a lesser extent, acquisitions; partially offset by a decrease of approximately
$3,900,000 related to the disposition of, or lease terminations on, certain
nursing facilities.
The Institutional Pharmacy Business had an immaterial effect on the change
in interest expense for the year ended December 31, 1996, as compared to the
same period in 1995. Excluding the Institutional Pharmacy Business, depreciation
and amortization expense decreased approximately $1,300,000 for the year ended
December 31, 1996, as compared to the same period in 1995, primarily due to the
disposition of, or lease terminations on certain nursing facilities, partially
offset by an increase due to capital additions and improvements.
1995 Compared to 1994
Beverly's net loss was $8,123,000 for the year ended December 31, 1995, as
compared to net income of $74,501,000 for the same period in 1994. Net loss for
1995 included a pre-tax charge of $100,277,000 for impaired long-lived assets
related primarily to the adoption of SFAS No. 121 (as defined below) and the
write-off of software and business development costs, as well as a charge of
$4,000,000 related to an overhead and staff reduction program implemented during
the fourth quarter of 1995. Net income for 1994 included a $2,412,000
extraordinary charge, net of income taxes, related to the write-off of
unamortized deferred financing costs related to certain refinanced debt.
Excluding the Institutional Pharmacy Business, net loss for the year ended
December 31, 1995 would have been $12,709,000 as compared to a net income of
$61,855,000 for the same period in 1994. Excluding the Institutional Pharmacy
Business, the net loss for 1995 would have included a pre-tax charge of
$90,734,000 for impaired long-lived assets related primarily to the adoption of
SFAS No. 121 and the write-off software costs, as well as the $4,000,000
overhead and staff reduction charge, as mentioned above.
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In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amounts. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount.
In the fourth quarter of 1995, Beverly recorded an impairment loss of
approximately $68,130,000 upon adoption of SFAS No. 121. Such loss primarily
related to certain nursing facilities, transitional hospitals, institutional
pharmacies and assisted living centers with current period operating losses.
Such current period operating losses, combined with a history of operating
losses and anticipated future operating losses, led management to believe that
impairment existed at such facilities. In addition, there were certain nursing
facilities for which management expected an adverse impact on future earnings
and cash flows as a result of recent changes in state Medicaid reimbursement
programs. Accordingly, management estimated the undiscounted future cash flows
to be generated by each facility. If the undiscounted future cash flow estimates
were less than the carrying value of the corresponding facility, management
estimated the fair value of such facility and wrote the carrying value down to
their estimate of fair value. Management calculated the fair value of the
impaired facilities by using the present value of estimated future cash flows,
or its best estimate of what such facility, or similar facilities in that state,
would sell for in the open market. Management believes it has the knowledge to
make such estimates of open market sales prices based on the volume of
facilities Beverly has purchased and sold in previous years.
In addition to the SFAS No. 121 charge, Beverly recorded a fourth quarter
impairment loss for other long-lived assets of approximately $32,147,000
primarily related to the write-off of software and business development costs.
During the fourth quarter of 1995, Beverly hired a new Senior Vice President of
Information Technology, who redirected Beverly's systems development
initiatives, causing a write-down, or a write-off, of certain software and
software development projects. In addition, Beverly wrote off certain business
development and other costs where Beverly believed the carrying amount was
unrecoverable.
The impairment loss recorded upon adoption of SFAS No. 121, excluding the
Institutional Pharmacy Business, would have been approximately $62,738,000 and
the impairment loss for other long-lived assets would have been approximately
$27,996,000, excluding the Institutional Pharmacy Business.
Beverly had a negative annual effective tax rate of 32% for the year ended
December 31, 1995, compared to an annual effective tax rate of 33% for the same
period in 1994. Beverly's annual effective tax rate in 1995 was different than
the federal statutory rate primarily due to the impact of nondeductible goodwill
included in the adjustments resulting from the adoption of SFAS No. 121. In
addition, Beverly's 1994 annual effective tax rate was lower than the federal
statutory rate primarily due to the utilization of certain tax credit
carryforwards, partially offset by the impact of state income taxes. At December
31, 1995, Beverly had general business tax credit carryforwards of $20,784,000
for income tax purposes which expire in years 2005 through 2009. For financial
reporting purposes, the general business tax credit carryforwards have been
utilized to offset existing net taxable temporary differences reversing during
the carryforward periods. Due to taxable losses in prior years, future taxable
income was not assumed and a valuation allowance of $198,000 for the year ended
December 31, 1994 was recognized to offset the deferred tax assets related to
those carryforwards. Beverly's valuation allowance was eliminated in 1995 due to
the utilization of general business tax credits.
Excluding the Institutional Pharmacy Business, Beverly would have had an
annual effective tax rate of 24% for the year ended December 31, 1995, as
compared to an annual effective tax rate of 30.8% for the same period in 1994.
Beverly's net operating revenues and operating and administrative costs
increased approximately $259,300,000 and $245,300,000, respectively, for the
year ended December 31, 1995, as compared to the same period in 1994. These
increases consist of the following: increases in net operating revenues and
operating and administrative costs for facilities which Beverly operated during
each of the years ended December 31, 1995 and 1994 ("same facility operations")
of approximately $157,600,000 and $148,900,000, respectively; increases in net
operating revenues and operating and administrative costs of approximately
$239,500,000 and $222,400,000, respectively, related to the expanded operations
of ATH and the acquisitions of Insta-Care Holdings, Inc. ("Insta-Care") and
Synetic, Inc. ("Synetic") in late 1994 as well as PMSI in mid-1995; and
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decreases in net operating revenues and operating and administrative costs of
approximately $137,800,000 and $126,000,000, respectively, due to the
disposition of, or lease terminations on, 29 facilities in 1995 and 77
facilities in 1994.
Excluding the Institutional Pharmacy Business, net operating revenues and
operating and administrative costs would have increased approximately
$51,900,000 and $39,900,000, respectively, for the year ended December 31, 1995,
as compared to the same period in 1994. These increases consist of the
following: increases in net operating revenues and operating and administrative
costs of $139,900,000 and $127,600,000 for same facility operations,
respectively; increases in net operating revenues and operating and
administrative costs of approximately $49,800,000 and $38,300,000, respectively,
related to the acquisition of MedView in mid-1995 and the expanded operations of
ATH; and decreases in net operating revenues and operating and administrative
costs of approximately $137,800,000 and $126,000,000, respectively, due to
certain dispositions, as noted above.
The increase in Beverly's net operating revenues for same facility
operations for the year ended December 31, 1995, as compared to the same period
in 1994, was due to the following: approximately $111,800,000 due primarily to
increases in Medicaid room and board rates, and to a lesser extent, private and
Medicare room and board rates; approximately $37,500,000 due primarily to
increases in pharmacy-related revenues; approximately $23,000,000 due to
increased ancillary revenues as a result of providing additional ancillary
services to Beverly's Medicare and private-pay patients; and approximately
$8,300,000 due to various other items. These increases in Beverly's net
operating revenues were partially offset by approximately $23,000,000 due to a
decrease in same facility occupancy to 88.5% for the year ended December 31,
1995, as compared to 89.5% for the same period in 1994.
Excluding the Institutional Pharmacy Business, the increase in net
operating revenues for same facility operations for the year ended December 31,
1995, as compared to the same period in 1994, was due to the following:
approximately $111,800,000 due primarily to increases in room and board rates;
approximately $23,000,000 due to increased ancillary revenues; and approximately
$28,100,000 due to various other items. These increases in net operating
revenues were partially offset by approximately $23,000,000 due to a decrease in
same facility occupancy.
The increase in Beverly's operating and administrative costs for same
facility operations for the year ended December 31, 1995, as compared to the
same period in 1994, was due to the following: approximately $125,700,000 due to
increased wages and related expenses (excluding pharmacy) principally due to
higher wages and greater benefits required to attract and retain qualified
personnel, the hiring of therapists on staff as opposed to contracting for their
services and increased staffing levels in Beverly's nursing facilities to cover
increased patient acuity; approximately $4,000,000 due to an overhead and staff
reduction program implemented during the fourth quarter of 1995; approximately
$38,100,000 due to increases in nursing supplies and other variable costs; and
approximately $38,800,000 due primarily to increases in pharmacy-related costs
and various other items. These increases in Beverly's operating and
administrative costs were partially offset by approximately $57,700,000 due to a
decrease in contracted therapy expenses as a result of hiring therapists on
staff as opposed to contracting for their services.
Excluding the Institutional Pharmacy Business, the increase in operating
and administrative costs for same facility operations for the year ended
December 31, 1995, as compared to the same period in 1994, was due to the
following: approximately $125,700,000 due to increased wages and related
expenses; approximately $4,000,000 due to the overhead and staff reduction
program discussed above; approximately $38,100,000 due to increases in nursing
supplies and other variable costs; and approximately $17,500,000 due to various
other items. These increases in operating and administrative costs were
partially offset by approximately $57,700,000 due to a decrease in contracted
therapy expenses.
Beverly's interest expense increased approximately $19,500,000 as compared
to the same period in 1994 primarily due to additional interest related to the
issuance of approximately $308,000,000 of long-term obligations during late 1994
and in 1995 primarily in conjunction with certain acquisitions. Beverly's
depreciation and amortization expense increased approximately $14,800,000 as
compared to the same period in 1994 primarily due to acquisitions, capital
additions and improvements and the opening of newly
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constructed facilities, partially offset by a decrease due to the dispositions
of, or lease terminations on, certain facilities.
The Institutional Pharmacy Business had no effect on the increase in
interest expense for the year ended December 31, 1995, as compared to the same
period in 1994. Excluding the Institutional Pharmacy Business, depreciation and
amortization expense increased approximately $7,400,000 for the year ended
December 31,1995, as compared to the same period in 1994 primarily due to
capital additions and improvements and the opening of newly constructed
facilities, partially offset by a decrease due to the dispositions of, or lease
terminations on, certain facilities.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Beverly had approximately $64,100,000 in cash and cash
equivalents and net working capital of approximately $327,300,000. Beverly
anticipates that approximately $19,600,000 of its existing cash at March 31,
1997, while not legally restricted, will be utilized to fund certain workers'
compensation and general liability claims, and Beverly does not expect to use
such cash for other purposes. Beverly had approximately $162,800,000 of unused
commitments under its Existing Credit Facility as of March 31, 1997.
Excluding the Institutional Pharmacy Business, cash and cash equivalents
were approximately $58,500,000 and net working capital was approximately
$230,000,000 as of March 31, 1997.
Net cash provided by operating activities for the first quarter of 1997 was
approximately $42,100,000, an increase of approximately $11,400,000 from the
prior year. Net cash used for investing activities and net cash provided by
financing activities were approximately $58,500,000 and $10,800,000,
respectively, for the first quarter of 1997. Beverly primarily used cash
generated from operations, borrowings under its Existing Credit Facility,
collections on notes receivable and cash on hand to fund capital expenditures
totaling approximately $37,600,000; to fund acquisitions of approximately
$30,800,000; and to repay approximately $16,400,000 of long-term obligations.
Excluding the Institutional Pharmacy Business, net cash provided by
operating activities for the first quarter of 1997 was approximately
$31,700,000, an increase of approximately $5,300,000 from the prior year. Net
cash used for investing activities and net cash provided by financing
activities, excluding the Institutional Pharmacy Business, were approximately
$32,600,000 and $11,100,000, respectively, for the first quarter of 1997.
Excluding the Institutional Pharmacy Business, cash from operations, borrowings
under the Existing Credit Facility, collections on notes receivable and cash on
hand were used to fund capital expenditures totalling approximately $34,400,000;
to fund acquisitions of approximately $8,700,000; and to repay approximately
$16,000,000 of long-term obligations.
In June 1997, Beverly sold 49 of its skilled nursing facilities in the
state of Texas to Complete Care Services, L.P. Beverly anticipates using the net
cash proceeds generated from the sale to repay indebtedness. The operations of
these facilities are immaterial to Beverly's consolidated financial position and
results of operations.
In April 1997, Beverly entered into a definitive agreement with Capstone to
combine PCA with Capstone to create the nation's largest independent
institutional pharmacy company. Beverly will receive approximately $275,000,000
of cash as partial repayment for PCA's intercompany debt, with any remaining
intercompany balance contributed to PCA's capital. Beverly intends to use the
$275,000,000 to repay Revolver borrowings, to pay off the 7 5/8% Debentures, to
pay off the 8.75% Senior Notes and to repay certain other notes and mortgages.
Pursuant to the Merger Agreement, at the Effective Time each share of Beverly
Common Stock issued and outstanding immediately prior to the Effective Time
(other than fractional shares) will be converted into the right to receive that
number of newly issued shares of Capstone Common Stock equal to the quotient,
expressed to four decimal places, of (a) 50,000,000 divided by (b) the number of
shares of Beverly Common Stock outstanding immediately prior to the Effective
Time. The Merger, which is subject to approvals by the stockholders of both
Beverly and Capstone, completion of the Distribution (as discussed below), and
approvals by various government agencies, is expected to close by year-end.
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In connection with the restructuring, Beverly will transfer all of its
non-PCA assets and liabilities to New Beverly, in exchange for the issuance of
New Beverly Common Stock. Beverly will then distribute such New Beverly Common
Stock to the holders of Beverly's Common Stock on a one-for-one basis. In
connection with the Distribution, Beverly will be required to restructure, repay
or otherwise renegotiate substantially all of its outstanding debt instruments
and renegotiate or make certain payments under various employment agreements
with officers of Beverly. Beverly has not yet determined the impact this will
have on its consolidated financial position, results of operations or cash
flows. For additional information with respect to material debt instruments of
Beverly which affect the liquidity and capital resources of both Beverly and New
Beverly, and Beverly's current intentions with respect thereto in order to
satisfy its covenants under the Merger Agreement, see "Treatment of Beverly
Indebtedness."
Beverly believes that its existing cash and cash equivalents, working
capital from operations, borrowings under its banking arrangements, issuance of
certain debt securities and refinancings of certain existing indebtedness will
be adequate to repay its debts due within one year, to make normal recurring
capital additions and improvements for the twelve months ending March 31, 1998,
to make selective acquisitions, including the purchase of previously leased
facilities, to construct new facilities, and to meet working capital
requirements.
As of March 31, 1997, Beverly had total indebtedness of approximately
$1,156,200,000 and total stockholders' equity of approximately $881,300,000. On
a pro forma basis, as of March 31, 1997, after giving effect to the Texas
disposition as well as the Merger, the Distribution and all transactions
contemplated thereby, New Beverly would have total indebtedness of approximately
$632,500,000 and stockholders' equity of approximately $855,900,000. The ability
of Beverly, or New Beverly, to satisfy its long-term obligations will be
dependent upon its future performance, which will be subject to prevailing
economic conditions and to financial, business and other factors beyond
Beverly's, or New Beverly's, control, such as federal and state healthcare
reform. In addition, healthcare service providers operate in an industry that is
currently subject to significant changes from business combinations, new
strategic alliances, legislative reform, increased regulatory oversight,
aggressive marketing practices by competitors and market pressures. In this
environment, Beverly is, and it is expected that New Beverly will be, frequently
contacted by, and otherwise engage in discussions with, other healthcare
companies and financial advisors regarding possible strategic alliances, joint
ventures, business combinations and other financial alternatives. The terms of
substantially all of New Beverly's debt instruments will require New Beverly to
repay or refinance indebtedness under such debt instruments in the event of a
change of control. There can be no assurance that New Beverly will have the
financial resources to repay such indebtedness upon a change of control. See
" -- General."
Following the Distribution and Merger, New Beverly believes that its cash
and cash equivalents, working capital from operations, borrowings under its
banking arrangements, issuance of certain debt securities and refinancings of
certain existing indebtedness will be adequate to repay its debts due within one
year, to make normal recurring capital additions and improvements, to make
selective acquisitions, including the purchase of previously leased facilities,
to construct new facilities and to meet working capital requirements. On a pro
forma basis, as of March 31, 1997, New Beverly would have debts due within one
year of approximately $26,500,000 and normal recurring capital additions and
improvements for the twelve months ending March 31, 1998 of approximately
$118,000,000.
BUSINESS
GENERAL
References herein to Beverly include Beverly Enterprises, Inc. and its
wholly-owned subsidiaries. References herein to New Beverly are to the Remaining
Healthcare Business after the consummation of the Transactions. Immediately
following the completion of the Transactions, New Beverly will change its name
to Beverly Enterprises, Inc.
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The business of Beverly consists principally of providing long-term
healthcare, including the operation of nursing facilities, acute long-term
transitional hospitals, institutional and mail service pharmacies,
rehabilitation therapy services, outpatient therapy clinics, assisted living
centers, hospices and home healthcare centers. The business of New Beverly will
consist of all of the operations of Beverly except the institutional and mail
service pharmacies.
Beverly is, and New Beverly is expected to be, the largest operator of
nursing facilities in the United States. At March 31, 1997, Beverly operated 627
nursing facilities with 70,623 licensed beds. The facilities are located in 32
states and the District of Columbia, and range in capacity from 20 to 355 beds.
At March 31, 1997, Beverly also operated 73 pharmacies, 33 assisted living
centers containing 869 units, 11 transitional hospitals containing 578 beds, 34
outpatient therapy clinics, 19 hospices and six home healthcare centers. It is
expected that New Beverly will operate all of such businesses after the
Transactions, except for the 73 pharmacies. Beverly's facilities had average
occupancy of 86.6% for the three months ended March 31, 1997 and 87.4%, 88.1%
and 88.5% during the years ended December 31, 1996, 1995 and 1994, respectively.
See "Properties" below.
Healthcare service providers, such as Beverly, and after the Transactions
New Beverly, operate in an industry that is subject to significant changes from
business combinations, new strategic alliances, legislative reform, aggressive
marketing practices by competitors and market pressures. In this environment,
Beverly is, and it is expected that New Beverly will be frequently contacted by,
and otherwise engage in discussions with, other healthcare companies and
financial advisors regarding possible strategic alliances, joint ventures,
business combinations and other financial alternatives.
OPERATIONS
New Beverly will be organized into three operating units, which will
support New Beverly's delivery of vertically integrated services to the
long-term healthcare market. These operating units include: (i) Beverly Health
and Rehabilitation Services, Inc. ("BHRS") and its subsidiaries provide
long-term and subacute care through the operation of nursing facilities and
assisted living centers; (ii) Spectra Rehab Alliance, Inc. ("Spectra") and its
subsidiaries operate outpatient therapy clinics, and hospices and manage
Beverly's rehabilitation services business; and (iii) ATH and its subsidiaries
operate Beverly's transitional hospitals. Each operating unit will be headed by
a President who will be a senior officer of New Beverly and will report directly
to the President of New Beverly. Each of the three operating units will also
have a separate Board of Directors consisting of four senior executives of New
Beverly and the President of the unit.
Long-Term Care. BHRS's nursing facilities provide, and BHRS will continue
to provide residents with routine long-term care services, including daily
dietary, social and recreational services and a full range of pharmacy services
and medical supplies. BHRS's highly skilled staff also offers complex and
intensive medical services to patients with higher acuity disorders outside the
traditional acute care hospital setting.
Rehabilitation Therapies. Spectra has developed, and will continue to
develop and expand New Beverly's healthcare expertise in rehabilitation and
provide skilled rehabilitation (occupational, physical, speech and respiratory)
therapies in substantially all of BHRS's nursing facilities. Through Spectra,
Beverly offers, and New Beverly will offer, industrial rehabilitation,
outpatient therapy clinics, acute hospital therapy contracts,
management/consulting rehabilitation programs and hospice programs within
Beverly's, and after the Transactions New Beverly's, network of facilities, and
to other healthcare providers.
Transitional Care. ATH operates, and will continue to operate, transitional
hospitals which address the needs of patients requiring intense therapy
regimens, but not necessarily the breadth of services provided within
traditional acute care hospitals. The typical ATH patient requires an average of
six hours of nursing care per day for 30 to 45 days.
Other Services. Beverly offers, and New Beverly will offer, other
healthcare related services to payors and patients, including assisted living
and home healthcare services, and information and referral systems that link
payors and employees to long-term care providers.
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<PAGE> 294
Pharmacy Services. PCA is one of the nation's largest institutional
pharmacies delivering drugs and related products and services, infusion therapy
and other healthcare products (enteral and urological) to nursing facilities,
acute care and transitional care hospitals, home care providers, psychiatric
facilities, correctional facilities, assisted living centers, retirement homes
and their patients. PCA also provides consultant pharmacist services, which
include evaluations of patient drug therapy, and drug handling, distribution and
administration within a nursing facility as well as assistance with state and
federal regulatory compliance. PCA's mail service pharmacy delivers drugs and
medical equipment to workers' compensation payors, claimants and employers.
Pursuant to the Merger Agreement and the Distribution Agreement, the Remaining
Healthcare Business of Beverly will be transferred to New Beverly and the
Institutional Pharmacy Business, operated by PCA, which will be the sole
remaining business of Beverly, will be merged with and into Capstone. See "The
Distribution" herein and "The Merger Agreement" in the Joint Proxy
Statement/Prospectus.
Beverly has, and New Beverly will have, a Quality Management ("QM") program
to help ensure that high quality care is provided in each of its nursing,
transitional and outpatient facilities. Beverly's QM program has been a key
factor in helping Beverly to exceed the industry's nationwide average compliance
statistics, as determined by the Health Care Financing Administration of the
Department of Health and Human Services ("HCFA"). Beverly's nationwide QM
network of healthcare professionals includes physician Medical Directors,
registered nurses, dieticians, social workers and other specialists who work in
conjunction with regional and facility based QM professionals. Facility based QM
is structured through Beverly's Quality Assessment and Assurance committee. With
a philosophy of quality improvement, Beverly-wide clinical indicators are
utilized as a database to set goals and monitor thresholds in critical areas
directly related to the delivery of healthcare related services. These internal
evaluations are used by local quality improvement teams, which include QM
advisors, to identify and correct possible problems. The Senior Vice President
of QM reports directly to the President of Beverly and the QM Committee of
Beverly's Board of Directors, and will report directly to the President of New
Beverly and the QM Committee of New Beverly's Board of Directors.
GOVERNMENTAL REGULATION AND REIMBURSEMENT
Beverly's nursing facilities are, and New Beverly's nursing facilities will
be, subject to compliance with various federal, state and local healthcare
statutes and regulations. Compliance with state licensing requirements imposed
upon all healthcare facilities is a prerequisite for the operation of the
facilities and for participation in government-sponsored healthcare funding
programs, such as Medicaid and Medicare. Medicaid is a medical assistance
program for the indigent, operated by individual states with the financial
participation of the federal government. Medicare is a health insurance program
for the aged and certain other chronically disabled individuals, operated by the
federal government. Changes in the reimbursement policies of such funding
programs as a result of budget cuts by federal and state governments or other
legislative and regulatory actions could have a material adverse effect on
Beverly's and New Beverly's financial position, results of operations and cash
flows.
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Beverly receives, and New Beverly will receive, payments for services
rendered to patients from (a) each of the states in which its nursing facilities
are located under the Medicaid program; (b) the federal government under the
Medicare program; and (c)private payors, including commercial insurers and
managed care payors, and Veterans Administration ("VA"). The following table
sets forth: (i) patient days derived from the indicated sources of payment as a
percentage of total patient days, (ii) room and board revenues derived from the
indicated sources of payment as a percentage of net operating revenues, and
(iii) ancillary and other revenues derived from all sources of payment as a
percentage of net operating revenues, for the periods indicated:
<TABLE>
<CAPTION>
MEDICAID MEDICARE PRIVATE AND VA
------------------ ------------------ ------------------ ANCILLARY
ROOM AND ROOM AND ROOM AND AND
PATIENT BOARD PATIENT BOARD PATIENT BOARD OTHER
DAYS REVENUES DAYS REVENUES DAYS REVENUES REVENUES
------- -------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Three months ended:
March 31, 1997............... 68% 40% 13% 13% 19% 15% 32%
Year ended:
December 31, 1996............ 69% 42% 12% 12% 19% 14% 32%
December 31, 1995............ 68% 43% 12% 11% 20% 15% 31%
December 31, 1994............ 68% 47% 12% 11% 20% 16% 26%
</TABLE>
Excluding revenues from the Institutional Pharmacy Business, Medicaid,
Medicare, Private and VA, and Ancillary and Other Revenues would have been 47%,
15%, 18% and 20%, respectively, as a percentage of net operating revenues for
the three months ended March 31, 1997.
Consistent with the long-term care industry in general, changes in the mix
of Beverly's, or New Beverly's, patient population among the Medicaid, Medicare
and private categories can significantly affect revenues and profitability.
Although the level of cost reimbursement for Medicare patients typically
generates the highest revenue per patient day, profitability is not
proportionally increased due to the additional costs associated with the
required higher level of nursing care and other services for such patients. In
most states, private patients are the most profitable, and Medicaid patients are
the least profitable.
Beverly has experienced significant growth in ancillary revenues over the
past several years. Ancillary revenues are derived from providing services to
residents beyond room, board and custodial care and include occupational,
physical, speech, respiratory and intravenous ("IV") therapy, as well as sales
of pharmaceuticals and other services. Such services are currently provided
primarily to Medicare and private pay patients, consistent with the trend in
healthcare of providing a broader range of services in a lower cost setting,
such as Beverly's nursing facilities. Beverly is pursuing, and New Beverly will
continue to pursue, further growth of ancillary revenues, through acquisitions
as well as internal expansion of specialty services such as rehabilitation and
sales of pharmaceuticals. Due to Beverly's continuing efforts to bring
therapists on staff as opposed to contracting for their services, and the
corresponding reduction in costs, the overall rate of growth in ancillary
revenues has been adversely impacted.
Medicaid programs are currently in existence in all of the states in which
Beverly currently, and New Beverly will, operate nursing facilities. While these
programs differ in certain respects from state to state, they are all subject to
federally-imposed requirements, and at least 50% of the funds available under
these programs are provided by the federal government under a matching program.
Medicare and most state Medicaid programs utilize a cost-based
reimbursement system for nursing facilities which reimburses facilities for the
reasonable direct and indirect allowable costs incurred in providing routine
patient care services (as defined by the programs) plus, in certain states,
efficiency incentives or a return on equity, subject to certain cost ceilings.
These costs normally include allowances for administrative and general costs as
well as the costs of property and equipment (e.g. depreciation and interest,
fair rental allowance or rental expense). In some states, cost-based
reimbursement is subject to retrospective adjustment through cost report
settlement. In other states, payments made to a facility on an interim basis
that are subsequently determined to be less than or in excess of allowable costs
may be adjusted through future payments to the affected facility and to other
facilities owned by the same owner. State Medicaid
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<PAGE> 296
reimbursement programs vary as to methodology used to determine the level of
allowable costs which are reimbursed to operators.
Arkansas, California, Louisiana and Texas provide for reimbursement at a
flat daily rate, as determined by the responsible state agency. In all other
states with a Medicaid program in which Beverly currently operates, and in which
New Beverly will operate, payments are based upon facility-specific cost
reimbursement formulas established by the applicable state. The Medicaid and
Medicare programs each contain specific requirements which must be adhered to by
healthcare facilities in order to qualify under the programs.
Governmental funding for healthcare programs is subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of which
may materially increase or decrease program reimbursement to healthcare
facilities. Healthcare system reform and concerns over rising Medicare and
Medicaid costs continue to be high priorities for both federal and state
governments. Although no comprehensive healthcare, Medicare or Medicaid reform
legislation has yet been implemented, pressures to contain costs and the active
discussions between the Clinton Administration, Congress and various other
groups have impacted the healthcare delivery system. Many states are
experimenting with alternatives to traditional Medicaid delivery systems through
federal waiver programs, and efforts to provide these services more efficiently
will continue to be a priority. In August 1996, Congress passed the Health
Insurance Portability and Accountability Act of 1996 which, among other things,
provides favorable changes in the tax treatment of long-term care insurance and
allows inclusion of long-term care insurance in medical savings accounts.
Although Beverly believes this legislation will have a favorable impact on the
long-term care industry, the full effect is not readily determinable. There can
be no assurances made as to the ultimate impact of this, or future healthcare
reform legislation, on Beverly's and New Beverly's financial position, results
of operations or cash flows. However, future federal budget legislation and
regulatory changes may negatively impact New Beverly.
In addition to the requirements to be met by nursing facilities for annual
licensure renewal, healthcare facilities are subject to annual surveys and
inspections in order to be certified for participation in the Medicare and
Medicaid programs. In order to maintain their operator's licenses and their
certification for participation in Medicare and Medicaid programs, the nursing
facilities must meet certain statutory and administrative requirements. These
requirements relate to the condition of the facilities and the adequacy and
condition of the equipment used therein, the quality and adequacy of personnel,
and the quality of medical care. Such requirements are subject to change. There
can be no assurance that, in the future, New Beverly will be able to maintain
such licenses for its facilities or that New Beverly will not be required to
expend significant sums in order to do so.
HCFA adopted survey, certification and enforcement procedures by
regulations effective July 1, 1995 to implement the Medicare and Medicaid
provisions of the Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987")
governing survey, certification and enforcement of the requirements for contract
participation by skilled nursing facilities under Medicare and nursing
facilities under Medicaid. Among the provisions that HCFA has adopted are
requirements that (i) surveys focus on residents' outcomes; (ii) all deviations
from the participation requirements will be considered deficiencies, but that
all deficiencies will not constitute noncompliance; and (iii) certain types of
deficiencies must result in the imposition of a sanction. The regulations also
identify alternative remedies and specify the categories of deficiencies for
which they will be applied. These remedies include: temporary management; denial
of payment for new admissions; denial of payment for all residents; civil money
penalties of $50 to $10,000 per day of violation; closure of facility and/or
transfer of residents in emergencies; directed plans of correction; and directed
in service training. The regulations also specify under what circumstances
alternative enforcement remedies or termination, or both, will be imposed on
facilities which are not in compliance with the participation requirements.
Beverly has undertaken an analysis of the procedures in respect of its programs
and facilities covered by the final HCFA regulations. While Beverly is unable to
predict with total accuracy the degree to which its programs and facilities will
be determined to be in compliance with regulations, compliance data for the past
year is available. Results of HCFA surveys for the past year determined that
approximately 96% of Beverly's facilities were in compliance with the HCFA
criteria. HCFA reports have determined that of the non-Beverly facilities
surveyed nationally, approximately 95% of such facilities were determined to be
in compliance with such
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<PAGE> 297
HCFA criteria. Although New Beverly could be adversely affected if a substantial
portion of its programs or facilities were eventually determined not to be in
compliance with the HCFA regulations, New Beverly believes its programs and
facilities generally exceed industry standards.
Beverly believes that its facilities are in substantial compliance with the
various Medicaid and Medicare regulatory requirements currently applicable to
them. In the ordinary course of its business, however, Beverly receives notices
of deficiencies for failure to comply with various regulatory requirements.
Beverly reviews such notices and takes appropriate corrective action. In most
cases, Beverly and the reviewing agency will agree upon the steps to be taken to
bring the facility into compliance with regulatory requirements. In some cases
or upon repeat violations, the reviewing agency may take a number of adverse
actions against a facility. These adverse actions can include the imposition of
fines, temporary suspension of admission of new patients to the facility,
decertification from participation in the Medicaid or Medicare programs and, in
extreme circumstances, revocation of a facility's license.
The Medicaid and Medicare programs provide criminal penalties for entities
that knowingly and willfully offer, pay, solicit or receive remuneration in
order to induce business that is reimbursed under these programs. The illegal
remuneration provisions of the Social Security Act, also known as the
"anti-kickback" statute, prohibit the payment or receipt of remuneration
intended to induce the purchasing, leasing, ordering or arranging for any good,
facility, service or item paid by Medicaid or Medicare programs. The violation
of the illegal remuneration provisions is a felony and can result in the
imposition of fines of up to $25,000 per occurrence. In addition, certain states
in which Beverly's facilities are located, and in which New Beverly facilities
will be located, have enacted statutes which prohibit the payment of kickbacks,
bribes and rebates for the referral of patients. The Medicare program has
published certain "Safe Harbor" regulations which describe various criteria and
guidelines for transactions which are deemed to be in compliance with the anti-
remuneration provisions. Although Beverly has, and New Beverly will have,
contractual arrangements with some healthcare providers, management believes it
is in compliance with the anti-kickback statute and other provisions of the
Social Security Act and with the applicable state statutes. However, there can
be no assurance that government officials responsible for enforcing these
statutes will not assert that New Beverly or certain transactions in which it is
involved are in violation of these statutes. The Social Security Act also
imposes criminal and civil penalties for making false claims to the Medicaid and
Medicare programs for services not rendered or for misrepresenting actual
services rendered in order to obtain higher reimbursement.
The Medicare and Medicaid programs also provide for the mandatory and/or
permissive exclusion of providers of services who are convicted of certain
offenses or who have been found to have violated certain laws or regulations. In
certain circumstances, conviction of abusive or fraudulent behavior with respect
to one facility may subject other facilities under common control or ownership
to disqualification from participation in Medicaid and Medicare programs. In
addition, some federal and state regulations provide that all facilities under
common control or ownership licensed to do business within a state are subject
to delicensure if any one or more of such facilities is delicensed.
While federal regulations do not provide states with grounds to curtail
funding of their Medicaid cost reimbursement programs due to state budget
deficiencies, states have nevertheless curtailed funding in such circumstances
in the past. No assurance can be given that states will not do so in the future
or that the future funding of Medicaid programs will remain at levels comparable
to the present levels. The United States Supreme Court ruled in 1990 that
healthcare providers may bring suit in federal court to enforce the Medicaid Act
requirement that the states reimburse nursing facilities at rates which are
reasonable and adequate. Nursing facility operators, such as Beverly, and New
Beverly after the Transactions, have utilized and should continue to be able to
utilize the federal courts to require states to comply with their legal
obligation to adequately fund Medicaid programs. However, certain of the
legislative proposals discussed above contain provisions which would repeal the
provisions of the Medicaid Acts which require states to pay reasonable and
adequate rates and which would also eliminate the right to judicial review of
certain aspects of the reimbursement systems of state Medicaid programs;
therefore, there can be no assurance that nursing facility operators will be
able to utilize federal courts for such purposes in the future.
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<PAGE> 298
COMPETITION
The long-term care industry is highly competitive. Beverly's competitive
position has varied, and New Beverly's competitive position will vary, from
facility to facility, from community to community and from state to state. Some
of the significant competitive factors for the placing of patients in a nursing
facility include quality of care, reputation, physical appearance of facilities,
services offered, family preferences, location, physician services and price.
New Beverly's operations will compete with services provided by nursing
facilities, acute care hospitals, subacute facilities, transitional hospitals,
rehabilitation facilities, therapy clinics, hospices and home healthcare
centers. Beverly does, and New Beverly will, compete with a number of tax-exempt
nonprofit organizations which can finance acquisitions and capital expenditures
on a tax-exempt basis or receive charitable contributions unavailable to
Beverly, and New Beverly. There can be no assurance that New Beverly will not
encounter increased competition which could adversely affect its business,
results of operations or financial condition.
EMPLOYEES
At March 31, 1997, Beverly had approximately 80,000 employees
(approximately 76,000 employees excluding those of the Institutional Pharmacy
Business). Beverly is, and New Beverly will be, subject to both federal minimum
wage and applicable federal and state wage and hour laws and maintains various
employee benefit plans.
The federal government recently increased the minimum wage. This new
legislation is being rolled out in two phases. The initial increase took effect
October 1, 1996, and the final increase is scheduled to take effect September 1,
1997. This new legislation did not result in a material increase in Beverly's
wage rates in 1996, and Beverly does not anticipate a material impact on its
wage rates in 1997, since a substantial portion of Beverly's associates earn in
excess of the new minimum wage levels; however, Beverly believes there may
continue to be competitive pressures to increase the wage levels of associates
earning above the new minimum wage. The effect of the new minimum wage on New
Beverly's future operations is not expected to be material as New Beverly
believes that a significant portion of such increase will be reimbursed through
Medicare and Medicaid rate increases.
In recent years, Beverly has experienced increases in its labor costs
primarily due to higher wages and greater benefits required to attract and
retain qualified personnel, increased staffing levels in its nursing facilities
due to greater patient acuity and the hiring of therapists on staff. Although
New Beverly expects labor costs to increase in the future, it is anticipated
that any increase in costs will generally result in higher patient rates in
subsequent periods, subject to the time lag in most states, of up to 18 months,
between increases in reimbursable costs and the receipt of related reimbursement
rate increases. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Operating Results."
In the past, the healthcare industry, including Beverly's long-term care
facilities, has experienced a shortage of nurses to staff healthcare operations,
and, more recently, the healthcare industry has experienced a shortage of
therapists. Beverly is not currently experiencing a nursing or therapist
shortage, but it competes with other healthcare providers for nursing and
therapist personnel and may compete with other service industries for persons
serving Beverly in other capacities, such as nurses' aides. A nursing, therapist
or nurse's aide shortage could force New Beverly to pay even higher salaries and
make greater use of higher cost temporary personnel. A lack of qualified
personnel might also require New Beverly to reduce its census or admit patients
requiring a lower level of care, both of which could adversely affect operating
results.
Approximately 100 of Beverly's facilities, and after the Transactions New
Beverly's facilities, are represented by various labor unions. Certain labor
unions have publicly stated that they are concentrating their organizing efforts
within the long-term healthcare industry. Beverly, being one of the largest
employers within the long-term healthcare industry, has been the target of a
"corporate campaign" by two AFL-CIO affiliated unions attempting to organize
certain of Beverly's facilities. Although Beverly has never experienced any
material work stoppages and believes that its relations with its employees (and
the existing unions that represent certain of them) are generally good, Beverly
cannot predict the effect continued union representation or organizational
activities will have on its, or New Beverly's, future activities. There can be
no assurance
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that continued union representation and organizational activities will not
result in material work stoppages, which could have a material adverse effect on
New Beverly's operations.
Excessive litigation is a tactic common to "corporate campaigns" and one
that is being employed against Beverly and is expected to continue against New
Beverly. There have been several proceedings against facilities to be operated
by New Beverly before the National Labor Relations Board ("NLRB"). These
proceedings consolidate individual cases from separate facilities, and certain
of these proceedings are currently pending before the NLRB. Beverly has, and New
Beverly will continue to, vigorously defend these proceedings and believes that
many of the cases are without merit.
PROPERTIES
At March 31, 1997, Beverly operated 627 nursing facilities, 33 assisted
living centers, 11 transitional hospitals, 73 pharmacies, 34 outpatient therapy
clinics, 19 hospices and six home healthcare centers in 36 states and the
District of Columbia. It is expected that New Beverly will operate all of such
businesses after the Transactions, except for the 73 pharmacies. Most of the 211
leased nursing facilities are subject to "net" leases which require the payment
of all taxes, insurance and maintenance costs. Most of these leases have
original terms from ten to fifteen years and contain at least one renewal
option, which could extend the original term of the leases by five to fifteen
years. Many of these leases also contain purchase options. New Beverly believes
that all of its physical properties are in good operating condition and suitable
for the purposes for which they are being used. Certain of the nursing
facilities and assisted living centers to be owned by New Beverly will be
included in the collateral securing the obligations under various debt
agreements to be assumed by New Beverly.
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<PAGE> 300
The following is a summary of Beverly's and, after the Transactions,
subject to adjustments for acquisitions, dispositions and construction after
March 31, 1997, New Beverly's nationwide network of nursing facilities, assisted
living centers, transitional hospitals, outpatient therapy clinics and hospices
at March 31, 1997:
<TABLE>
<CAPTION>
OUTPATIENT
ASSISTED LIVING TRANSITIONAL THERAPY
NURSING FACILITIES CENTERS HOSPITALS CLINICS HOSPICES
------------------- ---------------- ----------------- ---------- --------
TOTAL TOTAL
LICENSED TOTAL LICENSED
NUMBER BEDS NUMBER UNITS NUMBER BEDS NUMBER NUMBER
------- --------- ------- ------ ------ -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOCATION:
Alabama.................... 21 2,680 1 24 -- -- -- --
Arizona.................... 3 480 -- -- 2 78 -- --
Arkansas................... 33 4,083 3 48 -- -- -- 1
California................. 71 7,406 2 113 -- -- -- 5
Colorado................... -- -- -- -- -- -- -- --
Connecticut................ 3 435 -- -- -- -- -- --
District of Columbia....... 1 355 -- -- -- -- -- --
Florida.................... 62 7,782 5 267 -- -- -- --
Georgia.................... 17 2,100 3 48 -- -- 16 1
Hawaii..................... 2 396 -- -- -- -- -- --
Illinois................... 3 275 -- -- -- -- -- --
Indiana.................... 26 3,817 1 16 1 40 -- 1
Kansas..................... 33 2,146 3 39 -- -- -- --
Kentucky................... 8 1,047 -- -- -- -- -- --
Louisiana.................. 1 200 -- -- -- -- -- --
Maryland................... 4 585 1 16 -- -- -- --
Massachusetts.............. 24 2,402 -- -- -- -- -- --
Michigan................... 2 206 -- -- -- -- -- --
Minnesota.................. 36 3,230 2 28 -- -- -- 1
Mississippi................ 21 2,456 -- -- -- -- -- --
Missouri................... 28 2,918 3 101 -- -- -- 1
Nebraska................... 24 2,205 1 16 -- -- -- 2
New Jersey................. 1 120 -- -- -- -- -- --
North Carolina............. 11 1,398 1 16 -- -- -- --
Ohio....................... 12 1,435 -- -- 1 44 3 --
Oklahoma................... -- -- -- -- 2 64 -- --
Pennsylvania............... 42 4,901 3 48 -- -- -- 3
Rhode Island............... -- -- -- -- -- -- -- --
South Carolina............. 3 302 -- -- -- -- -- --
South Dakota............... 17 1,232 -- -- -- -- -- --
Tennessee.................. 7 948 2 57 1 35 -- --
Texas (A).................. 49 6,061 -- -- 4 317 15 3
Virginia................... 16 2,113 2 32 -- -- -- --
Washington................. 11 1,080 -- -- -- -- -- --
West Virginia.............. 3 310 -- -- -- -- -- --
Wisconsin.................. 32 3,519 -- -- -- -- -- 1
--- ------ -- --- -- --- -- --
627 70,623 33 869 11 578 34 19
=== ====== == === == === == ==
CLASSIFICATION
Owned...................... 415 46,224 29 677 1 198 -- --
Leased..................... 211 24,324 4 192 10 380 34 19
Managed.................... 1 75 -- -- -- -- -- --
--- ------ -- --- -- --- -- --
627 70,623 33 869 11 578 34 19
=== ====== == === == === == ==
</TABLE>
- ---------------
(A) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" for a discussion regarding
the disposition of such nursing facilities.
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<PAGE> 301
LEGAL PROCEEDINGS
There are various lawsuits and regulatory actions pending against Beverly
arising in the normal course of business, some of which seek punitive damages.
To the extent those actions relate to the Remaining Healthcare Business, they
will be assumed by New Beverly after the Disposition and the Merger. Management
does not believe that the ultimate resolution of these matters will have a
material adverse effect on Beverly's or New Beverly's financial position or
results of operations.
MANAGEMENT
The table below sets forth, as to each executive officer and director of
Beverly, such person's name, positions with Beverly and age. Each executive
officer and director of Beverly holds office until a successor is elected, or
until the earliest of death, resignation or removal. Each executive officer is
elected or appointed by the Beverly Board of Directors. It is expected that
most, if not all, of the executive officers listed below (other than Dr.
Renschler who will become the Chief Executive Officer and a director of Capstone
following the Distribution and Merger) will be asked to continue their
employment with New Beverly in substantially the same capacity as such
individuals have served Beverly. It is also expected that the directors of
Beverly, listed below, will continue as directors of New Beverly.
The executive officers listed below have employment or severance agreements
that provide for certain payments in the event of a "change of control" (as
defined in the relevant employment or severance agreements). Executive officers
entitled to payments in the event of a change of control under current
employment agreements with Beverly will be asked to waive their right to such
payments as a condition to entering into a new employment or severance agreement
with New Beverly. It is anticipated that the employment or severance agreements
to be entered into between such executive officers and New Beverly will provide
certain payments in the event of a "change of control" (as such term will be
defined in such employment agreements) of New Beverly. The current directors of
New Beverly are Messrs. Banks, Hendrickson, Pommerville, Stephens and Tabakin.
Immediately following the Distribution, Messrs. Pommerville, Stephens and
Tabakin will resign from the Board of Directors of New Beverly and will be
replaced by the then current non-employee directors of Beverly. No assurance can
be given that any of the executive officers or directors listed below will
accept any offered positions with New Beverly or that the management team of New
Beverly will remain substantially the same as Beverly's management team. The
information below is given as of May 29, 1997.
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
David R. Banks(1)......................... Chairman of the Board, Chief Executive 60
Officer and Director
Boyd W. Hendrickson(1).................... President, Chief Operating Officer and 52
Director
William A. Mathies........................ Executive Vice President and President of 37
BHRS
T. Jerald Moore........................... Executive Vice President and President of 56
ATH
Robert W. Pommerville..................... Executive Vice President, General Counsel 56
and Secretary
C. Arnold Renschler, M.D. ................ Executive Vice President and President of 55
PCA
Bobby W. Stephens......................... Executive Vice President -- Asset Management 52
Scott M. Tabakin.......................... Executive Vice President and Chief Financial 38
Officer
Mark D. Wortley........................... Executive Vice President and President of 41
Spectra
Pamela H. Daniels......................... Vice President, Controller and Chief 33
Accounting Officer
Beryl F. Anthony, Jr.(1)(2)(3)(5)......... Director 59
James R. Greene(2)(3)(4).................. Director 75
Edith E. Holiday(2)(3)(4)(5).............. Director 45
Jon E. M. Jacoby(1)(2).................... Director 59
Risa J. Lavizzo-Mourey, M.D.(2)(3)(4)..... Director 42
Marilyn R. Seymann(2)(4)(5)............... Director 54
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Member of Quality Management Committee.
(5) Member of Nominating Committee.
57
<PAGE> 302
Mr. Banks has been a director of Beverly since 1979 and has served as Chief
Executive Officer since May 1989 and Chairman of the Board since March 1990. Mr.
Banks was President of Beverly from 1979 to September 1995. Mr. Banks is a
director of Nationwide Health Properties, Inc., Ralston Purina Company,
Wellpoint Health Networks, Inc., and trustee for the University of the Ozarks
and Occidental College.
Mr. Hendrickson joined Beverly in 1988 as a Division President. He was
elected Vice President of Marketing in May 1989, Executive Vice President of
Operations and Marketing in February 1990, President of BHRS in January 1995 and
President, Chief Operating Officer and a director of Beverly in September 1995.
Mr. Mathies joined Beverly in 1981 as an Administrator in training. He was
an Administrator until 1986 at which time he became a Regional Manager. In 1988,
Mr. Mathies was elected Vice President of Operations for the California region
and was elected Executive Vice President of Beverly and President of BHRS in
September 1995.
Mr. Moore joined Beverly as Executive Vice President in December 1992 and
was elected President of ATH in June 1996. Mr. Moore was employed at Aetna Life
and Casualty from 1963 to 1992 and was elected Senior Vice President in 1990.
Mr. Pommerville first joined Beverly in 1970 and left in 1976. He rejoined
Beverly as Vice President and General Counsel in 1984 and was elected Secretary
in February 1990, Senior Vice President in March 1990 and Executive Vice
President and Acting Compliance Officer in February 1995.
Dr. Renschler joined Beverly in 1996 as Executive Vice President and
President of PCA. In connection with the Merger, it is expected that Dr.
Renschler will resign as an officer of Beverly and become Chief Executive
Officer and a director of Capstone. From 1990 to 1996, Mr. Renschler was Senior
Vice President and Chief Clinical Officer, as well as President of three
operating divisions of NovaCare, Inc. and a member of its board of directors.
Prior to that time, he held a series of key executive positions at Manor
Healthcare Corp., including President and Chief Operating Officer.
Mr. Stephens joined Beverly as a staff accountant in 1969. He was elected
Assistant Vice President in 1978, Vice President of Beverly and President of
Beverly's Central Division in 1980, and Executive Vice President in February
1990. Mr. Stephens is a director of City National Bank in Fort Smith, Arkansas,
Beverly Japan Corporation, and Harbortown Properties, Inc.
Mr. Tabakin joined Beverly in October 1992 as Vice President, Controller
and Chief Accounting Officer. He was elected Senior Vice President in May 1995,
Acting Chief Financial Officer in September 1995, and Executive Vice President
and Chief Financial Officer in October 1996. From 1980 to 1992, Mr. Tabakin was
with Ernst & Young LLP.
Mr. Wortley joined Beverly as Senior Vice President and President of
Spectra in September 1994 and was elected Executive Vice President in February
1996. From 1988 to 1994, Mr. Wortley was an officer of Therapy Management
Innovations.
Ms. Daniels joined Beverly in May 1988 as Audit Coordinator. She was
promoted to Financial Reporting Senior Manager in 1991 and Director of Financial
Reporting in 1992. She was elected Vice President, Controller and Chief
Accounting Officer in October 1996. From 1985 to 1988, Ms. Daniels was with
Price Waterhouse LLP.
Mr. Anthony served as a member of the United States Congress and was
Chairman of the Democratic Congressional Campaign Committee from 1987 through
1990. In 1993, he became a partner in the Winston & Strawn law firm. He has been
a director of Beverly since January 1993.
Mr. Greene's principal occupation has been that of a director and
consultant to various U.S. and international businesses since 1986. He is a
director of a number of mutual funds of Alliance Capital Management Corporation,
Buck Engineering Company and Bank Leumi. He has been a director of Beverly since
January 1991.
58
<PAGE> 303
Ms. Holiday is an attorney. She served as White House Liaison for the
Cabinet and all federal agencies during the Bush administration. Prior to that,
Ms. Holiday served as General Counsel of the U.S. Treasury Department, as well
as its Assistant Secretary of Treasury for Public Affairs and Public Liaison.
She is a director of Amerada Hess Corporation, Hercules Incorporated and H. J.
Heinz Company and a director or trustee of various investment companies in the
Franklin Templeton Group of Funds. She has been a director of Beverly since
March 1995.
Mr. Jacoby is Executive Vice President, Chief Financial Officer and a
director of Stephens Group, Inc. Mr. Jacoby has held the indicated positions
with Stephens Group, Inc. since 1986, and prior to that time, served as Manager
of the Corporate Finance Department and Assistant to the President of Stephens
Inc. Mr. Jacoby is a director of the American Classic Voyages Company, Delta and
Pine Land Company, Inc. and Medicus Systems, Inc. He has been a director of
Beverly since February 1987.
Dr. Lavizzo-Mourey is Director of the Institute of Aging, Chief of the
Division of Geriatric Medicine and Associate Executive Vice President for health
policy at the University of Pennsylvania, Ralston-Penn Center. From 1992 to
1994, Dr. Lavizzo-Mourey was in the Senior Executive Service in the Agency for
Health Care Policy and Research, U.S. Public Health Service of the Department of
Health and Human Services. She is a director of Medicus Systems, Inc. and
Nellcor Puritan Bennett. She has been a director of Beverly since March 1995.
Ms. Seymann is President and Chief Executive Officer of M One, Inc., a
management and information systems consulting firm specializing in the financial
services industry. From 1990 to 1993, Ms. Seymann was Director and Vice Chairman
of the Federal Housing Finance Board. Prior to that, she served as Managing
Director of Andersen Asset Based Services, a unit of Arthur Andersen LLP. From
1986 to 1990, Ms. Seymann was Executive Vice President of Chase Bank of Arizona
and served as President, Private Banking of Chase Trust Company from 1987 to
1990. She has been a director of Beverly since March 1995.
During 1996, there were nine meetings of Beverly's Board of Directors. Each
director attended 75% or more of the meetings of the Board and committees on
which he or she served.
DIVIDEND POLICY
Beverly currently does not pay dividends on any of its issued and
outstanding securities. New Beverly does not expect to pay any dividends for the
foreseeable future. Rather, New Beverly expects that it will reinvest any
earnings into funding future acquisitions and growth. Any future payments of
dividends and the amount thereof will be dependent upon New Beverly's results of
operations, financial condition, cash requirements, future prospects and other
factors deemed relevant by the Board of Directors of New Beverly from time to
time.
59
<PAGE> 304
PRINCIPAL STOCKHOLDERS OF NEW BEVERLY
New Beverly will be a wholly-owned subsidiary of Beverly until the
consummation of the Distribution. Because all of the shares of New Beverly
Common Stock now held by Beverly will be distributed to shareholders of Beverly
in connection with the Distribution, the number of shares of New Beverly Common
Stock shown below to be owned beneficially by certain beneficial owners holding
more than five percent of the issued and outstanding Beverly Common Stock, as
well as by each director and by all directors and officers as a group will
depend upon the number of shares held by such persons at the time of the
Distribution. This table assumes that each of the executive officers set forth
below will (i) be offered a position with New Beverly and (ii) accept such
position if offered. In order to present estimated beneficial ownership of the
persons and entities set forth below immediately following the Distribution, the
following table shows: (i) the number of shares of Beverly Common Stock
beneficially owned by such person or entities as of , 1997
(including, if applicable, shares underlying Company Options exercisable within
60 days of such date) and (ii) the number of shares of New Beverly Common Stock
that such persons or entities would own immediately following the Distribution
(including, if applicable, shares underlying New Beverly Options exercisable
within 60 days of such date), assuming none of such persons or entities disposes
of any shares of Beverly Common Stock prior to the Distribution and Merger.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth as of March 31, 1997, those persons who
beneficially own more than five percent of the issued and outstanding Beverly
Common Stock based on information filed in reports by such persons with the SEC.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES OF TOTAL
NAME COMMON STOCK COMMON STOCK
---- ------------ ------------
<S> <C> <C>
FMR Corp............................................... 7,894,799(1) 8.0%
("FMR")
82 Devonshire Street
Boston, MA 02109
Franklin Resources, Inc................................ 8,417,800(2) 8.5%
("Franklin")
777 Mariners Island Blvd.
San Mateo, CA 94404
Loomis, Sayles & Company, L.P.......................... 6,213,650(3) 6.3%
("Loomis")
One Financial Center
Boston, MA 02111
Wellington Management Company.......................... 6,463,419(4) 6.5%
("WMC")
75 State Street
Boston, MA 02109
</TABLE>
- ---------------
(1) Based on the latest schedule 13G, dated February 14, 1997, provided to
Beverly by FMR; FMR had sole voting power with regard to 746,928 shares and
sole dispositive power with respect to 7,894,799 shares.
(2) Based on the latest schedule 13G, dated February 12, 1997, provided to
Beverly by Franklin; Franklin had sole voting and dispositive power with
respect to 8,417,800 shares.
(3) Based on the latest schedule 13G, dated February 13, 1997, provided to
Beverly by Loomis; Loomis had sole voting power with respect to 2,176,125
shares and shared dispositive power with respect to 6,213,650 shares.
(4) Based on the latest schedule 13G, dated January 24, 1997, provided to
Beverly by WMC; WMC had shared voting power with respect to 1,663,574 shares
and shared dispositive power with respect to 6,463,419 shares.
60
<PAGE> 305
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of March 31, 1997, the amount of Beverly
Common Stock beneficially owned by each of Beverly's directors, each executive
officer named in the Summary Compensation Table included in Beverly's Proxy
Statement for the Annual Meeting of Stockholders held on May 29, 1997, and all
directors and executive officers as a group based on information obtained from
such persons.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
----------------------------------------------------------------------
SOLE VOTING OPTIONS PERCENTAGE
AND EXERCISABLE OTHER OF
INVESTMENT WITHIN BENEFICIAL COMMON
POWER 60 DAYS OWNERSHIP TOTAL STOCK
----------- -------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Beryl F. Anthony, Jr............. 0 20,000 0 20,000 *
David R. Banks(1)................ 216,656 377,223 8,774(2) 602,653 *
James R. Greene.................. 500 20,000 0 20,500 *
Boyd W. Hendrickson(1)........... 142,153 159,000 0 301,153 *
Edith E. Holiday................. 800 5,000 200(2) 6,000 *
Jon E. M. Jacoby................. 0 20,000 0 20,000 *
Risa J. Lavizzo-Mourey, M.D...... 1,000 5,000 0 6,000 *
William A. Mathies(1)............ 76,373 62,500 2,986(2) 141,859 *
Louis W. Menk(3)................. 0 5,000 0 5,000 *
C. Arnold Renschler, M.D.(4)..... 65,000 10,000 0 75,000 *
Marilyn R. Seymann............... 1,000 5,000 0 6,000 *
Mark D. Wortley(1)............... 66,530 33,750 0 100,280 *
All Directors and Executive
Officers as a Group (17
Persons)(3)(4)................. 1,082,897 1,022,029 19,896 2,124,822 2.1%
</TABLE>
- ---------------
* Percentage of Common Stock owned does not exceed 1%.
(1) Includes shares allocated to the employee through participation in Beverly's
Employee Stock Purchase Plan.
(2) Shares owned by family members.
(3) Mr. Menk retired from the Beverly Board of Directors in May 1997.
(4) C. Arnold Renschler, M.D., currently an Executive Vice President of Beverly
and President of PCA is expected to resign his position with Beverly
effective as of the Effective Time of the Merger, when he will assume the
position of Chief Executive Officer and will become a director of Capstone.
61
<PAGE> 306
EXECUTIVE AND DIRECTOR COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the Chief
Executive Officer and the other four most highly compensated individuals of
Beverly as to whom the total annual salary and bonus for the year ended December
31, 1996, exceeded $100,000. All of these individuals were executive officers of
Beverly at December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------------
AWARDS PAYOUTS
ANNUAL ----------------------
COMPENSATION RESTRICTED SECURITIES
----------------- OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
FISCAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)(7)(8) (#) ($) ($)(9)
--------------------------- ------ ------- ------- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David R. Banks.................. 1996 597,542 324,973 None 697,500 90,000 None 20,230
Chairman of the Board and 1995 622,096 None None None None None 51,973
Chief Executive Officer 1994 539,170 173,384 None 151,711 60,000 None 51,469
Boyd W. Hendrickson............. 1996 437,971 245,314 None 581,250 65,000 None 17,973
President and Chief 1995 392,862 None None 412,500 70,000 None 38,100
Operating Officer(1) 1994 323,502 80,912 None 70,798 30,000 None 40,646
William A. Mathies.............. 1996 275,000 185,000 216,198(5) 465,000 40,000 None 8,858
Executive Vice President 1995 203,481 44,334 48,465(5) 206,250 35,000 None 19,526
and President-Beverly 1994 159,260 29,958 None 26,223 12,000 None 18,630
Health & Rehabilitation
Services, Inc.(BHRS)(2)
C. Arnold Renschler, MD......... 1996 200,481 187,500 46,995(6) 673,750 285,000 None 1,226
Executive Vice President 1995
and President-Pharmacy 1994
Corporation of America(3)
Mark D. Wortley................. 1996 258,704 171,316 None 465,000 75,000 None 8,693
Executive Vice President 1995 230,481 None None None None None 12,793
and President-Spectra 1994 65,769 24,000 None 20,996 50,000 None 3,779
Rehab Alliance, Inc.(4)
</TABLE>
- ---------------
(1) Mr. Hendrickson was elected to his current position on September 29, 1995.
Prior to that he was Executive Vice President and President-BHRS.
(2) Mr. Mathies was elected to his current position on September 29, 1995. Prior
to that he was a Vice President-Operations of BHRS.
(3) Dr. Renschler assumed his current position on June 3, 1996.
(4) Mr. Wortley was elected to his current position on February 9, 1996. Prior
to that he was a Senior Vice President and President of Spectra Rehab
Alliance, Inc.
(5) Relocation costs and expenses paid to Mr. Mathies in connection with his
relocation from California to Arkansas.
(6) Relocation costs and expenses paid to Dr. Renschler in connection with his
relocation from Pennsylvania to Florida.
62
<PAGE> 307
(7) Amounts shown as Restricted Stock Awards consist of the following (shown in
dollars) (Beverly does not currently pay dividends on its Common Stock).
<TABLE>
<CAPTION>
YEAR MR. BANKS MR. HENDRICKSON MR. MATHIES DR. RENSCHLER MR. WORTLEY
---- --------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Restricted Stock Grants.......... 1996 None None None 183,750(a) None
1995 None 412,500(b) 206,250(b) None
1994 None None None None
Performance Shares(c)............ 1996 697,500 581,250 465,000 490,000 465,000
1995
1994
Award Pursuant to the............ 1996
Annual Incentive Plan(d) 1995
1994 43,346 20,228 7,494 5,995
Award Pursuant to the............ 1996
Equity Incentive Plan(e) 1995
1994 108,365 50,570 18,729 15,001
Total........................ 1996 697,500 581,250 465,000 673,750 465,000
1995 None 412,500 206,250 None
1994 151,711 70,798 26,223 20,996
</TABLE>
- ---------------
(a) The total $183,750 restricted stock award to Dr. Renschler in 1996
consists of, on June 3, 1996, at which time the closing price of the
Common Stock was $12.25, a grant of 15,000 shares which vest twenty-five
percent per year beginning one year from the date of the grant.
(b) The total $412,500 restricted stock award to Mr. Hendrickson and the
total $206,250 restricted stock award to Mr. Mathies in 1995 consists
of, on October 2, 1995, at which time the closing price of the Common
Stock was $13.75, grants of 30,000 and 15,000 shares respectively, which
vest twenty-five percent per year beginning one year from the date of
grant.
(c) The total $697,500, $581,250, $465,000 and $465,000 Performance Share
awards to Mr. Banks, Mr. Hendrickson, Mr. Mathies and Mr. Wortley
consist of, on February 9, 1996, at which time the closing price of the
Common Stock was $11.625, a grant of performance-based restricted stock
in the following number of shares: 60,000; 50,000; 40,000; and 40,000
respectively. Performance is measured by appreciation in the price of
Common Stock from December 31, 1995. To satisfy the performance
restriction, the Common Stock must close at or above the performance
target for at least five consecutive trading days on the New York Stock
Exchange. Achievement of the performance target for any performance
period is deemed to be achievement of the performance target for all
prior performance periods. The percentage of shares that vest, if the
performance target is met, and the performance target, are: 10% and
$14.00; 20% and $16.125; 20% and $18.50; 25% and $21.375; 25% and $24.50
for 1996, 1997, 1998, 1999 and 2000 respectively. The total $490,000
Performance Share award to Dr. Renschler consists of, on June 3, 1996,
at which time the closing price of the Common Stock was $12.25, a grant
of 40,000 shares with the same performance targets and vesting schedule
as set forth above.
(d) For 1994 performance, the Annual Incentive Plan provided for the payment
of 20% of the annual incentive award earned to be paid by a grant of
other stock units, vesting one year from the grant date. The following
number of other stock units were granted to the named Executive
Officers: Mr. Banks -- 3,152; Mr. Hendrickson -- 1,471; Mr.
Mathies -- 545; and Mr. Wortley -- 436.
(e) The Equity Incentive Plan provided, for 1994 performance, the granting
of phantom units, with cliff vesting four years from the grant date. The
phantom units are payable, upon vesting, at an amount per unit equal to
the fair market value of the Common Stock on that date, in cash, shares
of Common Stock or a combination thereof at the discretion of the
Compensation Committee. The following number of phantom units were
granted to the named executive officers, to vest on February 14, 2000:
Mr. Banks -- 7,881; Mr. Hendrickson -- 3,678; Mr. Mathies -- 1,362; and
Mr. Wortley -- 1,091.
(8) Based on the closing price for the Common Stock of $12.75, at December 31,
1996, the number and value of aggregate restricted stock, performance shares
and phantom unit holdings for the named executive officers are as follows:
<TABLE>
<CAPTION>
MR. BANKS MR. HENDRICKSON MR. MATHIES DR. RENSCHLER MR. WORTLEY
--------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Restricted Stock............ (Shares) None 22,500 11,250 15,000 None
(Value $) None 286,875 143,437 191,250 None
Performance Shares.......... (Shares) 60,000 50,000 40,000 40,000 40,000
(Value $) 765,000 637,500 510,000 510,000 510,000
Phantom Units............... (Shares) 16,274 7,571 2,436 None 1,091
(Value $) 207,493 96,530 31,059 None 13,910
</TABLE>
63
<PAGE> 308
(9) All other compensation consists of the following:
<TABLE>
<CAPTION>
YEAR MR. BANKS MR. HENDRICKSON MR. MATHIES DR. RENSCHLER MR. WORTLEY
---- --------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Car Allowance(a)................. 1996 None None None None None
1995 2,019 2,019 2,019 2,019
1994 7,500 7,500 7,500 2,192
Matching Contribution to......... 1996 2,340 2,340 2,340 None 2,340
Employee Stock Purchase 1995 2,340 2,340 2,340 2,340
Plan(b) 1994 2,340 2,340 2,250 None
Executive Medical Plan........... 1996 3,834 6,659 1,347 62 887
1995 6,168 9,660 4,098 2,530
1994 7,661 11,479 3,570 1,379
Premiums Under Executive......... 1996 1,350 1,080 177 None 216
Life Insurance Plan(c) 1995 4,753 2,607 420 294
1994 4,410 2,392 407 None
Regular Life Insurance........... 1996 5,648 2,187 297 626 464
Plan(d) 1995 3,410 1,483 167 282
1994 1,125 720 99 33
Matching Contribution to......... 1996 3,341 1,990 980 None 1,069
Executive Retirement 1995 30,541 17,249 7,938 2,586
Plan(e) 1994 28,258 16,040 4,629 None
Financial Planning............... 1996 None None None None None
1995 None None None None
1994 175 175 175 175
Benefit Allowance(f)............. 1996 3,717 3,717 3,717 538 3,717
1995 2,742 2,742 2,544 2,742
Total........................ 1996 20,230 17,973 8,858 1,226 8,693
1995 51,973 38,100 19,526 12,793
1994 51,469 40,646 18,630 3,779
</TABLE>
- ---------------
(a) Car allowances were discontinued in 1995. Amounts previously paid were
added to base salary.
(b) The Employee Stock Purchase Plan enables all full-time employees which
have completed one year of continuous service to purchase shares of
Common Stock through payroll deductions of up to $300 per pay period.
Beverly contributes 30% of the amount of payroll deductions for the
participating employee.
(c) Effective January 1, 1996, the amount shown represents the dollar value
benefit of premium payments under split dollar life insurance policies
for which Beverly will be reimbursed for premiums paid. In prior years,
the amounts shown represented premiums on individual term life insurance
policies.
(d) Imputed income for life insurance provided under Beverly's regular life
insurance plan for amounts in excess of $50,000.
(e) The Beverly Enterprises, Inc. Executive Retirement Plan, (the "Executive
Retirement Plan") provides that, depending on the Beverly's profits,
Beverly will match each participant's annual contribution, based on a
sliding scale relating to years of service with the Beverly, up to a
maximum of six percent of a participant's compensation. The Executive
Retirement Plan also provides that Beverly will pay each participant
additional compensation approximately equivalent to the tax liability
such participant shall accrue as a result of the Beverly's contribution.
During 1995 and 1994, Beverly contributed 50 percent and during 1996,
five percent of the maximum match permitted under the Executive
Retirement Plan for each participant. These figures include both the
employer match and the additional compensation for reimbursement of
taxes.
(f) Reimbursement for premiums paid under regular medical and dental
insurance.
64
<PAGE> 309
The following tables set forth certain information at December 31, 1996 and
for the fiscal year then ended with respect to stock options granted to and
exercised by the individuals named in the Summary Compensation Table above. No
stock appreciation rights have been granted and no options have been granted at
an option price below fair market value on the date of the grant.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS GRANT DATE
------------------------------------------------------ VALUE
NUMBER OF % OF TOTAL ----------
SECURITIES OPTIONS/SARS GRANT DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE ($)(2)
---- ------------ ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
David R. Banks................... 90,000(1) 5.26% 12.75 12/11/06 684,900(6)
Boyd W. Hendrickson.............. 65,000(1) 3.80% 12.75 12/11/06 494,650(6)
William B. Mathies............... 40,000(1) 2.34% 12.75 12/11/06 304,400(6)
C. Arnold Renschler, M.D. ....... 35,000(2) 2.04% 12.25 06/03/01 172,900(7)
160,000(2) 9.35% 12.625 06/13/01 819,200(8)
40,000(1) 2.34% 12.75 12/11/06 304,400(6)
50,000(3) 2.92% 12.625 06/12/02 256,000(8)
Mark Wortley..................... 22,400(4) 1.31% 11.625 02/09/01 97,216(9)
40,000(1) 2.34% 12.75 12/11/06 304,400(6)
12,600(5) 0.74% 11.625 02/09/01 54,684(9)
</TABLE>
- ---------------
(1) Nonqualified stock options granted on December 12, 1996. 25% of these
options become fully exercisable one year from the grant date and 25% per
year thereafter on a cumulative basis.
(2) Nonqualified stock options for 35,000 shares were granted on June 3, 1996
and nonqualified stock options for 160,000 shares were granted on June 13,
1996. 25% of these options become fully exercisable one year from the grant
date and 25% per year thereafter on a cumulative basis.
(3) Nonqualified stock options granted on June 13, 1996. 10,000 shares vested on
December 31, 1996. 40,000 shares are subject to performance conditions
contained in the stock option agreement. 20,000 shares will vest on December
31, 1997 if the 1997 performance conditions are met and 20,000 shares will
vest on December 31, 1998 if the 1998 performance conditions are met.
Certain of the 1997 and all of the 1998 performance conditions will be set
by the Compensation Committee at a later date.
(4) Nonqualified stock options granted on February 9, 1996. 25% of these options
become fully exercisable one year from the grant date and 25% per year
thereafter on a cumulative basis.
(5) Incentive stock options granted on February 9, 1996. 25% of these options
become fully exercisable one year from the grant date and 25% per year
thereafter on a cumulative basis.
(6) Based upon the Black-Scholes Option Valuation Model, which estimates the
present dollar value of options to purchase shares of Common Stock to be
$7.61 per option share. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised, so that there is no assurance the value
realized will be at or near the value estimated by the Black-Scholes Model.
The assumptions underlying the Black-Scholes Model include: (a) an expected
volatility of .3440 based on the thirty-six months prior to the grant date,
(b) a risk-free rate of return of 6.54%, which approximates the ten year
U.S. Treasury Strip Rate on the grant date, (c) no dividend on the Common
Stock, and (d) a ten year period from the grant until expiration.
(7) Based upon the Black-Scholes Option Valuation Model, which estimates the
present dollar value of options to purchase shares of Common Stock to be
$4.94 per option share. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised, so that there is no assurance the value
realized will be at or near the value estimated by the Black-Scholes Model.
The assumptions underlying the Black-Scholes Model include: (a) an expected
volatility of .3226 based on the thirty-six months prior to the grant date,
(b) a risk-free rate of
65
<PAGE> 310
return of 6.64%, which approximates the five year U.S. Treasury Strip Rate
on the grant date, (c) no dividend on the Common Stock, and (d) a five year
period from the grant until expiration.
(8) Based upon the Black-Scholes Option Valuation Model, which estimates the
present dollar value of options to purchase shares of Common Stock to be
$5.12 per option share. This analysis assumed that all performance
conditions would be met for vesting. The actual value, if any, an executive
may realize will depend on the excess of the stock price over the exercise
price on the date the option is exercised, so that there is no assurance the
value realized will be at or near the value estimated by the Black-Scholes
Model. The assumptions underlying the Black-Scholes Model include: (a) an
expected volatility of .3326 based on the thirty-six months prior to the
grant date, (b) a risk-free rate of return of 6.79%, which approximates the
five year U.S. Treasury Strip Rate on the grant date, (c) no dividend on the
Common Stock, and (d) a five year period from the grant until expiration.
(9) Based upon the Black-Scholes Option Valuation Model, which estimates the
present dollar value of options to purchase shares of Common Stock to be
$4.34 per option share. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised, so that there is no assurance the value
realized will be at or near the value estimated by the Black-Scholes Model.
The assumptions underlying the Black-Scholes Model include: (a) an expected
volatility of .3167 based on the thirty-six months prior to the grant date,
(b) a risk-free rate of return of 5.23%, which approximates the five year
U.S. Treasury Strip Rate on the grant date, (c) no dividend on the Common
Stock, and (d) a five year period from the grant until expiration.
COMPENSATION OF DIRECTORS AND OTHER INFORMATION CONCERNING THE BOARD AND ITS
COMMITTEES
Effective June 1, 1996, compensation to Beverly directors other than Mr.
Banks and Mr. Hendrickson was changed to an annual retainer of $25,000 for
serving as a director plus an additional fee of $1,000 for each Board or
committee meeting attended. In addition, committee chairpersons receive $1,000
for each committee meeting chaired. Mr. Banks, the current Chairman of the Board
and Chief Executive Officer of Beverly, and Mr. Hendrickson, the current
President and Chief Operating Officer of Beverly, received no additional cash
compensation for serving on the Board or its committees.
Pursuant to the Beverly Enterprises, Inc. Non-Employee Directors' Stock
Option Plan, each non-employee director is automatically granted an option to
purchase 2,500 shares of Beverly Common Stock on June 1 of each year, at an
exercise price of 100 percent of the fair market value of such Common Stock on
the respective grant dates. The options become fully exercisable one year from
the grant date.
During 1996, there were nine meetings of the Beverly Board. Each director
attended 75% or more in the aggregate of the meetings of the Beverly Board and
committees on which the director served.
The Executive Committee, which met nine times during 1996, is delegated
authority to exercise all of the authority of the Beverly Board during the
intervals between meetings except that authority delegated to other committees
or extraordinary actions.
The Audit Committee, which met three times during 1996, reviews and acts,
or reports to the Beverly Board, with respect to various auditing and accounting
matters, including the selection of Beverly's independent auditors, the scope of
audit procedures, the nature of services to be performed for Beverly by and the
fees to be paid to the independent auditors, oversight of Beverly's internal
audit function, the performance of Beverly's independent auditors and the
accounting practices of Beverly.
The Nominating Committee, which met two times during 1996, is delegated the
following responsibilities: (i) identification and recommendation for nomination
of candidates to stand for election to the Beverly Board; and (ii) establishment
of procedures for the nomination process and criteria for the selection of
nominees, including stockholders' suggestions of nominees for director that are
submitted in writing in compliance with Beverly's Bylaws. The Nominating
Committee is also responsible for administering the Beverly Board's
self-evaluation.
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The Quality Management Committee, which met six times during 1996, monitors
the quality of service provided by Beverly and reports to the Beverly Board of
Directors progress made toward reaching quality goals.
The Compensation Committee met seven times during 1996. See the
Compensation Committee Report on Executive Compensation below for a discussion
of the Compensation Committee functions.
THE BEVERLY NON-EMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN
The following is a description of the Beverly Enterprises, Inc.
Non-Employee Director Deferred Compensation Plan (the "Non-Employee Director
Plan") that was approved by the Beverly stockholders and became effective May
29, 1997. The purpose of the Non-Employee Director Plan is to provide outside
directors with the opportunity to receive awards equivalent to shares of Beverly
Common Stock (referred to as "deferred share units") and to defer receipt of
compensation for services rendered to Beverly. It is expected that New Beverly
will assume the Non-Employee Director Plan immediately following the
Transactions. It is intended that the Non-Employee Director Plan shall aid
Beverly (and after the Transactions, New Beverly) in retaining and attracting
non-employee directors whose abilities, experience and judgment can contribute
to the continued progress of Beverly (and after the Transactions, New Beverly).
Further, the Non-Employee Director Plan is intended to more closely align
directors with stockholders through compensation awards equivalent to shares of
Beverly Common Stock (and after the Transactions, New Beverly Common Stock).
There are three types of contributions available under the Non-Employee
Director Plan. First, directors will be able to defer all or part of retainer
and meeting fees to a pre-tax deferred compensation account with two investment
options. The first investment option will be a cash account which is credited
with interest (at a variable interest rate equal to the prime interest rate as
established by a major New York bank), and the second investment option will be
a deferred share unit account, with each unit having a value equivalent to one
share of Beverly Common Stock (and after the Transactions, New Beverly Common
Stock). A director's deferred share unit account will fluctuate in value as if
it had been invested in Beverly Common Stock (and after the Transactions, New
Beverly Common Stock), however the Non-Employee Director Plan is not actually
funded and amounts deferred will not necessarily be invested in the Beverly
Common Stock (and after the Transactions, New Beverly Common Stock). It is
possible for the value of a director's account to decrease in value as a result
of this deemed investment if the value of the Beverly Common Stock (and after
the Transactions, New Beverly Common Stock) decreases.
The second type of contribution is a Beverly matching contribution. Beverly
(and after the Transactions, New Beverly) will match 25% of the amount that is
deferred, but only to the extent the director elects to credit his deferral into
the deferred share unit account.
Third, in connection with the termination of Beverly's previous retirement
plan for non-employee directors, in order to replace lost benefits under such
plan, directors will receive a grant of 500 deferred share units each year under
the Non-Employee Director Plan. Both Beverly (and after the Transactions, New
Beverly) matching contributions and the annual 500 deferred share unit grant
will be automatically credited to the deferred share unit account.
Directors are at all times 100% vested in their accounts. Distributions
will commence upon retirement, termination, death, or disability. Earlier
payments are available only if approved by the full Board of Directors (which
administers the Non-Employee Director Plan), in the event of an unforeseeable
emergency resulting in an extreme financial hardship. Payment will be in the
form of a single lump sum or installment of up to ten years, as elected by each
director. Distributions will be made in shares of Beverly Common Stock (and
after the Transactions, New Beverly Common Stock). However, with prior Board of
Directors approval, a director may elect to be paid out of cash instead.
The right of a Director or his or her beneficiary to receive a distribution
under the Non-Employee Directors Plan is an unsecured claim against the general
assets of Beverly (and after the Transactions, New Beverly) . Beverly (and after
the Transactions, New Beverly) may (but is not required to) informally "fund"
some or all of the Non-Employee Director Plan liabilities through a so-called
"rabbi trust" or grantor trust,
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but neither a director nor any beneficiary shall have any rights in or against
any specific assets of Beverly (and after the Transactions, New Beverly). The
Non-Employee Directors Plan became effective May 29, 1997, upon approval by the
stockholders of Beverly. New Beverly, at the Time of Distribution, will assume
the obligations and responsibilities of the Non-Employee Director Plan from
Beverly.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following is the Compensation Committee Report of the Beverly Board of
Directors, provided in connection with the Beverly Annual Meeting of
Stockholders held on May 29, 1997. This report reviews executive compensation
for Beverly for the fiscal year ended December 31, 1996. It is anticipated that,
prior to the consummation of the Transactions, the Compensation Committee of
Beverly will become the Compensation Committee of New Beverly and will continue
the same compensation philosophies currently in place at Beverly.
The Compensation Committee of Beverly's Board of Directors (the Committee)
is currently composed of three independent, non-employee Directors. There were
four members until June 1996, when new Committee assignments were made. Mr.
Louis W. Menk, former Chairman of the Compensation Committee, retired from the
Beverly Board of Directors in May 1997. Three Committee members remained and
one, Marilyn R. Seymann, left for another committee assignment. The Committee's
overall responsibility is to ensure executive compensation policies are directly
aligned with the strategic goals of Beverly. The Committee approves the design
of compensation programs, evaluates their effectiveness, and authorizes the
adoption of new plans and strategies as warranted.
COMPENSATION PHILOSOPHY
Our compensation philosophy and the underlying compensation programs are
designed to directly support Beverly's business objectives by:
- Allowing Beverly to recruit, retain and develop highly qualified
executive employee talent
- Linking individual compensation with Beverly and individual performance
- Maintaining compensation levels that are competitive (targeted at the
median (50th percentile) of the Competitive Market discussed below)
- Emphasizing the variable and at-risk portion of compensation through
incentive plans which properly reflect and reward both short and
long-term performance
- Promoting executive stock ownership and encouraging stock retention by
executives
The Committee evaluates each element of compensation as well as total
executive compensation. The Chief Executive Officer provides input to the
Committee in this regard. In addition, the Committee receives consulting advice
and assistance from an independent executive compensation firm on an ongoing
basis.
COMPETITIVE MARKET EVALUATION
Beverly and its Compensation Committee evaluate competitive compensation
practices and levels in the marketplace by considering data from publicly
available surveys published by recognized, major compensation consulting firms,
as well as special studies and surveys of industry comparisons. In addition, the
compensation consulting firm engaged by the Committee and Beverly provided a
comprehensive assessment of compensation from its executive database. This
analysis included reference to companies of comparable revenues to Beverly in
the healthcare services industry as well as general industry. In addition, the
compensation consultant conducted several private surveys of executive pay in
companies that compete with Beverly for management talent. All of these sources
of data have been combined and median and averages calculated to establish
targets for each element of compensation for Company executives for 1997 and the
immediate future. The Competitive Market is the combination of all the survey
data in general industry of similar revenues, healthcare industry with similar
lines of business and companies from the proxy analysis peer group
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with similar revenues. In establishing competitive levels, Beverly has used the
50th percentile as its target level for each element of compensation. The
Committee believes that actual compensation levels for the five executive
officers named in the Summary Compensation Table were at or below the 50th
percentile of the Competitive Market during 1996.
BASE SALARY
The Committee regularly reviews the base salary of corporate officers. In
addition to targeting the median of the Competitive Market, the Committee also
considers the level and scope of responsibility, experience, performance and
internal equity. No specific weighting is assigned to each of these criteria.
The Committee's annual salary review for corporate officers was moved from
December 1996 to March 1997 in order to provide the Committee the opportunity to
review 1996 performance prior to making compensation decisions.
The base salary for Mr. Banks, Chairman of the Board and Chief Executive
Officer of Beverly, and other corporate officers was reviewed at the March 27,
1997 meeting of the Committee. The Compensation Committee reviewed the
performance criteria it had established on April 11, 1996 to evaluate Mr. Banks'
performance for 1996. The performance criteria included financial and operating
objectives as well as succession planning, strategic planning and stockholder
relations. Effective January 1, 1997, Mr. Banks' base salary was reinstated to
$627,500, where it had been prior to the 5% salary reduction in 1996. In
addition, based on the results of Mr. Banks' performance in meeting these
objectives, and the comparison to the Competitive Market, his base salary was
also adjusted, effective January 1, 1997, to $700,000, which represents an 11.5%
increase over the reinstated level and places Mr. Banks at approximately the
50th percentile level of the Competitive Market for total compensation.
ANNUAL INCENTIVES
The annual incentive plans are designed to provide a direct link between
Beverly performance and individual performance over the annual performance
period (calendar year). During 1996, Beverly maintained two annual incentive
plans; one for corporate management and one for operations management. Each plan
has an initial performance threshold which must be met before potential awards
become available. This initial threshold is an internal standard of the quality
of service being provided by Beverly to its residents. The internal standard of
quality is set and approved by the Quality Management Committee of the Board.
Once the quality threshold has been reached or exceeded, the financial
criteria are then assessed for each executive based upon appropriate corporate
or individual areas of responsibility. The incentive plans measure financial
performance by evaluating Beverly earnings per share and operating margin and,
in the case of individuals responsible for business units, other key operating
financial measures related to the business unit.
Each executive participating in the annual incentive plan, including all of
the executive officers listed in the Summary Compensation Table, has a target
and maximum annual incentive opportunity expressed as a percentage of base
salary. Opportunities for participants under this plan for 1996 ranged from 25%
to 100% of base salary.
In calculating the 1996 annual incentive for the Chief Executive Officer,
the Committee first ascertained that the quality performance threshold had been
achieved. The Committee then determined that the Chief Executive Officer
exceeded the specific performance goals established by the Committee. As a
result, Mr. Banks received a bonus of $324,973, which amounted to 54.5% of base
salary.
LONG-TERM INCENTIVES
Long-term incentives are delivered through the Beverly Enterprises, Inc.
1996 Long-Term Incentive Stock Plan (the "1996 Plan"), which was approved by
stockholders at the 1996 annual meeting. The Committee believes that annual
grants of stock options provide a long-term incentive for key personnel to
remain with Beverly and improve future Beverly performance. In addition, stock
option grants confirm the mutuality of interests shared by Beverly's management
and its other stockholders with this compensation
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dependent upon the appreciation of Beverly's Common Stock. The compensation
consulting firm provides the Committee with data on granting practices of other
healthcare companies to determine if Beverly's grants are competitive in size
and terms. Stock options are always granted at 100% of fair market value on the
date of grant. During 1996, a stock option grant for 90,000 shares was provided
to Mr. Banks. Option grants for the following number of shares were granted in
1996 to the following executive officers: Mr. Hendrickson -- 65,000; Mr.
Mathies -- 40,000; Dr. Renschler -- 285,000; and Mr. Wortley -- 75,000.
STOCK OWNERSHIP GUIDELINE
In 1994, Beverly introduced a stock ownership initiative for key executives
and officers of Beverly. The purpose of this initiative is to align executive
interests with stockholders' interests and to encourage executives to retain
Beverly shares over an extended period. Participants are required to own Beverly
securities with a value based on a multiple of the officer's base salary.
Failure to comply with this guideline may result in reduction in or suspension
from participation in Beverly's incentive plans. The Chief Executive Officer is
required to own securities with a market value of three times his base salary.
Other executives and officers are required to own Beverly securities with a
market value ranging from one to two and a half times base salary.
$1 MILLION LIMIT ON COMPENSATION
Section 162(m) of the Internal Revenue Code generally limits the corporate
deduction for compensation paid to executive officers named in the Summary
Compensation Table to $1 million, unless certain requirements are met which
allows for an exemption of certain compensation as performance-based. The Board
of Directors and the Committee desire that all incentive compensation plans for
executive officers be qualified as performance-based, thereby ensuring Beverly
will retain full tax deductibility. In 1994, the Committee approved a change in
the design and operation of both the annual and long-term incentive plans, which
change was then approved by the stockholders in May 1994. In 1996, stockholders
approved the 1996 Long-Term Incentive Stock Plan which provides certain features
designed to ensure tax deductibility of awards granted under the Plan.
OTHER MATTERS
The Committee has worked with a compensation consulting firm in revamping
Beverly's compensation plans for 1996 and future years. The focus of this work
was to develop pay for performance and included revised base salary ranges,
annual incentive compensation opportunities, long-term incentives and the
streamlining of certain employee benefits. All of this work has been
accomplished with the goal of motivating management behaviors which will enhance
Beverly's financial and operating results, thereby leading to the potential for
increased stockholder value. The work is ongoing and the Committee anticipates
working with top management and the consulting firm throughout 1997 to meet this
end.
COMPENSATION COMMITTEE
Louis W. Menk, Chairman
Beryl F. Anthony, Jr.
Edith E. Holiday
Marilyn R. Seymann
The Compensation Committee Report on Executive Compensation shall not be
deemed incorporated by reference by any general statement incorporating by
reference this proxy statement into any filing under the Securities Act of 1933
or the Securities and Exchange Act of 1934, except to the extent that Beverly
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such acts.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No Committee member had any relationship requiring disclosure under any
paragraph of Item 404 of Regulation S-K.
PERFORMANCE GRAPH
The following graph shows a five-year comparison of cumulative total
returns for Beverly, the S&P 500 Composite Index and the S&P Health Care
Composite Index. The stock price performance shown on the graph below is not
necessarily indicative of future price performance.
<TABLE>
<CAPTION>
MEASUREMENT PERIOD S&P HEALTHCARE
(FISCAL YEAR COVERED) BEVERLY S&P 500 COMPOSITE
<S> <C> <C> <C>
1991 100 100 100
1992 146 108 84
1993 149 118 77
1994 162 120 87
1995 120 165 137
1996 144 203 165
</TABLE>
The total cumulative return on investment (change during the year in stock
price plus reinvested dividends) for each of the periods for Beverly, the S&P
500 Composite Index and the S & P Healthcare Composite Index is based on the
stock price or the composite index on December 31, 1991.
The performance graph and its description above shall not be deemed
incorporated by reference by any general statement incorporating by reference
this proxy statement into any filing under the Securities Act of 1933 or the
Securities and Exchange Act of 1934, except to the extent that Beverly
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such acts.
OTHER PLANS
Executive Stock Purchase Program
On October 10, 1996 the Board of Directors established the Executive Stock
Purchase Program whereby those officers subject to the Stock Ownership
Guideline, described on page 67, could borrow, under three year loans made by
City National Bank of Fort Smith and guaranteed by Beverly, for the purpose of
buying Common Stock in order to meet the Stock Ownership Guideline. Executives
participating in the program were required to pledge the stock purchased to
Beverly pursuant to an Indemnification and Pledge Agreement. Messrs.
Hendrickson, Mathies, Renschler, and Wortley borrowed the following amounts
under the program: $182,125; $100,000; $135,620 and $203,481 respectively.
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Deferred Compensation Plan
As of July 18, 1991, Beverly amended and restated the Deferred Compensation
Plan: to allow no future grants; to close and pay out accounts with balances of
$10,000 or less; and to fix accounts with balances in excess of $10,000 using
the closing price of Beverly's Common Stock on the New York Stock Exchange on
July 18, 1991, of $11.00, which was credited to participants' Special Ledger
Accounts. Messrs. Banks and Hendrickson maintain accounts in the Deferred
Compensation Plan which are credited with interest at a rate of 9% per annum.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Beverly adopted a severance policy, as of December 1, 1989, which provides
assistance in the form of a lump sum severance payment to active, full-time,
corporate or regional office employees who are permanently, involuntarily and
without cause separated from all employment with Beverly or its successor.
Severance pay is calculated based upon an employee's base weekly pay, position
and continuous past service with Beverly as of the last day of the employee's
active employment. David R. Banks, Boyd W. Hendrickson, William A. Mathies, C.
Arnold Renschler, M.D. and Mark D. Wortley would have received $323,077,
$192,308, $150,000, $59,385 and $105,192, respectively, if they were entitled to
a severance payment as of January 1, 1997.
Effective December 8, 1995, Beverly entered into Change in Control
Severance Agreements that provide for payments to be made to the Executive Vice
Presidents of Beverly (including Messrs. Mathies and Wortley) (the "Severance
Agreements"). The Severance Agreements have an initial term of three years, with
an automatic extension of one additional day for each day beyond December 8,
1995 that the Executive Vice President (the "Executive") remains employed by
Beverly until such time as Beverly elects to cease such extension by written
notice, thereby setting the term to end three years from the written notice. The
Severance Agreements provide for specified severance benefits in the event of a
change of control and (i) termination of employment of the Executive by Beverly
without cause or by the Executive for good reason (which includes material
reduction in duties or authority, reduction in compensation or benefits, or a
relocation of employment from Fort Smith) during a period of two years following
the change in control or (ii) termination of employment initiated by the
Executive without good cause during the 31 day period commencing on the first
day of the 13th month following the change in control.
For purposes of the Severance Agreements, a change in control shall be
deemed to have taken place if: (i) any person, corporation, or other entity or
group, including any "group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, other than any employee benefit plan then maintained by
Beverly, becomes the beneficial owner of shares of Beverly's Common Stock having
30 percent or more of the total number of votes that may be cast for the
election of directors of Beverly; (ii) as the result of, or in connection with,
any contested election for the Board of Directors of Beverly, or any tender or
exchange offer, merger or other business combination or sale of assets, or any
combination of the foregoing (a "Transaction"), the persons who were directors
before the Transaction shall cease to constitute a majority of the Board of
Directors of Beverly or any successor to Beverly or its assets, or (iii) at any
time (a) Beverly shall consolidate with, or merge with, any other Person and
Beverly shall not be the continuing or surviving corporation, (b) any Person
shall consolidate with, or merge with, Beverly, and Beverly shall be the
continuing or surviving corporation and in connection therewith, all or part of
the outstanding Common Stock shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other property, (c) Beverly
shall be a party to a statutory share exchange with any other Person after which
Beverly is a subsidiary of any other Person, or (d) Beverly shall sell or
otherwise transfer 50% or more of the assets or earning power of Beverly and its
subsidiaries (taken as a whole) to any Person or Persons.
The severance benefit under the Severance Agreements includes (i) a lump
sum payment equal to three times the sum of (a) the Executive's base salary and
(b) the Executive's target bonus under Beverly's Annual Incentive Plan, with (a)
and (b) to be determined at either the termination of employment or the change
in control so as to produce the greater payment; (ii) vesting of all options,
restricted stock, phantom units, and other awards granted to Executive which
have not otherwise vested; (iii) continuation, for a period of three years
following termination of employment, of participation in Beverly's Medical Plan,
Executive Medical
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Reimbursement Plan, and Dental Plan; (iv) relocation to the next base of
full-time employment, if commenced within three years of termination of
employment, in accordance with Beverly's general relocation policy for
executives; (v) a matching contribution to Beverly's Executive Retirement Plan
for the plan year in which the termination of employment occurs; and (vi) for
two years following termination of employment, disability insurance benefits
equivalent to the benefits the Executive would have received had he or she
remained employed by Beverly.
The Severance Agreements include a provision for a gross-up payment if, in
the opinion of a Big 6 accounting firm or if so alleged by the Internal Revenue
Service, the aggregate severance benefit described above would cause the payment
of any part of such benefit to constitute an "excess parachute payment" as
defined in Section 280G(b) of the Internal Revenue Code. The amount of the
gross-up payment will be equal to the amount necessary to cause the net amount
retained by the Executive, after deduction of any (a) excise tax on the
severance benefit, (b) income tax on the gross-up payment, and (c) excise tax on
the gross-up payment, to be equal to the aggregate remuneration the Executive
would have received, as if Sections 280G and 4999 of the Internal Revenue Code
had not been enacted into law.
Effective December 8, 1995, Beverly entered into employment contracts (each
an "Employment Contract" and collectively the "Employment Contracts") with Mr.
Banks and Mr. Hendrickson (collectively the "Senior Executives"). The Employment
Contracts have an initial term of three years, with an automatic extension of
one additional day for each day beyond December 8, 1995 that each of the
respective Senior Executives remains employed by Beverly until such time as
Beverly elects to cease such extension by giving written notice thereby setting
the term to end three years from the written notice. The Employment Contracts
provide the Senior Executives with: (i) a stated minimum base salary per annum
through a specified date, and thereafter at any such greater rate as is
determined by the Committee (the stated minimum base salary per annum for
Messrs. Banks and Hendrickson is $627,500 and $450,000 respectively; (ii)
participation in all benefit plans; and (iii) an annual cash bonus pursuant to
Beverly's Annual Incentive Plan.
The Employment Contracts provide severance benefits in the event of a
change in control (including gross-up payments) on substantially the same terms
and conditions as set forth above with respect to the Severance Agreements
except that the Senior Executives may claim the relocation benefit without
commencing full-time employment. In addition Mr. Banks' Employment Contract
provides that Beverly will provide office space to Mr. Banks for a period of the
lesser of three years or the date he commences full-time employment.
In addition to severance benefits in the event of a change in control, the
Employment Contracts provide for severance benefits to the Senior Executives
during their term if there is a termination of employment initiated by (i)
Beverly without cause or (ii) by the Senior Executive for good reason. In this
event, the severance benefit includes: (a) a lump sum payment equal to one times
the sum of the Senior Executive's (1) base salary and (2) target bonus or actual
bonus for the previous year, if higher; (b) vesting of all unvested equity-based
compensation; (c) continuation, for at least two years from termination of
employment, of participation in Beverly's Medical Plan, Executive Medical
Reimbursement Plan, and Dental Plan; (d) relocation benefits as described above;
and (e) a matching contribution to Beverly's Executive Retirement Plan for the
plan year in which the termination of employment occurs.
Effective June 3, 1996 Beverly entered into an employment contract with Dr.
Renschler (as amended by the Employment Contract Addendum and Amendment to
Employment Contract, the "Renschler Agreement"). The Renschler Agreement
contains the same terms as the Employment Contract with Mr. Hendrickson with the
following exceptions: (i) the minimum base salary is $375,000; (ii) a guaranteed
bonus for 1996 performance of no less than 50% of base salary; (iii) a payment
of $400,000 in quarterly installments of $100,000 each beginning in June 1996 to
reimburse Dr. Renschler for lost benefits; (iv) the Beverly agreed to be a
co-signer on a note for $1,200,000 to enable Dr. Renschler to exercise options
from his former employer (which has been repaid in full and Beverly's
obligations terminated and released); (v) the definition of "Change of Control"
was amended to include the sale by Beverly of at least 80 percent of the capital
stock of Pharmacy Corporation of America to a person other than Beverly or any
direct or indirect
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affiliate and (vi) various provisions relating to Dr. Renschler's participation
in various Company stock-based compensation and other benefit plans.
A trust has been established with Chemical Bank to fund certain benefits
payable pursuant to certain employee benefit plans, including the Severance
Agreements, the Employment Contracts and the Renschler Agreement in the event of
termination of employment after a change in control of Beverly. Immediately
prior to a change in control of Beverly, Beverly is required to make a deposit
to the trust in an amount equal to the excess of the maximum amount potentially
payable under the plans to all participants over the current value of the trust
assets. The trust is revocable by Beverly until a change in control. The trust
assets are subject to the claims of general creditors of Beverly in the event of
Beverly's insolvency.
The Beverly Board of Directors believes that the Severance Agreements, the
Employment Contracts and the Renschler Agreement will encourage the commitment
and availability of its key management employees in the face of potentially
disruptive and distracting circumstances that may arise in the event of an
attempted or actual change in control or an unsolicited takeover of Beverly. In
any such event, such key management employees will be able to analyze and
evaluate proposals objectively with a view to the best interest of Beverly and
its stockholders. The Severance Agreements, the Employment Contracts and the
Renschler Agreement, however, may have the incidental effect of discouraging
takeovers and protecting employees from removal, since the agreements increase
the cost that would be incurred by an acquiror seeking to replace current
management. New Beverly intends to enter into similar agreements with those key
management employees that sign a consent and release.
NEW BEVERLY 1997 LONG-TERM INCENTIVE PLAN
On May 29, 1997, the Board of Directors of New Beverly adopted the New
Beverly 1997 Long-Term Incentive Plan (the "New Beverly 1997 Incentive Plan").
On , 1997, the Board of Directors, its Compensation Committee and
Beverly, as sole stockholder of New Beverly prior to the Distribution, approved
the New Beverly 1997 Incentive Plan and recommended its approval by Beverly
stockholders at a meeting called to vote thereon. The Compensation Committee and
Board of Directors of Beverly have determined that it is in the best interest of
Beverly and its stockholders to seek stockholder approval from the Beverly
stockholders of the New Beverly 1997 Incentive Plan in view of the federal tax
provisions contained in Section 162(m) of the Code. Under Code Section 162(m),
New Beverly may be prohibited from deducting the expense of compensation accrued
or paid to its chief executive officer and its four other most highly-
compensated officers ("Covered Participants") to the extent such compensation to
any Covered Participant exceeds $1 million for any taxable year of New Beverly.
An exception exists to this deduction limit for performance-based compensation
such as an award granted under the New Beverly 1997 Incentive Plan, if, among
other conditions, the specific terms of the performance-based compensation to
such Covered Participants are disclosed to and approved by the stockholders.
Stockholder approval of the New Beverly 1997 Incentive Plan is being sought in
order that awards granted under the New Beverly 1997 Incentive Plan will not
count toward the $1 million deductible compensation limit under Code Section
162(m).
The purpose of the New Beverly 1997 Incentive Plan is to allow New Beverly
to attract and retain qualified officers, key employees and consultants and to
provide these individuals with an additional incentive to devote themselves to
the future success of New Beverly. Additionally, New Beverly believes that
awards under the 1997 Incentive Plan will more closely align the interests of
its personnel with those of its stockholders. New Beverly will also use the New
Beverly 1997 Incentive Plan to fulfill its obligations under the Employee
Benefit Agreement with regards to Transferred Employees. For a discussion of the
material terms of the New Beverly 1997 Incentive Plan, see "Other Beverly
Proposals -- New Beverly 1997 Long-Term Incentive Plan" in the Joint Proxy
Statement/Prospectus. The New Beverly 1997 Incentive Plan is attached as Annex I
to the Joint Proxy Statement/Prospectus.
NEW BEVERLY NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
On May 29, 1997, the Board of Directors of New Beverly adopted the New
Beverly Non-Employee Directors Stock Option Plan ("New Beverly Directors Option
Plan"). On , 1997, the New
74
<PAGE> 319
Beverly Directors Option Plan was adopted by the Board of Directors and
Compensation Committee of Beverly, and was approved by Beverly as sole
stockholder of New Beverly prior to the Distribution. Non-Employee Directors are
not eligible to participate under the New Beverly 1997 Incentive Plan.
The purpose of the New Beverly Directors Option Plan is to build a
proprietary interest among the Non-Employee Directors on the New Beverly Board
of Directors, and thereby secure for New Beverly stockholders the benefits
associated with stock ownership by those who will oversee New Beverly's future
growth and success. For a discussion of the material terms of the New Beverly
Directors Option Plan, see "Other Beverly Proposals -- New Beverly Non-Employee
Directors Stock Option Plan" in the Joint Proxy Statement/Prospectus. The New
Beverly Directors Option Plan is attached as Annex J to the Joint Proxy
Statement/Prospectus.
CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS
Jon E.M. Jacoby, a director of Beverly, serves as Executive Vice President,
Chief Financial Officer and director of Stephens Group, Inc. For the year ended
December 31, 1996, Beverly paid to Stephens Group, Inc. or its affiliates,
approximately $880,113 for investment banking and brokerage services. It is
anticipated that prior to the consummation of the Transactions, Mr. Jacoby will
be appointed as a director of New Beverly. See "Business -- Management."
DESCRIPTION OF NEW BEVERLY CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Prior to the Distribution, New Beverly shall cause to be filed an amendment
to its Certificate of Incorporation which shall grant to New Beverly the
authority to issue shares of capital stock, of which are
common stock, par value $.10 per share, and are preferred stock, par
value $1.00 per share ("New Beverly Preferred Stock"). At June 2, 1997, New
Beverly had outstanding 1,000 shares of New Beverly Common Stock all of which
such shares are held by Beverly.
NEW BEVERLY PREFERRED STOCK
Under New Beverly's Certificate of Incorporation, New Beverly's Board of
Directors may from time to time establish and issue one or more series of
preferred stock and fix the designations, powers, preferences and rights of the
shares of such series and the qualification, limitations or restrictions
thereon, including, but not limited to, the fixing of the dividend rights,
dividend rate or rates, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or prices,
and the liquidation preferences, in each case, if any, of any wholly unissued
series of New Beverly Preferred Stock.
NEW BEVERLY COMMON STOCK
Holders of New Beverly Common Stock are entitled to receive such dividends
as are declared by the Board of Directors, subject to the preference of any
outstanding New Beverly Preferred Stock, and are entitled to cast one vote per
share on all matters voted upon by stockholders. There is no cumulative voting
for the election of directors and New Beverly Common Stock does not have any
preemptive rights. Upon liquidation of New Beverly, holders of New Beverly
Common Stock are entitled to share equally and ratably in any assets available
for distribution to them, after payment or provision for liabilities and amounts
owing with respect to any outstanding New Beverly Preferred Stock. Payment and
declaration of dividends on New Beverly Common Stock and purchases of shares
thereof by New Beverly will be subject to restrictions if New Beverly fails to
pay dividends on any series of New Beverly Preferred Stock ranking prior to New
Beverly Common Stock as to the payment of dividends. It is anticipated that New
Beverly will be subject to certain restrictions under its banking arrangements
related to the payment of cash dividends on its common stock.
The Registrar and Transfer Agent for New Beverly Common Stock is The Bank
of New York.
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<PAGE> 320
NEW BEVERLY COMMON STOCK PURCHASE RIGHTS
The New Beverly Board of Directors on May 29, 1997 adopted a stockholders
rights plan, pursuant to which one common stock purchase right (a "Right" or
"Rights") will be issued with respect to each share of New Beverly Common Stock
(the "Common Shares"), outstanding at the close of business on ,
1997 (the "Record Date"). Each Right entitles the registered holder thereof,
after the Right becomes exercisable and until (or the earlier
redemption, exchange, or termination of the Right), to purchase from New Beverly
one Common Share at a price of $ per share, subject to adjustment (the
"Purchase Price"). The description and terms of the Rights are set forth in a
Rights Agreement dated (the "Rights Agreement") between New Beverly
and The Bank of New York, as Rights Agent (the "Rights Agent").
The Rights are represented by the Common Share certificates and are not
exercisable until a Distribution Date (as defined). A Distribution Date is
defined as the earlier of the following: (i) ten days following the Shares
Acquisition Date (the first date of a public announcement by New Beverly or an
Acquiring Person (as defined in the Rights Agreement) which reveals the
existence of an Acquiring Person) or (ii) the tenth day after the date of the
commencement of, or of the first public announcement of the intent of any person
(other than New Beverly, any of its subsidiaries, or any of its Employee Benefit
Plans) to commence a tender or exchange offer which would result in any Person
becoming the beneficial owner of common shares aggregating 15% or more of the
outstanding New Beverly Common Shares (an "Acquiring Person"). The Board of
Directors of New Beverly may postpone, under certain circumstances, one or more
times, a Distribution Date beyond the dates set forth above. As soon as
practicable, after a Distribution Date, the Rights Agent will send to each
record holder of New Beverly Common Shares, as of the close of business on a
Distribution Date, a certificate for Rights evidencing one Right for each Common
Share. The Rights will first become exercisable on a Distribution Date, unless
earlier redeemed or exchanged, and may then begin trading separately. The Rights
will not at any time have any voting rights.
Each holder of a Right (other than those owned by the Acquiring Person
which shall be void) will have the right to receive upon its exercise that
number of Common Shares having a market value of two times the then current
Purchase Price of one Right if one of the following events is triggered: (1) a
person becomes an Acquiring Person (except under certain circumstances where
cash offers for all outstanding Common Shares are approved by the Board of
Directors of New Beverly); or (2) if New Beverly is the surviving corporation in
a merger with an Acquiring Person or any Associate or Affiliate (as defined in
Section 12b-2 of the Exchange Act) of any Acquiring Person, and the Common
Shares were not changed or exchanged. In the event that a person or group
becomes an Acquiring Person, or New Beverly is acquired in a merger or other
business combination transaction where more than 50% of its assets or earning
power was sold, proper provision shall be made so that each holder of a Right
shall thereafter have the right to receive, upon the exercise thereof at the
then current Purchase Price of the Right, that number of shares of common stock
of the acquiring company which at the time of such transaction would have the
market value of two times the then current Purchase Price of one Right.
The New Beverly Board of Directors has the right at any time prior to an
acquisition of an Acquiring Person of 50% or more of the then outstanding Common
Shares to cause New Beverly to acquire the Rights (other than those owned by the
Acquiring Person which are void) in exchange for that number of Common Shares
which has an aggregate value, per Right, equal to the excess of the value of the
Common Shares issuable upon exercise of a Right after a person becomes an
Acquiring Person over the Purchase Price.
The New Beverly Board of Directors may redeem the Rights in whole at a
price of $.01 per Right (the "Redemption Price") at any time prior to the close
of business on the tenth day following the public announcement of an Acquiring
Person. The ten-day redemption period may be changed by a majority of the Board
of Directors under certain circumstances. The right to exercise the Rights will
immediately terminate upon action by the New Beverly Board of Directors to
redeem the Rights and the holders of the Rights will only have the right to
receive the Redemption Price. The Rights will expire on , unless
earlier redeemed or exchanged.
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<PAGE> 321
The Purchase Price, the number of shares covered by each Right and the
number of Rights outstanding are subject to adjustment from time to time to
prevent dilution. Such adjustments may be made in the event New Beverly (i)
declares a stock dividend on, or a subdivision, combination or reclassification
of, the Common Shares, (ii) upon the grant to holders of the Common Shares of
certain rights or warrants to subscribe for or purchase Common Shares or
convertible securities at less than the current market price of the Common
Shares or (iii) upon the distribution to holders of the Common Shares of
evidences of indebtedness, securities or assets (excluding regular periodic cash
dividends at a rate not in excess of 125% of the last regular periodic cash
dividend paid, or if not previously paid at a rate not to exceed 50% of the
average net income per share of New Beverly for the four quarters ended
immediately prior to the payment of such dividend, or dividends payable in
Common Shares (which dividends will be subject to the adjustment described in
clause (i) above) or of subscription rights or warrants (other than those
referred to above).
No adjustment in the Purchase Price will be required until cumulative
adjustments require an adjustment of at least 1% in such Purchase Price. No
fractional shares will be issued and in lieu thereof, a payment in cash will be
made based on the market price of the Common Shares on the last trading date
prior to the date of exercise.
Until a Right is exercised, the holder thereof will have no rights as a
stockholder of New Beverly beyond those as an existing stockholder, including,
without limitation, the right to vote or to receive dividends.
Any provisions of the Rights Agreement may be amended by the Board of
Directors of New Beverly prior to a Distribution Date. After a Distribution
Date, New Beverly and the Rights Agent may amend or supplement the Rights
Agreement without the approval of any holders of Right Certificates to cure any
ambiguity, to correct or supplement any provision contained therein which may be
defective or inconsistent with any other provisions therein, to shorten or
lengthen any period under the Rights Agreement (requiring a majority of the
Board of Directors under certain circumstances), or so long as the interest of
the holders of Right Certificates (other than an Acquiring Person or an
affiliate or associate of an Acquiring Person) are not adversely affected,
thereby, to make any other provision in regard to matters or questions arising
thereunder which New Beverly and the Rights Agent may deem necessary or
desirable, including but not limited to extending the Final Expiration Date. New
Beverly may at any time prior to a Person becoming an Acquiring Person amend the
Rights Agreement to lower the thresholds described above to not less than the
greater of (i) any percentage greater than the largest percentage of the
outstanding Common Shares then known by New Beverly to be beneficially owned by
any person or group of affiliated or associated persons and (ii) 10%.
The Rights will cause substantial dilution to a person or group that
acquires 15% or more of New Beverly's stock on terms not approved by the New
Beverly's Board of Directors, except pursuant to an offer conditioned on
substantial number of Rights being acquired. The Rights should not interfere
with any merger or other business combination approved by the Board of Directors
prior to ten days after the time that a Person or group has become an Acquiring
Person as the Rights may be redeemed by New Beverly at $.01 per Right prior to
such time.
THE CHARTER AND BYLAWS OF NEW BEVERLY
The provisions of the New Beverly Certificate of Incorporation (the "New
Beverly Certificate") and the New Beverly Bylaws will be amended and restated by
Beverly prior to the Distribution to duplicate the substance of the provisions
of Beverly's current Certificate of Incorporation (the "Beverly Certificate")
and the Beverly Bylaws, respectively. For a discussion of the material
provisions of the Beverly Certificate and the Beverly Bylaws, see the
information set forth in the Joint Proxy Statement/Prospectus under the caption
"Comparative Rights of Stockholders."
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<PAGE> 322
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Distribution, New Beverly will have an estimated
shares of New Beverly Common Stock outstanding, all of which will be
freely tradable without restriction or further registration under the Securities
Act, except to the extent such shares are held by "affiliates" of New Beverly,
which will be subject to the limitations of Rule 144 promulgated under the
Securities Act. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this Prospectus, persons who may be deemed affiliates of
New Beverly, as that term is defined in the Securities Act would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of New Beverly Common
Stock (approximately shares immediately after the Distribution) or the
average weekly trading volume during the four calendar weeks preceding a sale by
such person. Sales under Rule 144 are also subject to certain provisions
relating to the manner and notice of sale and availability of current public
information about New Beverly. Following the Distribution, shares of
New Beverly Common Stock will be issuable upon the exercise of options held by
directors and employees of New Beverly and former employees of Beverly.
LEGAL MATTERS
Certain legal matters in connection with the Distribution will be passed
upon for New Beverly by Giroir, Gregory, Holmes & Hoover, PLC, Little Rock,
Arkansas, and certain other legal matters in connection with this Offering will
be passed upon for New Beverly by John W. MacKenzie, Deputy General Counsel of
New Beverly.
EXPERTS
The consolidated financial statements and schedule of Beverly Enterprises,
Inc. at December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements and schedule of Pharmacy Corporation
of America at December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The balance sheet of New Beverly Holdings, Inc. as of May 31, 1997,
appearing in this Prospectus and Registration Statement, has been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
78
<PAGE> 323
BEVERLY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following financial statements and schedules are included herein:
<TABLE>
<S> <C>
BEVERLY ENTERPRISES, INC.
Condensed Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996................................... F-2
Condensed Consolidated Statements of Income for the three
months ended March 31, 1997 and 1996.................... F-3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996.............. F-4
Notes to Condensed Consolidated Financial Statements...... F-5
PHARMACY CORPORATION OF AMERICA
Condensed Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996................................... F-7
Condensed Consolidated Statements of Income for the three
months ended March 31, 1997 and 1996.................... F-8
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996.............. F-9
Notes to Condensed Consolidated Financial Statements...... F-10
BEVERLY ENTERPRISES, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-12
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................... F-13
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994........................ F-14
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994............ F-15
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994........................ F-16
Notes to Consolidated Financial Statements................ F-17
Schedule II -- Valuation and Qualifying Accounts.......... F-35
PHARMACY CORPORATION OF AMERICA
Report of Ernst & Young LLP, Independent Auditors......... F-36
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................... F-37
Consolidated Statements of Income and Retained Earnings
for the years ended December 31, 1996, 1995 and 1994.... F-38
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994........................ F-39
Notes to Consolidated Financial Statements................ F-40
Schedule II -- Valuation and Qualifying Accounts.......... F-50
NEW BEVERLY HOLDINGS, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-51
Balance Sheet as of May 31, 1997.......................... F-52
Note to Balance Sheet..................................... F-53
</TABLE>
F-1
<PAGE> 324
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 64,136 $ 69,761
Accounts receivable -- patient, less allowance for
doubtful accounts:
1997 -- $26,161; 1996 -- $25,618....................... 522,415 491,063
Accounts receivable -- nonpatient, less allowance for
doubtful accounts:
1997 -- $275; 1996 -- $401............................. 11,628 13,480
Notes receivable.......................................... 10,572 10,746
Operating supplies........................................ 56,661 55,348
Deferred income taxes..................................... 13,320 14,543
Prepaid expenses and other................................ 42,505 42,304
---------- ----------
Total current assets.............................. 721,237 697,245
Property and equipment, net of accumulated depreciation and
amortization:
1997 -- $655,785; 1996 -- $643,085..................... 1,262,671 1,248,785
Other assets:
Notes receivable, less allowance for doubtful notes:
1997 -- $5,143; 1996 -- $4,951......................... 29,206 37,306
Designated and restricted funds........................... 81,346 75,848
Goodwill, net............................................. 372,637 356,197
Other, net................................................ 115,301 109,701
---------- ----------
Total other assets................................ 598,490 579,052
---------- ----------
$2,582,398 $2,525,082
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 122,467 $ 99,121
Accrued wages and related liabilities..................... 136,863 131,072
Accrued interest.......................................... 13,714 16,969
Other accrued liabilities................................. 84,516 93,042
Current portion of long-term obligations.................. 36,361 38,826
---------- ----------
Total current liabilities......................... 393,921 379,030
Long-term obligations....................................... 1,119,865 1,106,256
Deferred income taxes payable............................... 87,980 83,610
Other liabilities and deferred items........................ 99,305 95,091
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............ -- --
Common stock, shares issued:
1997 -- 104,595,272; 1996 -- 104,432,848............... 10,460 10,443
Additional paid-in capital................................ 776,424 774,672
Retained earnings......................................... 152,420 133,957
Treasury stock, at cost: 5,423,408 shares................. (57,977) (57,977)
---------- ----------
Total stockholders' equity........................ 881,327 861,095
---------- ----------
$2,582,398 $2,525,082
========== ==========
</TABLE>
- ---------------
NOTE: The balance sheet at December 31, 1996 has been derived from the audited
consolidated financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
F-2
<PAGE> 325
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net operating revenues...................................... $816,716 $811,047
Interest income............................................. 3,565 3,460
-------- --------
Total revenues.................................... 820,281 814,507
Costs and expenses:
Operating and administrative:
Wages and related...................................... 449,782 449,995
Other.................................................. 289,930 293,484
Interest.................................................. 22,716 23,145
Depreciation and amortization............................. 27,081 25,056
-------- --------
Total costs and expenses.......................... 789,509 791,680
-------- --------
Income before provision for income taxes.................... 30,772 22,827
Provision for income taxes.................................. 12,309 9,131
-------- --------
Net income.................................................. $ 18,463 $ 13,696
======== ========
Net income per share of common stock:
Primary:
Net income per share of common stock................... $ 0.19 $ 0.14
======== ========
Shares used to compute net income per share............ 99,411 99,978
======== ========
Fully diluted:
Net income per share of common stock................... $ 0.18 $ 0.13
======== ========
Shares used to compute net income per share............ 110,688 111,231
======== ========
</TABLE>
Primary earnings per share for the three months ended March 31, 1997 and
1996 were computed by dividing net income by the weighted average number of
shares of common stock outstanding during the period and the weighted average
number of shares issuable upon exercise of common stock equivalents (principally
stock options), calculated using the treasury stock method. Fully diluted
earnings per share for the three months ended March 31, 1997 and 1996 were
computed as above and assumed conversion of the Company's 5 1/2% convertible
subordinated debentures. Conversion of the Company's 7 5/8% convertible
subordinated debentures and zero coupon notes would have an anti-dilutive effect
and, therefore, were not assumed.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which is
required to be adopted in financial statements for periods ending after December
15, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements, primary earnings per share will be renamed basic
earnings per share and will exclude the dilutive effect of stock options. The
impact is not expected to result in a change in the Company's primary earnings
per share or fully diluted earnings per share (which will be renamed dilutive
earnings per share) for the three months ended March 31, 1997 and 1996.
See accompanying notes.
F-3
<PAGE> 326
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 18,463 $ 13,696
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 27,081 25,056
Provision for reserves and discounts on patient, notes
and other receivables, net............................ 6,378 6,550
Amortization of deferred financing costs............... 662 1,893
(Gains) losses on dispositions of facilities and other
assets, net........................................... 1,469 (2,212)
Deferred taxes......................................... 5,740 3,264
Net decrease in insurance related accounts............. (1,364) (7,131)
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable -- patient....................... (36,631) (16,211)
Operating supplies................................... (276) 1,610
Prepaid expenses and other receivables............... (950) (1,162)
Accounts payable and other accrued expenses.......... 25,960 (5,166)
Income taxes payable................................. (4,751) 10,509
Other, net........................................... 320 (21)
--------- ---------
Total adjustments................................. 23,638 16,979
--------- ---------
Net cash provided by operating activities......... 42,101 30,675
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........... (30,829) (10,630)
Proceeds from dispositions of facilities and other
assets................................................. 263 6,692
Collections on notes receivable and REMIC investment...... 8,981 3,006
Capital expenditures...................................... (37,638) (29,206)
Other, net................................................ 742 (4,016)
--------- ---------
Net cash used for investing activities............ (58,481) (34,154)
Cash flows from financing activities:
Revolver borrowings....................................... 387,000 284,000
Repayments of Revolver borrowings......................... (363,000) (333,000)
Proceeds from issuance of long-term obligations........... 3,534 180,000
Repayments of long-term obligations....................... (16,356) (128,673)
Purchase of common stock for treasury..................... (2,397) --
Proceeds from exercise of stock options................... 1,855 361
Deferred financing costs.................................. (320) (5,242)
Dividends paid on preferred stock......................... -- (688)
Proceeds from designated funds, net....................... 439 472
--------- ---------
Net cash provided by (used for) financing
activities...................................... 10,755 (2,770)
--------- ---------
Net decrease in cash and cash equivalents................... (5,625) (6,249)
Cash and cash equivalents at beginning of period............ 69,761 56,303
--------- ---------
Cash and cash equivalents at end of period.................. $ 64,136 $ 50,054
========= =========
Supplemental schedule of cash flow information:
Cash paid (received) during the period for:
Interest (net of amounts capitalized).................. $ 25,309 $ 17,701
========= =========
Income tax payments (refunds), net..................... 11,320 (4,642)
========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 327
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(i) The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, and include all adjustments of a
normal recurring nature which are, in the opinion of management, necessary for a
fair presentation of the results of operations for the three months ended March
31, 1997 and 1996 pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures in these
condensed consolidated financial statements are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto included in the Company's 1996 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results for a full year. Unless the context indicates
otherwise, the Company means Beverly Enterprises, Inc. and its consolidated
subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
(ii) The provisions for income taxes for the three months ended March 31,
1997 and 1996 were based on an estimated annual effective tax rate of 40%. The
Company's estimated annual effective tax rates for 1997 and 1996 are different
than the federal statutory rate primarily due to the impact of state income
taxes and amortization of nondeductible goodwill. The provisions for income
taxes consist of the following for the three months ended March 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Federal:
Current................................................... $ 5,298 $4,553
Deferred.................................................. 4,840 2,765
State:
Current................................................... 1,271 1,314
Deferred.................................................. 900 499
------- ------
$12,309 $9,131
======= ======
</TABLE>
(iii) During the three months ended March 31, 1997, the Company purchased
three previously leased nursing facilities (449 beds) and certain other assets
including, among other things, 14 institutional pharmacies and six outpatient
therapy clinics, for approximately $30,500,000 cash and approximately $1,400,000
closing and other costs. Also during such period, the Company terminated the
leases on five nursing facilities (707 beds) and disposed of certain other
assets for cash proceeds of approximately $600,000. The Company recognized net
pre-tax losses during the first quarter of 1997 of approximately $1,500,000 as a
result of these dispositions. The operations of these facilities were immaterial
to the Company's consolidated financial position and results of operations.
In March 1997, the Company entered into a definitive agreement to sell 49
of its skilled nursing facilities in the state of Texas to Complete Care
Services, L.P. The transaction is scheduled to close during the second quarter
of 1997 and is subject to normal regulatory review. The Company anticipates
using the net cash proceeds generated from the sale for one or more of the
following purposes: strategic investments; repay
F-5
<PAGE> 328
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indebtedness; and repurchase Common Stock. The operations of these facilities
are immaterial to the Company's consolidated financial position and results of
operations.
In April 1997, the Company entered into a definitive agreement with
Capstone Pharmacy Services, Inc. ("Capstone") to combine Pharmacy Corporation of
America ("PCA"), a wholly-owned subsidiary of the Company, with Capstone (the
"Merger") to create the nation's largest independent institutional pharmacy
company. The Company will receive approximately $275,000,000 of cash as partial
repayment for PCA's intercompany debt, with any remaining intercompany balance
contributed to PCA's capital. In addition, Capstone will issue approximately
50,000,000 shares of its common stock to the Company's shareholders. The
Company's shareholders are expected to receive approximately .44 shares of
Capstone common stock for each share of the Company's Common Stock outstanding,
based on the fully diluted number of shares of the Company's Common Stock
outstanding at March 31, 1997, and will own approximately 57% of the combined
pharmacy company after the combination. The exact conversion ratio of the
Company's Common Stock to Capstone common shares will be determined based on the
total number of shares of the Company's Common Stock outstanding on the
effective date of the Merger. The Merger, which is subject to approvals by the
shareholders of both the Company and Capstone, completion of the Distribution
(as discussed below), and approvals by various government agencies, is expected
to close by year-end.
In connection with the Merger, the Company will transfer all of its non-PCA
assets and liabilities to New Beverly Holdings, Inc. ("NBHI"), in exchange for
the issuance of NBHI common stock. The Company will then distribute (the
"Distribution") such NBHI common stock to the then current shareholders of the
Company's Common Stock on a one-for-one basis. In connection with the
Distribution, the Company will be required to restructure, repay or otherwise
renegotiate substantially all of its outstanding debt instruments and
renegotiate or make certain payments under various employment agreements with
officers of the Company. The Company has not yet determined the impact this will
have on its consolidated financial position, results of operations or cash
flows.
(iv) There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
(v) Effective July 31, 1987, Beverly Enterprises, a California corporation
("Beverly California"), became a wholly-owned subsidiary of Beverly Enterprises,
Inc., a Delaware corporation ("Beverly Delaware"). Effective January 1, 1995,
Beverly California changed its name to Beverly Health and Rehabilitation
Services, Inc. ("BHRS"). Beverly Delaware (the parent) provides financial,
administrative and legal services to its subsidiaries, including BHRS, for which
it charges management fees.
The following summarized unaudited financial information concerning BHRS is
being reported because BHRS's 7 5/8% convertible subordinated debentures due
March 2003 and its zero coupon notes (collectively, the "Debt Securities") are
publicly-held. Beverly Delaware is co-obligor of the Debt Securities. Summary
unaudited financial information for BHRS is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
------------------ ------------------
<S> <C> <C>
Total revenues................................... $ 670,353 $ 680,273
Total costs and expenses......................... 642,355 658,740
Net income....................................... 16,799 12,920
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
Current assets......................................... $ 388,467 $ 369,501
Long-term assets....................................... 1,413,184 1,404,292
Current liabilities.................................... 192,050 184,887
Long-term liabilities.................................. 799,489 795,593
</TABLE>
F-6
<PAGE> 329
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,671 $ 7,575
Accounts receivable, less allowance for doubtful accounts:
1997 -- $13,429; 1996 -- $13,070....................... 100,696 93,078
Notes and other receivables, less allowance for doubtful
accounts: 1997 -- $823; 1996 -- $820................... 1,297 1,383
Inventory................................................. 23,682 22,025
Prepaid expenses and other................................ 424 335
-------- --------
Total current assets.............................. 131,770 124,396
Property and equipment, net of accumulated depreciation and
amortization: 1997 -- $25,316; 1996 -- $23,263............ 34,579 32,698
Other assets:
Goodwill, net............................................. 288,086 276,430
Systems development, net.................................. 4,891 4,837
Other, net................................................ 7,357 3,215
-------- --------
Total other assets................................ 300,334 284,482
-------- --------
$466,683 $441,576
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 21,367 $ 18,017
Accrued wages and related liabilities..................... 6,029 6,656
Other accrued liabilities................................. 5,965 6,621
Current portion of long-term obligations.................. 1,078 968
-------- --------
Total current liabilities......................... 34,439 32,262
Long-term obligations....................................... 1,442 1,334
Deferred income taxes payable............................... 5,026 3,980
Due to Parent............................................... 326,343 312,395
Commitments and contingencies
Stockholder's equity:
Common stock, 1,000 shares issued......................... 1 1
Additional paid-in capital................................ 3,866 3,866
Retained earnings......................................... 95,566 87,738
-------- --------
Total stockholder's equity........................ 99,433 91,605
-------- --------
$466,683 $441,576
======== ========
</TABLE>
NOTE: The balance sheet at December 31, 1996 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes.
F-7
<PAGE> 330
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Non-affiliates........................ $122,390 $105,221
Affiliates............................ 25,202 19,155
-------- --------
Total revenues................ 147,592 124,376
Cost of goods sold...................... 80,087 65,672
-------- --------
Gross profit............................ 67,505 58,704
Costs and expenses:
Wages and related..................... 32,033 29,614
Selling, general and administrative... 14,204 12,355
Provision for doubtful accounts....... 2,371 2,189
Depreciation and amortization......... 4,826 3,807
Management fees....................... 667 529
-------- --------
Total costs and expenses...... 54,101 48,494
-------- --------
Income before provision for income
taxes................................. 13,404 10,210
Provision for income taxes.............. 5,576 4,284
-------- --------
Net income.............................. $ 7,828 $ 5,926
======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE> 331
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 7,828 5,926
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 4,826 3,807
Provision for reserves on accounts, notes and other
receivables, net...................................... 2,371 2,189
Deferred taxes......................................... 1,046 1,214
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable.................................. (7,349) (3,122)
Inventory............................................ (318) 1,650
Prepaid expenses and other........................... (60) (24)
Accounts payable and other accrued expenses.......... 2,067 (7,435)
-------- -------
Total adjustments................................. 2,583 (1,721)
-------- -------
Net cash provided by operating activities......... 10,411 4,205
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........... (22,144) (110)
Capital expenditures...................................... (2,809) (1,638)
Systems development....................................... (462) (332)
Other, net................................................ (439) 693
-------- -------
Net cash used for investing activities............ (25,854) (1,387)
Cash flows from financing activities:
Advances (to) from Parent, net............................ 13,852 (5,622)
Repayments of long-term obligations....................... (313) (108)
-------- -------
Net cash provided by (used for) financing
activities....................................... 13,539 (5,730)
-------- -------
Net decrease in cash and cash equivalents................... (1,904) (2,912)
Cash and cash equivalents at beginning of period............ 7,575 3,315
-------- -------
Cash and cash equivalents at end of period.................. $ 5,671 403
======== =======
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest............................................... $ 93 6
</TABLE>
See accompanying notes.
F-9
<PAGE> 332
PHARMACY CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(i) The condensed consolidated financial statements included herein have
been prepared by Pharmacy Corporation of America (the "Company"), without audit,
and include all adjustments of a normal recurring nature which are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the three months ended March 31, 1997 and 1996 pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures in these condensed consolidated financial
statements are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the Company's December 31, 1996 consolidated financial statements and the notes
thereto. The results of operations for the three months ended March 31, 1997 are
not necessarily indicative of the results for a full year. Unless the context
indicates otherwise, the Company means Pharmacy Corporation of America and its
consolidated subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
(ii) The provisions for income taxes for the three months ended March 31,
1997 and 1996 were based on estimated annual effective tax rates of 41.6% and
42.0%, respectively. The Company's estimated annual effective tax rates for 1997
and 1996 are different than the federal statutory rate primarily due to the
impact of state income taxes and amortization of nondeductible goodwill. The
provisions for income taxes consist of the following for the three months ended
March 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Federal:
Current.................................................. $3,728 $2,527
Deferred................................................. 861 999
State:
Current.................................................. 802 543
Deferred................................................. 185 215
------ ------
$5,576 $4,284
====== ======
</TABLE>
(iii) During the three months ended March 31, 1997, the Company purchased
14 pharmacies, for approximately $22,100,000 cash. The operations of these
pharmacies were immaterial to the Company's consolidated financial position and
results of operations.
In April 1997, Beverly Enterprises, Inc. ("Beverly") entered into a
definitive agreement with Capstone Pharmacy Services, Inc. ("Capstone") to
combine the Company, a wholly-owned subsidiary of Beverly, with Capstone (the
"Merger") to create the nation's largest independent institutional pharmacy
company. Beverly will receive approximately $275,000,000 of cash as partial
repayment for the Company's intercompany debt, with any remaining intercompany
balance contributed to the Company's capital. In addition, Capstone will issue
approximately 50,000,000 shares of its common stock to Beverly's stockholders.
Beverly's stockholders are expected to receive approximately .44 shares of
Capstone common stock for each share of Beverly's Common Stock outstanding,
based on the fully diluted number of shares of Beverly's Common Stock
F-10
<PAGE> 333
PHARMACY CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
outstanding at March 31, 1997, and will own approximately 57% of the combined
pharmacy company after the combination. The exact conversion ratio of Beverly's
Common Stock to Capstone common shares will be determined based on the total
number of shares of Beverly's Common Stock outstanding on the effective date of
the Merger. In connection with the Merger, Beverly will transfer all of its
non-Company assets and liabilities to New Beverly Holdings, Inc. ("New
Beverly"), in exchange for the issuance of New Beverly common stock. Beverly
will then distribute (the "Distribution") such New Beverly common stock to the
then current stockholders of Beverly's Common Stock on a one-for-one basis. The
Merger, which is subject to approvals by the stockholders of both Beverly and
Capstone, completion of the Distribution, and approvals by various government
agencies, is expected to close by year-end.
(iv) There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
(v) The Company provides its pharmaceutical dispensing, infusion therapy
products and services and its pharmacy and nursing consulting services to
nursing facilities operated by Beverly, and to the residents of Beverly
facilities. Revenues from sales directly to Beverly nursing facilities were
approximately $25,202,000 and $19,155,000 for the three months ended March 31,
1997 and 1996, respectively. Revenues from sales to residents of Beverly
facilities, which are not considered by the Company to be revenues from
affiliates, are estimated to be approximately $24,000,000 and $21,000,000 for
the three months ended March 31, 1997 and 1996, respectively.
Beverly provides certain administrative services to the Company. These
services have included, among others, cash management, finance, legal, tax,
financial reporting, executive management, payroll and payables processing and
employee benefit plans maintenance. The responsibility for certain of these
services, including finance, tax and payables processing was transferred to the
Company in mid-1996 as part of a consolidation and reorganization of the
Company's accounting and related functions. Substantially all cash received by
the Company is deposited daily and wired to Beverly's corporate cash account. In
turn, all of the Company's operating expenses, capital expenditures and other
cash needs are paid by Beverly, and charged back to the Company along with a
management fee for handling such services. Fees for these services amounted to
approximately $667,000 and $529,000 for the three months ended March 31, 1997
and 1996, respectively. The Company believes that the charges for services
provided by Beverly to the Company are a reasonable allocation of the costs
incurred by Beverly on behalf of the Company in providing these services;
however, such costs are not necessarily indicative of the costs that would have
been incurred if the Company operated as a stand-alone entity.
The net result of all intercompany transactions between the Company and
Beverly is recorded in the "Due to Parent" account in the accompanying
consolidated balance sheets. There are currently no required repayment terms for
this account nor do such amounts bear interest.
F-11
<PAGE> 334
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Beverly Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Beverly
Enterprises, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included
financial statement Schedule II-Valuation and Qualifying Accounts of Beverly
Enterprises, Inc. These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Beverly Enterprises, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
ERNST & YOUNG LLP
Little Rock, Arkansas
February 7, 1997, except
for Note 2, paragraph 3,
as to which the date is
March 13, 1997
F-12
<PAGE> 335
BEVERLY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 69,761 $ 56,303
Accounts receivable -- patient, less allowance for
doubtful accounts:
1996 -- $25,618; 1995 -- $22,860....................... 491,063 514,820
Accounts receivable -- nonpatient, less allowance for
doubtful accounts:
1996 -- $401; 1995 -- $497............................. 13,480 15,995
Notes receivable.......................................... 10,746 7,460
Operating supplies........................................ 55,348 59,109
Deferred income taxes..................................... 14,543 24,892
Prepaid expenses and other................................ 42,304 38,013
---------- ----------
Total current assets.............................. 697,245 716,592
Property and equipment, net................................. 1,248,785 1,189,985
Other assets:
Notes receivable, less allowance for doubtful notes:
1996 -- $4,951; 1995 -- $4,953......................... 37,306 41,915
Designated and restricted funds........................... 75,848 57,082
Goodwill, net............................................. 356,197 380,681
Other, net................................................ 109,701 120,206
---------- ----------
Total other assets................................ 579,052 599,884
---------- ----------
$2,525,082 $2,506,461
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 99,121 $ 155,385
Accrued wages and related liabilities..................... 131,072 134,391
Accrued interest.......................................... 16,969 10,261
Other accrued liabilities................................. 93,042 88,869
Current portion of long-term obligations.................. 38,826 84,639
---------- ----------
Total current liabilities......................... 379,030 473,545
Long-term obligations....................................... 1,106,256 1,066,909
Deferred income taxes payable............................... 83,610 54,687
Other liabilities and deferred items........................ 95,091 90,987
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............ -- --
Common stock, shares issued: 1996 -- 104,432,848;
1995 -- 102,618,241.................................... 10,443 10,262
Additional paid-in capital................................ 774,672 766,549
Retained earnings......................................... 133,957 83,657
Treasury stock, at cost: 1996 -- 5,423,408 shares;
1995 -- 3,972,208 shares............................... (57,977) (40,135)
---------- ----------
Total stockholders' equity........................ 861,095 820,333
---------- ----------
$2,525,082 $2,506,461
========== ==========
</TABLE>
See accompanying notes.
F-13
<PAGE> 336
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net operating revenues................................... $3,267,189 $3,228,553 $2,969,239
Interest income.......................................... 13,839 14,228 14,578
---------- ---------- ----------
Total revenues................................. 3,281,028 3,242,781 2,983,817
Costs and expenses:
Operating and administrative:
Wages and related................................... 1,819,500 1,736,151 1,600,580
Other............................................... 1,139,442 1,224,681 1,114,916
Interest............................................... 91,111 84,245 64,792
Depreciation and amortization.......................... 105,468 103,581 88,734
Impairment of long-lived assets:
Adoption of SFAS No. 121............................ -- 68,130 --
Development and other costs......................... -- 32,147 --
---------- ---------- ----------
Total costs and expenses....................... 3,155,521 3,248,935 2,869,022
---------- ---------- ----------
Income (loss) before provision for income taxes and
extraordinary charge................................... 125,507 (6,154) 114,795
Provision for income taxes............................... 73,481 1,969 37,882
---------- ---------- ----------
Income (loss) before extraordinary charge................ 52,026 (8,123) 76,913
Extraordinary charge, net of income taxes of $1,099 in
1996 and $1,188 in 1994................................ (1,726) -- (2,412)
---------- ---------- ----------
Net income (loss)........................................ $ 50,300 $ (8,123) $ 74,501
========== ========== ==========
Net income (loss) applicable to common shares............ $ 50,300 $ (14,998) $ 66,251
========== ========== ==========
Income (loss) per share of common stock:
Primary:
Before extraordinary charge......................... $ .52 $ (.16) $ .79
Extraordinary charge................................ (.02) -- (.03)
---------- ---------- ----------
Net income (loss)................................... $ .50 $ (.16) $ .76
========== ========== ==========
Shares used to compute per share amounts............ 99,646 92,233 87,087
========== ========== ==========
Fully-diluted:
Before extraordinary charge......................... $ .50 $ (.16) $ .78
Extraordinary charge................................ (.02) -- (.02)
---------- ---------- ----------
Net income (loss)................................... $ .48 $ (.16) $ .76
========== ========== ==========
Shares used to compute per share amounts............ 111,002 92,233 98,428
========== ========== ==========
</TABLE>
See accompanying notes.
F-14
<PAGE> 337
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
--------- -------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994................ $ 150,000 $ 8,825 $590,909 $ 33,263 $(40,135) $ 742,862
Exercise of stock option grant........... -- 100 11,900 -- -- 12,000
Employee stock transactions, net......... -- 37 4,830 -- -- 4,867
Preferred stock dividends................ -- -- -- (8,250) -- (8,250)
Issuance of ATH preferred stock(1)....... -- -- 1,264 -- -- 1,264
Accretion of amounts due upon redemption
of ATH preferred stock(1)............. -- -- 859 (859) -- --
Net income............................... -- -- -- 74,501 -- 74,501
--------- -------- -------- -------- -------- ---------
Balances at December 31, 1994.............. 150,000 8,962 609,762 98,655 (40,135) 827,244
Issuance of 12,361,184 shares of common
stock for the purchase of PMSI........ -- 1,236 149,693 -- -- 150,929
Exchange of Preferred Stock into 5 1/2%
Debentures............................ (150,000) -- -- -- -- (150,000)
Employee stock transactions, net......... -- 64 7,094 -- -- 7,158
Preferred stock dividends................ -- -- -- (6,875) -- (6,875)
Net loss................................. -- -- -- (8,123) -- (8,123)
--------- -------- -------- -------- -------- ---------
Balances at December 31, 1995.............. -- 10,262 766,549 83,657 (40,135) 820,333
Employee stock transactions, net......... -- 181 8,123 -- -- 8,304
Purchase of common stock for treasury.... -- -- -- -- (17,842) (17,842)
Net income............................... -- -- -- 50,300 -- 50,300
--------- -------- -------- -------- -------- ---------
Balances at December 31, 1996.............. $ -- $ 10,443 $774,672 $133,957 $(57,977) $ 861,095
========= ======== ======== ======== ======== =========
</TABLE>
- ---------------
(1) Amounts were recorded by ATH prior to its merger with the Company in
September 1994.
See accompanying notes.
F-15
<PAGE> 338
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 50,300 $ (8,123) $ 74,501
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 105,468 103,581 88,734
Impairment of long-lived assets.................. -- 100,277 --
Provision for reserves and discounts on patient,
notes and other receivables, net............... 28,544 15,889 14,107
Amortization of deferred financing costs......... 3,210 4,379 4,241
Extraordinary charge............................. 2,825 -- 3,600
Gains on dispositions of facilities and other
assets, net.................................... (20,951) (2,253) (9,749)
Deferred taxes................................... 33,765 (20,394) (2,031)
Net increase (decrease) in insurance related
accounts....................................... (22,336) (10,531) 8,342
Changes in operating assets and liabilities, net
of acquisitions and dispositions:
Accounts receivable -- patient................. (25,851) (84,420) (76,320)
Operating supplies............................. 3,226 1,649 (2,777)
Prepaid expenses and other receivables......... 771 (154) 1,597
Accounts payable and other accrued expenses.... (53,029) 16,370 (2,809)
Income taxes payable........................... 26,711 (6,194) 7,332
Other, net..................................... 527 (3,867) (13,361)
----------- ---------- ---------
Total adjustments........................... 82,880 114,332 20,906
----------- ---------- ---------
Net cash provided by operating activities... 133,180 106,209 95,407
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired..... (80,981) (34,184) (267,227)
Proceeds from dispositions of facilities and other
assets........................................... 121,660 46,892 77,211
Collections on notes receivable and REMIC
investment....................................... 12,809 15,594 8,393
Capital expenditures................................ (136,442) (161,911) (124,742)
Other, net.......................................... (8,547) (10,945) (12,375)
----------- ---------- ---------
Net cash used for investing activities...... (91,501) (144,554) (318,740)
Cash flows from financing activities:
Revolver borrowings................................. 1,308,000 1,017,000 62,000
Repayments of Revolver borrowings................... (1,230,000) (939,000) (62,000)
Proceeds from issuance of long-term obligations..... 228,862 25,000 309,308
Repayments of long-term obligations................. (318,447) (68,400) (98,340)
Purchase of common stock for treasury............... (15,445) -- --
Proceeds from exercise of stock options............. 3,620 2,146 14,509
Proceeds from issuance of ATH preferred stock....... -- -- 1,264
Deferred financing costs............................ (7,560) (2,161) (7,653)
Dividends paid on preferred stock................... (688) (8,250) (8,250)
Proceeds from designated funds, net................. 3,437 349 3,401
----------- ---------- ---------
Net cash provided by (used for) financing
activities................................ (28,221) 26,684 214,239
----------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... 13,458 (11,661) (9,094)
Cash and cash equivalents at beginning of year........ 56,303 67,964 77,058
----------- ---------- ---------
Cash and cash equivalents at end of year.............. $ 69,761 $ 56,303 $ 67,964
=========== ========== =========
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized)............. $ 81,193 $ 80,433 $ 59,242
Income taxes (net of refunds).................... 11,906 28,557 31,501
</TABLE>
See accompanying notes.
F-16
<PAGE> 339
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
References herein to the Company include Beverly Enterprises, Inc. and its
wholly-owned subsidiaries. The Company provides long-term healthcare in 35
states and the District of Columbia. Its operations include nursing facilities,
acute long-term transitional hospitals, institutional and mail service
pharmacies, rehabilitation therapy services, outpatient therapy clinics,
assisted living centers, hospices and home healthcare centers. The consolidated
financial statements of the Company include the accounts of the Company and all
of its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and certificates of deposit
with original maturities of three months or less.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligations
less accumulated amortization. Depreciation and amortization are computed by the
straight-line method over the estimated useful lives of the assets.
Intangible Assets
Goodwill (stated at cost less accumulated amortization of $38,446,000 in
1996 and $30,431,000 in 1995) is being amortized over 40 years or, if
applicable, the life of the lease using the straight-line method. Operating and
leasehold rights and licenses, which are included in the consolidated balance
sheet caption "Other, net," (stated at cost less accumulated amortization of
$18,716,000 in 1996 and $19,040,000 in 1995) are being amortized over the lives
of the related assets (principally 40 years) and leases (principally 10 to 15
years), using the straight-line method.
On an ongoing basis, the Company reviews the carrying value of its
intangible assets in light of any events or circumstances that indicate they may
be impaired or that the amortization period may need to be adjusted. If such
circumstances suggest the intangible value cannot be recovered, calculated based
on undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such shortfall. As of December 31,
1996, the Company does not believe there is any indication that the carrying
value or the amortization period of its intangibles needs to be adjusted. See
"-- Impairment of Long-Lived Assets."
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121")
which requires impairment losses to be recognized for long-lived assets
F-17
<PAGE> 340
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
used in operations when indicators of impairment are present and the
undiscounted cash flows are not sufficient to recover the assets' carrying
amounts. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. In accordance with SFAS No. 121, the Company
assesses the need for an impairment write-down when such indicators of
impairment are present. There were no material impairment adjustments recorded
during the year ended December 31, 1996.
In the fourth quarter of 1995, the Company recorded an impairment loss of
approximately $68,130,000 upon adoption of SFAS No. 121. Such loss primarily
related to certain nursing facilities, transitional hospitals, institutional
pharmacies and assisted living centers with current period operating losses.
Such current period operating losses, combined with a history of operating
losses and anticipated future operating losses, led management to believe that
impairment existed at such facilities. In addition, there were certain nursing
facilities for which management expected an adverse impact on future earnings
and cash flows as a result of recent changes in state Medicaid reimbursement
programs. Accordingly, management estimated the undiscounted future cash flows
to be generated by each facility. If the undiscounted future cash flow estimates
were less than the carrying value of the corresponding facility, management
estimated the fair value of such facility and wrote the carrying value down to
their estimate of fair value. Management calculated the fair value of the
impaired facilities by using the present value of estimated future cash flows,
or its best estimate of what such facility, or similar facilities in that state,
would sell for in the open market. Management believes it has the knowledge to
make such estimates of open market sales prices based on the volume of
facilities the Company has purchased and sold in previous years.
In addition to the SFAS No. 121 charge, the Company recorded a fourth
quarter of 1995 impairment loss for other long-lived assets of approximately
$32,147,000 primarily related to the write-off of software and business
development costs. During the fourth quarter of 1995, the Company hired a new
Senior Vice President of Information Technology, who redirected the Company's
systems development initiatives, causing a write-down, or a write-off, of
certain software and software development projects. In addition, the Company
wrote off certain business development and other costs where the Company
believed the carrying amount was unrecoverable.
Insurance
The Company insures auto liability, general liability and workers'
compensation risks, in most states, through insurance policies with third
parties, some of which may be subject to reinsurance agreements between the
insurer and Beverly Indemnity, Ltd., a wholly-owned subsidiary of the Company.
The liabilities for estimated incurred losses not covered by third party
insurance are discounted at 10% to their present value based on expected loss
payment patterns determined by independent actuaries. The discounted insurance
liabilities are included in the consolidated balance sheet captions as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accrued wages and related liabilities....................... $ 32,644 $ 35,265
Other accrued liabilities................................... 8,226 6,572
Other liabilities and deferred items........................ 90,714 84,720
-------- --------
$131,584 $126,557
======== ========
</TABLE>
On an undiscounted basis, the total insurance liabilities as of December
31, 1996 and 1995 were $170,099,000 and $164,060,000, respectively. As of
December 31, 1996, the Company had deposited approximately $94,500,000 in funds
(the "Beverly Indemnity funds") that are restricted for the payment of
F-18
<PAGE> 341
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
insured claims. In addition, the Company anticipates that approximately
$21,700,000 of its existing cash at December 31, 1996, while not legally
restricted, will be utilized to fund certain workers' compensation and general
liability claims, and the Company does not expect to use such cash for other
purposes.
Stock-Based Awards
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair value on the date of grant. The Company has elected to continue to
account for its stock-based awards in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense for its stock option grants. See
Note 6 for the pro forma effects on the Company's reported net income and
earnings per share assuming the election had been made to recognize compensation
expense on stock-based awards in accordance with SFAS No. 123.
Revenues
The Company's revenues are derived primarily from providing long-term
healthcare services. Approximately 75%, 77% and 80% of the Company's net
operating revenues for 1996, 1995 and 1994, respectively, were derived from
funds under federal and state medical assistance programs, and approximately
73%, 72% and 78% of the Company's net patient accounts receivable at December
31, 1996, 1995 and 1994, respectively, are due from such programs. These
revenues and receivables are reported at their estimated net realizable amounts
and are subject to audit and retroactive adjustment. Provisions for estimated
third-party payor settlements are provided in the period the related services
are rendered and are adjusted in the period of settlement. Changes in estimates
related to third party receivables resulted in the recording of approximately
$10,900,000, $19,700,000 and $11,000,000 of revenues for the years ended
December 31, 1996, 1995 and 1994, respectively.
Concentration of Credit Risk
The Company has significant accounts receivable, notes receivable and other
assets whose collectibility or realizability is dependent upon the performance
of certain governmental programs, primarily Medicaid and Medicare. These
receivables and other assets represent the only concentration of credit risk for
the Company. The Company does not believe there are significant credit risks
associated with these governmental programs. The Company believes that an
adequate provision has been made for the possibility of these receivables and
other assets proving uncollectible and continually monitors and adjusts these
allowances as necessary.
Earnings per Share
For the years ended December 31, 1995 and 1994, net income (loss)
applicable to common shares was computed by deducting preferred stock dividends
from net income (loss), when dilutive. During the fourth quarter of 1995, the
Company exchanged its cumulative convertible exchangeable preferred stock into
5 1/2% convertible subordinated debentures. Primary earnings per share for the
years ended December 31, 1996 and 1994 were computed by dividing net income
applicable to common shares by the weighted average number of shares of Common
Stock outstanding during the period and the weighted average number of shares
issuable upon exercise of stock options, calculated using the treasury stock
method. Fully diluted earnings per share for the year ended December 31, 1996
was computed as above and assumed conversion of the Company's 5 1/2% convertible
subordinated debentures. Fully diluted earnings per share for the year ended
December 31, 1994
F-19
<PAGE> 342
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
was computed as above and assumed conversion of the Company's cumulative
convertible exchangeable preferred stock. Conversion of the Company's 7 5/8%
convertible subordinated debentures and zero coupon notes would have an
anti-dilutive effect and, therefore, were not assumed. For the year ended
December 31, 1995, primary and fully diluted earnings per share were computed by
dividing net loss applicable to common shares by the weighted average number of
shares of Common Stock outstanding during the period.
Other
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
2. ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1996, the Company acquired 22 nursing
facilities (2,138 beds) (15 of such facilities (1,747 beds) were previously
leased), one previously managed nursing facility (180 beds) and certain other
assets including, among other things, pharmacy, hospice and outpatient therapy
businesses, for approximately $80,000,000 cash, approximately $7,500,000
acquired debt, approximately $7,000,000 closing and other costs, approximately
$4,800,000 reduction in receivables and approximately $1,900,000 security and
other deposits. The acquisitions of such facilities and other assets were
accounted for as purchases. The Company does not operate three of such nursing
facilities which were subleased to other nursing home operators in prior year
transactions. Also during such period, the Company sold or terminated the leases
on 83 nursing facilities (5,230 beds) (including the three nursing facilities
which were not operated by the Company, as mentioned above) and certain other
assets for cash proceeds of approximately $36,700,000 and approximately
$4,200,000 of notes receivable. The operations of these facilities and certain
other assets were immaterial to the Company's financial position and results of
operations.
In November 1996, the Company sold its MedView Services unit ("MedView")
for cash of approximately $89,700,000 (approximately $2,200,000 of which was
included in accounts receivable-nonpatient at December 31, 1996). MedView
provides a full range of managed care services to the workers' compensation
market and is the nation's largest workers' compensation-related preferred
provider organization with 120,000 member providers. It also offers case
management and injury reporting and tracking services. The operations of MedView
were immaterial to the Company's financial position and results of operations.
On March 13, 1997, the Company announced that it has entered into a
definitive agreement to sell 49 of its skilled nursing facilities in the state
of Texas to Complete Care Services, L.P. The transaction is scheduled to close
during the second quarter of 1997 and is subject to normal regulatory review.
The Company anticipates using the net cash proceeds generated from the sale for
one or more of the following purposes: strategic investments; repay
indebtedness; and repurchase Common Stock. The operations of these facilities
are immaterial to the Company's financial position and results of operations.
During the year ended December 31, 1995, the Company purchased 17
previously leased nursing facilities (2,118 beds), one previously leased
retirement living center (17 units) and certain other assets for approximately
$32,700,000 cash, approximately $40,400,000 acquired debt and approximately
$1,700,000 security and other deposits. The Company does not operate four of
such facilities which were subleased to other nursing home operators in prior
year transactions. Also during such period, the Company sold, subleased or
terminated the leases on 11 nursing facilities (1,199 beds), 12 homes for the
developmentally disabled (1,065 beds), six retirement living centers (1,141
units) and certain other assets for cash proceeds of approximately $39,400,000,
approximately $3,700,000 of notes receivable and the assumption of approximately
$52,800,000 of debt. In addition, the Company terminated a management agreement
on two nursing
F-20
<PAGE> 343
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
facilities (150 beds) and four assisted living centers (510 units). The
operations of these facilities were immaterial to the Company's financial
position and results of operations.
In June 1995, the Company acquired Pharmacy Management Services, Inc.
("PMSI") in exchange for approximately 12,400,000 shares of the Company's Common
Stock plus closing and related costs. PMSI is a leading nationwide provider of
medical cost containment and managed care services to workers' compensation
payors and claimants. The acquisition was accounted for as a purchase and was
not material to the Company's financial position or results of operations.
During the year ended December 31, 1994, the Company purchased 19
previously leased nursing facilities (2,202 beds), one previously leased
retirement living center (20 units) and certain other assets for approximately
$43,600,000 cash, approximately $1,000,000 issuance of debt, approximately
$16,900,000 assumed and acquired debt and approximately $1,400,000 security and
other deposits. Also during such period, the Company sold, subleased or
terminated the leases on 77 nursing facilities (7,192 beds) and certain other
assets for cash proceeds of approximately $80,200,000, approximately $700,000 of
notes receivable and the assumption of approximately $40,000 of debt. The
operations of these facilities were immaterial to the Company's financial
position and results of operations.
During the third quarter of 1994, the Company issued 2,400,000 shares of
Common Stock for all of the outstanding stock of American Transitional
Hospitals, Inc. ("ATH"). ATH operates licensed hospitals specializing in
long-term acute care and transitional acute care to medically complex,
chronically ill patients. The merger was accounted for as a pooling of interests
and, accordingly the Company's consolidated financial statements were restated
to reflect ATH's financial position, results of operations and cash flows for
each period prior to the merger. All transactions between the Company and ATH
prior to the merger were eliminated in the restated consolidated financial
statements. The merger of ATH was not material to the Company's financial
position or results of operations.
In November 1994, Pharmacy Corporation of America ("PCA"), a wholly-owned
subsidiary of the Company, acquired Insta-Care Holdings, Inc. ("Insta-Care"),
for cash of approximately $112,000,000, as well as other costs incurred totaling
approximately $10,500,000. Insta-Care provides pharmaceutical dispensing
services in six states to approximately 65,000 patients in nursing homes and
correctional facilities. In December 1994, PCA acquired three institutional
pharmacy subsidiaries of Synetic, Inc. ("Synetic pharmacies"), for cash of
approximately $107,300,000, as well as other costs incurred totaling
approximately $6,000,000. The Synetic businesses provide pharmaceutical
dispensing services in the New England area and the state of Indiana to
approximately 45,000 patients in various institutions, including nursing homes,
transitional care facilities, correctional facilities and group homes. These
acquisitions were accounted for as purchases and were not material to the
Company's financial position or results of operations.
F-21
<PAGE> 344
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. PROPERTY AND EQUIPMENT
Following is a summary of property and equipment and related accumulated
depreciation and amortization, by major classification, at December 31 (in
thousands):
<TABLE>
<CAPTION>
TOTAL OWNED LEASED
----------------------- ----------------------- -----------------
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Land, buildings and improvements................ $1,476,988 $1,375,945 $1,424,517 $1,319,008 $52,471 $56,937
Furniture and equipment......................... 375,479 347,478 365,678 340,220 9,801 7,258
Construction in progress........................ 39,403 47,587 39,403 47,587 -- --
---------- ---------- ---------- ---------- ------- -------
1,891,870 1,771,010 1,829,598 1,706,815 62,272 64,195
Less accumulated depreciation and
amortization.................................. 643,085 581,025 601,330 537,704 41,755 43,321
---------- ---------- ---------- ---------- ------- -------
$1,248,785 $1,189,985 $1,228,268 $1,169,111 $20,517 $20,874
========== ========== ========== ========== ======= =======
</TABLE>
The Company provides depreciation and amortization using the straight-line
method over the following estimated useful lives: land improvements -- 5 to 15
years; buildings -- 35 to 40 years; building improvements -- 5 to 20 years;
leasehold improvements -- 5 to 20 years or term of lease, if less; furniture and
equipment -- 5 to 15 years. Capitalized lease assets are amortized over the
remaining initial terms of the leases.
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1996, 1995 and 1994 was $85,221,000, $82,752,000
and $77,575,000, respectively.
F-22
<PAGE> 345
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31 (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Notes and mortgages, less imputed interest: 1996 -- $257,
1995 -- $312; due in installments through the year 2031,
at effective interest rates of 5.89% to 14.00%, a portion
of which is secured by property, equipment and other
assets with a net book value of $272,875 at December 31,
1996...................................................... $ 178,983 $ 158,597
Industrial development revenue bonds, less imputed interest:
1996 -- $48, 1995 -- $61; due in installments through the
year 2013, at effective interest rates of 4.99% to 10.52%,
a portion of which is secured by property and other assets
with a net book value of $221,964 at December 31, 1996.... 203,606 214,107
9% Senior Notes due February 15, 2006, unsecured............ 180,000 --
1996 Credit Agreement due December 31, 2001................. 156,000 --
1994 Credit Agreement (repaid in December 1996)............. -- 280,500
Term Loan under the 1992 Credit Facility (repaid in December
1996)..................................................... -- 55,000
Nippon Term Loan under the Nippon Credit Agreement (repaid
in December 1996)......................................... -- 20,000
Term Loan under the GE Capital Facility..................... 9,547 --
8 3/4% First Mortgage Bonds due July 1, 2008, secured by
first mortgages on eight nursing facilities with an
aggregate net book value of $16,924 at December 31,
1996...................................................... 19,362 19,765
8 5/8% First Mortgage Bonds due October 1, 2008, secured by
first mortgages on 11 nursing facilities with an aggregate
net book value of $30,417 at December 31, 1996............ 29,062 29,788
8 3/4% Notes due December 31, 2003, unsecured............... 24,845 24,875
7 3/4% Note due in quarterly installments through June 1,
2001, secured by first mortgages on 11 nursing facilities
and one assisted living center with an aggregate net book
value of $22,109 at December 31, 1996..................... 22,554 23,589
Series 1995 Bonds due June 2005, at interest rates of 6.88%
with respect to $7,000 and 7.24% with respect to $18,000,
secured by a letter of credit............................. 25,000 25,000
Medium Term Notes due June 15, 2000, at an interest rate
based on LIBOR, as defined, plus .35%, secured by eligible
receivables of selected nursing facilities of $70,902 at
December 31, 1996, which cannot be used to satisfy claims
of the Company or any of its subsidiaries................. 50,000 50,000
7 5/8% convertible subordinated debentures due March 15,
2003, convertible at $20.47 per share of Common Stock..... 67,924 67,924
5 1/2% convertible subordinated debentures due August 1,
2018, convertible at $13.33 per share of Common Stock..... 150,000 150,000
Zero coupon notes, face amount, less unamortized discount:
1996 -- $785, 1995 -- $1,039; maturing July 16, 2003,
anticipated to be due September 30, 1997, convertible into
13.32 shares of Common Stock per $1 note.................. 1,172 1,288
---------- ----------
1,118,055 1,120,433
Present value of capital lease obligations, less imputed
interest: 1996 -- $863, 1995 -- $972, at effective
interest rates of 5.71% to 13.00%......................... 27,027 31,115
---------- ----------
1,145,082 1,151,548
Less amounts due within one year............................ 38,826 84,639
---------- ----------
$1,106,256 $1,066,909
========== ==========
</TABLE>
F-23
<PAGE> 346
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. LONG-TERM OBLIGATIONS -- (CONTINUED)
In February 1996, the Company completed the sale of $180,000,000 of 9%
Senior Notes due February 15, 2006 (the "Senior Notes") through a public
offering (the "Senior Notes offering") for net cash proceeds of approximately
$174,850,000. The Company used approximately $87,500,000 of such net proceeds to
prepay certain scheduled maturities on the Term Loan under its 1994 Credit
Agreement, approximately $28,000,000 to prepay certain scheduled maturities on
the Term Loan under its 1992 Credit Facility, approximately $8,750,000 to prepay
certain scheduled maturities under its Nippon Term Loan, and the remaining net
proceeds to repay Revolver borrowings and for general corporate purposes. The
Senior Notes are unsecured obligations, guaranteed by substantially all of the
Company's present and future subsidiaries (collectively, the "Subsidiary
Guarantors"), and impose on the Company certain restrictive covenants. Separate
financial statements of the Subsidiary Guarantors are not considered to be
material to holders of the Senior Notes since the guaranty of each of the
Subsidiary Guarantors is joint and several and full and unconditional (except
that liability thereunder is limited to an aggregate amount equal to the largest
amount that would not render its obligations thereunder subject to avoidance
under Section 548 of the Bankruptcy Code of 1978, as amended, or any comparable
provisions of applicable state law), and Beverly Enterprises, Inc., the parent,
has no operations or assets separate from its investment in its subsidiaries.
In July 1996, the Company entered into a term loan facility (the "GE
Capital Facility"), whereby the Company may borrow up to $25,000,000 from time
to time in separate series, in amounts and at interest rates based on the
three-year U.S. Treasury Note rate plus 230 basis points at the date of funding.
The GE Capital Facility requires monthly principal and interest payments and is
secured by a security interest in certain lighting equipment of various nursing
facilities. As of December 31, 1996, approximately $14,900,000 of aggregate
principal amount under the GE Capital Facility remained unissued.
In December 1996, the Company entered into a $375,000,000 Amended and
Restated Credit Agreement (the "1996 Credit Agreement") which provides for a
Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). The proceeds
from the 1996 Credit Agreement were used to repay the Term Loan and Revolver
borrowings under the 1994 Credit Agreement, the Term Loan under the 1992 Credit
Facility and the Nippon Term Loan. Borrowings under the 1996 Credit Agreement
bear interest at adjusted LIBOR plus .875%, the Prime Rate, as defined, or the
adjusted CD rate, as defined, plus 1%, at the Company's option. Such interest
rates may be adjusted quarterly based on certain financial ratio calculations.
The Company pays certain commitment fees and commissions with respect to the
Revolver/LOC Facility and had approximately $186,800,000 of unused commitments
under such facility at December 31, 1996. The 1996 Credit Agreement is secured
by a security interest in the stock of PCA and certain of its subsidiaries and
imposes on the Company certain financial tests and restrictive covenants. The
Company incurred a $1,726,000 extraordinary charge, net of income taxes, in 1996
related to the write-off of unamortized deferred financing costs associated with
the repayment of these debt instruments, as well as certain bond refundings.
The Company entered into various other notes and mortgages during 1996
totaling approximately $38,700,000 in conjunction with the purchase of certain
nursing facilities. Such debt instruments bear interest at rates ranging from
8.25% to 9.08%, require monthly installments of principal and interest, and are
secured by mortgage interests in the real property and security interests in the
personal property of the purchased nursing facilities.
During 1996, the Company filed a Registration Statement covering
$200,000,000 of debt securities, shares of preferred stock, shares of Common
Stock and warrants to purchase Common Stock which may be offered, separately or
together, in separate series in amounts, at prices and on terms to be determined
at the time of sale. The net proceeds from the offerings are anticipated to be
used for general corporate purposes,
F-24
<PAGE> 347
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. LONG-TERM OBLIGATIONS -- (CONTINUED)
which may include, but are not limited to, working capital, capital
expenditures, repayments of indebtedness and acquisitions. As of December 31,
1996, no securities have been issued under such registration statement.
In 1993, the Company registered with the Securities and Exchange Commission
$100,000,000 aggregate principal amount of certain debt securities, which are to
be offered from time to time as separate series in amounts, at prices and on
terms to be determined at the time of sale. The Company issued $20,000,000 of
8 3/4% First Mortgage Bonds, $30,000,000 of 8 5/8% First Mortgage Bonds and
$25,000,000 of 8 3/4% Notes under such registration. As of December 31, 1996,
$25,000,000 of aggregate principal amount of debt securities under such
registration remained unissued.
Maturities and sinking fund requirements of long-term obligations,
including capital leases, for the years ending December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 THEREAFTER TOTAL
------- ------- ------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Future minimum lease payments.................... $ 6,682 $ 5,191 $ 4,272 $ 3,202 $ 3,228 $ 24,920 $ 47,495
Less interest.................................... 2,457 2,127 1,839 1,620 1,446 10,979 20,468
------- ------- ------- ------- -------- -------- ----------
Net present value of future minimum lease
payments....................................... 4,225 3,064 2,433 1,582 1,782 13,941 27,027
Notes, mortgages, bonds and debentures........... 34,601 39,790 34,687 87,076 205,525 716,376 1,118,055
------- ------- ------- ------- -------- -------- ----------
$38,826 $42,854 $37,120 $88,658 $207,307 $730,317 $1,145,082
======= ======= ======= ======= ======== ======== ==========
</TABLE>
Many of the capital and operating leases contain at least one renewal
option (which could extend the term of the leases by five to fifteen years),
purchase options, escalation clauses and provisions for payments by the Company
of real estate taxes, insurance and maintenance costs.
The industrial development revenue bonds were originally issued prior to
1985 primarily for the construction or acquisition of nursing facilities. Bond
reserve funds are included in designated funds. These funds are invested
primarily in certificates of deposit and in United States government securities
and are carried at cost, which approximates market value. Net capitalized
interest relating to construction was not material in 1996, 1995 or 1994.
5. COMMITMENTS AND CONTINGENCIES
The future minimum rental commitments required by all noncancelable
operating leases with initial or remaining terms in excess of one year as of
December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997............................................................... $ 73,533
1998............................................................... 58,579
1999............................................................... 47,373
2000............................................................... 32,578
2001............................................................... 22,036
Thereafter......................................................... 57,076
--------
$291,175
========
</TABLE>
Total future minimum rental commitments are net of approximately
$15,194,000 of minimum sublease rental income due in the future under
noncancelable subleases. Rent expense on operating leases, net of sublease
rental income, for the years ended December 31 was as follows:
1996 -- $116,718,000; 1995 -- $127,074,000; 1994 -- $127,187,000. Sublease rent
income was approximately $4,595,000, $5,426,000 and
F-25
<PAGE> 348
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
$5,410,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Contingent rent expense, based primarily on revenues, was approximately
$18,000,000, $22,000,000 and $22,000,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
In 1992, the Company entered into an agreement to outsource its management
information systems functions for a period of seven years, with an option to
renew based on mutual agreement among the parties. The future minimum
commitments as of December 31, 1996 required under such agreement, as amended,
are as follows: 1997 -- $6,133,000; 1998 -- $6,133,000; 1999 -- $3,578,000. The
Company incurred approximately $8,711,000, $8,529,000 and $8,906,000 under such
agreement during the years ended December 31, 1996, 1995 and 1994, respectively.
The Company is contingently liable for approximately $105,596,000 of
long-term obligations maturing on various dates through 2019, as well as annual
interest and letter of credit fees of approximately $8,460,000. Such contingent
liabilities principally arose from the Company's sale of nursing facilities and
retirement living centers. The Company operates the facilities related to
approximately $25,891,000 of the principal amount for which it is contingently
liable, pursuant to long-term agreements accounted for as operating leases. In
addition, the Company is contingently liable for various operating leases that
were assumed by purchasers and are secured by the rights thereto.
Approximately 100 of the Company's facilities are represented by various
labor unions. Certain labor unions have publicly stated that they are
concentrating their organizing efforts within the long-term healthcare industry.
The Company, being one of the largest employers within the long-term healthcare
industry, has been the target of a "corporate campaign" by two AFL-CIO
affiliated unions attempting to organize certain of the Company's facilities.
Although the Company has never experienced any material work stoppages and
believes that its relations with its employees (and the existing unions that
represent certain of them) are generally good, the Company cannot predict the
effect continued union representation or organizational activities will have on
the Company's future activities. There can be no assurance that continued union
representation and organizational activities will not result in material work
stoppages, which could have a material adverse effect on the Company's
operations.
There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
6. STOCKHOLDERS' EQUITY
The Company had 300,000,000 shares of authorized $.10 par value common
stock ("Common Stock") at December 31, 1996 and 1995. The Company is subject to
certain restrictions under its long-term debt agreements related to the payment
of cash dividends on its Common Stock. The Company had 25,000,000 shares of
authorized $1 par value preferred stock at December 31, 1996 and 1995, all of
which remained unissued. The Board of Directors has authority, without further
stockholder action, to set rights, privileges and preferences for any unissued
shares of preferred stock.
In June 1996, the Company announced that its Board of Directors had
authorized a stock repurchase program whereby the Company may repurchase, from
time to time on the open market, up to a total of 10,000,000 shares of its
outstanding Common Stock. During 1996, the Company repurchased approximately
1,500,000 shares of its Common Stock at a cost of approximately $17,800,000. The
repurchases were financed primarily through proceeds from dispositions and
borrowings under the Company's Revolver/LOC Facility.
F-26
<PAGE> 349
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
During 1994, the Board of Directors of the Company adopted a Stockholder
Rights Plan (the "Rights Plan"). The Rights Plan provides for the distribution
of one Common Stock Purchase Right (the "Rights") for each share of Common Stock
outstanding at the close of business on November 2, 1994. Under certain
circumstances, the Rights become exercisable to purchase shares of Common Stock,
or securities of an acquiring entity, at one-half of market value. The Rights
are designed to protect stockholders in the event of an unsolicited attempt to
acquire the Company and to deal with the possibility of unilateral actions by
hostile acquirors. These Rights are redeemable at the option of the Company at
$.01 per Right. The issuance of the Rights has no dilutive effect on the
Company's earnings per share.
During 1996, the Beverly Enterprises, Inc. 1996 Long-Term Incentive Plan
was approved (the "1996 Long-Term Incentive Plan"). Such plan became effective
July 1, 1996 and will remain in effect until December 31, 2006, subject to the
earlier termination by the Board of Directors. The Company has 4,000,000 shares
of Common Stock authorized for issuance, subject to certain adjustments, under
the 1996 Long-Term Incentive Plan in the form of nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock,
performance awards and other stock unit awards. Nonqualified and incentive stock
options must be granted at a purchase price equal to market price on the date of
grant. All options are exercisable no sooner than six months from the grant date
and expire no later than 10 years from the grant date. Stock appreciation rights
may be granted alone, in tandem with an option or in addition to an option.
Stock appreciation rights are exercisable no sooner than six months from the
grant date and expire no later than 10 years from the grant date. Restricted
stock awards are outright stock grants which have a minimum vesting period of
one year for performance-based awards and three years for other awards.
Performance awards and other stock unit awards may be granted based on the
achievement of certain performance or other goals and will carry certain
restrictions, as defined. The Compensation Committee of the Board of Directors
is responsible for administering the 1996 Long-Term Incentive Plan and will have
complete discretion in determining the number of shares or units to be granted,
in setting performance goals and in applying other restrictions to awards, as
needed, under the plan.
The Company has 200,000 shares of Common Stock authorized for issuance,
subject to certain adjustments, under its Nonemployee Directors' Plan. The
Nonemployee Directors' Plan provides that 2,500 nonqualified stock options be
granted to each nonemployee director on June 1 of each year until the plan is
terminated, subject to the availability of shares. Such nonqualified stock
options are granted at a purchase price equal to fair market value on the date
of grant, become exercisable one year after date of grant and expire ten years
after date of grant.
The Company has 3,000,000 shares of Common Stock authorized for issuance,
subject to certain adjustments, under its 1993 Incentive Stock Plan in the form
of nonqualified stock options, incentive stock options, restricted stock,
performance awards and other stock unit awards. Incentive stock options must be
granted at a purchase price equal to market price on the date of grant.
Nonqualified stock options may be granted at no less than 85% of market price on
the date of grant. All grants made at less than market price must be in lieu of
cash payments. All options are exercisable no sooner than one year from the
grant date and expire no later than 10 years from the grant date. Restricted
stock awards are outright stock grants which have a minimum vesting period of
one year for performance-based awards, and three years for other awards.
Performance awards and other stock unit awards, including phantom units, may be
granted based on the achievement of certain performance or other goals and will
carry certain restrictions, as defined. The Compensation Committee of the Board
of Directors is responsible for administering the 1993 Incentive Stock Plan and
will have complete discretion in determining the number of shares or units to be
granted, in setting performance goals and in applying other restrictions to
awards, as needed, under the plan.
F-27
<PAGE> 350
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The Company has 2,400,000 shares of Common Stock authorized for issuance
under its 1985 Nonqualified Stock Option Plan. Under the plan, options are
granted at a purchase price equal to market price on the date of grant, become
exercisable no sooner than one year after date of grant and expire no later than
12 years after date of grant, as determined by the Compensation Committee of the
Board of Directors. In addition to options, the plan provides for outright
grants of Common Stock, subject to forfeiture provisions. As a condition
precedent to the release of such shares, the employee must be continuously
employed with the Company from and after the date of grant and remain employed
on share release dates. Commencing one year after the grant date, the shares
will be released in accordance with a schedule determined at the time of grant.
During 1995, in conjunction with the acquisition of PMSI, the Company
assumed PMSI's 1990 Incentive and Non-statutory Stock Option Plan, as amended,
(the "PMSI Plan") and issued options to purchase shares of the Company's Common
Stock in exchange for each option then outstanding under the PMSI Plan. During
1994, in conjunction with the merger of ATH, the Company assumed ATH's 1993
Nonqualified Stock Option Plan (the "ATH Plan") and issued options to purchase
shares of the Company's Common Stock in exchange for each option then
outstanding under the ATH Plan. In addition, the Company signed an option
agreement with an officer of ATH and issued options to purchase shares of ATH
stock previously held by such officer. Also during 1994, in conjunction with the
acquisition of Insta-Care, the Company issued options to purchase shares of its
Common Stock in exchange for each option then outstanding under the Insta-Care
Holdings, Inc. First Employees Stock Option Plan (the "Insta-Care Plan"). No
options are available for grant under the PMSI Plan, the ATH Plan or the
Insta-Care Plan.
F-28
<PAGE> 351
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The following table summarizes stock option, restricted stock and other
stock units data relative to the Company's 1996 Long-Term Incentive Plan, the
Nonemployee Directors' Plan, the 1993 Incentive Stock Plan, the 1985
Nonqualified Stock Option Plan, the PMSI Plan, the ATH Plan and the Insta-Care
Plan for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 4,394,382 $ 9.02 4,375,441 $ 8.74 3,989,411 $ 8.26
Changes during the year:
Granted................ 1,696,500 12.38 355,500 13.04 635,000 14.01
Acquired............... -- -- 342,311 6.17 269,620 1.22
Exercised.............. (833,587) 5.41 (416,010) 5.22 (375,369) 6.35
Cancelled.............. (348,568) 12.39 (262,860) 12.19 (143,221) 10.82
--------- --------- ---------
Options outstanding at
end of year............ 4,908,727(1) 10.55 4,394,382 9.02 4,375,441 8.74
========= ========= =========
Options exercisable at
end of year............ 2,560,209 8.75 3,028,903 7.52 2,340,512 7.24
========= ========= =========
Options available for
grant.................. 3,052,403 1,243,953 1,735,318
========= ========= =========
Restricted stock
outstanding at
beginning of year...... 306,052 267,353 431,800
Changes during the year:
Granted................ 29,000 236,555 14,553
Vested................. (148,352) (182,153) (167,000)
Forfeited.............. (41,500) (15,703) (12,000)
--------- --------- ---------
Restricted stock
outstanding at end of
year................... 145,200 306,052 267,353
========= ========= =========
Phantom units outstanding
at beginning of year... 90,942 44,529 --
Changes during the year:
Granted................ -- 54,110 44,529
Vested................. (6,982) -- --
Cancelled.............. (7,191) (7,697) --
--------- --------- ---------
Phantom units outstanding
at end of year......... 76,769 90,942 44,529
========= ========= =========
Performance units
outstanding at
beginning of year...... -- -- --
Changes during the year:
Granted................ 1,040,000 -- --
Cancelled.............. (48,000) -- --
--------- --------- ---------
Performance units
outstanding at end of
year................... 992,000 -- --
========= ========= =========
</TABLE>
- ---------------
(1) Exercise prices for options outstanding as of December 31, 1996 ranged from
$0.83 to $18.63. The weighted-average remaining contractual life of these
options is seven years.
F-29
<PAGE> 352
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The Company accounts for its stock-based awards in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and related Interpretations because, as discussed
below, the alternative fair value accounting provided for under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") requires use of option valuation models that
were not developed for use in valuing employee stock options. Since the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized for
employee stock options under APB No. 25. The Company recognizes compensation
expense for its restricted stock grants, performance unit grants (when the
performance targets are achieved) and other stock unit awards. The total charges
to the Company's consolidated statements of operations for the years ended
December 31, 1996, 1995 and 1994 related to these stock-based awards were
approximately $509,000, $3,065,000 and $1,189,000, respectively.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its 1996 and 1995 stock option and performance unit grants under
the fair value method as prescribed by such statement. The fair value for stock
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for the years ended
December 31, 1996 and 1995, respectively: risk-free interest rates of 6.5% and
6.0%; volatility factors of the expected market price of the Company's Common
Stock of .34 and .35; and a weighted-average expected life of the option of 10
years. The Company does not currently pay cash dividends on its Common Stock and
no future dividends are currently planned. Such weighted-average assumptions
resulted in a weighted average fair value of options granted during 1996 and
1995 of $7.30 per share and $7.65 per share, respectively. The fair value of the
performance unit grants was based on the market value of the Company's Common
Stock on the date of grant.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
stock options and performance units is amortized to expense over their
respective vesting periods. The pro forma effects on reported net income (loss)
and earnings per share assuming the Company had elected to account for its stock
option and performance unit grants in accordance with SFAS No. 123 for the years
ended December 31, 1996 and 1995, respectively, would have been net income of
$48,964,000 or $.49 per share and net loss of $8,408,000 or $.17 per share. Such
pro forma effects are not necessarily indicative of the effect on future years.
The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees having completed one year of
continuous service to purchase shares of Common Stock at the current market
price through payroll deductions. The Company makes contributions in the amount
of 30% of the participant's contribution. Each participant specifies the amount
to be withheld from earnings per two-week pay period, subject to certain
limitations. The total charges to the Company's consolidated statements of
operations for the years ended December 31, 1996, 1995 and 1994 related to this
plan were approximately $2,258,000, $2,201,000 and $1,790,000, respectively.
F-30
<PAGE> 353
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. INCOME TAXES
The provisions for taxes on income before extraordinary charge consist of
the following for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Federal:
Current............................................ $31,615 $ 17,518 $31,523
Deferred........................................... 29,466 (16,877) (2,824)
State:
Current............................................ 8,101 4,845 8,390
Deferred........................................... 4,299 (3,517) 793
------- -------- -------
$73,481 $ 1,969 $37,882
======= ======== =======
</TABLE>
The Company had an annual effective tax rate of 59% for the year ended
December 31, 1996, compared to a negative annual effective tax rate of 32% and
an annual effective tax rate of 33% for the years ended December 31, 1995 and
1994, respectively. The annual effective tax rate in 1996 was different than the
federal statutory rate primarily due to the impact of nondeductible goodwill
associated with the MedView disposition (see Note 2). The annual effective tax
rate in 1995 was different than the federal statutory rate primarily due to the
impact of nondeductible goodwill included in the adjustments resulting from the
adoption of SFAS No. 121. In addition, the Company's annual effective tax rate
for 1994 was lower than the federal statutory rate primarily due to the
utilization of certain tax credit carryforwards, partially offset by the impact
of state income taxes.
A reconciliation of the provision for (benefit from) income taxes, computed
at the statutory rate, to the Company's annual effective tax rate is summarized
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax (benefit) at statutory
rate........................... $43,927 35 $(2,154) 35 $ 40,178 35
General business tax credits..... -- -- (1,014) 17 (16,199) (14)
State tax provision, net......... 8,060 6 863 (14) 6,130 5
Nondeductible intangibles........ 20,881 17 3,797 (62) 940 1
Other............................ 613 1 477 (8) 6,833 6
------- -- ------- --- -------- ---
$73,481 59 $ 1,969 (32) $ 37,882 33
======= == ======= === ======== ===
</TABLE>
F-31
<PAGE> 354
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. INCOME TAXES -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of temporary
differences giving rise to the Company's deferred tax assets and liabilities at
December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
ASSET LIABILITY ASSET LIABILITY
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Insurance reserves.............................. $ 55,540 $ -- $ 53,333 $ --
General business tax credit carryforwards....... 12,236 -- 20,784 --
Alternative minimum tax credit carryforwards.... 14,698 -- 15,129 --
Provision for dispositions...................... 11,009 6,152 17,825 6,771
Depreciation and amortization................... 1,401 141,804 25,395 143,267
Operating supplies.............................. -- 14,206 -- 13,378
Other........................................... 22,995 24,784 23,666 22,511
-------- -------- -------- --------
$117,879 $186,946 $156,132 $185,927
======== ======== ======== ========
</TABLE>
At December 31, 1996, the Company had general business tax credit
carryforwards of $12,236,000 for income tax purposes which expire in years 2005
through 2011. For financial reporting purposes, the general business tax credit
carryforwards have been utilized to offset existing net taxable temporary
differences reversing during the carryforward periods.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Statement No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial instruments:
Cash and Cash Equivalents
The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents approximates its fair value.
Notes Receivable, Net (Including Current Portion)
For variable-rate notes that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for other loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
F-32
<PAGE> 355
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Beverly Indemnity Funds
The fair value of the Beverly Indemnity funds is based on information
obtained from the trustee and the manager of such funds. Such funds are included
in the consolidated balance sheet captions "Prepaid expenses and other" and
"Designated and restricted funds" based on when the corresponding claims are
expected to be paid. These funds are invested primarily in United States
government securities with maturity dates ranging primarily from one to five
years. The Company intends to hold such securities to maturity.
Investment in a Real Estate Mortgage Investment Conduit (REMIC)
The fair value of the Company's REMIC investment, which is included in the
consolidated balance sheet caption "Other, net," is based on information
obtained from the REMIC servicer. The Company intends to convert the REMIC
investment to notes receivable from the underlying note makers during 1997. Such
conversion to notes in 1997 is not expected to have a material adverse effect on
the carrying amount or fair value disclosed.
Long-term Obligations (Including Current Portion)
The carrying amounts of the Company's variable-rate borrowings approximate
their fair values. The fair values of the remaining long-term obligations are
estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 69,761 $ 69,761 $ 56,303 $ 56,303
Notes receivable, net (including
current portion)................ 48,052 49,900 49,375 51,800
Beverly Indemnity funds........... 94,472 94,821 58,284 59,806
REMIC investment.................. 8,052 8,084 17,974 18,000
Long-term obligations (including
current portion)................ 1,145,082 1,161,031 1,151,548 1,175,000
</TABLE>
In order to consummate certain dispositions and other transactions, the
Company has agreed to guarantee the debt assumed or acquired by the purchaser or
the performance under a lease, by the lessor. It was not practicable to estimate
the fair value of the Company's off-balance sheet guarantees (See Note 5). The
Company does not charge a fee for entering into such agreements and contracting
with a financial institution to estimate such amounts could not be done without
incurring excessive costs. In addition, unlike the Company, a financial
institution would not be in a position to assume the underlying obligations and
operate the nursing facilities collateralizing the obligations, which would
significantly impact the calculation of the fair value of such off-balance sheet
guarantees.
9. ADDITIONAL INFORMATION
Effective July 31, 1987, Beverly Enterprises, a California corporation
("Beverly California"), became a wholly-owned subsidiary of Beverly Enterprises,
Inc., a Delaware corporation ("Beverly Delaware"). Effective
F-33
<PAGE> 356
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. ADDITIONAL INFORMATION -- (CONTINUED)
January 1, 1995, Beverly California changed its name to Beverly Health and
Rehabilitation Services, Inc. ("BHRS") and distributed certain of its
wholly-owned subsidiaries to Beverly Delaware in an effort to better focus
management's attention on specific services delivered by the Company within the
long-term healthcare arena. Beverly Delaware (the parent) provides financial,
administrative and legal services to its subsidiaries, including BHRS, for which
it charges management fees.
The following summarized financial information concerning BHRS is being
reported because BHRS's 7 5/8% convertible subordinated debentures due March
2003 and its zero coupon notes (collectively, the "Debt Securities") are
publicly-held. Beverly Delaware is co-obligor of these Debt Securities. Summary
financial information for BHRS is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Total revenues.......................................... $2,717,360 $2,797,348 $2,985,107
Total costs and expenses................................ 2,581,647 2,780,463 2,870,529
Income before extraordinary charge...................... 80,071 7,598 76,767
Net income.............................................. 78,345 7,598 74,777
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C> <C>
Current assets.......................................... $ 369,501 $ 421,641
Long-term assets........................................ 1,404,292 1,365,413
Current liabilities..................................... 184,887 367,074
Long-term liabilities................................... 795,593 709,515
</TABLE>
F-34
<PAGE> 357
BEVERLY ENTERPRISES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
DUE TO
BALANCE AT CHARGED ACQUISITIONS BALANCE
BEGINNING (CREDITED) TO AND AT END OF
DESCRIPTION OF YEAR OPERATIONS WRITE-OFFS DISPOSITIONS OTHER YEAR
----------- ---------- ------------- ---------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts:
Accounts receivable -- patient.... $22,860 $ 28,637 $(29,163) $ 2,555 $ 729 $ 25,618
Accounts
receivable -- nonpatient........ 813 56 (223) -- (9) 637*
Notes receivable.................. 4,953 (149) (257) 24 380 4,951
------- -------- -------- -------- -------- --------
$28,626 $ 28,544 $(29,643) $ 2,579 $ 1,100 $ 31,206
======= ======== ======== ======== ======== ========
Year ended December 31, 1995:
Allowance for doubtful accounts:
Accounts receivable -- patient.... $28,293 $ 21,008 $(30,326) $ 3,885 $ -- $ 22,860
Accounts
receivable -- non-patient....... 2,802 (1,919) (70) -- -- 813*
Notes receivable.................. 6,429 (3,200) (61) 1,285 500 4,953
------- -------- -------- -------- -------- --------
$37,524 $ 15,889 $(30,457) $ 5,170 $ 500 $ 28,626
======= ======== ======== ======== ======== ========
Valuation allowance on deferred tax
assets............................ $ 198 $ (198) $ -- $ -- $ -- $ --
======= ======== ======== ======== ======== ========
Year ended December 31, 1994:
Allowance for doubtful accounts:
Accounts receivable -- patient.... $19,999 $ 18,124 $(20,109) $ 10,339 $ (60) $ 28,293
Accounts
receivable -- nonpatient........ 343 233 (334) -- 2,560 2,802*
Notes receivable.................. 10,440 (4,250) (58) -- 297 6,429
------- -------- -------- -------- -------- --------
$30,782 $ 14,107 $(20,501) $ 10,339 $ 2,797 $ 37,524
======= ======== ======== ======== ======== ========
Accrued restructuring costs......... $34,310 $ (2,400) $ -- $(15,684) $(16,226)(1) $ --
======= ======== ======== ======== ======== ========
Valuation allowance on deferred tax
assets............................ $15,097 $(14,899) $ -- $ -- $ -- $ 198
======= ======== ======== ======== ======== ========
</TABLE>
- ---------------
* Includes amounts classified in long-term other assets as well as current
assets.
(1) Primarily relates to costs of relocating certain administrative, operations
and management information system support functions.
F-35
<PAGE> 358
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Pharmacy Corporation of America
We have audited the accompanying consolidated balance sheets of Pharmacy
Corporation of America as of December 31, 1996 and 1995, and the related
consolidated statements of income and retained earnings, and cash flows for each
of the three years in the period ended December 31, 1996. Our audits also
included the financial statement Schedule II -- Valuation and Qualifying
Accounts of Pharmacy Corporation of America. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Pharmacy Corporation of America at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
ERNST & YOUNG LLP
Little Rock, Arkansas
April 18, 1997
F-36
<PAGE> 359
PHARMACY CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,575 $ 3,315
Accounts receivable, less allowance for doubtful accounts:
1996 -- $13,070, 1995 -- $17,913....................... 93,078 84,651
Notes and other receivables, less allowance for doubtful
accounts: 1996 -- $820, 1995 -- $352................... 1,383 2,892
Inventory................................................. 22,025 25,175
Prepaid expenses and other................................ 335 298
-------- --------
Total current assets.............................. 124,396 116,331
Property and equipment, net (Note 3)........................ 32,698 28,551
Other assets:
Goodwill, net............................................. 276,430 277,360
Systems development, net.................................. 4,837 4,627
Other, net................................................ 3,215 2,003
-------- --------
Total other assets................................ 284,482 283,990
-------- --------
$441,576 $428,872
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,017 $ 25,039
Accrued wages and related liabilities..................... 6,656 4,212
Other accrued liabilities................................. 6,621 8,938
Current portion of long-term obligations (Note 4)......... 968 630
-------- --------
Total current liabilities......................... 32,262 38,819
Long-term obligations (Note 4).............................. 1,334 125
Deferred income taxes....................................... 3,980 --
Due to Parent (Notes 4, 6, 9 and 10)........................ 312,395 318,610
Commitments and contingencies (Note 5)
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding................................. 1 1
Additional paid-in capital................................ 3,866 3,866
Retained earnings......................................... 87,738 67,451
-------- --------
Total stockholder's equity........................ 91,605 71,318
-------- --------
$441,576 $428,872
======== ========
</TABLE>
See accompanying notes.
F-37
<PAGE> 360
PHARMACY CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Non-affiliates............................................ $434,317 $377,664 $170,299
Affiliates (Note 9)....................................... 82,083 74,021 77,213
-------- -------- --------
Total revenues.................................... 516,400 451,685 247,512
Cost of goods sold.......................................... 280,468 242,761 117,045
-------- -------- --------
Gross profit................................................ 235,932 208,924 130,467
Operating expenses:
Wages and related......................................... 118,888 106,742 61,619
Selling, general and administrative....................... 50,377 48,334 28,302
Provision for doubtful accounts........................... 13,500 17,679 7,388
Depreciation and amortization............................. 16,392 13,219 5,734
Management fees (Note 9).................................. 1,820 2,844 2,075
Impairment of long-lived assets (Note 1):
Adoption of SFAS No. 121............................... -- 5,392 --
Development costs...................................... -- 4,151 --
-------- -------- --------
Total operating expenses.......................... 200,977 198,361 105,118
-------- -------- --------
Income before provision for income taxes.................... 34,955 10,563 25,349
Provision for income taxes (Note 6)......................... 14,668 5,977 10,291
-------- -------- --------
Net income.................................................. 20,287 4,586 15,058
Retained earnings, beginning of year........................ 67,451 62,865 47,807
-------- -------- --------
Retained earnings, end of year.............................. $ 87,738 $ 67,451 $ 62,865
======== ======== ========
</TABLE>
See accompanying notes.
F-38
<PAGE> 361
PHARMACY CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 20,287 $ 4,586 $ 15,058
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 16,392 13,219 5,734
Impairment of long-lived assets........................ -- 9,543 --
Gain on dispositions of assets......................... (250) -- --
Provision for doubtful accounts........................ 13,500 17,679 7,388
Deferred income taxes (benefit)........................ 4,159 (909) 635
Change in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable.................................. (21,474) (22,489) (14,972)
Inventory............................................ 3,510 2,282 (1,173)
Prepaid expenses and other receivables............... (44) 614 147
Accounts payable and accrued expenses................ (7,498) (2,836) 6,595
-------- -------- ---------
Total adjustments................................. 8,295 17,103 4,354
-------- -------- ---------
Net cash provided by operating activities......... 28,582 21,689 19,412
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........... (10,835) (2,151) (223,435)
Proceeds from dispositions................................ 2,152 -- --
Capital expenditures...................................... (7,803) (10,497) (6,903)
Systems development....................................... (1,813) (2,601) (504)
Other, net................................................ 329 1,852 (11)
-------- -------- ---------
Net cash used for investing activities............ (17,970) (13,397) (230,853)
Cash flows from financing activities:
Advances (to) from Parent, net............................ (5,064) (9,716) 216,735
Proceeds from issuance of long-term obligations........... -- 143 --
Repayments of long-term obligations....................... (1,288) (877) (1,079)
-------- -------- ---------
Net cash provided by (used for) financing
activities...................................... (6,352) (10,450) 215,656
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 4,260 (2,158) 4,215
Cash and cash equivalents at beginning of year.............. 3,315 5,473 1,258
-------- -------- ---------
Cash and cash equivalents at end of year.................... $ 7,575 $ 3,315 $ 5,473
======== ======== =========
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest............................................... $ 11 $ 35 $ 517
</TABLE>
See accompanying notes.
F-39
<PAGE> 362
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pharmacy Corporation of America (the "Company") is a wholly-owned
subsidiary of Beverly Enterprises, Inc. ("Beverly"). The Company is one of the
nation's largest institutional pharmacies delivering drugs and related products
and services, infusion therapy and other healthcare products (enteral and
urological) to nursing facilities, acute care and transitional care hospitals,
home care providers, psychiatric facilities, correctional facilities, assisted
living centers, retirement homes and their patients. The Company also provides
consultant pharmacist services, which include evaluations of patient drug
therapy, and drug handling, distribution and administration within a nursing
facility as well as assistance with state and federal regulatory compliance. The
Company's mail service pharmacy delivers drugs and medical equipment to workers'
compensation payors, claimants and employers. As of December 31, 1996, the
Company operated 57 pharmacies and pharmacy-related outlets located in 25
states. All references to the Company shall mean Pharmacy Corporation of America
and its consolidated subsidiaries. All significant intercompany accounts and
transactions between the Company and its subsidiaries have been eliminated. (See
Note 10.)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits and certificates of deposit
with original maturities of three months or less.
INVENTORY
Inventory, consisting of pharmaceuticals and other products held for
resale, are carried primarily at the lower of cost (first-in, first-out) or
market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligation
less accumulated amortization. Depreciation and amortization are computed by the
straight-line method over the estimated useful lives of the assets.
INTANGIBLES
Goodwill (stated at cost less accumulated amortization of approximately
$17,865,000 and $10,586,000 in 1996 and 1995, respectively) is being amortized
over 40 years using the straight-line method.
Software development (stated at cost less accumulated amortization of
approximately $5,674,000 and $4,068,000 in 1996 and 1995, respectively) is being
amortized over five years using the straight-line method. Software development
costs consist of incremental costs for the development of software to be used in
the operations of the Company and the cost of any purchased software packages.
On an ongoing basis, the Company reviews the carrying value of its
intangible assets in light of any events or circumstances that indicate they may
be impaired or that the amortization period may need to be adjusted.
F-40
<PAGE> 363
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
If such circumstances suggest the intangible value cannot be recovered,
calculated based on undiscounted cash flows over the remaining amortization
period, the carrying value of the intangible will be reduced by such shortfall.
As of December 31, 1996, the Company does not believe there is any indication
that the carrying value or the amortization period of its intangibles needs to
be adjusted.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121")
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted future
cash flows are not sufficient to recover the assets' carrying amounts. The
impairment loss is measured by comparing the fair value of an asset to its
carrying amount.
In 1995, the Company recorded an impairment loss of approximately
$5,392,000 upon adoption of SFAS No. 121. The impairment indicators which led to
recording this loss were as follows: two pharmacies, purchased by the Company in
late 1994, had operating losses in 1995, and the Company anticipated future
operating losses for these facilities primarily related to Beverly's lack of
presence in the markets; one pharmacy, located in a state where Beverly had
recently sold all of its interest, began to lose the contracts that had been
assumed by the new owners, and it became apparent that the operations would not
recover to their previous level; and, lastly, the Company operates a medical
records servicing business which lost approximately half of its business in 1995
when Beverly pursued a different vendor for this service. Accordingly,
management estimated the undiscounted future cash flows to be generated by each
business. The undiscounted future cash flow estimates were less than the
carrying value of such businesses, so management estimated the fair value of
such businesses and wrote the carrying values down to their estimates of fair
value. Management calculated the fair values of the impaired businesses by using
the present values of estimated future cash flows.
In addition to the SFAS No. 121 charge, the Company recorded an impairment
loss in 1995 of approximately $4,151,000 primarily related to the write-off of
software costs. In conjunction with the Company's 1995 acquisition of
Prescription Management Services, Inc. ("PMSI") (see Note 2), PMSI's Vice
President of Management Information Systems assumed the management information
systems' functions for the Company and redirected the Company's systems
development initiatives, which caused a write-off of certain software and
systems development costs.
INSURANCE
The Company is insured for general liability and workers' compensation
risks through Beverly's self-insurance programs. Beverly allocates expense to
the Company based on the relative percentage of insurance costs incurred by
Beverly on behalf of the Company. Total insurance allocations to the Company
were approximately $1,829,000, $1,409,000 and $919,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Management believes these
charges represent a reasonable allocation of the costs incurred by Beverly on
behalf of the Company.
STOCK-BASED AWARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair
F-41
<PAGE> 364
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
value on the date of grant. The Company has elected to continue to account for
stock-based awards in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for stock option grants. See Note 7 for the pro forma
effects on the Company's reported net income assuming the election had been made
to recognize compensation expense on stock-based awards in accordance with SFAS
No. 123.
REVENUES
The Company's revenues are derived primarily from providing pharmaceuticals
and related healthcare products and services to long-term care facilities, acute
care and transitional care hospitals, home care providers, psychiatric
facilities, correctional facilities and their patients. The Company's mail
service pharmacy delivers drugs and medical equipment to workers' compensation
payors, claimants and employers. The Company records fees at the time the
services or products are provided. These revenues are reported at the estimated
net amounts to be received from individuals, third party payors, nursing
facilities and others. Approximately 37%, 41% and 41% of the Company's operating
revenues for 1996, 1995 and 1994, respectively, were derived from funds under
federal and state medical assistance programs, and approximately 43% of the
Company's net accounts receivable at December 31, 1996 and 1995 are due from
such programs.
Concentration of Credit Risk
The Company has significant accounts receivable whose collectibility or
realizability is dependent upon the performance of certain governmental
programs, primarily Medicaid and Medicare. These receivables represent the only
concentration of credit risk for the Company. The Company does not believe there
are significant credit risks associated with these governmental programs. The
Company believes that an adequate provision has been made for the possibility of
these receivables proving uncollectible and continually monitors and adjusts
these allowances as necessary. See also Note 9 for a discussion of business with
Beverly.
2. ACQUISITIONS
During 1996, the Company acquired three institutional pharmacies for cash
of approximately $10,835,000 and disposed of one institutional pharmacy for cash
proceeds of approximately $2,152,000. The acquisitions were accounted for as
purchases.
In June 1995, Beverly acquired Pharmacy Management Services, Inc. ("PMSI")
in exchange for approximately 12,361,000 shares of Beverly common stock, plus
closing and related costs. As a leading independent nationwide provider of
medical cost containment and managed care services to workers' compensation
payors and claimants, PMSI's services included, among others, pharmacy benefit
management through both a national retail pharmacy network and home delivery of
prescription drugs, medical supplies and medical equipment. The mail-service
portion of PMSI's business was assumed by the Company. This transaction was
accounted for as a purchase and resulted in additional goodwill for the Company
of approximately $ 83,800,000. The Company also purchased one institutional
pharmacy during 1995 for cash of approximately $2,492,000. This acquisition was
accounted for as a purchase.
In November 1994, the Company acquired Insta-Care Holdings, Inc.,
("Insta-Care") for cash of approximately $112,000,000 as well as other costs
incurred totaling approximately $8,600,000. Insta-Care provided pharmaceutical
dispensing services in six states to approximately 65,000 patients in nursing
homes and correctional facilities. In December 1994, the Company acquired three
institutional pharmacy subsidiaries of Synetic, Inc., ("Synetic") for cash of
approximately $107,300,000, as well as other costs incurred totaling
approximately $6,000,000. The Synetic businesses provided pharmaceutical
dispensing services in New
F-42
<PAGE> 365
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. ACQUISITIONS -- (CONTINUED)
England and Indiana to approximately 45,000 patients in various institutions,
including nursing homes, transitional care facilities, correctional facilities
and group homes. These acquisitions were accounted for as purchases and resulted
in additional goodwill for the Company of approximately $95,100,000 related to
Insta-Care and approximately $90,800,000 related to Synetic. The Company
consummated such transactions with funds provided by Beverly. Beverly borrowed
such funds through banking arrangements (see Note 4). The Company also purchased
one institutional pharmacy during 1994 for cash of approximately $782,000. This
acquisition was accounted for as a purchase.
Summarized below are the unaudited proforma consolidated results of
operations of the Company for the years ended December 31, 1995 and 1994,
assuming the PMSI, Insta-Care and Synetic transactions discussed above had
occurred as of January 1, 1994. The operations of all of the other pharmacies
acquired or disposed of during 1996, 1995 and 1994 were immaterial to the
Company's financial position and results of operations.
These unaudited proforma consolidated results of operations have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had those transactions been made at January 1, 1994, or
of results which may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994
-------- ------------------------
INSTA-CARE,
INSTA-CARE SYNETIC
PMSI & SYNETIC & PMSI
-------- ---------- -----------
<S> <C> <C> <C>
Revenues.................................................... $493,262 $421,379 $505,350
Income before provision for income taxes.................... 12,827 30,217 35,863
Net income.................................................. 5,567 17,950 21,304
</TABLE>
3. PROPERTY AND EQUIPMENT
Following is a summary of property and equipment and related accumulated
depreciation and amortization by major classifications at December 31 (in
thousands):
<TABLE>
<CAPTION>
TOTAL OWNED LEASED
----------------- ----------------- ---------------
1996 1995 1996 1995 1996 1995
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Leasehold improvements..................... $11,460 $ 9,941 $11,460 $ 9,941 $ -- $ --
Furniture and equipment.................... 44,156 34,859 39,764 33,146 4,392 1,713
Construction in progress................... 345 550 345 550 -- --
------- ------- ------- ------- ------ ------
55,961 45,350 51,569 43,637 4,392 1,713
Less: accumulated depreciation and
amortization......................... 23,263 16,799 21,238 15,456 2,025 1,343
------- ------- ------- ------- ------ ------
$32,698 $28,551 $30,331 $28,181 $2,367 $ 370
======= ======= ======= ======= ====== ======
</TABLE>
The estimated useful lives of the assets are as follows: leasehold
improvements 5 to 20 years or term of lease, if less; furniture and equipment 5
to 15 years. Capitalized lease assets are amortized over the initial terms of
the leases.
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1996, 1995 and 1994 was approximately $6,737,000,
$4,534,000 and $3,363,000, respectively.
F-43
<PAGE> 366
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Present value of capital lease obligations, at effective
interest rates of 6.25% to 9.25%.......................... $2,262 $412
Non-interest bearing note due July 1996..................... -- 250
Other notes payable......................................... 40 93
------ ----
2,302 755
Less amounts due within one year............................ 968 630
------ ----
$1,334 $125
====== ====
</TABLE>
Scheduled maturities of long-term obligations, including capital leases,
for the years ending December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 THEREAFTER TOTAL
------ ---- ---- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Future minimum lease payments................ $1,088 $983 $440 $4 $4 $1 $2,520
Less interest................................ 157 82 18 1 -- -- 258
------ ---- ---- -- -- --- ------
Net present value of future minimum lease
payments................................... 931 901 422 3 4 1 2,262
Notes payable................................ 37 3 -- -- -- -- 40
------ ---- ---- -- -- --- ------
$ 968 $904 $422 $3 $4 $1 $2,302
====== ==== ==== == == === ======
</TABLE>
Included in the Company's "Due to Parent" account at December 31, 1996 and
1995 is a $225,000,000 obligation to repay Beverly for certain bank debt, as
discussed below. Beverly executed a credit agreement on November 1, 1994, which
provided for, among other things, a $225,000,000 Term Loan (the "Term Loan").
The proceeds from the Term Loan were used to consummate the Insta-Care and
Synetic acquisitions (as previously discussed). No interest has been charged to
the Company related to this debt obligation or any other amounts included in the
"Due to Parent" account. In December 1996, Beverly repaid the Term Loan with the
net proceeds from a $375,000,000 Amended and Restated Credit Agreement. Such
credit agreement provides for a Revolver/Letter of Credit Facility (the
"Revolver/LOC Facility"). Borrowings under the Revolver/LOC Facility bear
interest at adjusted LIBOR plus .875%, the Prime Rate, as defined, or the
adjusted CD rate, as defined, plus 1%, at Beverly's option. Such interest rates
may be adjusted quarterly based on certain financial ratio calculations. The
Revolver/LOC Facility is secured by a security interest in the stock of the
Company and matures on December 31, 2001.
F-44
<PAGE> 367
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. COMMITMENTS AND CONTINGENCIES
The future minimum rental commitments required by noncancelable operating
leases on the Company's pharmacy locations with initial or remaining terms in
excess of one year as of December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997...................................................... $ 3,830
1998...................................................... 3,215
1999...................................................... 2,586
2000...................................................... 1,895
2001...................................................... 1,493
Thereafter................................................ 3,610
-------
$16,629
=======
</TABLE>
The Company leases all of its pharmacy locations and certain of its
equipment primarily under operating leases. Rent expense on operating leases for
the years ended December 31 was as follows: 1996 -- $12,142,000;
1995 -- $13,005,000; 1994 -- $8,037,000. Contingent rent, based primarily on
increases in the consumer price index, was approximately $343,000, $437,000 and
$511,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company's capital and operating leases primarily have initial terms of
five years with renewal options (which could extend the term of the leases by up
to five years), contain escalation clauses and have provisions for payments by
the Company of real estate taxes, insurance and maintenance costs.
The Company is contingently liable for Beverly's $180,000,000 of 9% Senior
Notes due February 15, 2006 (the "Senior Notes"). Beverly issued the Senior
Notes in February 1996 through a public offering and used the net cash proceeds
to repay indebtedness. The Senior Notes are unsecured obligations of Beverly,
guaranteed by substantially all of Beverly's present and future subsidiaries and
impose certain restrictive covenants.
There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
F-45
<PAGE> 368
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. INCOME TAXES
The Company joins with Beverly in the filing of consolidated income tax
returns. The consolidated tax provision of Beverly is allocated to its
subsidiaries on a separate company basis, as required. The resultant income
taxes payable to, or tax benefit receivable from, Beverly flows through the "Due
to Parent" account. Beverly accounts for income taxes using the liability method
required by Financial Accounting Standards Statement No. 109, "Accounting for
Income Taxes." The Company's provision for income taxes consists of the
following for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Federal:
Current.................................................. $ 8,649 $5,667 $ 7,946
Deferred................................................. 3,423 (748) 523
State:
Current.................................................. 1,860 1,219 1,710
Deferred................................................. 736 (161) 112
------- ------ -------
$14,668 $5,977 $10,291
======= ====== =======
</TABLE>
The Company's annual effective tax rate was approximately 42%, 56.6% and
40.6% for the years ended December 31, 1996, 1995 and 1994, respectively. A
reconciliation of the provision for income taxes, computed at the statutory
rate, to the Company's annual effective tax rate is summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------ ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate.................. $12,234 35.0 $3,697 35.0 $ 8,872 35.0
State tax provision.................... 1,688 4.8 688 6.5 1,185 4.7
Amortization of intangibles............ 561 1.6 1,519 14.4 182 0.7
Other.................................. 185 0.6 73 0.7 52 0.2
------- ---- ------ ---- ------- ----
$14,668 42.0 $5,977 56.6 $10,291 40.6
======= ==== ====== ==== ======= ====
</TABLE>
In accordance with Statement No. 109, deferred income taxes for 1996, 1995
and 1994 reflect the impact of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The tax effects of temporary differences
giving rise to the Company's deferred tax assets and liabilities at December 31,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
ASSET LIABILITY ASSET LIABILITY
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Provision for bad debts...................... $5,014 $ -- $6,582 $ --
Uniform capitalization of inventory.......... 363 -- 363 --
Depreciation and amortization................ -- 9,569 -- 7,230
Other........................................ 212 -- 464 --
------ ------ ------ ------
$5,589 $9,569 $7,409 $7,230
====== ====== ====== ======
</TABLE>
Due to Parent includes cumulative amounts for current and deferred income
taxes as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Current taxes payable....................................... $56,700 $46,191
Deferred taxes payable (receivable)......................... 3,980 (179)
------- -------
$60,680 $46,012
======= =======
</TABLE>
F-46
<PAGE> 369
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. STOCK-BASED AWARDS
The Company accounts for stock-based awards granted to its employees by
Beverly in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
Interpretations because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") requires use of
option valuation models that were not developed for use in valuing employee
stock options. Since the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized for employee stock options under APB No. 25.
The Company recognizes compensation expense for its restricted stock grants,
performance unit grants (when the performance targets are achieved) and other
stock unit awards. The total charges to the Company's consolidated statements of
income and retained earnings for the years ended December 31, 1996, 1995 and
1994 related to these stock-based awards were approximately $24,000, $616,000
and $104,000, respectively.
Pro forma information regarding net income is required by SFAS No. 123, and
has been determined as if the Company had accounted for its 1996 and 1995 stock
option and performance unit grants under the fair value method as prescribed by
such statement. The fair value for stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the years ended December 31, 1996 and 1995,
respectively: risk-free interest rates of 6.5% and 6.0%; volatility factors of
the expected market price of Beverly's common stock of .34 and .35; and a
weighted-average expected life of the option of 10 years. Beverly does not
currently pay cash dividends on its common stock and no future dividends are
currently planned. Such weighted-average assumptions resulted in a weighted
average fair value of options granted during 1996 and 1995 of $7.11 per share
and $7.31 per share, respectively. The fair value of the performance unit grants
was based on the market value of Beverly's common stock on the date of grant.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Beverly's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of employee
stock options and performance units granted by Beverly to employees of the
Company is amortized to expense over their respective vesting periods. Pro forma
net income, assuming the Company had elected to account for these stock option
and performance unit grants in accordance with SFAS No. 123, would have been
approximately $19,987,000 and $4,577,000 for the years ended December 31, 1996
and 1995, respectively. Such pro forma effects are not necessarily indicative of
the effects on future years.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Statement No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the
F-47
<PAGE> 370
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
instrument. Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments. The carrying amount of cash
and cash equivalents reported in the consolidated balance sheets approximates
its fair value. The fair value of notes receivable, net, which are included in
the consolidated balance sheet captions "Notes and other receivables" and
"Other, net" was estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. The fair value of long-term obligations was estimated
using discounted cash flow analyses based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents.......................... $7,575 $7,575 $3,315 $3,315
Notes receivable, net.............................. 1,163 1,163 1,735 1,701
Long-term obligations.............................. 2,302 2,274 755 730
</TABLE>
It was not practicable to estimate the fair value of the "Due to Parent"
account as no formal agreement exists for repayment of the balance. It was also
not practicable to estimate the fair value of the Company's off-balance sheet
guarantee of Beverly's Senior Notes (see Note 4) since the Company did not
charge a fee for entering into this agreement and contracting with a financial
institution to estimate such amount could not be done without incurring
excessive costs.
9. RELATED PARTY TRANSACTIONS
The Company provides its pharmaceutical dispensing, infusion therapy
products and services and its pharmacy and nursing consulting services to
nursing facilities operated by Beverly, and to the residents of Beverly
facilities. Revenues from sales directly to Beverly nursing facilities were
approximately $82,083,000, $74,021,000 and $77,213,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Revenues from sales to residents
of Beverly facilities, which are not considered by the Company to be revenues
from affiliates, are estimated to be approximately $78,000,000, $89,000,000 and
$80,000,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Beverly provides certain administrative services to the Company. These
services have included, among others, cash management, finance, legal, tax,
financial reporting, executive management, payroll and payables processing and
employee benefit plans maintenance. The responsibility for certain of these
services, including finance, tax and payables processing was transferred to the
Company in mid-1996 as part of a consolidation and reorganization of the
Company's accounting and related functions. Substantially all cash received by
the Company is deposited daily and wired to Beverly's corporate cash account. In
turn, all of the Company's operating expenses, capital expenditures and other
cash needs are paid by Beverly, and charged back to the Company along with a
management fee for handling such services. Fees for these services amounted to
approximately $1,820,000, $2,844,000 and $2,075,000 for the years ended December
31, 1996, 1995, and 1994, respectively. See Note 1 for a description of the
charges for insurance. The Company believes that the charges for services
provided by Beverly to the Company are a reasonable allocation of the costs
incurred by Beverly
F-48
<PAGE> 371
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. RELATED PARTY TRANSACTIONS -- (CONTINUED)
on behalf of the Company in providing these services; however, such costs are
not necessarily indicative of the costs that would have been incurred if the
Company operated as a stand-alone entity.
The net result of all intercompany transactions between the Company and
Beverly are recorded in the "Due to Parent" account in the accompanying
consolidated balance sheets. There are currently no required repayment terms for
this account nor do such amounts bear interest.
10. SUBSEQUENT EVENTS
In January 1997, the Company purchased 12 pharmacies from Interstate
Pharmacy Corporation for cash of approximately $19,800,000. The acquisition was
accounted for as a purchase and was not material to the Company's financial
position or results of operations.
In April 1997, Beverly signed a definitive agreement to combine the Company
with Capstone Pharmacy Services, Inc. ("Capstone"), which will create the
nation's largest independent institutional pharmacy company. Capstone will issue
approximately 50,000,000 shares of its common stock to Beverly stockholders and
Beverly will be repaid approximately $275,000,000 of the Company's "Due to
Parent," with any remaining balance contributed to capital. Beverly stockholders
will own approximately 57% of the combined pharmacy company after the
combination; however, Beverly will not retain any ownership interest. The exact
conversion ratio of Beverly to Capstone shares will be determined based on the
total number of shares of Beverly stock outstanding on the record date of this
transaction. The record date has not yet been set. The transaction is subject to
approval by the stockholders of both Beverly and Capstone, as well as to
approvals by various government agencies. It is expected to close by year-end
1997.
F-49
<PAGE> 372
PHARMACY CORPORATION OF AMERICA
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
DUE TO
BALANCE AT ACQUISITIONS BALANCE
BEGINNING CHARGED TO AND AT END
DESCRIPTION OF YEAR OPERATIONS WRITE-OFFS, NET DISPOSITIONS OTHER OF YEAR
----------- ---------- ---------- --------------- ------------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts:
Accounts
receivable -- patient....... $17,913 $12,840 $(17,304) $ (8) $(371) $13,070
Notes and other receivables... 995 660 (371) 0 371 1,655*
------- ------- -------- ------ ----- -------
$18,908 $13,500 $(17,675) $ (8) $ 0 $14,725
======= ======= ======== ====== ===== =======
Year ended December 31, 1995:
Allowance for doubtful accounts:
Accounts
receivable -- patient....... $11,469 $17,679 $(10,966) $ 459 $(728) $17,913
Notes and other receivables... 92 -- 175 -- 728 995*
------- ------- -------- ------ ----- -------
$11,561 $17,679 $(10,791) $ 459 $ 0 $18,908
======= ======= ======== ====== ===== =======
Year ended December 31, 1994:
Allowance for doubtful accounts:
Accounts
receivable -- patient....... $ 2,671 $ 7,362 $ (6,453) $7,949 $ (60) $11,469
Notes and other receivables... 66 26 (60) -- 60 92*
------- ------- -------- ------ ----- -------
$ 2,737 $ 7,388 $ (6,513) $7,949 $ 0 $11,561
======= ======= ======== ====== ===== =======
</TABLE>
- ---------------
* Includes amounts classified in long-term other assets as well as current
assets.
F-50
<PAGE> 373
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
New Beverly Holdings, Inc.
We have audited the accompanying balance sheet of New Beverly Holdings,
Inc. as of May 31, 1997. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of New Beverly Holdings, Inc. at May
31, 1997, in conformity with generally accepted accounting principles.
Little Rock, Arkansas
June 2, 1997
F-51
<PAGE> 374
NEW BEVERLY HOLDINGS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF BEVERLY ENTERPRISES, INC.)
BALANCE SHEET
MAY 31, 1997
ASSETS
<TABLE>
<S> <C>
Cash.................................... $100
----
Total assets.................. $100
----
STOCKHOLDER'S EQUITY
Stockholder's equity:
Common stock, $.10 par value; 3,000
shares authorized; 1,000 shares
issued and outstanding............. $100
----
Total stockholder's equity.... $100
====
</TABLE>
See accompanying note.
F-52
<PAGE> 375
NOTE TO BALANCE SHEET
MAY 31, 1997
New Beverly Holdings, Inc. ("New Beverly") was incorporated in the state of
Delaware on April 15, 1997, as a wholly-owned subsidiary of Beverly Enterprises,
Inc. ("Beverly"). New Beverly was formed in connection with the execution of an
Agreement and Plan of Distribution (the "Distribution Agreement") by and between
Beverly and New Beverly dated April 15, 1997. Under the Distribution Agreement,
Beverly will transfer all of its skilled nursing and rehabilitation facilities,
transitional acute care hospitals, outpatient therapy clinics, assisted living
facilities, hospice and home health agencies and other health care and related
services and businesses, other than its institutional and mail service pharmacy
business currently operated by Pharmacy Corporation of America ("PCA"), to New
Beverly, and shares of New Beverly will be distributed to the Beverly
stockholders in a tax-free spin-off. Beverly, then consisting solely of the
institutional and mail service pharmacy business operated by PCA, will merge
into and be acquired by Capstone Pharmacy Services, Inc. ("Capstone") through a
tax-free exchange of shares of common stock of Capstone for Beverly common
shares (the "Merger"), all as contemplated by an Agreement and Plan of Merger
dated April 15, 1997 (the "Merger Agreement").
New Beverly will become a public company upon the effectiveness of this
registration statement, will change its name to Beverly Enterprises, Inc. and
will be treated as the continuation of Beverly. Closing under the Merger
Agreement is subject to certain conditions, including but not limited to the
approvals of both Beverly and Capstone stockholders, completion of all
requirements under the Distribution Agreement, customary regulatory approvals
and the receipt, at the option of Beverly, of either a favorable tax ruling from
the Internal Revenue Service or an opinion of counsel or Ernst & Young LLP
concerning the tax-free nature of the transaction. For accounting and financial
reporting purposes, such transactions will be treated as the spin-off of PCA and
a reorganization/recapitalization of Beverly into New Beverly since New Beverly
will continue the majority of the Beverly businesses. No gain will be recognized
as a result of the spin-off for the difference between the market value of the
Capstone shares received and the carrying value of the net assets of PCA. In
addition, since Beverly stockholders will own a majority of the outstanding
shares of Capstone after the Merger, the Merger transaction will be accounted
for as a reverse acquisition of Capstone by PCA.
New Beverly has had no operations from its inception through May 31, 1997.
Therefore, the Statement of Operations and the Statement of Cash Flows have been
omitted from these financial statements.
F-53
<PAGE> 376
ANNEX B
AGREEMENT AND PLAN OF MERGER
BETWEEN
BEVERLY ENTERPRISES, INC.
AND
CAPSTONE PHARMACY SERVICES, INC.
DATED
APRIL 15, 1997
B-1
<PAGE> 377
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I
THE MERGER
Section 1.01 The Merger.................................................. B-7
Section 1.02 Effective Time.............................................. B-7
Section 1.03 Certificate of Incorporation and By-laws of Surviving
Corporation............................................... B-7
Section 1.04 Directors and Officers of Surviving Corporation............. B-7
Section 1.05 Stockholders' Meetings...................................... B-7
Section 1.06 Filing of Certificate of Merger............................. B-8
Section 1.07 Further Assurances.......................................... B-8
ARTICLE II
CONVERSION OF SHARES
Section 2.01 Conversion of Beverly Shares................................ B-8
Section 2.02 Exchange of Certificates.................................... B-9
Section 2.03 Effect on Beverly Options................................... B-9
Section 2.04 Fractional Shares........................................... B-10
Section 2.05 Assumption of Employment Agreements......................... B-10
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CAPSTONE
Section 3.01 Organization and Qualification.............................. B-11
Section 3.02 Authority Relative to This Agreement........................ B-11
Section 3.03 Consents, No Conflicts...................................... B-11
Section 3.04 Board Recommendation........................................ B-12
Section 3.05 State Anti-takeover Statutes................................ B-12
Section 3.06 No Existing Violation, Default, Etc......................... B-12
Section 3.07 Licenses and Permits........................................ B-13
Section 3.08 Registration Statement; Prospectus/Joint Proxy Statement.... B-13
Section 3.09 Finders or Brokers.......................................... B-13
Section 3.10 SEC Filings................................................. B-13
Section 3.11 Financial Statements........................................ B-14
Section 3.12 Absence of Undisclosed Liabilities.......................... B-14
Section 3.13 Absence of Changes or Events................................ B-14
Section 3.14 Capitalization.............................................. B-15
Section 3.15 Capital Stock of Subsidiaries............................... B-16
Section 3.16 Litigation.................................................. B-16
Section 3.17 Insurance................................................... B-16
Section 3.18 Title to and Condition of Properties........................ B-16
Section 3.19 Leases...................................................... B-17
Section 3.20 Contracts and Commitments................................... B-17
Section 3.21 Labor Matters............................................... B-18
Section 3.22 No Change of Control Puts................................... B-18
Section 3.23 Employment and Labor Contracts.............................. B-18
Section 3.24 Intellectual Property Rights................................ B-18
Section 3.25 Taxes....................................................... B-19
Section 3.26 Employee Benefit Plans; ERISA............................... B-20
Section 3.27 Environmental Matters....................................... B-22
Section 3.28 Disclosure.................................................. B-24
</TABLE>
B-2
<PAGE> 378
<TABLE>
<CAPTION>
<S> <C> <C>
Section 3.29 Institutional Pharmacy Business............................. B-24
Section 3.30 Fairness Opinion............................................ B-25
Section 3.31 Sufficiency of Assets....................................... B-25
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BEVERLY
Section 4.01 Organization and Qualification.............................. B-25
Section 4.02 Authority Relative to This Agreement........................ B-26
Section 4.03 Consents, No Conflicts...................................... B-26
Section 4.04 Board Action................................................ B-27
Section 4.05 State Anti-takeover Statutes................................ B-27
Section 4.06 No Existing Violation, Default, Etc......................... B-27
Section 4.07 Affiliates.................................................. B-27
Section 4.08 Licenses and Permits........................................ B-27
Section 4.09 Registration Statement; Prospectus/Joint Proxy Statement;
NBHI Registration Document................................ B-28
Section 4.10 Finders or Brokers.......................................... B-28
Section 4.11 SEC Filings................................................. B-29
Section 4.12 Financial Statements........................................ B-29
Section 4.13 Absence of Undisclosed Liabilities.......................... B-29
Section 4.14 Absence of Changes or Events................................ B-30
Section 4.15 Capitalization.............................................. B-30
Section 4.16 Capital Stock of Subsidiaries............................... B-31
Section 4.17 Litigation.................................................. B-31
Section 4.18 Insurance................................................... B-31
Section 4.19 Title to and Condition of Properties........................ B-32
Section 4.20 Leases...................................................... B-32
Section 4.21 Contracts and Commitments................................... B-33
Section 4.22 Labor Matters............................................... B-34
Section 4.23 No Change of Control Puts................................... B-34
Section 4.24 Employment and Labor Contracts.............................. B-34
Section 4.25 Intellectual Property Rights................................ B-34
Section 4.26 Taxes....................................................... B-34
Section 4.27 Employee Benefit Plans; ERISA............................... B-35
Section 4.28 Environmental Matters....................................... B-37
Section 4.29 Disclosure.................................................. B-39
Section 4.30 Institutional Pharmacy Business............................. B-39
Section 4.31 Fairness Opinion............................................ B-40
Section 4.32 Sufficiency of Assets....................................... B-40
ARTICLE V
COVENANTS
Section 5.01 Conduct of Business of Beverly.............................. B-40
Section 5.02 Conduct of Business of Capstone............................. B-42
Section 5.03 No Solicitation by Beverly.................................. B-44
Section 5.04 No Solicitation by Capstone................................. B-44
Section 5.05 Access to Information....................................... B-45
Section 5.06 Registration Statement and Proxy Statement.................. B-45
Section 5.07 Commercially Reasonable Efforts; Other Actions.............. B-45
Section 5.08 Public Announcements........................................ B-46
Section 5.09 Notification of Certain Matters............................. B-46
</TABLE>
B-3
<PAGE> 379
<TABLE>
<CAPTION>
<S> <C> <C>
Section 5.10 Indemnification............................................. B-46
Section 5.11 Expenses.................................................... B-46
Section 5.12 Stock Exchange Listings..................................... B-47
Section 5.13 Beverly and Subsidiary Actions.............................. B-47
Section 5.14 Capstone and Subsidiary Actions............................. B-47
Section 5.15 Environmental Matters....................................... B-47
Section 5.16 Actions Regarding Outstanding Debt.......................... B-47
Section 5.17 Retroactive Insurance Coverage.............................. B-48
Section 5.18 Preferred Provider Agreements............................... B-48
Section 5.19 Failure to Take Action...................................... B-48
Section 5.20 Exhibits, Closing Statements and Schedules.................. B-48
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF CAPSTONE AND BEVERLY
Section 6.01 Registration Statements..................................... B-48
Section 6.02 Beverly Stockholder Approval................................ B-48
Section 6.03 Capstone Stockholder Approval............................... B-48
Section 6.04 Listings.................................................... B-48
Section 6.05 Certain Proceedings......................................... B-48
Section 6.06 Distribution................................................ B-49
Section 6.07 Debt Restructure............................................ B-49
Section 6.08 Opinions.................................................... B-49
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF CAPSTONE
Section 7.01 Representations and Warranties True......................... B-49
Section 7.02 Performance................................................. B-49
Section 7.03 Consents and Approvals...................................... B-50
Section 7.04 Certificates................................................ B-50
Section 7.05 Material Adverse Change..................................... B-50
Section 7.06 Pharmacy Financial Statements............................... B-50
Section 7.07 Auditors' Letter............................................ B-50
Section 7.09 Working Capital............................................. B-50
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF BEVERLY
Section 8.01 Representations and Warranties True......................... B-50
Section 8.02 Performance................................................. B-50
Section 8.03 Consents and Approvals...................................... B-51
Section 8.04 Certificates................................................ B-51
Section 8.05 Material Adverse Change..................................... B-51
Section 8.06 Interim Quarterly Results................................... B-51
Section 8.07 Voting Agreement............................................ B-51
Section 8.08 Repayment of Indebtedness................................... B-51
Section 8.09 Auditors' Letter............................................ B-51
</TABLE>
B-4
<PAGE> 380
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE IX
CLOSING
Section 9.01 Time And Place.............................................. B-52
Section 9.02 Filings at the Closing...................................... B-52
ARTICLE X
TERMINATION AND ABANDONMENT
Section 10.01 Termination................................................. B-52
Section 10.02 Termination by Capstone..................................... B-52
Section 10.03 Termination by Beverly...................................... B-53
Section 10.04 Procedure for Termination................................... B-53
Section 10.05 Effect of Termination and Abandonment....................... B-53
ARTICLE XI
DEFINITIONS
Section 11.01 Terms Defined in This Agreement............................. B-55
ARTICLE XII
MISCELLANEOUS
Section 12.01 Amendment and Modification.................................. B-57
Section 12.02 Waiver of Compliance; Consents.............................. B-57
Section 12.03 Survivability; Investigations............................... B-57
Section 12.04 Notices..................................................... B-57
Section 12.05 Assignment.................................................. B-58
Section 12.06 Governing Law............................................... B-58
Section 12.07 Counterparts................................................ B-58
Section 12.08 Severability................................................ B-58
Section 12.09 Interpretation.............................................. B-58
Section 12.10 Entire Agreement............................................ B-59
Section 12.11 Choice of Forum............................................. B-59
</TABLE>
EXHIBITS TO MERGER AGREEMENT
<TABLE>
<S> <C>
A Agreement and Plan of Distribution (including the Ancillary
Agreements)
B Form of Voting Agreement
C Form of Amendments to Certificate of Incorporation of
Capstone
D Members of the Board of Directors of the Surviving
Corporation at the Effective Time
E Senior Officers of the Surviving Corporation at the
Effective Time
F Form of Affiliate Letter Agreement
G Forms of Provider Agreements
H-1 Opinion of Beverly Counsel
H-2 Opinion of Capstone Counsel
7.08 Non-Competition Agreement
</TABLE>
ATTACHMENTS TO MERGER AGREEMENT
Beverly Disclosure Statement
Capstone Disclosure Statement
B-5
<PAGE> 381
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 15, 1997 (the "Agreement"),
by and between Capstone Pharmacy Services, Inc., a Delaware corporation
("Capstone"), and Beverly Enterprises, Inc., a Delaware corporation ("Beverly").
Capstone and Beverly are hereinafter sometimes collectively referred to as the
"Constituent Corporations."
RECITALS
WHEREAS, Capstone and Beverly, among other things, own or operate
institutional pharmacy businesses serving the acute, post-acute, long-term and
institutional health care markets, and desire to combine these respective
institutional pharmacy businesses;
WHEREAS, Capstone does not want to own Beverly's Remaining Health Care
Businesses (as hereinafter defined);
WHEREAS, prior to the Merger (as hereinafter defined), Beverly and its
Subsidiaries (as hereinafter defined) will transfer on the terms and subject to
the conditions set forth in the Agreement and Plan of Distribution between
Beverly and a previously existing corporation, New Beverly Holdings, Inc., a
Delaware corporation ("NBHI"), in the form attached hereto as Exhibit A
(including the Ancillary Agreements as defined therein, the "Distribution
Agreement"), all of the Remaining Health Care Assets and Remaining Health Care
Liabilities of Beverly and its Subsidiaries (each as defined in the Distribution
Agreement) to NBHI (the "Restructuring"); following which all of the capital
stock of NBHI (the "NBHI Stock") will be distributed (the "Distribution")
immediately prior to the Merger to the shareholders of Beverly.
WHEREAS, after the Distribution Beverly will own only the Institutional
Pharmacy Assets, and be subject only to the Institutional Pharmacy Liabilities
(each as defined in the Distribution Agreement);
WHEREAS, the Board of Directors of Beverly has determined that the Merger
and the Distribution are advisable on the terms and conditions contained in this
Agreement and the Distribution Agreement, and that each of the other
transactions contemplated herein or in the Distribution Agreement is consistent
with and in furtherance of the long-term business strategy of Beverly and is
fair to, and in the best interests of, Beverly and Beverly's shareholders, and
has approved and adopted this Agreement and the Distribution Agreement and each
of the other transactions contemplated herein and intends to recommend the
approval and adoption of this Agreement and the Distribution Agreement by the
stockholders of Beverly;
WHEREAS, the Board of Directors of Capstone has determined that the Merger
is advisable on the terms and conditions contained in this Agreement and that
each of the other transactions contemplated herein is consistent with and in
furtherance of the long-term business strategy of Capstone and is fair to, and
in the best interests of, Capstone and Capstone's shareholders, and has approved
and adopted this Agreement and each of the other transactions contemplated
herein and intends to recommend the approval and adoption of this Agreement by
the stockholders of Capstone;
WHEREAS, Counsel Corporation, a Toronto, Ontario corporation ("Counsel"),
and a principal stockholder of Capstone, has committed to vote its shares of
Capstone Common Stock (as hereinafter defined) in favor of approving this
Agreement and the transactions contemplated hereby and has agreed not to approve
or support any competing transaction, all as provided in a voting agreement of
even date, the form of which is attached hereto as Exhibit B to this Agreement
(the "Voting Agreement");
WHEREAS, Capstone and Beverly intend that at the Effective Time (as
hereinafter defined) the Board of Directors of Capstone shall consist equally of
individuals designated by Capstone and by Beverly and that the senior officers
of the Surviving Corporation (hereinafter defined) shall be those persons
identified in Exhibit E to this Agreement; and
WHEREAS, Capstone and Beverly desire to make certain representations,
warranties, covenants and agreements in connection with the merger of Capstone
and Beverly and the Distribution by Beverly.
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NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01 THE MERGER.
(a) In accordance with the provisions of this Agreement and the General
Corporation Law of the State of Delaware (the "Delaware Act"), at the Effective
Time, Beverly shall be merged with and into Capstone (the "Merger"), and
Capstone shall be the surviving corporation (hereinafter sometimes called the
"Surviving Corporation") and shall continue its corporate existence under the
laws of the State of Delaware. At the Effective Time, the separate existence of
Beverly shall cease.
(b) The Merger shall have the effects on Capstone and Beverly as
constituent corporations in the Merger as provided under the Delaware Act.
SECTION 1.02 EFFECTIVE TIME. The Merger shall become effective at the time
of filing of, or at such later time specified in, a certificate of merger, in
the form required by and executed in accordance with the Delaware Act, with the
Secretary of State of the State of Delaware in accordance with the provisions of
Section 251 of the Delaware Act (the "Certificate of Merger"). The date and time
when the Merger shall become effective is herein referred to as the "Effective
Time."
SECTION 1.03 CERTIFICATE OF INCORPORATION AND BY-LAWS OF SURVIVING
CORPORATION.
(a) The Certificate of Incorporation of Capstone, as in effect immediately
prior to the Effective Time and with such amendments thereto as set forth in
Exhibit C hereto, incorporated herein by reference, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by law.
(b) The By-laws of Capstone, as in effect immediately prior to the
Effective Time, shall be the By-laws of the Surviving Corporation until
thereafter amended as provided by law.
SECTION 1.04 DIRECTORS AND OFFICERS OF SURVIVING CORPORATION. The
individuals respectively designated by Capstone and Beverly and identified on
Exhibit D to this Agreement, which Exhibit shall be attached to a certificate
signed by both parties and made a part of this Agreement no later than the time
of mailing the Prospectus/Joint Proxy Statement (as hereinafter defined) to the
stockholders of Capstone and Beverly, and which individuals shall be identified
in the Prospectus/Joint Proxy Statement as such, shall comprise all of the
members of the Board of Directors of the Surviving Corporation at the Effective
Time. The individuals identified on Exhibit E to this Agreement shall comprise
all of the senior officers of the Surviving Corporation at the Effective Time
and shall hold the positions set forth opposite their names.
SECTION 1.05 STOCKHOLDERS' MEETINGS.
(a) Beverly will take all action necessary in accordance with applicable
law and its Restated Certificate of Incorporation and By-laws to convene a
special meeting of its stockholders (the "Beverly Special Meeting") as soon as
practicable to consider and vote upon the approval of this Agreement, the
Distribution Agreement and the other transactions contemplated by this Agreement
and the Distribution Agreement. Beverly, through its Board of Directors, shall
recommend to its stockholders approval of this Agreement, the Distribution
Agreement and the other transactions contemplated by this Agreement and the
Distribution Agreement (which recommendation shall be contained in the
Prospectus/Joint Proxy Statement (the "Prospectus/Joint Proxy Statement") to be
contained as part of the Registration Statement (as hereinafter defined)) and
shall use all commercially reasonable efforts to solicit from its stockholders
proxies in favor of approval and adoption of this Agreement, the Distribution
Agreement and the other transactions contemplated by this Agreement and the
Distribution Agreement. Beverly's Board of Directors shall not withdraw, change,
modify in any manner or take action inconsistent with its recommendation of the
Distribution, the Distribution Agreement, the Merger, this Agreement or the
other transactions contemplated hereby or thereby and shall not resolve to do
any of the foregoing and publicly disclose such resolution; provided, however,
that
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Beverly's Board of Directors may withdraw, change, modify in any manner or take
action inconsistent with such recommendation or resolve to do any of the
foregoing and publicly disclose such resolution in the event that (i) Beverly
shall have received an unsolicited written proposal for a Beverly Acquisition
Transaction from a bona fide financially capable third party, (ii) Beverly shall
have provided two business days' written notice to Capstone of such proposal and
(iii) Beverly's Board of Directors, after having received advice from its
investment banker or bankers and outside counsel to Beverly, shall have
determined that failure to take the proposed action would be inconsistent with
such Board of Directors' fiduciary duties.
(b) Capstone will take all action necessary in accordance with applicable
law and its Certificate of Incorporation and By-laws to convene a special
meeting of its stockholders (the "Capstone Special Meeting") as soon as
practicable to consider and vote upon the approval of this Agreement and the
other transactions contemplated by this Agreement. Capstone, through its Board
of Directors, shall recommend to its stockholders approval of this Agreement and
the other transactions contemplated by this Agreement (which recommendation
shall be contained in the Prospectus/Joint Proxy Statement) and shall use all
commercially reasonable efforts to solicit from its stockholders proxies in
favor of approval and adoption of this Agreement and the other transactions
contemplated by this Agreement. Capstone's Board of Directors shall not
withdraw, change, modify in any manner or take action inconsistent with its
recommendation of the Merger, this Agreement or the other transactions
contemplated hereby and shall not resolve to do any of the foregoing and
publicly disclose such resolution; provided, however, that Capstone's Board of
Directors may withdraw, change, modify in any manner or take action inconsistent
with such recommendation or resolve to do any of the foregoing and publicly
disclose such resolution in the event that (i) Capstone shall have received an
unsolicited written proposal for a Capstone Acquisition Transaction from a bona
fide financially capable third party, (ii) Capstone shall have provided two
business days' written notice to Beverly of such proposal, and (iii) Capstone's
Board of Directors, after having received advice from its investment banker or
bankers and outside counsel to Capstone, shall have determined that failure to
take the proposed action would be inconsistent with such Board of Directors'
fiduciary duties.
SECTION 1.06 FILING OF CERTIFICATE OF MERGER. At the Closing (as
hereinafter defined), Capstone and Beverly shall cause a Certificate of Merger
to be executed and filed with the Secretary of State of the State of Delaware as
provided in Section 251 of the Delaware Act, and shall take any and all other
lawful actions and do any and all other lawful things to cause the Merger to
become effective.
SECTION 1.07 FURTHER ASSURANCES. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the Constituent Corporations acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger or otherwise to carry out this Agreement, the officers and directors of
the Surviving Corporation shall be authorized to execute and deliver, in the
name and on behalf of each of the Constituent Corporations or otherwise, all
such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each of the Constituent Corporations or otherwise, all
such other actions and things as may be necessary or desirable to vest, perfect
or confirm any and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation or otherwise to carry out this
Agreement.
ARTICLE II
CONVERSION OF SHARES
SECTION 2.01 CONVERSION OF BEVERLY SHARES.
(a) Except as provided in Section 2.04, each share of common stock, $.10
par value, of Beverly (the "Beverly Common Stock") issued and outstanding
immediately prior to the Effective Time, (except for shares owned by Beverly as
treasury stock, shares owned by Capstone or any Subsidiary of Beverly) together
with the associated Rights (as defined in Section 4.15) shall, by virtue of the
Merger and without any action on the part of the holder thereof be converted
into the right to receive a number of fully paid and
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nonassessable shares of Common Stock, $.01 par value, of Capstone ("Capstone
Common Stock") equal to the Conversion Number. The term "Conversion Number"
shall mean a number, expressed to four decimal places, equal to the quotient of
50,000,000, divided by the number of shares of Beverly Common Stock outstanding
immediately prior to the Effective Time. The shares of Capstone Common Stock
delivered in exchange for shares of Beverly Common Stock, and associated Rights,
pursuant to this Section 2.01(a), are hereinafter sometimes called the "Closing
Consideration." In the event of any change in Capstone Common Stock or Beverly
Common Stock by reason of any stock split, readjustment, stock dividend,
exchange of shares, reclassification, recapitalization or otherwise (other than
the Distribution), the Conversion Number shall be correspondingly adjusted.
(b) At the Effective Time, all shares of Beverly Common Stock, and
associated Rights, by virtue of the Merger and without any action on the part of
the holders thereof, shall no longer be outstanding and shall be canceled and
retired and shall cease to exist, and each holder of a certificate representing
any such shares of Beverly Common Stock shall thereafter cease to have any
rights with respect to such shares of Beverly Common Stock, and associated
Rights, except the right to receive the Closing Consideration for such shares of
Beverly Common Stock, and associated Rights, as specified in the foregoing
clause (a), upon the surrender of such certificate in accordance with Section
2.02 and the right to receive the NBHI capital stock distributed with respect to
such shares of Beverly Common Stock in accordance with the terms of the
Distribution Agreement.
(c) Each share of Capstone Common Stock issued and outstanding at and as of
the Effective Time will remain issued and outstanding and become the issued and
outstanding capital stock of the Surviving Corporation and shall continue to be
held of record by the stockholders of Capstone, including those receiving the
Closing Consideration, at and after the Effective Time.
SECTION 2.02 EXCHANGE OF CERTIFICATES.
(a) Promptly after the Effective Time, Capstone shall mail to each record
holder, as of the Effective Time, of an outstanding certificate or certificates
which immediately prior to the Effective Time represented shares of Beverly
Common Stock (the "Certificates") a form letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to
Capstone) and instructions for use in effecting the surrender of the
Certificates for exchange thereof. Upon surrender to Capstone of a Certificate,
together with such letter of transmittal duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor that number of
shares of Capstone Common Stock which such holder has the right to receive under
this Article II, and such Certificate shall forthwith be canceled. If any shares
of Capstone Common Stock are to be issued to a person other than the person in
whose name the Certificate surrendered is registered, it shall be a condition of
exchange that the Certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the person requesting such
exchange shall pay any transfer or other taxes required by reason of the
exchange of the Certificate surrendered to a person other than the registered
holder or such person shall establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. Until surrendered
in accordance with the provisions of this Section 2.02, each Certificate shall
represent, for all purposes, the right to receive the Closing Consideration in
respect of the number of shares of Beverly Common Stock evidenced by such
Certificate, without any interest thereon.
(b) From and after the Effective Time there shall be no transfers on the
stock transfer books of Beverly or the Surviving Corporation of the shares of
Beverly Common Stock which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged as provided in this Article
II.
(c) The Surviving Corporation shall not be liable to any holder of shares
of Beverly Common Stock delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
SECTION 2.03 EFFECT ON BEVERLY OPTIONS.
(a) As of the Time of Distribution (as defined in the Distribution
Agreement), by virtue of the provisions of the Employee Benefit Matters
Agreement (as defined in the Distribution Agreement) and
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without any action on the part of the holders thereof, options to purchase
shares of Beverly Common Stock that are outstanding under the Beverly Option
Plans (as hereinafter defined) immediately prior to the Time of Distribution,
whether or not exercisable, and which are granted to each person employed or
formerly employed by Beverly or any Subsidiary of Beverly other than any
employee or former employee of any of the Pharmacy Subsidiaries, and any other
person who becomes an employee of NBHI immediately after the Time of
Distribution other than the Retained Employees (the "Transferred Employees"),
shall be assumed by NBHI in accordance with the Employee Benefit Matters
Agreement and such shares shall be exercisable upon the same terms and
conditions as under the applicable Beverly Option Plan and the applicable option
agreement issued thereunder, except that (i) the number of shares of NBHI Common
Stock for which such options may be converted and (ii) the option exercise price
per share of such options shall be adjusted in accordance with the Employee
Benefit Matters Agreement.
(b) As of the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, all remaining options to purchase
shares of Beverly Common Stock that are outstanding under the Beverly Option
Plans immediately prior to the Effective Time (as reflected in Section 2.03(b)
of the Beverly Disclosure Statement) whether or not exercisable, shall be
assumed by Capstone and each such option shall be exercisable upon the same
terms and conditions as under the applicable Beverly Option Plan and the
applicable option agreement issued thereunder, except that (i) each such option
shall be exercisable for that number of shares of Capstone Common Stock (rounded
in accordance with established mathematical convention to the nearest whole
share) into which the number of shares of Beverly Common Stock subject to such
option immediately prior to the Effective Time, determined after giving effect
to the adjustments set forth in the Employee Benefit Matters Agreement, would be
converted under Section 2.01(a) if such option were exercised prior to the
Effective Time, and (ii) the option price per share of Capstone Common Stock,
determined after giving effect to the adjustments set forth in the Employee
Benefit Matters Agreement, shall be an amount equal to such adjusted option
price per share of Beverly Common Stock subject to such option in effect
immediately prior to the Effective Time divided by the Conversion Number
(rounded in accordance with established mathematical convention to the nearest
whole cent).
(c) Prior to the Effective Time or Time of Distribution, Beverly shall (i)
obtain any consents from holders of outstanding options to purchase Beverly
Common Stock granted under the Beverly Option Plans and (ii) make any amendments
to the terms of the Beverly Option Plans, Beverly Options or any other award
granted thereunder that are necessary to give effect to the transactions
contemplated by this Section 2.03 and the Employee Benefits Matters Agreement
referred to in clause (a) above.
SECTION 2.04 FRACTIONAL SHARES. Notwithstanding any other provision of
this Agreement, each holder of shares of Beverly Common Stock who upon surrender
of Certificates would be entitled to receive a fraction of a share of Capstone
Common Stock shall not be entitled to receive any dividends on or vote such
fractional share and shall receive, in lieu of such fractional share, cash in an
amount equal to such fraction multiplied by the Average Market Value. "Average
Market Value" shall mean the arithmetic average of the last reported sale price
per share of Capstone Common Stock as reported on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") for the fifteen (15)
consecutive trading days ending with the last trading day prior to the scheduled
date of the Beverly Special Meeting specified in the Prospectus/Joint Proxy
Statement. The fractional share interests of each Beverly stockholder will be
aggregated, and no Beverly stockholder will receive cash in an amount equal to
or greater than the value of one full share of Capstone Common Stock. All
references in this Agreement to shares of Capstone Common Stock to be issued as
Closing Consideration shall be deemed to include any cash in lieu of fractional
shares payable pursuant to this Section 2.04.
SECTION 2.05 ASSUMPTION OF EMPLOYMENT AGREEMENTS. Beverly shall retain
(and not transfer to NBHI in the Restructuring and Distribution) and Capstone
shall assume in the Merger all employment, compensation, and benefit agreements
and plans relating to employees or former employees of the Institutional
Pharmacy Business, including without limitation, all employment contracts,
change of control agreements, severance, and indemnity agreements with such
employees and former employees, all PCA employee benefit plans; the portion of
all Beverly employee benefit plans relating to Retained Employees; and all
grants and
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awards under the Beverly Stock Incentive and Long-Term Incentive Plans relating
to current or former Institutional Pharmacy employees.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CAPSTONE
Except as set forth in the Capstone Disclosure Statement delivered by
Capstone to Beverly at or prior to the execution of this Agreement (the
"Capstone Disclosure Statement") (each section of which qualifies the
correspondingly numbered representation and warranty and covenant), Capstone
represents and warrants to Beverly as follows:
SECTION 3.01 ORGANIZATION AND QUALIFICATION. Each of Capstone and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Capstone SEC Reports (as hereinafter
defined). Each of Capstone and its Subsidiaries is duly qualified to transact
business as a foreign corporation and is in good standing in each jurisdiction
in which the conduct of its business or the ownership, leasing or operation of
its property requires such qualification, except for failures to be so qualified
or in good standing which would not, singly or in the aggregate with all such
other failures, have a Capstone Material Adverse Effect. "Capstone Material
Adverse Effect" means, (i) with respect to any event, occurrence, failure of
event or occurrence, change, effect, state of affairs, breach, default,
violation, fine, penalty or failure to comply (each, a "circumstance"),
individually or taken together with all other circumstances contemplated by or
in connection with any or all of the representations and warranties made in this
Agreement, a material adverse effect on the business, properties, assets,
condition (financial or otherwise), results of operations or prospects of
Capstone and its Subsidiaries, taken as a whole or (ii) circumstances resulting
in the impairment of Capstone's ability to perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. Neither
Capstone nor any of its Subsidiaries is in violation of any of the provisions of
its certificate of incorporation (or other applicable charter document) or
By-laws. True and complete copies of the certificate of incorporation and
By-laws, as currently in effect, of Capstone and of each Subsidiary of Capstone
have been previously delivered or made available to Beverly. No amendments to
the Certificate of Incorporation, as amended, and By-laws of Capstone have been
authorized since December 31, 1996.
SECTION 3.02 AUTHORITY RELATIVE TO THIS AGREEMENT. Capstone has full
corporate power and authority to execute and deliver this Agreement and, upon
obtaining the approval of a majority of the outstanding shares of Capstone
Common Stock at the Capstone Special Meeting or any adjournment thereof as
authorized under the Delaware Act, including obtaining such approval to amend
Capstone's Certificate of Incorporation to increase the authorized number of
shares of Capstone Common Stock to an aggregate of 300 million shares (or such
other number as may be agreed to by the parties), to consummate the Merger and
the other transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the Merger and the other transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of Capstone, and except as stated in the preceding sentence, no other
corporate proceedings on the part of Capstone are necessary to authorize this
Agreement or to consummate the Merger and the other transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by
Capstone and, assuming the due authorization, execution and delivery hereof by
Beverly, constitutes a valid and binding agreement of Capstone, enforceable
against Capstone in accordance with its terms, except to the extent that its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally or by general equitable principles.
SECTION 3.03 CONSENTS, NO CONFLICTS.
(a) Except for the filing of the Certificate of Merger, the filing and
effectiveness of the Registration Statement (as hereinafter defined), the
filings required under and in connection with the applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and filings required pursuant to any state securities or "blue sky" laws,
no filing or registration with,
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notification or disclosure to, or permit, authorization, consent or approval of,
(i) any court, (ii) any government agency or body or (iii) any third party,
whether acting in an individual, fiduciary or other capacity, is required for
the consummation by Capstone of the Merger or the other transactions
contemplated hereby, except such as are set forth in Section 3.03(a) of the
Capstone Disclosure Statement, all of which will have been obtained or made
prior to the Effective Time and which will then be in full force and effect or
which would not, singly or in the aggregate with all other such consents which
have not been obtained, have a Capstone Material Adverse Effect.
(b) The execution, delivery and performance of this Agreement and the
consummation of the Merger and the other transactions contemplated hereby and
compliance by Capstone with any of the provisions hereof do not and will not:
(i) subject to obtaining the approval of a majority of the outstanding shares of
Capstone Common Stock, conflict with or result in any breach or violation of any
provision of the certificate of incorporation (or other comparable charter
documents) or By-laws of Capstone or any of its Subsidiaries, (ii) result in (1)
a breach or violation of, a default under or an event triggering any payment or
other obligation pursuant to any of Capstone's existing pension plans, welfare
plans, multiemployer plans, employee benefit plans, benefit arrangements or
similar plans, arrangements or policies including bonus, incentive, deferred
compensation, stock purchase, stock option, stock appreciation right, health or
group insurance, severance pay, retirement or other benefit plans, and all
similar arrangements or policies of Capstone and its Subsidiaries (the "Capstone
Compensation and Benefit Plans") or any grant or award made under any of the
foregoing, (2) a breach, violation or event triggering a right of termination
of, a default under, or the acceleration of any obligation or the creation of a
lien, pledge, security interest or other encumbrance on assets (with or without
the giving of notice or the lapse of time or both) pursuant to any provision of,
any agreement, lease of real or personal property, marketing agreement,
contract, note, mortgage, indenture, arrangement or other obligation of Capstone
or any of its Subsidiaries ("Capstone Contracts") or any law, rule, ordinance or
regulation or judgment, decree, order or award to which Capstone or any of its
Subsidiaries is subject or any governmental or non-governmental authorization,
consent, approval, registration, franchise, license or permit under which
Capstone or any of its Subsidiaries conducts any of its business, or (3) any
other change in the rights or obligations of any party under any of the Capstone
Contracts.
SECTION 3.04 BOARD RECOMMENDATION. The Board of Directors of Capstone has,
by a unanimous vote at a meeting of such Board duly held on April 15, 1997,
approved and adopted this Agreement, the Merger and the other transactions
contemplated hereby. At such meeting, the Board of Directors of Capstone
determined that the consideration to be paid by Capstone pursuant to the Merger
is fair to the holders of shares of Capstone Common Stock and recommended that
the holders of such shares approve and adopt this Agreement, the Merger and the
other transactions contemplated hereby.
SECTION 3.05 STATE ANTI-TAKEOVER STATUTES. Capstone has granted all
approvals and taken all other steps necessary to exempt the Merger and the other
transactions contemplated hereby from the requirements and provisions of Section
203 of the Delaware Act and any other state antitakeover statute or regulation
such that none of the other provisions of such "business combination,"
"moratorium," "control share" or other state antitakeover statute or regulation
(x) prohibits or restricts either Capstone's ability to perform its obligations
under this Agreement or its ability to consummate the Merger and the other
transactions contemplated hereby, (y) would have the effect of invalidating or
voiding this Agreement or any provision hereof, or (z) would subject Beverly to
any material impediment or condition in connection with the exercise of any of
its rights under this Agreement.
SECTION 3.06 NO EXISTING VIOLATION, DEFAULT, ETC. None of Capstone or its
Subsidiaries is in violation (except for any violations which would not, singly
or in the aggregate with all such other violations, have a Capstone Material
Adverse Effect) of (A) any applicable law, ordinance, administrative or
governmental rule or regulation or (B) any order, decree or judgment of any
court or governmental agency or body having jurisdiction over Capstone or any of
its Subsidiaries. No event of default or event that, but for the giving of
notice or the lapse of time or both, would constitute an event of default,
exists under any Capstone Contract or any lease, permit, license or other
agreement or instrument to which Capstone or any of its Subsidiaries is a party
or by which any of them is bound or to which any of the properties, assets or
operations of Capstone or
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any of its Subsidiaries is subject (except for any events of default or other
defaults which would not, singly or in the aggregate with all such other
defaults, have a Capstone Material Adverse Effect).
SECTION 3.07 LICENSES AND PERMITS. Each of Capstone and its Subsidiaries
has such certificates, permits, licenses, franchises, consents, approvals,
orders, authorizations and clearances from appropriate governmental agencies and
bodies ("Capstone Licenses") as are necessary to own, lease or operate its
properties and to conduct its business in the manner described in the Capstone
SEC Reports and as presently conducted and all such Capstone Licenses are valid
and in full force and effect, other than any failure to have any such Capstone
License or any failure of any such Capstone License to be valid and in full
force and effect as would not, singly or in the aggregate with all such other
failures, have a Capstone Material Adverse Effect. Each of Capstone and its
Subsidiaries is and, within the period of all applicable statutes of limitation,
has been in compliance with its obligations under such Capstone Licenses and no
event has occurred that allows, or after notice or lapse of time would allow,
revocation or termination of such Capstone Licenses, other than any such failure
to be in compliance with such obligations or any such revocation or termination
as would not, singly or in the aggregate with all such other failures,
revocations or terminations, have a Capstone Material Adverse Effect. Capstone
has no knowledge of any facts or circumstances that could reasonably be expected
to result in an inability of Capstone or any of its Subsidiaries to renew any
Capstone License. Neither the execution and delivery by Capstone of this
Agreement nor the consummation of any of the transactions contemplated herein
will result in any revocation or termination of any Capstone License. Set forth
in Section 3.07 of the Capstone Disclosure Statement is a true and complete list
of all Capstone Licenses which are necessary for the conduct of the business
presently conducted by Capstone and its Subsidiaries.
SECTION 3.08 REGISTRATION STATEMENT; PROSPECTUS/JOINT PROXY
STATEMENT. None of the information supplied by Capstone for inclusion or
incorporation by reference in the registration statement under the Securities
Act of 1933, as amended, and the rules and regulations promulgated thereunder
(the "Securities Act") registering the Capstone Common Stock to be issued at the
Effective Time (such registration statement as amended by any amendments thereto
being referred to herein as the "Registration Statement") or the
Prospectus/Joint Proxy Statement to be sent to the stockholders of Beverly and
Capstone in connection with the Beverly Special Meeting and the Capstone Special
Meeting, including all amendments and supplements thereto, shall, in the case of
the Registration Statement, at (i) the time the Registration Statement becomes
effective, (ii) the Closing, (iii) the Effective Time, (iv) in the case of the
Prospectus/Joint Proxy Statement, on the date or dates the Prospectus/Joint
Proxy Statement is first mailed to Beverly and Capstone stockholders, (v) at the
date or dates of the Beverly Special Meeting and the Capstone Special Meeting,
(vi) at the Closing, and (vii) at the Effective Time, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. If at any time prior to the Effective Time any event with respect to
Capstone or any of its Subsidiaries shall occur which is required to be
described in the Registration Statement or the Prospectus/Joint Proxy Statement,
such event shall be so described, and after due consultation with Beverly, an
amendment or supplement shall be promptly filed with the Securities and Exchange
Commission (the "SEC") and, as required by law, disseminated to the stockholders
of Capstone and Beverly. The Registration Statement and the Prospectus/Joint
Proxy Statement will (with respect to Capstone) comply as to form in all
material respects with the applicable provisions of the Securities Act and the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "Exchange Act"), as the case may be.
SECTION 3.09 FINDERS OR BROKERS. Except as set forth in Section 3.09 of
the Capstone Disclosure Statement, neither Capstone nor any Subsidiary of
Capstone has employed any investment banker, broker, finder or intermediary in
connection with the transactions contemplated hereby who might be entitled to a
fee or any commission the receipt of which is conditioned in whole or part upon
consummation of the Merger.
SECTION 3.10 SEC FILINGS.
(a) Capstone has filed with the SEC all required forms, reports and
documents required to be filed by it with the SEC since December 31, 1991
(collectively, the "Capstone SEC Reports"), all of which, when filed, complied
as to form in all material respects with the applicable provisions of the
Securities Act and the
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Exchange Act, as the case may be. As of their respective dates the Capstone SEC
Reports (including documents included as exhibits thereto or incorporated by
reference therein) did not contain any untrue statement of a material fact or
omit 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.
(b) Capstone will deliver to Beverly as soon as they become available true
and complete copies of any report or statement mailed by Capstone to its
security holders generally or filed by it with the SEC, in each case subsequent
to the date hereof and prior to the Effective Time. As of their respective
dates, such reports and statements (excluding any information therein provided
by Beverly, as to which Capstone makes no representation) will comply as to form
in all material respects with the applicable provisions of the Securities Act
and the Exchange Act, will not contain any untrue statement of a material fact
or omit 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 are
made, not misleading, and will further comply in all material respects with all
applicable requirements of law. The audited consolidated financial statements
and unaudited consolidated interim financial statements of Capstone and its
Subsidiaries to be included or incorporated by reference in such reports and
statements will be prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods involved, and in
accordance with all applicable accounting requirements under the Securities Act
and the Exchange Act, and will fairly present the consolidated financial
position of Capstone and its Subsidiaries as of the dates thereof and the
consolidated results of operations and consolidated cash flow for the periods
then ended (subject, in the case of any unaudited interim financial statements,
to normal year-end adjustments and to the extent they may not include footnotes
or may be condensed or summary statements).
SECTION 3.11 FINANCIAL STATEMENTS. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Capstone
and its Subsidiaries included or incorporated by reference in the Capstone SEC
Reports have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved, and in
accordance with all applicable accounting requirements under the Securities Act
and the Exchange Act, and fairly present the consolidated financial position of
Capstone and its Subsidiaries as of the dates thereof and the consolidated
results of operations and consolidated cash flows for the periods then ended
(subject, in the case of any unaudited interim financial statements, to normal
year-end adjustments and to the extent they may not include footnotes or may be
condensed or summary statements) and such audited financial statements have been
certified as such (without exception) by Capstone's independent accountants.
SECTION 3.12 ABSENCE OF UNDISCLOSED LIABILITIES. Neither Capstone nor any
of its Subsidiaries has any liabilities or obligations of any nature, whether
absolute, accrued, unmatured, contingent or otherwise, or any unsatisfied
judgments or any leases of personalty or realty or unusual or extraordinary
commitments, except for those liabilities recorded on the Capstone Balance Sheet
(as hereinafter defined) or described in the notes thereto, and except for
liabilities or obligations incurred in the ordinary course of business and
consistent with past practice since December 31, 1996 that would not, singly or
in the aggregate, be reasonably expected to have a Capstone Material Adverse
Effect.
SECTION 3.13 ABSENCE OF CHANGES OR EVENTS.
(a) Since December 31, 1996: (i) Capstone and its Subsidiaries have
conducted their business in the ordinary course and have not incurred any
material liability or obligation (indirect, direct or contingent) or entered
into any material oral or written agreement or other transaction that is not in
the ordinary course of business (other than the Voting Agreement, the
Shareholders Agreement (as hereinafter defined) and this Agreement) or that
could reasonably be expected to result in a Capstone Material Adverse Effect;
(ii) neither Capstone nor its Subsidiaries have sustained any material loss or
interference with their business or properties from fire, flood, windstorm,
accident, strike or other calamity (whether or not covered by insurance); (iii)
there has been no material change in the indebtedness of Capstone and its
Subsidiaries, no change in the capital stock of Capstone and no dividend or
distribution of any kind declared, paid or made by Capstone on any class of its
capital stock; (iv) there has been no event or condition which has caused a
Capstone Material Adverse Effect, nor any development, occurrence or state of
facts or circumstances that could, singly or in the
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aggregate, reasonably be expected to result in a Capstone Material Adverse
Effect; (v) there has been no amendment, modification or supplement to any
material term of any Capstone Contract required to be identified in Section 3.20
of the Capstone Disclosure Statement or any equity security; and (vi) there has
been no material change by Capstone in its accounting principles, practices or
methods.
(b) Since December 31, 1996, other than in the ordinary course of business
consistent with past practice, there has not been any increase in the
compensation or other benefits payable, or which could become payable, by
Capstone, to its officers or key employees, or any amendment of any of the
Capstone Compensation and Benefit Plans.
SECTION 3.14 CAPITALIZATION.
(a) The authorized capital stock of Capstone consists of 50,000,000 shares
of Capstone Common Stock and 500,000 shares of serial preferred stock, par value
$.01 per share (the "Capstone Preferred Stock"). As of March 31, 1997, there
were 33,999,766 shares of Capstone Common Stock and no shares of Capstone
Preferred Stock outstanding and no shares of Capstone Common Stock were held in
Capstone's treasury; and except for shares which were reserved for issuance and
which may have been issued pursuant to the following sentence there have been no
issuances of capital stock of Capstone since December 31, 1996. As of March 31,
1997, 4,180,864 shares of Capstone Common Stock were reserved for issuance upon
the exercise of outstanding warrants (the "Capstone Warrants"), 2,835,535 shares
of Capstone Common Stock were reserved for issuance upon the exercise of
outstanding options (the "Capstone Options") which may be granted under the
stock option plans of Capstone covering an aggregate of 3,705,000 shares of
Capstone Common Stock (the "Capstone Option Plans"), and no other shares of
Capstone Common Stock are reserved for any purpose. Except for the foregoing and
as contemplated by this Agreement, there are not any existing options, warrants,
calls, subscriptions, or other rights or other agreements or commitments
obligating Capstone to issue, transfer or sell any shares of capital stock of
Capstone or any of its Subsidiaries or any other securities convertible into or
evidencing the right to subscribe for any such shares. There are no outstanding
stock appreciation rights with respect to the capital stock of Capstone or any
of its Subsidiaries. All issued and outstanding shares of Capstone Common Stock
are duly authorized and validly issued, fully paid and nonassessable and have
not been issued in violation of (nor are any of the authorized shares of capital
stock of, or other equity interests in, Capstone subject to) any preemptive or
similar rights created by statute, the Certificate of Incorporation or By-laws
of Capstone or any agreement to which Capstone is a party or by which it may be
bound. The Capstone Common Stock to be issued in accordance with Section 2.01 of
this Agreement, when so issued, will be duly authorized and validly issued,
fully paid and nonassessable.
(b) Except as set forth in Section 3.14(b) of the Capstone Disclosure
Statement, there are no (i) obligations, contingent or otherwise, of Capstone to
repurchase, redeem or otherwise acquire any shares of Capstone Common Stock; or
provide funds to, or make any investment in (in the form of a loan, capital
contribution or otherwise), or provide any guarantee with respect to the
obligations of, any other person, or (ii) agreements, arrangements or
commitments of any character (contingent or otherwise) pursuant to which any
person is or may be entitled to receive any payment based on the revenues or
earnings, or calculated in accordance therewith, of Capstone. Except for the
Voting Agreement and the Shareholders Agreement (as hereinafter defined), there
are no voting trusts, proxies or other agreements or understandings to which
Capstone is a party or by which Capstone is bound with respect to the voting of
any shares of capital stock of Capstone.
(c) Capstone has delivered or made available to Beverly complete and
correct copies of each of the Capstone Warrants and Capstone Option Plans,
including all amendments thereto. Section 3.14(c) of the Capstone Disclosure
Statement sets forth a complete and correct list of all outstanding Capstone
Warrants and Capstone Options, setting forth (i) the exercise price of each
outstanding Capstone Warrant and Capstone Option, (ii) the number of Capstone
Warrants and Capstone Options and (iii) the date of issuance or grant of each
such Capstone Warrant or Capstone Option. Section 3.14(c) of the Capstone
Disclosure Statement sets forth a complete and correct list of all restricted
stock awards including the recipients and the number of shares of Capstone
Common Stock received or to be received by each.
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SECTION 3.15 CAPITAL STOCK OF SUBSIDIARIES. The only direct or indirect
Subsidiaries of Capstone are those listed in Section 3.15 of the Capstone
Disclosure Statement. Capstone is directly or indirectly the record and
beneficial owner of all of the outstanding shares of capital stock of each of
its Subsidiaries, there are no proxies with respect to such shares, and there
are not any existing options, warrants, calls, subscriptions, or other rights or
other agreements or commitments obligating Capstone or any of such Subsidiaries
to issue, transfer or sell any shares of capital stock of such Subsidiary or any
other securities convertible into or evidencing the right to subscribe for any
such shares. All of such shares beneficially owned by Capstone are duly
authorized and validly issued, fully paid, nonassessable and free of preemptive
rights with respect thereto and are owned by Capstone free and clear of any
claim, lien or encumbrance of any kind with respect thereto. Except as set forth
in Section 3.15 of the Capstone Disclosure Statement, Capstone does not directly
or indirectly own any interest in any corporation, partnership, joint venture or
other business association or entity.
SECTION 3.16 LITIGATION. Except as set forth in Section 3.16 of the
Capstone Disclosure Statement, there are no pending actions, suits, proceedings
or, to the best knowledge of Capstone after due inquiry, investigations by,
against or affecting Capstone, any of its Subsidiaries or any of their
properties, assets or operations, or with respect to which Capstone or any of
its Subsidiaries is responsible by way of indemnity or otherwise. No pending or,
to the knowledge of Capstone, threatened actions, suits, proceedings or
investigations by, against or affecting Capstone, any of its Subsidiaries or any
of their properties, assets or operations, or with respect to which they are
responsible by way of indemnity or otherwise, whether or not disclosed in such
Capstone SEC Reports, would, singly or in the aggregate with all such other
actions, suits, investigations or proceedings, reasonably be expected to have a
Capstone Material Adverse Effect; and, to the best knowledge of Capstone after
due inquiry, no such actions, suits, proceedings or investigations which would
reasonably be expected to have a Capstone Material Adverse Effect are threatened
or contemplated and there is no reasonable basis, to the best knowledge of
Capstone after due inquiry, for any such action, suit, proceeding or
investigation, whether or not threatened or contemplated.
SECTION 3.17 INSURANCE. Capstone has insurance policies and fidelity bonds
covering it and its Subsidiaries' assets, business, equipment, properties,
operations, employees, officers and directors of the type and in amounts
customarily carried by persons conducting business similar to that of Capstone
and such Subsidiaries. All premiums due and payable under all such policies and
bonds have been paid, and Capstone is otherwise in full compliance with the
terms and conditions of all such policies and bonds, except where the failure to
have made payment or to be in full compliance would not, individually or in the
aggregate with all such other failures, have a Capstone Material Adverse Effect.
The reserves established by Capstone in respect of all matters as to which
Capstone self-insures or carries retention and/or deductibles, including
workers' medical coverage and workers' compensation, are adequate and
appropriate in light of Capstone's experience since December 31, 1991 with
respect thereto, and Capstone is not aware, after due inquiry, of any facts or
circumstances existing as of the date hereof that could reasonably be expected
to cause such reserves to be inadequate or inappropriate. Section 3.17 of the
Capstone Disclosure Statement sets forth a true and complete list of all
insurance policies, including retention and/or deductible programs, and fidelity
bonds of Capstone.
SECTION 3.18 TITLE TO AND CONDITION OF PROPERTIES. Capstone and its
Subsidiaries have good title to all of the real property and personal property
reflected on Capstone's December 31, 1996 audited consolidated balance sheet
contained in Capstone's Form 10-K for the fiscal year ended December 31, 1996
filed with the SEC (the "Capstone Balance Sheet"), except for property since
sold or otherwise disposed of in the ordinary course of business and consistent
with past practice. Set forth in Section 3.18 of the Capstone Disclosure
Statement is a true and complete list of all real properties owned by Capstone
and its Subsidiaries, all of which real properties are reflected on the Capstone
Balance Sheet. No such real or personal property is subject to claims, liens or
other encumbrances of any kind or character, including, without limitation,
mortgages, pledges, liens, conditional sale agreements, charges, security
interests, easements, restrictive covenants, rights of way or options, except
for (i) liens for taxes not yet delinquent or which are being contested in good
faith by appropriate proceedings and in respect of which Capstone or its
appropriate Subsidiary has set aside on its books adequate reserves in
accordance with generally accepted accounting principles; (ii) mechanics',
carriers', workers', repairers', materialmen's and other similar statutory liens
incurred in the ordinary course of business for obligations not yet delinquent
or the validity of which is being contested in good faith by
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appropriate proceedings and in respect of which Capstone or its appropriate
Subsidiary has set aside on its books adequate reserves in accordance with
generally accepted accounting principles; (iii) in the case of real property,
easements, rights of way, restrictions, minor defects or irregularities in title
that do not individually or in the aggregate have a material adverse effect on
the value or use of the real property encumbered thereby as currently used in
the operation of the business of Capstone or its Subsidiaries; or (iv) those
which would not materially interfere with the conduct of the business of
Capstone and its Subsidiaries or impair Capstone's ability to perform its
obligations under this Agreement and to consummate the transactions contemplated
hereby (the encumbrances described in clauses (i) through (iv) of this sentence,
collectively, the "Capstone Permitted Encumbrances"). There are no eminent
domain proceedings pending or, to Capstone's knowledge, threatened against any
owned property or any material portion thereof which proceedings (if resulting
in a taking) could reasonably be expected to have a material adverse effect on
the value or use of such property as currently used in the operation of the
business of Capstone or its Subsidiaries. The real properties and the
improvements located thereon (including the roof and structural portions of each
building) are in good operating order and condition, subject to ordinary wear
and tear. There are no structural, mechanical or other defects of a material
nature in any improvements located on the real properties. All building systems
in respect of the real properties are in all material respects in good condition
and working order, subject to ordinary wear and tear. The real properties are
served by all utilities required or necessary for the present use thereof.
Capstone has made available to Beverly true and correct copies of all title
insurance commitments, title insurance policies and surveys in the possession of
Capstone or its Subsidiaries relating to its real properties set forth in
Section 3.18 of the Capstone Disclosure Statement.
SECTION 3.19 LEASES. There have been delivered or made available to
Beverly true and complete copies of each lease pursuant to which real or
personal property is held under lease by Capstone or any of its Subsidiaries
(limited in the case of personal property, to leases pursuant to which annual
rentals are reasonably expected to be at least $100,000 per year), and true and
complete copies of each lease pursuant to which Capstone or any of its
Subsidiaries leases real or personal property to others (limited in the case of
personal property, to leases pursuant to which annual rentals are reasonably
expected to be at least $100,000 per year). Section 3.19 of the Capstone
Disclosure Statement sets forth a true and complete list of all such leases, and
such leases are the only leases that are material to the business conducted by
Capstone and its Subsidiaries. All of the leases so listed (i) are valid and
subsisting and in full force and effect with respect to Capstone and its
Subsidiaries, as the case may be, and, to Capstone's knowledge, with respect to
any other party thereto, (ii) were entered into as a result of bona fide arm's
length negotiations with the other party or parties thereto, and (iii) Capstone
or its Subsidiaries, as the case may be, have valid leasehold interests in all
properties leased thereunder free and clear of all liens and encumbrances other
than Capstone Permitted Encumbrances. The leased real properties are in good
operating order and condition, subject to ordinary wear and tear.
SECTION 3.20 CONTRACTS AND COMMITMENTS. Except as set forth in Section
3.20 of the Capstone Disclosure Statement, neither Capstone nor any of its
Subsidiaries is a party to any existing contract, obligation or commitment of
any type in any of the following categories:
(a) contracts for the purchase by Capstone or any of its Subsidiaries
of medicines, materials, supplies or equipment which are not cancelable
upon 90 days' or less notice and which either (i) have not been entered
into in the ordinary course of business and consistent with past practice
or (ii) provide for purchase prices substantially greater than those
presently prevailing for such materials, supplies or equipment, or (iii)
contracts obligating Capstone or its Subsidiaries to make capital
expenditures in excess of $200,000;
(b) contracts under which Capstone or any of its Subsidiaries has,
except by way of endorsement of negotiable instruments for collection in
the ordinary course of business and consistent with past practice, become
absolutely or contingently or otherwise liable for (i) the performance of
any other person, firm or corporation under a contract, or (ii) the whole
or any part of the indebtedness or liabilities of any other person, firm or
corporation;
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(c) powers of attorney outstanding from Capstone or any of its
Subsidiaries other than as issued in the ordinary course of business and
consistent with past practice with respect to customs, insurance, patent,
trademark or tax matters, or to agents for service of process;
(d) contracts under which any amount payable by Capstone or any of its
Subsidiaries is dependent upon, or calculated in accordance with, the
revenues or profits of Capstone or any of its Subsidiaries;
(e) contracts with any director, officer, employee or affiliate of
Capstone or any of its Subsidiaries other than in such person's capacity as
a director, officer or employee of Capstone or any of its Subsidiaries;
(f) contracts which limit or restrict where Capstone or any of its
Subsidiaries may conduct its business or the type or line of business in
which Capstone or any of its Subsidiaries may engage;
(g) contracts with any party for the loan of money or availability of
credit to or from Capstone or any of its Subsidiaries (except credit
extended by Capstone or any of its Subsidiaries to its customers in the
ordinary course of business and consistent with past practice); or
(h) any hedging, option, derivative or other similar transaction.
True and complete copies of all contracts, obligations and commitments
listed in Section 3.20 of the Capstone Disclosure Statement have been delivered
or made available to Beverly. All such contracts are in full force and effect.
None of Capstone or its Subsidiaries or, to the best knowledge of Capstone, any
other party is in breach of or default under any such contracts (and no facts or
circumstances exist which could reasonably support the assertion of any such
breach or default) except for breaches and defaults by parties other than
Capstone and its Subsidiaries which would not, singly or in the aggregate with
all other such breaches, have a Capstone Material Adverse Effect.
SECTION 3.21 LABOR MATTERS. None of Capstone or its Subsidiaries is a
party to any union contract or other collective bargaining agreement. Each of
Capstone and its Subsidiaries is in compliance in all material respects with all
applicable laws respecting employment and employment practices, terms and
conditions of employment, safety, wages and hours, and neither Capstone nor any
of its Subsidiaries is engaged in any unfair labor practice. There is no labor
strike, slowdown or stoppage pending (or, to the best knowledge of Capstone, any
labor strike or stoppage threatened) against or affecting Capstone or any of its
Subsidiaries. To the best of Capstone's knowledge, no union organizing
activities with respect to any of its or its Subsidiaries' employees are
occurring or threatened.
SECTION 3.22 NO CHANGE OF CONTROL PUTS. Neither the execution and delivery
by Capstone of this Agreement nor the consummation of any of the transactions
contemplated hereby gives rise to any obligation of Capstone or any of its
Subsidiaries to, or any right of any holder of any security of Capstone or any
of its Subsidiaries to, require Capstone to purchase, offer to purchase, redeem
or otherwise prepay or repay any such security, or deposit any funds to effect
the same.
SECTION 3.23 EMPLOYMENT AND LABOR CONTRACTS. Except as set forth in
Section 3.23 of the Capstone Disclosure Statement, neither Capstone nor any of
its Subsidiaries is a party to any employment, management services, consultation
or other contract or agreement with any past or present officer, director or
employee or, to the best knowledge of Capstone, any entity affiliated with any
past or present officer, director or employee, other than the agreements
executed by employees generally, the forms of which have been provided to
Beverly.
SECTION 3.24 INTELLECTUAL PROPERTY RIGHTS. Capstone or its Subsidiaries
own or have the right to use all Intellectual Property Rights (as hereinafter
defined) necessary to the conduct of their respective businesses. Section 3.24
of the Capstone Disclosure Statement contains a list of all patents, trade
names, registered and unregistered copyrights, trademarks and service marks,
mask works and applications for the foregoing owned by Capstone or its
Subsidiaries. Except as set forth in Section 3.24 of the Capstone Disclosure
Statement, (i) Capstone and/or its Subsidiaries have clear and unencumbered
title to the Intellectual Property Rights set forth in such Section 3.24 and
such title has not been challenged (pending or threatened) by others except for
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the encumbrances listed therein; (ii) no rights or licenses to use Intellectual
Property Rights have been granted or acquired by Capstone or its Subsidiaries;
(iii) there have been no claims or assertions made by others that Capstone has
infringed any Intellectual Property Rights of others by the sale of products or
any other activity in the preceding six-year period; (iv) to the knowledge of
Capstone, there has been no such infringement by Capstone or any of its
Subsidiaries during such six-year period; (v) Capstone has no knowledge of any
infringement of Intellectual Property Rights of Capstone or any of its
Subsidiaries by others, and (vi) all such patents, registered trademarks,
service marks and copyrights owned by Capstone or its Subsidiaries are in good
standing, and, to the extent recorded on the public record, are recorded in the
name of Capstone or its Subsidiaries. Such Section 3.24 also contains a list of
unpatented inventions used or planned for use by Capstone or its Subsidiaries.
True and complete copies of all material listed in Section 3.24 of the Capstone
Disclosure Statement have been delivered or made available to Beverly.
"Intellectual Property Rights" shall mean and include rights relating to
patents, trademarks, service marks, trade names, copyrights, mask works,
inventions, processes, trade secrets, know-how, confidentiality agreements,
consulting agreements, software and any documentation relating to the
manufacture, marketing and maintenance of products.
SECTION 3.25 TAXES. (i) Capstone and its Subsidiaries have prepared and
timely filed or will timely file with the appropriate governmental agencies all
franchise, income and all other Tax returns and reports (hereinafter
collectively referred to as "Tax Returns") required to be filed by them on or
before the Effective Time, taking into account any extension of time to file
granted to or obtained on behalf of Capstone and/or its Subsidiaries (copies of
which for the past three fiscal years have been delivered or made available to
Beverly); (ii) all Taxes of Capstone and its Subsidiaries have been paid in full
to the proper authorities or fully accrued or provided for with respect to
fiscal periods for which there are publicly available financial statements and
otherwise on the books of Capstone, other than such Taxes as are being contested
in good faith by appropriate proceedings and are adequately reserved for in
accordance with generally accepted accounting principles; (iii) all deficiencies
asserted in writing as a result of Tax examinations of federal, state and
foreign income, sales and franchise and all other Tax Returns filed by Capstone
and its Subsidiaries have either been paid or adequately reserved for in
accordance with generally accepted accounting principles; (iv) to the best
knowledge of Capstone, no unpaid deficiency has been asserted or assessed
against Capstone or any of its Subsidiaries, and no examination of Capstone or
any of its Subsidiaries is pending or threatened for any material amount of Tax
by any taxing authority (with respect to any such action, Section 3.25 of the
Capstone Disclosure Statement sets forth the periods at issue and the category
of Tax, and the examining authority's and any corresponding revenue agents'
reports relating to the issue have been delivered or made available to Beverly);
(v) except as set forth in the Capstone Disclosure Statement, no extension of
the period for assessment or collection of any Tax of Capstone or any of its
Subsidiaries is currently in effect and no extension of time within which to
file any Tax Return of Capstone or any of its Subsidiaries has been requested,
which Tax Return has not since been filed; (vi) no Tax liens have been filed
with respect to any Taxes of Capstone or any of its Subsidiaries except for
property taxes which have accrued but with respect to which penalty for
nonpayment has not occurred; (vii) neither Capstone nor any of its Subsidiaries
has agreed to make any adjustment by reason of a change in its accounting
methods that would affect the taxable income or deductions of Capstone or any of
its Subsidiaries for any period ending after the Effective Time; (viii) Capstone
and its Subsidiaries have made timely payments of the Taxes required to be
deducted and withheld from the wages paid to their employees; (ix) there are no
Tax sharing agreements or arrangements under which Capstone or any Subsidiary
will have any obligation or liability on or after the Effective Time; (x)
Capstone and its Subsidiaries have no foreign losses as defined in Section
904(f)(2) of the Internal Revenue Code of 1986, as amended (the "Code"); (xi) to
the best knowledge of Capstone, there are no transfer pricing agreements made by
or on behalf of Capstone or any of its Subsidiaries with any taxation authority;
(xii) no asset of Capstone or any of its Subsidiaries is held in an arrangement
for which partnership Tax Returns are being filed and neither Capstone nor any
of its Subsidiaries is a partner in any partnership; (xiii) neither Capstone nor
any of its Subsidiaries owns any interest in any "controlled foreign
corporation" (within the meaning of Section 957 of the Code), "passive foreign
investment company" (within the meaning of Section 1296 of the Code) or other
entity the income of which is required to be included in the income of Capstone
or such Subsidiary; (xiv) neither Capstone nor any of its Subsidiaries has made
an election under
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Section 341(f) of the Code; and (xv) neither Capstone nor any of its
Subsidiaries is obligated to make any payments that would constitute excess
parachute payments within the meaning of Section 280G of the Code.
"Tax" or "Taxes" shall mean all federal, state, local and foreign taxes,
duties, levies, charges and assessments of any nature, including social security
payments and deductibles relating to wages, salaries and benefits and payments
to subcontractors (to the extent required under applicable Tax law), and also
including all interest, penalties and additions imposed with respect to such
amounts.
SECTION 3.26 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Except as set forth in Section 3.26 of the Capstone Disclosure
Statement, there are no "employee pension benefit plans" as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), covering employees (or former employees), maintained or contributed
to by Capstone or any of its Subsidiaries or any of their ERISA Affiliates (as
hereinafter defined), or to which Capstone or any of its Subsidiaries or any of
their ERISA Affiliates contributes or is obligated to make payments thereunder
or otherwise may have any liability ("Capstone Pension Benefit Plans"). For
purposes of this Agreement, "ERISA Affiliate" shall mean any person (as defined
in Section 3(9) of ERISA) that is a member of any group of persons described in
Section 414(b), (c), (m) or (o) of the Code which includes the referent person
or its Subsidiaries.
(b) Capstone has delivered or made available to Beverly true and complete
copies of, and Section 3.26 of the Capstone Disclosure Statement lists, all
Capstone Pension Benefit Plans, "welfare benefit plans" (as defined in Section
3(1) of ERISA) covering employees (or former employees), maintained or
contributed to by Capstone or any of its Subsidiaries ("Capstone Welfare
Plans"), all multiemployer plans (as defined in Section 3(37) of ERISA) covering
employees (or former employees) to which Capstone or any of its Subsidiaries or
any of their ERISA Affiliates is required to make contributions or otherwise may
have any liability, and, to the extent covering employees, directors, or
independent contractors (or former employees, directors, or independent
contractors), all stock bonus, stock option, restricted stock, stock
appreciation right, stock purchase, bonus, incentive, deferred compensation,
severance, change of control, executive compensation, "top hat," other
equity-based compensation, and vacation plans, agreements, or arrangements
maintained or contributed to by Capstone or a Subsidiary of Capstone.
(c) Capstone and each of its Subsidiaries, and each of the Capstone Pension
Benefit Plans, Capstone Welfare Plans, and all other plans or arrangement
referenced in Section 3.26(b) (collectively, the "Capstone Employee Benefit
Plans") are administered in accordance with their terms and are in compliance
with the applicable provisions of ERISA and other applicable laws except where
the failure to comply would not, singly or in the aggregate, reasonably be
expected to have a Capstone Material Adverse Effect.
(d) All contributions to and payments from the Capstone Employee Benefit
Plans which are required to have been made in accordance with the Capstone
Employee Benefit Plans and, when applicable, Section 302 of ERISA or Section 412
of the Code, have been timely made.
(e) The Capstone Pension Benefit Plans intended to qualify under Section
401 of the Code are and have always been so qualified, have been determined by
the Internal Revenue Service ("IRS") to be so qualified, and nothing has
occurred with respect to such Capstone Pension Benefit Plans which could cause
the loss of such qualification or exemption or the imposition of any material
liability, penalty or tax under ERISA or the Code. Such plans have been amended
and submitted to the IRS on a timely basis to comply with changes to the Code
made by the Tax Reform Act of 1986 and other applicable legislative, regulatory
or administrative requirements.
(f) There are (i) no investigations or audits pending, to the best
knowledge of Capstone, by any governmental entity involving the Capstone Pension
Benefit Plans or Capstone Welfare Plans, (ii) no termination proceedings
involving the Capstone Pension Benefit Plans and (iii) no pending or, to the
best knowledge of Capstone, threatened claims (other than routine uncontested
claims for benefits), suits or proceedings relating to any Capstone Employee
Benefit Plan, against the assets of any of the trusts under any Capstone
Employee Benefit Plan or against any fiduciary of any Capstone Employee Benefit
Plan with respect to the operation of such plan or asserting any rights or
claims to benefits under any such Plan or against the
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assets of any trust under such Plan, except for those which would not, singly or
in the aggregate, give rise to any liability which would reasonably be expected
to have a Capstone Material Adverse Effect, nor, to the best knowledge of
Capstone, are there any facts which could give rise to any such liability.
except for those which would not, singly or in the aggregate, reasonably be
expected to have a Capstone Material Adverse Effect in the event of any such
investigation, claim, suit or proceeding.
(g) None of Capstone, any of its Subsidiaries or any employee of the
foregoing, nor any trustee, administrator, other fiduciary or any other "party
in interest" or "disqualified person" with respect to the Capstone Pension
Benefit Plans or Capstone Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section 406
of ERISA) which could result in a tax or penalty on Capstone or any of its
Subsidiaries under Section 4975 of the Code or Section 502(i) of ERISA, except
any such event which would not, singly or in the aggregate, reasonably be
expected to have a Capstone Material Adverse Effect.
(h) Neither the Capstone Pension Benefit Plans subject to Title IV of ERISA
nor any trust created thereunder has been terminated nor have there been any
"reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof, except any such event which would
not, singly or in the aggregate, reasonably be expected to have a Capstone
Material Adverse Effect, nor has there been any event with respect to any
Capstone Pension Benefit Plan requiring disclosure under Section 4063(a) of
ERISA or any event with respect to any Capstone Pension Benefit Plan requiring
disclosure under Section 4041(c)(3)(C) of ERISA, except any such event which
would not, singly or in the aggregate, reasonably be expected to have a Capstone
Material Adverse Effect.
(i) Neither Capstone nor any Subsidiary of Capstone nor any ERISA Affiliate
has incurred any currently outstanding liability to the Pension Benefit Guaranty
Corporation (the "PBGC") or to a trustee appointed under Section 4042(b) or (c)
of ERISA other than for the payment of premiums, all of which have been paid
when due. No Capstone Pension Benefit Plan has applied for, or received, a
waiver of the minimum funding standards imposed by Section 412 of the Code.
(j) Neither Capstone, any of its Subsidiaries nor any of their ERISA
Affiliates has any liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA.
(k) With respect to each of the Capstone Employee Benefit Plans, true,
correct and complete copies of the following documents have been delivered or
made available to Beverly: (i) the current plans and related trust documents,
including amendments thereto, (ii) any current summary plan descriptions, (iii)
the most recent Forms 5500, financial statements and actuarial reports, if
applicable, and (iv) the most recent IRS determination letter, if applicable.
(l) Neither Capstone, any of its Subsidiaries, any organization to which
Capstone is a successor or parent corporation, within the meaning of Section
4069(b) of ERISA, nor any of their ERISA Affiliates has engaged in any
transaction, within the meaning of Section 4069(a) of ERISA, except where the
liability therefor would not, singly or in the aggregate, reasonably be expected
to have a Capstone Material Adverse Effect.
(m) None of the Capstone Welfare Plans maintained by Capstone or any of its
Subsidiaries include retiree life or retiree health benefits or provide for
continuing benefits or coverage for any participant or any beneficiary of a
participant following termination of employment, except as may be required under
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"). Capstone and each of its Subsidiaries which maintain a "group health
plan" within the meaning of Section 5000(b)(1) of the Code have complied with
the notice and continuation requirements of Section 4980B of the Code, COBRA,
Part 6 of Subtitle B of Title I of ERISA and the regulations thereunder except
where the failure to comply would not, singly or in the aggregate, reasonably be
expected to have a Capstone Material Adverse Effect.
(n) No liability under any Capstone Employee Benefit Plan has been funded
nor has any such obligation been satisfied with the purchase of a contract from
an insurance company as to which Capstone or any of its Subsidiaries has
received notice that such insurance company is in rehabilitation.
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(o) The consummation of the transactions contemplated by this Agreement
will not result in an increase in the amount of compensation or benefits, deemed
satisfaction of goals or conditions, forgiveness or modification of loans, or
accelerate the vesting or timing of payment of any benefits or compensation
payable to or in respect of any employee or former employee of Capstone or any
of its Subsidiaries.
(p) Each Capstone Employee Benefit Plan can be amended or terminated at any
time without approval from any person, without advance notice, and without any
liability other than for benefits accrued prior to such amendment or
termination.
(q) With respect to each Capstone Employee Benefit Plan and any other
similar arrangement or plan either currently or previously terminated,
maintained, or contributed to by any entity which either is currently or was
previously under common control with Capstone or any of its Subsidiaries as
determined under Code Section 414, no event has occurred and no condition exists
that after the Merger could subject Capstone or Beverly, directly or indirectly,
to any liability (including liability under any indemnification agreement) under
Section 412, 4971, 4975, or 4980B of the Code or Section 502, 601 or 606 of
ERISA.
(r) All contributions and payments to or with respect to each Capstone
Employee Benefit Plan have been timely made and Capstone has made adequate
provision for reserves to satisfy contributions and payments that have not been
made because they are not yet due under the terms of such plan or related
arrangement, document, or applicable law. No Capstone Employee Benefit Plan has
any unfunded benefits that are not fully reflected in Capstone's most recent
audited financial statements.
(s) No agreement, commitment, or obligation exists to increase any benefits
under any Capstone Employee Benefit Plan or to adopt any new Capstone Employee
Benefit Plan.
SECTION 3.27 ENVIRONMENTAL MATTERS.
(a) Except as would not, singly or in the aggregate with all other such
instances of non-compliance, have a Capstone Material Adverse Effect, Capstone
and its Subsidiaries are, and within the period of all applicable statutes of
limitation have been, in compliance with all applicable Environmental Laws (as
hereinafter defined), which compliance includes, without limitation, the
possession of all licenses, permits, registrations and other governmental
authorizations (collectively, "Environmental Authorizations") required under
applicable Environmental Laws, and compliance with the terms and conditions
thereof, and there are no circumstances of which Capstone is aware which may
materially prevent or interfere with compliance in the future. To Capstone's
knowledge, all Environmental Authorizations currently held by Capstone and its
Subsidiaries pursuant to Environmental Laws are identified in Section 3.27(a)(1)
of the Capstone Disclosure Statement and represent all Environmental
Authorizations necessary for the conduct of the businesses of Capstone and its
Subsidiaries as currently conducted. Neither Capstone nor any of its
Subsidiaries has been notified, or has any reasonable basis to believe, that any
such Environmental Authorizations will be modified, suspended or revoked or
cannot be renewed or otherwise maintained in the ordinary course of business. To
Capstone's knowledge after due inquiry, the execution and delivery of this
Agreement and the consummation by Capstone of the transactions contemplated
hereby will not affect the validity or require the transfer of any Environmental
Authorizations, and will not require any notification, registration, reporting,
filing, investigation or remediation under any Environmental Law.
(b) There are no Environmental Notices (as hereinafter defined) that,
singularly or in the aggregate, reasonably could be expected to have a Capstone
Material Adverse Effect (i) pending or, to the best knowledge of Capstone,
threatened against Capstone or any of its Subsidiaries, (ii) to the best
knowledge of Capstone, pending or threatened against any person or entity whose
liability for such Environmental Notice may have been retained or assumed by or
could reasonably be imputed or attributed by law or contract to Capstone or any
of its Subsidiaries, (iii) that to the best knowledge of Capstone could subject
Capstone to any material risk of liability, loss or damages, or (iv) that to the
best knowledge of Capstone could reasonably be expected to require
investigation, removal or remedial or corrective action by Capstone or any of
its Subsidiaries. Since December 31, 1996 neither Capstone nor any of its
Subsidiaries has received any Environmental Notice alleging that Capstone or any
of its Subsidiaries is subject to liability under any
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Environmental Law or that Capstone or any of its Subsidiaries is not in full
compliance with Environmental Laws.
(c) There is no civil, criminal or administrative action, suit, demand,
claim, hearing, notice of violation, notice or demand letter or request for
information or, to the best knowledge of Capstone, investigation pending or
threatened under any Environmental Law (i) against Capstone or any of its
Subsidiaries, or (ii) to the knowledge of Capstone against any person or entity
in connection with which liability could reasonably be imputed or attributed by
law or contract to Capstone or any of its Subsidiaries, except, with respect to
each of clauses (i) and (ii), for such demands, claims, notices of violation,
notice or demand letters or requests for information which singly or in the
aggregate could not reasonably be expected to have a Capstone Material Adverse
Effect.
(d) No property or facility presently or to the knowledge of Capstone
formerly owned, operated or leased by Capstone or any of its present
Subsidiaries, or to the knowledge of Capstone any of its former Subsidiaries, or
any of their respective predecessors in interest, is listed or proposed for
listing on the National Priorities List or the Comprehensive Environmental
Response, Compensation and Liability Information System, both promulgated under
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended ("CERCLA"), or on any comparable list established under any
Environmental Law, nor has Capstone or any of its Subsidiaries received any
written notification of potential or actual liability or any request for
information under CERCLA or any comparable foreign, state or local law.
(e) There has been no disposal, spill, discharge or release of any
Hazardous Materials (as hereinafter defined) generated, used, owned, stored or
controlled by Capstone, or to the best knowledge of Capstone any of its
Subsidiaries or any of their respective predecessors in interest, on, at or
under any property presently or formerly owned, leased or operated by Capstone,
or to the best knowledge of Capstone its Subsidiaries, or any predecessors in
interest, and to the best knowledge of Capstone there are no Hazardous Materials
located in, at, on or under, or in the vicinity of, any such facility or
property, or at any other location, that (i) could reasonably be expected to
subject Capstone to a material risk of liability, loss or damages, or result in
the incurrence by Capstone of costs under Environmental Laws, (ii) could
reasonably be expected to form the basis of any Environmental Notice against or
with respect to Capstone or any of its Subsidiaries, or against any person or
entity whose liability for any Environmental Notice may have been retained or
assumed by or could be imputed or attributed by law or contract to Capstone or
any of its Subsidiaries or (iii) could reasonably be expected to require
investigation, removal or remedial or corrective action by Capstone or any of
its Subsidiaries, that in any case singularly or in the aggregate, reasonably
could be expected to have a Capstone Material Adverse Effect.
(f) Without in any way limiting the generality of the foregoing, to the
best knowledge of Capstone (i) there are and have been no underground or
aboveground storage tanks or other storage receptacles, or related piping or
other disposal areas containing Hazardous Materials, located on, at or under
property owned, operated or leased by Capstone, any of its Subsidiaries or any
of their respective predecessors in interest, (ii) there are and have been no
polychlorinated biphenyls located on any properties owned, operated or leased by
Capstone or any of its Subsidiaries, and (iii) there is no asbestos contained in
or forming part of any building, building component, structure or office space
owned, operated or leased by Capstone or any of its Subsidiaries.
(g) To the best knowledge of Capstone no lien has been recorded under
Environmental Laws with respect to any properties, assets or facilities owned,
operated or leased by Capstone or any of its Subsidiaries.
(h) In accordance with Section 5.05, Capstone has given Beverly and its
authorized representatives access to all records and files in its possession or
control relating to actual or potential compliance or liability issues of
Capstone or its Subsidiaries and any of their respective predecessors in
interest under Environmental Laws, including, without limitation, all reports,
studies, analyses, tests or monitoring results pertaining to the existence of
Hazardous Material or any other environmental concern relating to properties,
assets or facilities currently or formerly owned, operated, managed, leased,
used or controlled by Capstone or any of its Subsidiaries, or otherwise
concerning compliance with or liability under Environmental Laws.
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For purposes of this Agreement:
(i) "Environment" shall mean any surface water, groundwater or
drinking water supply, land surface or subsurface strata or ambient air and
includes, without limitation, any indoor location.
(ii) "Environmental Laws" shall mean CERCLA, the Resource Conservation
and Recovery Act of 1976, as amended, and any other federal, state, local
or foreign statute, rule, regulation, order, judgment, directive, decree or
common law, as now or previously in effect and regulating, relating to or
imposing liability or standards of conduct concerning air emissions, water
discharges, noise emissions, the release or threatened release or discharge
of any Hazardous Material into the Environment, the generation, handling,
treatment, storage, transport or disposal of any Hazardous Material or
otherwise concerning pollution or the protection of the outdoor or indoor
Environment, or employee health or safety. The term shall also include laws
governing the transfer of real property that require notification,
registration, reporting, filing, investigation or remediation prior to,
concurrent with or following sale or transfer of control of any property,
facility or establishment in connection with the actual or threatened
presence or release of Hazardous Materials at such property, facility or
establishment.
(iii) "Environmental Notice" shall mean any written communication,
notice or claim by any Governmental Authority or other third party alleging
civil or criminal liability (including, without limitation, liability for
investigatory costs, cleanup costs, governmental costs, compliance costs or
harm, injuries or damages to any person, property, natural resources, or
any fines or penalties) or alleging noncompliance arising out of, based
upon, resulting from or relating to any Environmental Law.
(iv) "Hazardous Material" shall mean any pollutant, contaminant or
hazardous, toxic or dangerous waste, substance, constituent or material
defined or regulated as such in, or for purposes of, any Environmental Law,
including, without limitation, any medical waste, any biochemical waste,
any asbestos, radon, any petroleum, oil (including crude oil or any
fraction thereof), any radioactive substance, any polychlorinated
biphenyls, any toxin, chemical, virus, infectious disease agent and any
other substance that can give rise to liability under any Environmental
Law.
SECTION 3.28 DISCLOSURE. No representation or warranty by Capstone and no
statement or information relating to Capstone or any of its Subsidiaries
contained herein, or in any certificate furnished by or on behalf of Capstone to
Beverly in connection herewith, contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary in
order to make the statements herein or therein, in light of the circumstances
under which they were made, not misleading.
SECTION 3.29 INSTITUTIONAL PHARMACY BUSINESS.
(a) Section 3.29 of the Capstone Disclosure Statement lists each Pharmacy
utilized by Capstone in connection with its pharmacy business and indicates (i)
the location of each such Pharmacy and (ii) whether such Pharmacy premises are
owned or held pursuant to a leasehold interest, management agreement or
otherwise. No other person or entity has any beneficial ownership or interest in
or to any such Pharmacy nor does any other person or entity have any right or
option to acquire any beneficial ownership or interest in or to any such
Pharmacy.
(b) Section 3.29 of the Capstone Disclosure Statement lists all of the
customers to which Capstone and its Subsidiaries provided pharmacy services
pursuant to oral or written contracts which generated revenues in excess of
$5,000,000 for the year ended December 31, 1996 ("Capstone Pharmacy Contracts").
Except as set forth in such Section 3.29, Capstone has not been informed, and
has no reason to believe, that any Capstone Pharmacy Contract will be terminated
for or without cause.
(c) None of Capstone nor any of its Subsidiaries has violated or is in
violation of any law or order of any court or governmental authority that is
applicable to any of them, their businesses or their properties, including but
not limited to the Medicare and Medicaid fraud and abuse provisions of the
Social Security Act, the Civil Monetary Penalties Law of the Social Security
Act, the so-called "Stark" law, 42 USC Section 1395nn, or any other federal or
state law, statute, rule or regulation prohibiting rebates, kickbacks,
fee-splitting or other financial incentives or inducements, including but not
limited to providing products or services below cost for
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the referral or continuation of business. None of Capstone or its Subsidiaries
is, to the best knowledge of Capstone, under investigation by the Office of
Inspector General of the Department of Health and Human Services or other
federal or state investigatory or regulatory body or agency relating to their
business activities, nor is Capstone aware of any state of facts which could
reasonably be likely to subject any of them to a claim for civil penalties,
criminal fines or other sanctions with respect to a violation or claimed
violation of any such laws or regulations relating to the conduct of their
business.
(d) Capstone and its Subsidiaries are duly licensed to provide pharmacy
services in all states in which they do business, and are participants in the
Medicare program and the Medicaid programs of the states listed in Section 3.07
of the Capstone Disclosure Statement. Capstone and its Subsidiaries are in
substantial compliance with all laws, rules and regulations affecting or in
connection with Capstone and its Subsidiaries, the Pharmacies and their licenses
with respect thereto and their participation in the Medicare and Medicaid
programs.
(e) Capstone has delivered or made available true and correct billing
requests for reimbursement and underlying information to all governmental
programs, including but not limited to the Medicare and Medicaid programs, in
compliance with all rules, regulations, policies and procedures of such
governmental programs and of the fiscal intermediaries of such programs. To the
best knowledge of Capstone all such billings were for goods actually provided,
and at appropriate charges or costs, and Capstone has appropriate documentation
to support such billing requests. All accounts receivable of Capstone and its
Subsidiaries reflected in the Capstone Balance Sheet represent valid claims
against debtors for sales of products or services or other charges on or before
the Capstone Balance Sheet Date, are not subject to discount except for normal
cash discounts and have been appropriately reduced to their estimated net
realizable value after establishing all necessary provisions or reserves with
respect to such accounts.
SECTION 3.30 FAIRNESS OPINION. Capstone has received the opinion of
Adirondack Capital Advisors, L.L.C. to the effect that as of the date hereof the
financial terms of the Merger are fair to Capstone's stockholders from a
financial point of view.
SECTION 3.31 SUFFICIENCY OF ASSETS. Capstone and its Subsidiaries own,
lease, hold or otherwise have the right to use all of the assets, properties,
Intellectual Property Rights and Capstone Licenses which are material to the
conduct of the business as presently conducted by Capstone and its Subsidiaries.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BEVERLY
Except as set forth in the Beverly Disclosure Statement delivered by
Beverly to Capstone at or prior to the execution of this Agreement (the "Beverly
Disclosure Statement") (each section of which qualifies the correspondingly
numbered representation and warranty and covenant), Beverly represents and
warrants to Capstone as follows:
SECTION 4.01 ORGANIZATION AND QUALIFICATION. Each of Beverly and its
Pharmacy Subsidiaries (as defined in the Distribution Agreement) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Beverly SEC Reports (as hereinafter defined). Each of
Beverly and its Pharmacy Subsidiaries is duly qualified to transact business as
a foreign corporation and is in good standing in each jurisdiction in which the
conduct of its business or the ownership, leasing or operation of its property
requires such qualification, except for failures to be so qualified or in good
standing which would not, singly or in the aggregate with all such other
failures, have a Beverly Material Adverse Effect. "Beverly Material Adverse
Effect" means (i) with respect to any event, occurrence, failure of event or
occurrence, change, effect, state of affairs, breach, default, violation, fine,
penalty or failure to comply (each, a "circumstance"), individually or taken
together with all other circumstances contemplated by or in connection with any
or all of the representations and warranties made in this Agreement, (a) a
material adverse effect on the business, properties, assets, condition
(financial or otherwise), results of operations or prospects of the
Institutional Pharmacy Business, taken as a whole, or (b) an impairment on the
ability of
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NBHI to conduct as a going concern the Remaining Health Care Business (as
defined in the Distribution Agreement) subsequent to the Distribution or (ii)
circumstances resulting in the impairment of Beverly's or NBHI's ability to
perform its obligations under this Agreement or the Distribution Agreement and
to consummate the transactions contemplated hereby and thereby. Neither Beverly
nor any of its Pharmacy Subsidiaries is in violation of any of the provisions of
its respective certificate of incorporation (or other applicable charter
document) or By-laws. True and complete copies of the certificate of
incorporation and By-laws, as currently in effect, of Beverly and of each
Pharmacy Subsidiary of Beverly have been previously delivered or made available
to Capstone. No amendments to the certificate of incorporation (or other similar
charter documents) and By-laws of Beverly or any Pharmacy Subsidiary have been
authorized since December 31, 1996.
SECTION 4.02 AUTHORITY RELATIVE TO THIS AGREEMENT. Beverly has full
corporate power and authority to execute and deliver this Agreement and the
Distribution Agreement and, upon obtaining the approval of a majority of the
outstanding shares of Beverly Common Stock at the Beverly Special Meeting or
adjournment thereof, as may be required by the Delaware Act, to consummate the
Merger and the Distribution and complete the other transactions contemplated
hereby. The execution and delivery of this Agreement and the Distribution
Agreement and the consummation of the Merger, the Distribution and the other
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Beverly, and except as stated in the preceding sentence,
no other corporate proceedings on the part of Beverly are necessary to authorize
this Agreement and the Distribution Agreement or to consummate the Merger, the
Distribution and the other transactions contemplated hereby. This Agreement and
the Distribution Agreement have been duly and validly executed and delivered by
Beverly and, assuming, in the case of this Agreement and the Distribution
Agreement, the due authorization, execution and delivery of each such agreement
by Capstone, constitute valid and binding agreements of Beverly, enforceable
against Beverly in accordance with their terms, except to the extent that their
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally or by general equitable principles.
SECTION 4.03 CONSENTS, NO CONFLICTS.
(a) Except for the filing of the Certificate of Merger, the filing and
effectiveness of the Registration Statement and the NBHI Registration Document
(as hereinafter defined), the filings required under and in connection with the
applicable requirements of the HSR Act, and filings required pursuant to any
state securities or "blue sky" laws, no filing or registration with,
notification or disclosure to, or permit, authorization, consent or approval of,
(i) any court, (ii) any government agency or body or (iii) any third party,
whether acting in an individual, fiduciary or other capacity, is required for
the consummation by Beverly of the Merger, the Distribution or the other
transactions contemplated hereby or by the Distribution Agreement except such as
are set forth in Section 4.03(a) of the Beverly Disclosure Statement, which will
have been obtained or made prior to the Effective Time and will then be in full
force and effect or which would not, singly or in the aggregate with all other
such consents which have not been obtained, have a Beverly Material Adverse
Effect.
(b) Except as set forth in Section 4.03(b) of the Beverly Disclosure
Statement, the execution, delivery and performance of this Agreement, the
Distribution Agreement, the consummation of the Distribution, the Merger and the
other transactions contemplated hereby (or thereby) and compliance by Beverly
with any of the provisions hereof (or thereof) do not and will not, (i) subject
to obtaining the approval of a majority of the outstanding shares of Beverly
Common Stock at the Beverly Special Meeting or any adjournment thereof as
required by the Delaware Act, conflict with or result in any breach or violation
of any provision of the certificate of incorporation (or other comparable
charter documents) or By-laws of Beverly or any of its Pharmacy Subsidiaries,
(ii) result in (1) a breach or violation of, a default under or an event
triggering any payment or other obligation pursuant to any of Beverly's existing
pension plans, welfare plans, multiemployer plans, employee benefit plans,
benefit arrangements or similar plans, arrangements or policies, including
bonus, incentive, deferred compensation, stock purchase, stock option, stock
appreciation right, phantom stock performance shares, health or group insurance,
severance pay, retirement or other benefit plans, and all similar arrangements
or policies of Beverly and its Subsidiaries (the "Beverly Compensation and
Benefit Plans") or
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any grant or award made under any of the foregoing in any case for which Beverly
or any of the Pharmacy Subsidiaries would be responsible after the Distribution,
(2) a breach, violation or event triggering a right of termination of, a default
under, the acceleration of any obligation, or the creation of a lien, pledge,
security interest or other encumbrance on assets (with or without the giving of
notice or the lapse of time or both) pursuant to any provision of any agreement,
lease of real or personal property, marketing agreement, contract, note,
mortgage, indenture, arrangement or other obligation of Beverly or any of its
Pharmacy Subsidiaries which relate to the Institutional Pharmacy Business
("Beverly Contracts") or any law, rule, ordinance or regulation or judgment,
decree, order or award to which Beverly or any of its Pharmacy Subsidiaries is
subject or any governmental or non-governmental authorization, consent,
approval, registration, franchise, license or permit under which Beverly or any
of its Pharmacy Subsidiaries conducts the Institutional Pharmacy Business, or
(3) any other change in the rights or obligations of any party under any of the
Beverly Contracts.
SECTION 4.04 BOARD ACTION. The Board of Directors of Beverly has, by a
unanimous vote at a meeting of such Board duly held on April 15, 1997, approved
and adopted this Agreement, the Distribution Agreement, the Merger and the other
transactions contemplated hereby or by the Distribution Agreement, including but
not limited to termination of the Beverly Rights Plan to be effective upon the
Closing of the Merger, determined that the consideration to be received by the
holders of shares of Beverly Common Stock pursuant to the Merger is fair to the
holders of such shares and recommended that the holders of such shares approve
and adopt this Agreement, the Distribution Agreement, the Merger and the other
transactions contemplated hereby.
SECTION 4.05 STATE ANTI-TAKEOVER STATUTES; RIGHTS AGREEMENT. Beverly has
granted all approvals and taken all other steps necessary to exempt the Merger
and the other transactions contemplated hereby from the requirements and
provisions of Section 203 of the Delaware Act and the Rights Agreement (as
hereinafter defined), and any other state anti-takeover statute or regulation
such that none of the provisions of such "business combination," "moratorium,"
"control share," or other state anti-takeover statute or regulation or the
Rights Agreement (x) prohibits or restricts Beverly's ability to perform its
obligations under this Agreement or its ability to consummate the Merger and the
other transactions contemplated hereby, (y) would have the effect of
invalidating or voiding this Agreement or any provision hereof, or (z) would
subject Capstone to any material impediment or condition in connection with the
exercise of any of their respective rights under this Agreement.
SECTION 4.06 NO EXISTING VIOLATION, DEFAULT, ETC. None of Beverly or any
of its Subsidiaries is in violation (except for any violations which would not,
singly or in the aggregate with all such other violations, (i) have a Beverly
Material Adverse Effect or (ii) result in Remaining Health Care Liabilities for
which as between NBHI on the one hand and Beverly and Capstone on the other
hand, NBHI shall be solely liable) of (A) any applicable law, ordinance,
administrative or governmental rule or regulation or (B) any order, decree or
judgment of any court or governmental agency or body having jurisdiction over
Beverly or any of its Subsidiaries. No event of default or event that, but for
the giving of notice or the lapse of time or both, would constitute an event of
default, exists under any Beverly Contract or any lease, permit, license or
other agreement or instrument to which Beverly or any of its Subsidiaries is a
party or by which any of them is bound or to which any of the properties, assets
or operations of Beverly or any of its Subsidiaries is subject (except for any
events of default or other defaults which would not, singly or in the aggregate
with all such other defaults, (i) have a Beverly Material Adverse Effect or (ii)
result in Remaining Health Care Liabilities for which as between NBHI on the one
hand and Beverly and Capstone on the other hand, NBHI shall be solely liable).
SECTION 4.07 AFFILIATES. Beverly has delivered to Capstone a letter
identifying all persons who, as of the date hereof, may be deemed to be
"affiliates" of Beverly for purposes of Rule 145 under the Securities Act
("Affiliates") and the written agreement of each such person, substantially in
the form of Exhibit F hereto.
SECTION 4.08 LICENSES AND PERMITS. Each of Beverly and its Pharmacy
Subsidiaries has such certificates, permits, licenses, franchises, consents,
approvals, orders, authorizations and clearances from appropriate governmental
agencies and bodies ("Beverly Licenses") as are necessary to own, lease or
operate its properties or conduct the Institutional Pharmacy Business in the
manner described in the Beverly SEC Reports and as
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presently conducted, and all such Beverly Licenses are valid and in full force
and effect, other than any failure to have any such Beverly License or any
failure of any such Beverly License to be valid and in full force and effect as
would not, singly or in the aggregate with all such other failures, have a
Beverly Material Adverse Effect. Each of Beverly and its Pharmacy Subsidiaries
is, and within the period of all applicable statutes of limitation has been, in
compliance with its obligations under such Beverly Licenses and no event has
occurred that allows, or after notice or lapse of time would allow, revocation
or termination of such Beverly Licenses, other than any such failure to be in
compliance with such obligations or any such revocation or termination as would
not, singly or in the aggregate with all such other failures, revocations or
terminations, have a Beverly Material Adverse Effect. Beverly has no knowledge
of any facts or circumstances that could reasonably be expected to result in an
inability of Beverly or any of its Pharmacy Subsidiaries to renew any Beverly
License. Except as set forth in Section 4.08 of the Beverly Disclosure
Statement, neither the execution and delivery by Beverly of this Agreement or
the Distribution Agreement nor the consummation of the Distribution, the Merger
or any of the other transactions contemplated herein will result in any
revocation or termination of any Beverly License or any requirement that the
Surviving Corporation be licensed in respect of any of the Beverly Licenses. Set
forth in such Section 4.08 is a true and complete list of all Beverly Licenses
which are necessary for the conduct of the Institutional Pharmacy Business as
presently conducted by Beverly and its Subsidiaries. The listed Beverly Licenses
are held by Beverly or the Pharmacy Subsidiaries.
SECTION 4.09 REGISTRATION STATEMENT; PROSPECTUS/JOINT PROXY STATEMENT;
NBHI REGISTRATION DOCUMENT.
(a) None of the information supplied by Beverly for inclusion or
incorporation by reference in the Registration Statement or the Prospectus/Joint
Proxy Statement to be sent to the stockholders of Capstone and Beverly in
connection with the Capstone Special Meeting and the Beverly Special Meeting,
including all amendments and supplements thereto, shall, in the case of the
Registration Statement, at (i) the time the Registration Statement becomes
effective, the Closing, (iii) the Effective Time, (iv) in the case of the
Prospectus/Joint Proxy Statement, on the date the Prospectus/Joint Proxy
Statement is first mailed to Capstone and Beverly stockholders, (v) at the time
of the Capstone Special Meeting and the Beverly Special Meeting, (vi) at the
Closing, and (vii) at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. If at any
time prior to the Effective Time any event with respect to Beverly or any of its
Subsidiaries shall occur which is required to be described in the Registration
Statement or the Prospectus/Joint Proxy Statement, such event shall be so
described, and after consultation with Capstone, an amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated to
the stockholders of Beverly and Capstone. The Registration Statement and
Prospectus/Joint Proxy Statement will (with respect to Beverly and its
Subsidiaries) comply as to form in all material respects with the applicable
provisions of the Securities Act and the Exchange Act, as the case may be.
(b) The Form S-1, Form 10 or other appropriate filings to be made to
register the NBHI Common Stock under the Securities Act and the Exchange Act, as
appropriate, as such filing or filings may be amended or supplemented
(collectively, the "NBHI Registration Document"), will not, at the date the NBHI
Registration Document (or any amendment or supplement thereto), at the time that
the NBHI Registration Document becomes effective, at the time of the Beverly
Special Meeting, at Closing and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements made therein not
misleading. The NBHI Registration Document will comply as to form in all
material respects with the applicable provisions of the Securities Act or the
Exchange Act, as the case may be.
SECTION 4.10 FINDERS OR BROKERS. Except as set forth in Section 4.10 of
the Beverly Disclosure Statement, neither Beverly nor any Subsidiary of Beverly
has employed any investment banker, broker, finder or intermediary in connection
with the transactions contemplated hereby who might be entitled to a fee or any
commission the receipt of which is conditioned in whole or part upon
consummation of the Merger or the Distribution.
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SECTION 4.11 SEC FILINGS.
(a) Beverly has filed with the SEC all required forms, reports and
documents required to be filed by it with the SEC since December 31, 1991
(collectively, the "Beverly SEC Reports"), all of which, when filed, complied in
all material respects as to form with the applicable provisions of the
Securities Act and the Exchange Act, as the case may be. As of their respective
dates the Beverly SEC Reports (including documents incorporated by reference
therein) did not contain any untrue statement of a material fact or omit 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.
(b) Beverly will deliver to Capstone as soon as they become available true
and complete copies of any report or statement mailed by Beverly to its security
holders generally or filed by it with the SEC, in each case subsequent to the
date hereof and prior to the Effective Time. As of their respective dates, such
reports and statements (excluding any information therein provided by Capstone,
as to which Beverly makes no representation) will comply as to form in all
material respects with the applicable provisions of the Securities Act and the
Exchange Act, will not contain any untrue statement of a material fact or omit
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 are made, not
misleading, and will further comply in all material respects with all applicable
requirements of law. The audited consolidated financial statements and unaudited
consolidated interim financial statements of Beverly and its Subsidiaries to be
included or incorporated by reference in such reports and statements will be
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods involved, and in accordance with all
applicable accounting requirements under the Securities Act and the Exchange
Act, and will fairly present the consolidated financial position of Beverly and
its Subsidiaries as of the dates thereof and the consolidated results of
operations and consolidated cash flow for the periods then ended (subject, in
the case of any unaudited interim financial statements, to normal year-end
adjustments and to the extent they may not include footnotes or may be condensed
or summary statements).
SECTION 4.12 FINANCIAL STATEMENTS. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Beverly
and its Subsidiaries included or incorporated by reference in the Beverly SEC
Reports have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved, and in
accordance with all applicable accounting requirements under the Securities Act
and the Exchange Act, and fairly present the consolidated financial position of
Beverly and its Subsidiaries as of the dates thereof and the consolidated
results of operations and consolidated cash flows for the periods then ended
(subject, in the case of any unaudited interim financial statements, to normal
year-end adjustments and to the extent they may not include footnotes or may be
condensed or summary statements) and such audited financial statements have been
certified as such (without exception) by Beverly's independent accountants. The
unaudited Institutional Pharmacy Business Financial Statements as set forth in
Section 4.12 of the Beverly Disclosure Statement have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved, and fairly presented the consolidated
financial position of the Pharmacy Subsidiaries as of the dates thereof and the
consolidated results of operations and consolidated cash flows for the periods
then ended (subject, except as noted in the following sentence, to normal
year-end adjustments and subject to the extent they may not include footnotes or
may be condensed or summary statements). Without limiting the generality of the
foregoing, such unaudited Institutional Pharmacy Business Financial Statements
reflect all material adjustments to working capital components reflected
therein.
SECTION 4.13 ABSENCE OF UNDISCLOSED LIABILITIES. Neither Beverly nor its
Subsidiaries has any liabilities or obligations of any nature, whether absolute,
accrued, unmatured, contingent or otherwise, or any unsatisfied judgments or any
leases of personalty or realty or unusual or extraordinary commitments, except
for (i) the liabilities recorded on the Institutional Pharmacy Business
Financial Statements or as set forth in the notes thereto, (ii) liabilities or
obligations incurred in the ordinary course of business and consistent with past
practice since December 31, 1996 that would not, singly or in the aggregate, be
reasonably expected to have a Beverly Material Adverse Effect and (iii)
Remaining Health Care Liabilities for which, as between NBHI on the one hand and
Beverly and Capstone on the other hand, NBHI and its Subsidiaries shall be
solely liable.
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SECTION 4.14 ABSENCE OF CHANGES OR EVENTS.
(a) Since December 31, 1996, except as set forth in Section 4.14(a) of the
Beverly Disclosure Statement, (i) Beverly and its Subsidiaries have conducted
the Institutional Pharmacy Business in the ordinary course and have not incurred
any material liability or obligation (indirect, direct or contingent) or entered
into any material oral or written agreement or other transaction that is not in
the ordinary course of business (other than the Distribution Agreement and this
Agreement) or that could reasonably be expected to result in any Beverly
Material Adverse Effect; (ii) neither Beverly nor its Pharmacy Subsidiaries have
sustained any material loss or interference with their business or properties
from fire, flood, windstorm, accident, strike or other calamity (whether or not
covered by insurance); (iii) there has been no material change in the
indebtedness of Beverly and its Pharmacy Subsidiaries, no change in the
authorized capital stock of Beverly and no dividend or distribution of any kind
declared, paid or made by Beverly on any class of its capital stock other than
the Distribution; (iv) there has been no event or condition which has caused a
Beverly Material Adverse Effect, nor any development, occurrence or state of
facts or circumstances that could, singly or in the aggregate, reasonably be
expected to result in a Beverly Material Adverse Effect; (v) there has been no
amendment, modification or supplement to any material term of any Beverly
Contract required to be identified in Section 4.21(a) of the Beverly Disclosure
Statement to which Beverly or a Pharmacy Subsidiary is a party, or to any equity
security; and (vi) there has been no material change by Beverly in its
accounting principles, practices or methods.
(b) Since December 31, 1996, other than in the ordinary course of business
consistent with past practice, there has not been any increase in the
compensation or other benefits payable, or which could become payable, by
Beverly, to its officers or key employees, or except for the transactions
contemplated by this Agreement and the Distribution Agreement, any amendment of
any of the Beverly Compensation and Benefit Plans. Copies of any such amendments
have been or will be provided to Capstone promptly upon adoption.
SECTION 4.15 CAPITALIZATION.
(a) The authorized capital stock of Beverly consists of 300,000,000 shares
of Beverly Common Stock and 25,000,000 shares of Preferred Stock, $1.00 par
value (the "Beverly Preferred Stock"). As of March 31, 1997, there were (i)
99,171,864 shares of Beverly Common Stock outstanding, (ii) no shares of Beverly
Preferred Stock outstanding, (iii) 5,423,408 shares of Beverly Common Stock held
in treasury and (iv) 97,171,864 shares of Beverly Common Stock were reserved for
issuance in connection with the rights (the "Rights") pursuant to the Rights
Agreement dated as of September 19, 1994, as amended April 6, 1995 (as so
amended, the "Rights Agreement") between Beverly and The Bank of New York, as
Rights Agent. Except for shares which were reserved for issuance and which may
have been issued pursuant to the following sentence there have been no issuances
of capital stock of Beverly since December 31, 1996. As of March 31, 1997, in
addition to the Rights, 8,264,261 shares of Beverly Common Stock were reserved
for issuance as restricted stock, performance shares or upon the exercise of
outstanding options (collectively, the "Beverly Options") which may be granted
under the incentive and stock option plans of Beverly covering an aggregate of
4,740,029 shares of Beverly Common Stock (collectively, the "Beverly Option
Plans"), 4,881,842 shares were reserved for issuance upon conversion of
Beverly's 7 5/8% Convertible Subordinated Debentures due March 15, 2003,
11,252,978 shares were reserved for issuance upon conversion of Beverly's 5 1/2%
Convertible Subordinated Debentures due August 1, 2018 (collectively, the
"Convertible Debentures"). No other shares of Beverly Common Stock are reserved
for any purpose. Except for the foregoing, there are not any existing options,
warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating Beverly to issue, transfer or sell any shares of capital
stock of Beverly or any of its Subsidiaries or any other securities convertible
into or evidencing the right to subscribe for any such shares. There are no
outstanding stock appreciation rights with respect to the capital stock of
Beverly or any of its Subsidiaries. All issued and outstanding shares of Beverly
Common Stock are duly authorized and validly issued, fully paid and non-
assessable and have not been issued in violation of (nor are any of the
authorized shares of capital stock of, or other equity interests in, Beverly
subject to) any preemptive or similar rights created by statute, the Amended and
Restated Certificate of Incorporation or By-laws of Beverly or any agreement to
which Beverly is a party or by which it may be bound.
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(b) Except as set forth in Section 4.15(b) of the Beverly Disclosure
Statement, there are no (i) obligations, contingent or otherwise, of Beverly to
repurchase, redeem or otherwise acquire any shares of Beverly Common Stock or to
provide funds to, or make any investment in (in the form of a loan, capital
contribution or otherwise, except for transactions constituting part of the
Restructuring and described in Exhibit A to the Distribution Agreement), or
provide any guarantee with respect to the obligations of, any other person, or
(ii) agreements, arrangements or commitments of any character (contingent or
otherwise) pursuant to which any person is or may be entitled to receive any
payment based on the revenues or earnings, or calculated in accordance
therewith, of Beverly. There are no voting trusts, proxies or other agreements
or understandings to which Beverly is a party or by which Beverly is bound with
respect to the voting of any shares of capital stock of Beverly.
(c) Beverly has delivered or made available to Capstone complete and
correct copies of each of the Beverly Option Plans, including all amendments
thereto. Section 4.15(c) of the Beverly Disclosure Statement sets forth a
complete and correct list of all outstanding options setting forth (i) the
exercise price of each outstanding Beverly Option, (ii) the number of Beverly
Options, (iii) the date of grant of each such Beverly Option. Section 4.15(c) of
the Beverly Disclosure Statement sets forth a complete and correct list of all
restricted stock awards including the recipients and the number of shares of
Beverly Common Stock received or to be received by each.
SECTION 4.16 CAPITAL STOCK OF SUBSIDIARIES. The only direct or indirect
Subsidiaries of Beverly are those listed in Section 4.16 of the Beverly
Disclosure Statement, which Section 4.16 separately sets forth the Pharmacy
Subsidiaries. As of the Effective Time, the Pharmacy Subsidiaries shall
constitute the only direct or indirect Subsidiaries of Beverly. Beverly is
directly or indirectly the record and beneficial owner of all of the outstanding
shares of capital stock of each of its Pharmacy Subsidiaries, there are no
proxies with respect to such shares, and there are not any existing options,
warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating Beverly or any of such Subsidiaries to issue, transfer or
sell any shares of capital stock of such Subsidiary or any other securities
convertible into or evidencing the right to subscribe for any such shares. All
of such shares beneficially owned by Beverly are duly authorized and validly
issued, fully paid, nonassessable and free of preemptive rights with respect
thereto and, except as set forth in Section 4.16 of the Beverly Disclosure
Statement, are owned by Beverly free and clear of any claim, lien or encumbrance
of any kind with respect thereto. Except as set forth in Section 4.16 of the
Beverly Disclosure Statement, Beverly does not directly or indirectly own any
interest in any corporation, partnership, joint venture or other business
association or entity.
SECTION 4.17 LITIGATION. Except (i) as set forth in Section 4.17 of the
Beverly Disclosure Statement or (ii) for Remaining Health Care Liabilities for
which, as between NBHI on the one hand and Beverly and Capstone on the other
hand, NBHI shall be solely liable: (A) there are no pending actions, suits,
proceedings or, to the best knowledge of Beverly after due inquiry, pending or
threatened investigations by, against or affecting Beverly, any of its
Subsidiaries or any of their properties, assets or operations, or with respect
to which Beverly or any of its Subsidiaries is responsible by way of indemnity
or otherwise, whether or not disclosed in the Beverly SEC Reports, which would,
singly or in the aggregate with all such other actions, suits, investigations or
proceedings, reasonably be expected to have a Beverly Material Adverse Effect;
and (B) to the best knowledge of Beverly after due inquiry, no actions, suits,
proceedings or investigations which would reasonably be expected to have a
Beverly Material Adverse Effect are threatened or contemplated and there is no
reasonable basis, to the best knowledge of Beverly after due inquiry, for any
such action, suit, proceeding or investigation, whether or not threatened or
contemplated.
SECTION 4.18 INSURANCE. Beverly has insurance policies, fidelity bonds
and/or self-insurance arrangements covering it and its Subsidiaries' assets,
business, equipment, properties, operations, employees, officers and directors
of the type and in amounts customarily carried by persons conducting business
similar to that of Beverly and such Subsidiaries. All applicable premiums due
and payable under all such policies and bonds have been paid, and Beverly is
otherwise in full compliance with the terms and conditions of all such policies
and bonds, except where the failure to have made payment or to be in full
compliance would not, singly or in the aggregate with all such other failures,
have a Beverly Material Adverse Effect. The reserves established by Beverly in
respect of all matters as to which Beverly self-insures or carries retentions
and/or deductibles,
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including workers' medical coverage and workers' compensation, are adequate and
appropriate in light of Beverly's experience since December 31, 1991 with
respect thereto and Beverly is not aware, after due inquiry, of any facts or
circumstances existing as of the date hereof that could reasonably be expected
to cause such reserves to be inadequate or inappropriate. Section 4.18 of the
Beverly Disclosure Statement sets forth a true and complete list of all
insurance policies and arrangements, including retention and/or deductible
programs and fidelity bonds of Beverly.
SECTION 4.19 TITLE TO AND CONDITION OF PROPERTIES. Beverly and its
Pharmacy Subsidiaries have good title to all of the real property and personal
property which is reflected on the Institutional Pharmacy Business Financial
Statements at December 31, 1996, except for property since sold or otherwise
disposed of in the ordinary course of business and consistent with past
practice. Set forth in Section 4.19 of the Beverly Disclosure Statement is a
true and complete list of all real properties owned by Beverly and its Pharmacy
Subsidiaries and used in connection with the Institutional Pharmacy Business,
all of which real properties are reflected in the Institutional Pharmacy
Business Financial Statements. No such real or personal property is subject to
claims, liens or other encumbrances of any kind or character, including, without
limitation, mortgages, pledges, liens, conditional sale agreements, charges,
security interests, easements, restrictive covenants, rights of way or options,
except for (i) liens for taxes not yet delinquent or which are being contested
in good faith by appropriate proceedings and in respect of which Beverly or its
appropriate Pharmacy Subsidiary has set aside on its books adequate reserves in
accordance with generally accepted accounting principles; (ii) mechanics',
carriers', workers', repairers', materialmen's and other similar statutory liens
incurred in the ordinary course of business for obligations not yet delinquent
or the validity of which are being contested in good faith by appropriate
proceedings and in respect of which Beverly or its appropriate Pharmacy
Subsidiary has set aside on its books adequate reserves in accordance with
generally accepted accounting principles; (iii) in the case of real property,
easements, rights of way, restrictions, minor defects or irregularities in title
that do not individually or in the aggregate have a material adverse effect on
the value or use of the real property encumbered thereby as currently used in
the operation of the Institutional Pharmacy Business of Beverly or its Pharmacy
Subsidiaries; or (iv) those which would not materially interfere with the
conduct of the Institutional Pharmacy Business of Beverly and its Pharmacy
Subsidiaries or impair Beverly's ability to perform its obligations under this
Agreement and to consummate the transactions contemplated hereby (the
encumbrances described in clauses (i) through (iv) of this sentence,
collectively, the "Beverly Permitted Encumbrances"). There are no eminent domain
proceedings pending or, to the knowledge of Beverly, threatened against any
property or any material portion thereof owned by Beverly or any Subsidiary and
used in the Institutional Pharmacy Business of Beverly and its Pharmacy
Subsidiaries, which proceedings (if resulting in a taking) could reasonably be
expected to have a material adverse effect on the value or use of such property
as currently used in the operation of the Institutional Pharmacy Business of
Beverly and its Subsidiaries. Such real properties and the improvements located
thereon (including the roof and structural portions of each building) are in
good operating order and condition, subject to ordinary wear and tear. There are
no structural, mechanical or other defects of a material nature in any
improvements located on such real properties. All building systems in respect of
such real properties are in all material respects in good condition and working
order, subject to ordinary wear and tear. Such real properties are served by all
utilities required or necessary for the present use thereof. Beverly has made
available to Capstone true and correct copies of all title insurance
commitments, title insurance policies and surveys in the possession of Beverly
or its Subsidiaries relating to such real properties set forth in Section 4.19
of the Beverly Disclosure Statement.
SECTION 4.20 LEASES. There have been delivered or made available to
Capstone true and complete copies of each lease pursuant to which real or
personal property is held under lease by Beverly or any Subsidiary (other than
those properties not utilized primarily in the Institutional Pharmacy Business)
limited in the case of personal property, to leases pursuant to which annual
rentals are reasonably expected to be at least $100,000 per year, and true and
complete copies of each lease pursuant to which Beverly or any of its Pharmacy
Subsidiaries leases real or personal property to others for use in a
pharmacy-related business limited in the case of personal property, to leases
pursuant to which annual rentals are reasonably expected to be at least $100,000
per year. Section 4.20(a) of the Beverly Disclosure Statement sets forth a true
and complete list of all such leases, and such leases are the only leases that
are material to the current operations of the Institutional Pharmacy Business.
All of the leases so listed are valid and subsisting and in full force and
effect
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with respect to Beverly and the Pharmacy Subsidiaries, as the case may be, and,
to Beverly's knowledge, with respect to any other party thereto. Beverly or its
Pharmacy Subsidiaries, as the case may be, have valid leasehold interests in all
properties leased thereunder free and clear of all liens other than Beverly
Permitted Encumbrances. The leased real properties are in good operating order
and condition, subject to ordinary wear and tear. Section 4.20(b) of the Beverly
Disclosure Statement lists all other leases of the types described above not
utilized solely with respect to the Remaining Health Care Business.
SECTION 4.21 CONTRACTS AND COMMITMENTS. With respect to the Institutional
Pharmacy Business, neither Beverly nor the Pharmacy Subsidiaries are parties to
any existing contract, obligation or commitment of any type in any of the
following categories:
(a) contracts for the purchase by Beverly or any of its Pharmacy
Subsidiaries of medicine, materials, supplies or equipment which are not
cancelable upon 90 days' or less notice and which either (i) have not been
entered into in the ordinary course of business and consistent with past
practice or (ii) provide for purchase prices substantially greater than
those presently prevailing for such materials, supplies or equipment, or
(iii) contracts obligating Beverly or any of its Pharmacy Subsidiaries to
make capital expenditures in excess of $200,000;
(b) contracts under which Beverly or any Pharmacy Subsidiary has,
except by way of endorsement of negotiable instruments for collection in
the ordinary course of business and consistent with past practice, become
absolutely or contingently or otherwise liable for (i) the performance of
any other person, firm or corporation under a contract, or (ii) the whole
or any part of the indebtedness or liabilities of any other person, firm or
corporation, except in either case for any such contracts for which Beverly
and its Pharmacy Subsidiaries would not be responsible after the
Distribution;
(c) powers of attorney outstanding from Beverly or any Pharmacy
Subsidiary other than as issued in the ordinary course of business and
consistent with past practice with respect to customs, insurance, patent,
trademark or tax matters, or to agents for service of process;
(d) contracts under which any amount payable by Beverly or any
Pharmacy Subsidiary is dependent upon, or calculated in accordance with,
the revenues or profits of Beverly or any of its Subsidiaries;
(e) contracts with any director, officer, affiliate or employee of
Beverly or any Pharmacy Subsidiary other than in such person's capacity as
a director, officer or employee of Beverly or any Pharmacy Subsidiary ;
(f) contracts which limit or restrict where Beverly or any of its
Pharmacy Subsidiaries may conduct its or their business or the type or line
of business in which Beverly or any of its Pharmacy Subsidiaries may
engage;
(g) other than as contemplated by the Distribution Agreement, any
contracts, obligations or commitments which will exist following the
Distribution between Beverly or the Pharmacy Subsidiaries on the one hand,
and the Remaining Health Care Business on the other;
(h) contracts with any party for the loan of money or availability of
credit to or from Beverly or any of its Pharmacy Subsidiaries (except
credit extended by Beverly or any of its Pharmacy Subsidiaries to its or
their customers in the ordinary course of business and consistent with past
practice); or
(i) any hedging, option, derivative or other similar transaction.
True and complete copies of all contracts, obligations and commitments listed in
Section 4.21 of the Beverly Disclosure Statement have been delivered or made
available to Capstone. All such contracts are in full force and effect or, to
the extent so contemplated by the Distribution Agreement, will be in full force
and effect as of the Effective Time. None of Beverly or its Pharmacy
Subsidiaries or, to the best of Beverly's knowledge, any other party is in
breach of or default under any such contracts (and no facts or circumstances
exist which, to the knowledge of Beverly, could reasonably support the assertion
of any such breach or default) except for
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breaches and defaults by parties other than Beverly and its Pharmacy
Subsidiaries which would not, singly or in the aggregate with all other such
breaches, have a Beverly Material Adverse Effect.
SECTION 4.22 LABOR MATTERS. With respect to the Institutional Pharmacy
Business, (i) none of Beverly or any of its Pharmacy Subsidiaries is a party to
any union contract or other collective bargaining agreement, (ii) each of
Beverly and its Pharmacy Subsidiaries is in compliance in all material respects
with all applicable laws respecting employment and employment practices, terms
and conditions of employment, safety, wages and hours, (iii) neither Beverly nor
any of its Pharmacy Subsidiaries is engaged in any unfair labor practice, (iv)
there is no labor strike, slowdown or stoppage pending (or, to the best
knowledge of Beverly, any labor strike or stoppage threatened) against or
affecting Beverly or any of its Pharmacy Subsidiaries and (v) to the best
knowledge of Beverly, no union organizing activities with respect to any of its
or its Pharmacy Subsidiaries' employees are occurring or threatened.
SECTION 4.23 NO CHANGE OF CONTROL PUTS. Except as set forth in Section
4.23 of the Beverly Disclosure Statement, neither the execution and delivery by
Beverly of this Agreement or the Distribution Agreement nor the consummation of
the Distribution, the Merger or any of the other transactions contemplated
hereby and thereby gives rise to any obligation of Beverly or any of its
Subsidiaries to, or any right of any holder of any security of Beverly or any of
its Subsidiaries to, require Beverly to purchase, offer to purchase, redeem or
otherwise prepay or repay any such security, or deposit any funds to effect the
same.
SECTION 4.24 EMPLOYMENT AND LABOR CONTRACTS. Except as set forth in
Section 4.24 of the Beverly Disclosure Statement, and other than the agreements
executed by employees generally, the forms of which have been provided to
Capstone, neither Beverly nor any of its Pharmacy Subsidiaries is a party to any
employment, management services, consultation or other contract or agreement
(except for any such contracts or agreements for which Beverly would not be
responsible after the Distribution) with any past or present officer, director
or employee or, to the best knowledge of Beverly, any entity affiliated with any
past or present officer, director or employee, in each case true and complete
copies of which contracts have been delivered or made available to Capstone.
SECTION 4.25 INTELLECTUAL PROPERTY RIGHTS. Beverly or its Pharmacy
Subsidiaries own or have the right to use all Intellectual Property Rights
necessary to the conduct of the Institutional Pharmacy Business. Section 4.25 of
the Beverly Disclosure Statement contains a list of all patents, trade names,
registered and unregistered copyrights, trademarks and service marks, mask works
and applications for the foregoing owned by Beverly or its Pharmacy Subsidiaries
and used in the Institutional Pharmacy Business. Beverly and/or its Pharmacy
Subsidiaries have clear and unencumbered title to the Intellectual Property
Rights set forth in such Section 4.25 and such title has not been challenged
(pending or threatened) by others except for the encumbrances listed therein.
Such Section 4.25 also contains a list of unpatented inventions used or planned
for use by Beverly or its Pharmacy Subsidiaries in the Institutional Pharmacy
Business. Except as set forth in such Section 4.25: (i) no rights or licenses to
use such Intellectual Property Rights have been granted or acquired by Beverly
or its Pharmacy Subsidiaries; (ii) there have been no claims or assertions made
by others that Beverly has infringed any such Intellectual Property Rights of
others by the sale of products or any other activity in the preceding six year
period and to the knowledge of Beverly, there has been no such infringement by
Beverly or any of its Pharmacy Subsidiaries during such period; (iv) Beverly has
no knowledge of any infringement of such Intellectual Property Rights of Beverly
or any of its Pharmacy Subsidiaries by others; and (v) all such patents,
registered trademarks, service marks, and copyrights owned by Beverly or its
Pharmacy Subsidiaries relating to the Institutional Pharmacy Business are in
good standing, and are recorded on the public record in the name of Beverly or
its Pharmacy Subsidiaries. True and complete copies of all material listed in
Section 4.25 of the Beverly Disclosure Statement have been delivered or made
available to Capstone.
SECTION 4.26 TAXES. (i) Beverly and its Subsidiaries have prepared and
timely filed or will timely file with the appropriate governmental agencies all
franchise, income and all other Tax Returns required to be filed by them on or
before the Effective Time, taking into account any extension of time to file
granted to or obtained on behalf of Beverly and/or its Subsidiaries (copies of
which for the past three fiscal years have been delivered or made available to
Capstone); (ii) all Taxes of Beverly and its Subsidiaries have been paid in full
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to the proper authorities or fully accrued or provided for with respect to
fiscal periods for which there are publicly available financial statements and
otherwise on the books of Beverly, other than such Taxes as are being contested
in good faith by appropriate proceedings and are adequately reserved for in
accordance with generally accepted accounting principles; (iii) all deficiencies
asserted in writing as a result of Tax examinations of federal, state and
foreign income, sales and franchise and all other Tax Returns filed by Beverly
and its Subsidiaries have either been paid or adequately reserved for in
accordance with generally accepted accounting principles; (iv) no unpaid
deficiency has been asserted or assessed against Beverly or any of its
Subsidiaries, and no examination of Beverly or any of its Subsidiaries is
pending or, to the best knowledge of Beverly, threatened for any material amount
of Tax by any taxing authority (with respect to any such action, Section 4.26 of
the Beverly Disclosure Statement sets forth the periods at issue and the
category of Tax, and the examining authority's and any corresponding revenue
agents' reports relating to the issue have been delivered or made available to
Capstone); (v) no extension of the period for assessment or collection of any
Tax of Beverly or any of its Subsidiaries is currently in effect and no
extension of time within which to file any Tax Return of Beverly or any of its
Subsidiaries has been requested, which Tax Return has not since been filed; (vi)
no Tax liens have been filed with respect to any Taxes of Beverly or any of its
Subsidiaries except for property taxes which have accrued but with respect to
which penalty for non-payment has not occurred; (vii) neither Beverly nor any of
its Subsidiaries has agreed to make any adjustment by reason of a change in
their accounting methods that would affect the taxable income or deductions of
Beverly or any of its Subsidiaries for any period ending after the Effective
Time; (viii) Beverly and its Subsidiaries have made timely payments of the Taxes
required to be deducted and withheld from the wages paid to their employees;
(ix) there are no Tax sharing agreements or arrangements under which Beverly or
any Subsidiary will have any obligation or liability on or after the Effective
Time; (x) Beverly and its Subsidiaries have no foreign losses as defined in
Section 904(f)(2) of the Code; (xi) to the best knowledge of Beverly, there are
no transfer pricing agreements made by or on behalf of Beverly or any of its
Subsidiaries with any taxation authority; (xii) no assets of Beverly or any of
its Subsidiaries is held in an arrangement for which partnership Tax Returns are
being filed and neither Beverly nor any of its Subsidiaries is a partner in any
partnership; (xiii) neither Beverly nor any of its Subsidiaries owns any
interest in any "controlled foreign corporation" (within the meaning of Section
957 of the Code), "passive foreign investment company" (within the meaning of
Section 1296 of the Code) or other entity the income of which is required to be
included in the income of Beverly or such Subsidiary; and (xiv) neither Beverly
nor any of its Subsidiaries has made an election under Section 341(f) of the
Code.
SECTION 4.27 EMPLOYEE BENEFIT PLANS; ERISA.
Except as set forth in Section 4.27 of the Beverly Disclosure Statement:
(a) Except as set forth in Section 4.27(a) of the Beverly Disclosure
Statement, there are no "employee pension benefit plans" as defined in Section
3(2) of ERISA, covering employees (or former employees), maintained or
contributed to by Beverly or any of its Subsidiaries or any of their ERISA
Affiliates (as hereinafter defined), or to which Beverly or any of its
Subsidiaries or any of their ERISA Affiliates contributes or is obligated to
make payments thereunder or otherwise may have any liability ("Beverly Pension
Benefit Plans"). For purposes of this Agreement, "ERISA Affiliate" shall mean
any person (as defined in Section 3(9) of ERISA) that is a member of any group
of persons described in Section 414(b), (c), (m) or (o) of the Code which
includes the referent person or its Subsidiaries.
(b) Beverly has delivered or made available to Capstone true and complete
copies of, and Section 4.27(b) of the Beverly Disclosure Statement lists, all
Beverly Pension Benefit Plans, "welfare benefit plans" (as defined in Section
3(1) of ERISA) covering employees (or former employees), maintained or
contributed to by Beverly or any of its Subsidiaries ("Beverly Welfare Plans"),
all multiemployer plans (as defined in Section 3(37) of ERISA) covering
employees (or former employees) to which Beverly or any of its Subsidiaries or
any of their ERISA Affiliates is required to make contributions or otherwise may
have any liability, and, to the extent covering employees, directors, or
independent contractors (or former employees, directors, or independent
contractors), all stock bonus, stock option, restricted stock, stock
appreciation right, stock purchase, bonus, incentive, deferred compensation,
severance, change of control, executive compensation, "top hat," other
equity-based compensation, and vacation plans, agreements, or arrangements
maintained or contributed to by Beverly or a Subsidiary of Beverly.
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(c) Beverly and each of its Subsidiaries, and each of the Beverly Pension
Benefit Plans, Beverly Welfare Plans, and all other plans or arrangement
referenced in Section 4.27(b) (collectively, the "Beverly Employee Benefit
Plans") are in compliance with the applicable provisions of ERISA and other
applicable laws except where the failure to comply would not, singly or in the
aggregate, reasonably be expected to have a Beverly Material Adverse Effect.
(d) All contributions to and payments from the Beverly Employee Benefit
Plans which are required to have been made in accordance with the Beverly
Pension Benefit Plans and, when applicable, Section 302 of ERISA or Section 412
of the Code, have been timely made.
(e) The Beverly Pension Benefit Plans intended to qualify under Section 401
of the Code are and have always been so qualified, have been determined by the
IRS to be so qualified, and nothing has occurred with respect to such Beverly
Pension Benefit Plans which could cause the loss of such qualification or
exemption or the imposition of any material liability, penalty or tax under
ERISA or the Code. Such plans have been amended and submitted to the IRS on a
timely basis to comply with changes to the Code made by the Tax Reform Act of
1986 and other applicable legislative, regulatory or administrative
requirements.
(f) There are (i) no investigations or audits pending, to the best
knowledge of Beverly, by any governmental entity involving the Beverly Pension
Benefit Plans or Beverly Welfare Plans, (ii) no termination proceedings
involving the Beverly Pension Benefit Plans and (iii) no pending or, to the best
knowledge of Beverly, threatened claims (other than routine claims for
benefits), suits or proceedings relating to any Beverly Employee Benefit Plan,
against the assets of any of the trusts under any Beverly Employee Benefit Plan
or against any fiduciary of any Beverly Employee Benefit Plan with respect to
the operation of such plan or asserting any rights or claims to benefits under
any such plan or against the assets of any trust under such plan, except for
those which would not, singly or in the aggregate, give rise to any liability
which would reasonably be expected to have a Beverly Material Adverse Effect,
nor, to the best knowledge of Beverly, are there any facts which could give rise
to any liability except for those which would not, singly or in the aggregate,
reasonably be expected to have a Beverly Material Adverse Effect in the event of
any such investigation, claim, suit or proceeding.
(g) None of Beverly, any of its Subsidiaries or any employee of the
foregoing, nor any trustee, administrator, other fiduciary or any other "party
in interest" or "disqualified person" with respect to the Beverly Pension
Benefit Plans or Beverly Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section 406
of ERISA) which could result in a tax or penalty on Beverly or any of its
Subsidiaries under Section 4975 of the Code or Section 502(i) of ERISA, except
any such event which would not, singly or in the aggregate, reasonably be
expected to have a Beverly Material Adverse Effect.
(h) Neither the Beverly Pension Benefit Plans subject to Title IV of ERISA
nor any trust created thereunder has been terminated nor have there been any
"reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof, except any such event which would
not, singly or in the aggregate, reasonably be expected to have a Beverly
Material Adverse Effect, nor has there been any event with respect to any
Beverly Pension Benefit Plan requiring disclosure under Section 4063(a) of ERISA
or any event with respect to any Beverly Pension Benefit Plan requiring
disclosure under Section 4041(c)(3)(C) of ERISA, except any such event which
would not, singly or in the aggregate, reasonably be expected to have a Beverly
Material Adverse Effect.
(i) Neither Beverly nor any Subsidiary of Beverly nor any ERISA Affiliate
has incurred any currently outstanding liability to the PBGC or to a trustee
appointed under Section 4042(b) or (c) of ERISA other than for the payment of
premiums, all of which have been paid when due. No Beverly Pension Benefit Plan
has applied for, or received, a waiver of the minimum funding standards imposed
by Section 412 of the Code.
(j) Neither Beverly, any of its Subsidiaries nor any of their ERISA
Affiliates has any liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA.
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(k) With respect to each of the Beverly Employee Benefit Plans, true,
correct and complete copies of the following documents have been delivered or
made available to Capstone: (i) the current plans and related trust documents,
including amendments thereto, (ii) any current summary plan descriptions, (iii)
the most recent Forms 5500, financial statements and actuarial reports, if
applicable, and (iv) the most recent IRS determination letter, if applicable.
(l) Neither Beverly, any of its Subsidiaries, any organization to which
Beverly is a successor or parent corporation, within the meaning of Section
4069(b) of ERISA, nor any of their ERISA Affiliates has engaged in any
transaction, within the meaning of Section 4069(a) of ERISA, except where the
liability therefor would not, singly or in the aggregate, reasonably be expected
to have a Beverly Material Adverse Effect.
(m) None of the Beverly Welfare Plans maintained by Beverly or any of its
Subsidiaries include retiree life or retiree health benefits or provide for
continuing benefits or coverage for any participant or any beneficiary of a
participant following termination of employment, except as may be required under
the COBRA. Beverly and each of its Subsidiaries which maintain a "group health
plan" within the meaning of Section 5000(b)(1) of the Code have complied with
the notice and continuation requirements of Section 4980B of the Code, COBRA,
Part 6 of Subtitle B of Title I of ERISA and the regulations thereunder except
where the failure to comply would not, singly or in the aggregate, reasonably be
expected to have a Beverly Material Adverse Effect.
(n) No liability under any Beverly Employee Benefit Plan has been funded
nor has any such obligation been satisfied with the purchase of a contract from
an insurance company as to which Beverly or any of its Subsidiaries has received
notice that such insurance company is in rehabilitation.
(o) Except as set forth in Section 4.27(o) of the Beverly Disclosure
Statement, the consummation of the transactions contemplated by this Agreement
will not result in an increase in the amount of compensation or benefits, deemed
satisfaction of goals or conditions, forgiveness or modification of loans, or
accelerate the vesting or timing of payment of any benefits or compensation
payable to or in respect of any employee or former employee of Beverly or any of
its Subsidiaries.
(p) Except as set forth in Section 4.27(p) of the Beverly Disclosure
Statement, each Beverly Employee Benefit Plan can be amended or terminated at
any time without approval from any person, without advance notice, and without
any liability other than for benefits accrued prior to such amendment or
termination.
(q) With respect to each Beverly Employee Benefit Plan and any other
similar arrangement or plan either currently or previously terminated,
maintained, or contributed to by any entity which either is currently or was
previously under common control with Beverly or any of its Subsidiaries as
determined under Code Section 414, no event has occurred and no condition exists
that after the Merger could subject Beverly or Capstone, directly or indirectly,
to any liability (including liability under any indemnification agreement) under
Section 412, 4971, 4975, or 4980B of the Code or Section 502, 601 or 606 of
ERISA.
(r) All contributions and payments to or with respect to each Beverly
Employee Benefit Plan have been timely made and except as set forth in Section
4.27(r) of the Beverly Disclosure Statement, Beverly has made adequate provision
for reserves to satisfy contributions and payments that have not been made
because they are not yet due under the terms of such plan or related
arrangement, document, or applicable law. No Beverly Employee Benefit Plan has
any unfunded benefits that are not fully reflected in Beverly's most recent
audited financial statements.
(s) No agreement, commitment, or obligation exists to increase any benefits
under any Beverly Employee Benefit Plan or to adopt any new Beverly Employee
Benefit Plan, except for such plans as may be adopted by NBHI and which will not
be obligations of Beverly or any Pharmacy Subsidiary after the Effective Time.
SECTION 4.28 ENVIRONMENTAL MATTERS.
(a) Except (i) as would not, singly or in the aggregate with all other such
events of non-compliance, have a Beverly Material Adverse Effect, or (ii) for
Remaining Health Care Liabilities for which, as between NBHI on the one hand and
Beverly and Capstone on the other hand, NBHI shall be solely liable: (A) Beverly
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and its Subsidiaries are, and within the period of all applicable statutes of
limitation have been, in compliance with all applicable Environmental Laws,
which compliance includes, without limitation, the possession of all
Environmental Authorizations required under applicable Environmental Laws, and
compliance with the terms and conditions thereof, and there are no circumstances
of which Beverly is aware which may materially prevent or interfere with
compliance in the future; (B) Beverly and its Subsidiaries have all
Environmental Authorizations necessary for the conduct of the businesses of
Beverly and its Subsidiaries as currently conducted; and (C) neither Beverly nor
any of its Subsidiaries has been notified, or has any reasonable basis to
believe, that any such Environmental Authorizations will be modified, suspended
or revoked or cannot be renewed or otherwise maintained in the ordinary course
of business. To Beverly's knowledge after due inquiry, the execution and
delivery of this Agreement and the consummation by Beverly of the Merger, the
Distribution and the other transactions contemplated hereby will not affect the
validity or require the transfer of any Environmental Authorizations associated
with the Institutional Pharmacy Business, and will not require any notification,
registration, reporting, filing, investigation or remediation under any
Environmental Law.
(b) There are no Environmental Notices that, singularly or in the
aggregate, could reasonably be expected to have a Beverly Material Adverse
Effect (i) pending or, to the best knowledge of Beverly, threatened against
Beverly or any of its Subsidiaries, (ii) to Beverly's knowledge pending or
threatened against any person or entity whose liability for such Environmental
Notice may have been retained or assumed by or could reasonably be imputed or
attributed by law or contract to Beverly or any of its Subsidiaries, (iii) that
to Beverly's knowledge could subject Beverly to any material risk of liability,
loss or damages, or (iv) that to Beverly's knowledge could reasonably be
expected to require investigation, removal or remedial or corrective action by
Beverly or any of its Subsidiaries, except, in any of the circumstances
described in clauses (i), (ii), (iii) and (iv) above for Remaining Health Care
Liabilities for which, as between NBHI on the one hand and Beverly and Capstone
on the other hand, NBHI shall be solely liable. Since December 31, 1996, neither
Beverly nor any of its Subsidiaries has received any Environmental Notice
alleging that Beverly or any of its Subsidiaries is subject to liability under
any Environmental Law or that Beverly or any of its Subsidiaries is not in full
compliance with Environmental Laws, except for Remaining Health Care Liabilities
for which, as between NBHI on the one hand and Beverly and Capstone on the other
hand, NBHI shall be solely liable.
(c) There is no civil, criminal or administrative action, suit, demand,
claim, hearing, notice of violation, notice or demand letter or request for
information or to the best knowledge of Beverly, investigation pending or
threatened under any Environmental Law (i) against Beverly or any of its
Subsidiaries, or (ii) to the knowledge of Beverly, against any person or entity
in connection with which liability could reasonably be imputed or attributed by
law or contract to Beverly or any of its Subsidiaries except, with respect to
each of clause (i) and (ii), for such demands, claims, notices of violation,
notice or demand letters or requests for information which singly or in the
aggregate could not reasonably be expected to have a Beverly Material Adverse
Effect.
(d) No property or facility presently or to the knowledge of Beverly
formerly owned, operated or leased by Beverly or any of its present
Subsidiaries, or to the knowledge of Beverly any of its former Subsidiaries, or
any of their respective predecessors in interest, is listed or proposed for
listing on the National Priorities List or the Comprehensive Environmental
Response, Compensation and Liability Information System, both promulgated under
CERCLA, or on any comparable list established under any Environmental Law, nor
has Beverly or any of its Subsidiaries received any written notification of
potential or actual liability or any request for information under CERCLA or any
comparable foreign, state or local law.
(e) There has been no disposal, spill, discharge or release of any
Hazardous Materials generated, used, owned, stored or controlled by Beverly, or
to Beverly's knowledge any of its Subsidiaries, or any of their respective
predecessors in interest, on, at or under any property presently or formerly
owned, leased or operated by Beverly, or to Beverly's knowledge its
Subsidiaries, or any predecessors in interest, and to Beverly's knowledge,
except as disclosed in Section 4.28(e) of the Beverly Disclosure Statement,
there are no Hazardous Materials located in, at, on or under, or in the vicinity
of, any such facility or property, or at any other location, that (i) could
reasonably be expected to subject Beverly to a material risk of liability, loss
or damages, or result in the incurrence by Beverly of costs under Environmental
Laws, (ii) could reasonably be expected to form the basis of any Environmental
Notice against or with respect to Beverly or any of its
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Subsidiaries, or against any person or entity whose liability for any
Environmental Notice may have been retained or assumed by or could be imputed or
attributed by law or contract to Beverly or any of its Subsidiaries or (iii)
could reasonably be expected to require investigation, removal or remedial or
corrective action by Beverly or any of its Subsidiaries, that in any case
singularly or in the aggregate reasonably could be expected to have a Beverly
Material Adverse Effect.
(f) Without in any way limiting the generality of the foregoing, to
Beverly's knowledge, except as disclosed in Section 4.28(f) of the Beverly
Disclosure Statement, (i) there are and have been no underground or aboveground
storage tanks or other storage receptacles, or related piping or other disposal
areas containing Hazardous Materials, located on, at or under property owned,
operated or leased by Beverly, any of its Subsidiaries or any of their
respective predecessors in interest, (ii) there are and have been no
polychlorinated biphenyls located on any properties owned, operated or leased by
Beverly or any of its Subsidiaries, and (iii) there is no asbestos contained in
or forming part of any building, building component, structure or office space
owned, operated or leased by Beverly or any of its Subsidiaries.
(g) To Beverly's knowledge no lien has been recorded under Environmental
Laws with respect to any properties, assets or facilities owned, operated or
leased by Beverly or any of its Subsidiaries.
(h) In accordance with Section 5.05, Beverly has given Capstone and its
authorized representatives access to all records and files in its possession or
control relating to actual or potential compliance or liability issues of
Beverly or its Subsidiaries and any of their respective predecessors in interest
under Environmental Laws, including, without limitation, all reports, studies,
analyses, tests or monitoring results pertaining to the existence of Hazardous
Material or any other environmental concern relating to properties, assets or
facilities currently or formerly owned, operated, managed, leased, used or
controlled by Beverly any of its Subsidiaries, or otherwise concerning
compliance with or liability under Environmental Laws.
SECTION 4.29 DISCLOSURE. No representation or warranty by Beverly and no
statement or information relating to Beverly or any of its Subsidiaries
contained herein, or in any certificate furnished by or on behalf of Beverly to
Capstone in connection herewith contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary in
order to make the statements herein or therein, in light of the circumstances
under which they were made, not misleading.
SECTION 4.30 INSTITUTIONAL PHARMACY BUSINESS.
(a) Section 4.30(a) of the Beverly Disclosure Statement lists each Pharmacy
utilized by Beverly in connection with its pharmacy business and indicates (i)
the location of such Pharmacy, (ii) whether such Pharmacy premises are owned or
held pursuant to a leasehold interest, management contract or otherwise and
(iii) whether any other person or entity has any beneficial ownership or
interest in or to any such Pharmacy or any right or option to acquire any
beneficial ownership or interest in or to any such Pharmacy.
(b) Section 4.30(b) of the Beverly Disclosure Statement lists all of the
customers to which Beverly and its Subsidiaries provide pharmacy services
pursuant to oral or written contracts which generated revenues in excess of
$5,000,000 for the year ended December 31, 1996 ("Beverly Pharmacy Contracts").
Beverly has not been informed and has no reason to believe that any Beverly
Pharmacy Contract will be terminated for or without cause.
(c) Except for Remaining Health Care Liabilities for which, as between NBHI
on the one hand and Beverly and Capstone on the other hand, NBHI shall be solely
liable, none of Beverly nor any of its Subsidiaries has violated or is in
violation of any law or order of any court or governmental authority that is
applicable to any of them, their businesses or their properties, including but
not limited to the Medicare and Medicaid fraud and abuse provisions of the
Social Security Act, the Civil Monetary Penalties Law of the Social Security
Act, the so-called "Stark" law, 42 USC Section 1395nn, or any other federal or
state law, statute, rule or regulation prohibiting rebates, kickbacks,
fee-splitting or other financial incentives or inducements, including but not
limited to providing products or services below cost for the referral or
continuation of business; and (ii) none of Beverly nor its Subsidiaries is, to
the best knowledge of Beverly, under investigation by the Office of Inspector
General of the Department of Health and Human Services or other federal or state
investigatory or regulatory body or agency relating to their business
activities, nor is
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Beverly aware of any state of facts which could reasonably be likely to subject
any of them to a claim for civil penalties, criminal fines or other sanctions
with respect to a violation or claimed violation of any such laws or regulations
relating to the conduct of their business.
(d) Beverly or the Pharmacy Subsidiaries are duly licensed to provide
pharmacy services in all states in which they engage in the Institutional
Pharmacy Business, and are also participants in the Medicare program and the
Medicaid programs of the states listed in Section 4.08 of the Beverly Disclosure
Statement. Beverly is in substantial compliance with all material laws, rules
and regulations affecting or in connection with the Pharmacies, the Pharmacy
Subsidiaries and their licenses with respect thereto and their participation in
the Medicare and Medicaid programs.
(e) Beverly has delivered or made available with respect to the
Institutional Pharmacy Business true and correct billing requests for
reimbursement and underlying information to all governmental programs, including
but not limited to the Medicare and Medicaid programs, in compliance with all
rules, regulations, policies and procedures of such governmental programs and of
the fiscal intermediaries of such programs. To the best knowledge of Beverly,
all such billings were for goods actually provided, and at appropriate charges
or costs, and Beverly has appropriate documentation to support such billing
requests.
SECTION 4.31 FAIRNESS OPINION. Beverly has received the opinions of
Merrill Lynch, Pierce, Fenner & Smith, Incorporated and Stephens Inc. to the
effect that as of the date hereof the financial terms of the Merger are fair to
Beverly's stockholders from a financial point of view.
SECTION 4.32 SUFFICIENCY OF ASSETS. Beverly and its Pharmacy Subsidiaries
own, lease, hold or otherwise have the right to use all of the assets,
properties, Intellectual Property Rights and Beverly Licenses which are material
to the conduct of the Institutional Pharmacy Business as presently conducted by
Beverly and its Subsidiaries.
ARTICLE V
COVENANTS
SECTION 5.01 CONDUCT OF BUSINESS OF BEVERLY. Except as contemplated by
this Agreement, the Distribution Agreement and the Beverly Disclosure Statement
or as expressly agreed to in writing by Capstone, during the period from the
date of this Agreement to the Effective Time, Beverly will and will cause its
Pharmacy Subsidiaries each to conduct its operations according to its ordinary
and usual course of business consistent with past practice, and will use all
commercially reasonable efforts to preserve intact its Institutional Pharmacy
Business organization, to keep available the services of the officers and
employees of the Pharmacy Subsidiaries and to maintain satisfactory
relationships with suppliers, distributors, customers and others having business
relationships with the Pharmacy Subsidiaries, and will take no action which
would adversely affect its ability to consummate the Merger, the Distribution or
the other transactions contemplated hereby. Without limiting the generality of
the foregoing, and except as otherwise expressly contemplated by this Agreement,
the Distribution Agreement or the Beverly Disclosure Statement, prior to the
Effective Time, neither Beverly nor any of its Pharmacy Subsidiaries will,
without the prior written consent of Capstone which shall not be unreasonably
withheld:
(a) amend its certificate of incorporation (or other applicable
charter document) or By-laws;
(b) authorize for issuance, issue, sell, deliver, grant any options
for, or otherwise agree or commit to issue, sell or deliver any shares of
any class of capital stock of Beverly or its Pharmacy Subsidiaries or any
securities convertible into or exchangeable or exercisable for shares of
any class of capital stock of Beverly or its Pharmacy Subsidiaries, other
than (i) pursuant to and in accordance with the terms of Beverly Options
outstanding on the date hereof under the Beverly Option Plans listed in
Section 4.15 of the Beverly Disclosure Statement, (ii) in connection with
the Distribution or (iii) except as set forth in Schedule 5.01(b) of the
Beverly Disclosure Statement;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
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capital stock or purchase, redeem or otherwise acquire any shares of its
own capital stock or that of any of its Subsidiaries, except for
intercompany transactions in the ordinary course of business consistent
with past practice and as may be necessary to facilitate the Restructuring
or the Distribution;
(d) with respect to Beverly the Institutional Pharmacy Business or any
Pharmacy Subsidiary, except as contemplated by this Agreement or the
Distribution Agreement: (i) create, incur, assume, maintain or permit to
exist any long-term debt or any short-term debt for borrowed money; (ii)
assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
other person except wholly owned Pharmacy Subsidiaries in the ordinary
course of business and consistent with past practice; or (iii) make any
loans, advances or capital contributions to, or investments in, any other
person; other than, in any of the foregoing cases, indebtedness,
obligations, guarantees, endorsements, loans, advances or investments in
any other person that are to be assigned to and assumed by NBHI prior to
the Effective Time and as to which Beverly and each Pharmacy Subsidiary
will be relieved of liability with respect thereto prior to the Effective
Time;
(e) except as contemplated by this Agreement with respect to the
Pharmacy Subsidiaries or otherwise in connection with the Institutional
Pharmacy Business, (i) increase in any manner the compensation of any of
their respective directors, officers or employees, except in the ordinary
course of business and consistent with past practice; (ii) pay or agree to
pay any pension, retirement allowance or other employee benefit not
required, or enter into or agree to enter into any agreement or arrangement
with any of their respective past or present employees relating to any such
pension, retirement allowance or other employee benefit, except as required
under currently existing agreements, plans or arrangements; (iii) grant any
severance or termination pay to, or enter into any employment or severance
agreement with, any of their respective past or present employees; (iv)
except to the extent permitted by the foregoing clause (i), enter into any
contract, agreement or understanding with any of their respective past or
present directors or officers; or (v) except in the ordinary course of
business and consistent with past practice or as may be required to comply
with applicable law, become obligated (other than pursuant to any new or
renewed collective bargaining agreement) under any new pension plan,
welfare plan, multiemployer plan, employee benefit plan, benefit
arrangement, or similar plan, arrangement or policy which was not in
existence on the date hereof, including any bonus, incentive, deferred
compensation, stock purchase, stock option, stock appreciation right,
health or group insurance, severance pay, retirement or other benefit plan,
agreement or arrangement, or employment or consulting agreement with or for
the benefit of any person, or amend any of such plans or any of such
agreements in existence on the date hereof, other than as contemplated by
the Employee Benefits Matters Agreement (as defined in the Distribution
Agreement); (iv) enter into any loan or loan guarantee, forgive any loan,
extend the repayment terms, or otherwise modify any loan or extend any
credit to any current or former officer, director, or employee.
(f) with respect to the Pharmacy Subsidiaries or otherwise in
connection with the Institutional Pharmacy Business, except in the ordinary
course of business and consistent with past practice or as disclosed in
Section 5.01(f) of the Beverly Disclosure Statement or as otherwise
expressly contemplated hereby or the Distribution Agreement, sell,
transfer, lease, license, pledge, mortgage, or otherwise dispose of, or
encumber, or agree to sell, transfer, lease, license, pledge, mortgage or
otherwise dispose of or encumber, any material properties, real, personal
or mixed;
(g) with respect to the Pharmacy Subsidiaries or otherwise in
connection with the Institutional Pharmacy Business, except as otherwise
expressly contemplated hereby, enter into any other agreements, commitments
or contracts, except agreements, commitments or contracts for the purchase,
sale or lease of goods or services in the ordinary course of business and
consistent with past practice and having a term of no more than one year;
(h) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into any agreement in principle
or an agreement with respect to, (i) any plan of liquidation or
dissolution, or (ii) with respect to any Beverly Pharmacy Subsidiary, any
acquisition of a material amount of assets or securities, any disposition
of a material amount of assets or securities or any material
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change in its capitalization, or any entry into a material contract or any
amendment or modification of any material contract or any release or
relinquishment of any material contract rights not in the ordinary course
of business and consistent with past practice except as expressly
contemplated by this Agreement or the Distribution Agreement;
(i) except as previously approved by Beverly prior to the date hereof
and as listed in Section 5.01 (i) of the Beverly Disclosure Statement,
authorize or commit to make capital expenditures in excess of $200,000 for
which Beverly or any of its Pharmacy Subsidiaries would be responsible
subsequent to the Merger;
(j) permit any insurance policy naming it or any Pharmacy Subsidiary
as a beneficiary or a loss payee to be canceled, terminated or materially
altered, except in the ordinary course of business and consistent with past
practice and following written notice to Capstone;
(k) maintain its books and records or the books and records of the
Pharmacy Subsidiaries in a manner not in the ordinary course of business or
inconsistent with past practice;
(l) except in the ordinary course of business, enter into any hedging,
option, derivative or other similar transaction;
(m) with respect to any Pharmacy Subsidiary, change any assumption
underlying, or method of calculating, any bad debt, contingency, provision
or other reserve;
(n) with respect to any Pharmacy Subsidiary or otherwise in connection
with the Institutional Pharmacy Business, pay, discharge or satisfy any
claims, liabilities or obligations (absolute, accrued, contingent or
otherwise), other than the payment, discharge or satisfaction of
liabilities (including accounts payable) in the ordinary course of business
and consistent with past practice, or collect, or accelerate the collection
of, any amounts owed (including accounts receivable) other than the
collection in the ordinary course of business; and
(o) agree to do any of the foregoing.
SECTION 5.02 CONDUCT OF BUSINESS OF CAPSTONE. Except as contemplated by
this Agreement, the Voting Agreement, the Shareholder Agreement (as hereinafter
defined) or the Capstone Disclosure Statement or as expressly agreed to in
writing by Beverly, during the period from the date of this Agreement to the
Effective Time, Capstone and its Subsidiaries will each conduct its operations
according to its ordinary and usual course of business consistent with past
practice, and will use all commercially reasonable efforts to preserve intact
its business organization, to keep available the services of its officers and
employees and to maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with it and
will take no action which would adversely affect its ability to consummate the
Merger or the other transactions contemplated hereby. Without limiting the
generality of the foregoing, and except as otherwise expressly contemplated by
this Agreement or the Capstone Disclosure Statement, prior to the Effective
Time, neither Capstone nor any of its Subsidiaries will, without the prior
written consent of Beverly which shall not be unreasonably withheld:
(a) amend its certificate of incorporation (or other applicable
charter document) or By-laws;
(b) authorize for issuance, issue, sell, deliver, grant any options
for, or otherwise agree or commit to issue, sell or deliver any shares of
any class of capital stock of Capstone or its Subsidiaries or any
securities convertible into or exchangeable or exercisable for shares of
any class of capital stock of Capstone or its Subsidiaries, other than
pursuant to and in accordance with the terms of the Capstone Option Plans
listed in Section 3.14(a) of the Capstone Disclosure Statement;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock or purchase, redeem or otherwise acquire any shares of its
own capital stock or that of any of its Subsidiaries;
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(d) except in the ordinary course of business and consistent with past
practice (i) create, incur, assume, maintain or permit to exist any
long-term debt or any short-term debt for borrowed money other than under
existing lines of credit; (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for the obligations of any other person except wholly owned Subsidiaries of
Capstone; or (iii) make any loans, advances or capital contributions to, or
investments in, any other person;
(e) (i) increase in any manner the compensation of any of its
directors, officers or employees, except in the ordinary course of business
and consistent with past practice; (ii) pay or agree to pay any pension,
retirement allowance or other employee benefit not required, or enter into
or agree to enter into any agreement or arrangement with any of its past or
present employees relating to any such pension, retirement allowance or
other employee benefit, except as required under currently existing
agreements, plans or arrangements; (iii) grant any severance or termination
pay to, or enter into any employment or severance agreement with, any of
its past or present employees; (iv) except to the extent permitted by the
foregoing clause (i), enter into any contract, agreement or understanding
with any of its past or present directors or officers; (v) except in the
ordinary course of business and consistent with past practice or as may be
required to comply with applicable law, become obligated (other than
pursuant to any new or renewed collective bargaining agreement) under any
new pension plan, welfare plan, multiemployer plan, employee benefit plan,
benefit arrangement, or similar plan, arrangement or policy which was not
in existence on the date hereof, including any bonus, incentive, deferred
compensation, stock purchase, stock option, stock appreciation right,
health or group insurance, severance pay, retirement or other benefit plan,
agreement or arrangement, or employment or consulting agreement with or for
the benefit of any person, or amend any of such plans or any of such
agreements in existence on the date hereof; or (vi) enter into any loan or
loan guarantee, forgive any loan, extend the repayment terms, or otherwise
modify any loan or extend any credit to any current or former officer,
director, or employee.
(f) except in the ordinary course of business and consistent with past
practice or as otherwise expressly contemplated hereby, sell, transfer,
lease, license, pledge, mortgage, or otherwise dispose of, or encumber, or
agree to sell, transfer, lease, license, pledge, mortgage or otherwise
dispose of or encumber, any material properties, real, personal or mixed;
(g) except as otherwise expressly contemplated hereby, enter into any
other agreements, commitments or contracts, except agreements, commitments
or contracts for the purchase, sale or lease of goods or services in the
ordinary course of business and consistent with past practice and having a
term of no more than one year;
(h) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into any agreement in principle
or an agreement with respect to, any plan of liquidation or dissolution,
any acquisition of a material amount of assets or securities, any
disposition of a material amount of assets or securities or any material
change in its capitalization, or any entry into a material contract or any
amendment or modification of any material contract or any release or
relinquishment of any material contract rights not in the ordinary course
of business and consistent with past practice except as expressly
contemplated by this Agreement;
(i) except as previously approved by the Board of Directors of
Capstone prior to the date hereof and as identified to Beverly prior to the
date hereof, authorize or commit to make capital expenditures in excess of
$200,000;
(j) permit any insurance policy naming it as a beneficiary or a loss
payee to be canceled, terminated or materially altered, except in the
ordinary course of business and consistent with past practice and following
written notice to Beverly;
(k) maintain its books and records in a manner not in the ordinary
course of business or inconsistent with past practice;
(l) except in the ordinary course of business, enter into any hedging,
option, derivative or other similar transaction;
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(m) change any assumption underlying, or method of calculating, any
bad debt, contingency, provision or other reserve;
(n) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), other than the payment,
discharge or satisfaction of liabilities (including accounts payable) in
the ordinary course of business and consistent with past practice, or
collect, or accelerate the collection of, any amounts owed (including
accounts receivable) other than the collection in the ordinary course of
business; or
(o) agree to do any of the foregoing.
SECTION 5.03 NO SOLICITATION BY BEVERLY.
(a) Beverly agrees that, prior to the Effective Time, and subject to
subsection (b) below, it shall not, and shall not authorize or permit any of its
Subsidiaries or any of its or its Subsidiaries' directors, officers, employees,
agents or representatives to, directly or indirectly, solicit, initiate,
facilitate or encourage (including by way of furnishing or disclosing
information) any merger, consolidation, other business combination involving
Beverly or its Subsidiaries, an acquisition primarily relating to all or a
substantial portion of the assets or of the capital stock of Beverly or its
Subsidiaries or inquiries or proposals concerning or which may reasonably be
expected to lead to, any of the foregoing (a "Beverly Acquisition Transaction")
or negotiate, explore or otherwise communicate in any way with any third party
(other than Capstone or its affiliates) with respect to any Beverly Acquisition
Transaction or enter into any agreement, arrangement or understanding requiring
it to abandon, terminate or fail to consummate the Merger or any other
transactions contemplated by this Agreement. Beverly shall be obligated to
immediately advise Capstone of any inquiries or proposals relating to a Beverly
Acquisition Transaction.
(b) Notwithstanding the foregoing, in the event that there is an
unsolicited written proposal for any merger, consolidation or other business
combination primarily involving the Institutional Pharmacy Business, an
acquisition primarily relating to all or a substantial portion of the assets
used in the Institutional Pharmacy Business or of the capital stock of any
Pharmacy Subsidiaries or inquiries or proposals concerning which or may
reasonably be expected to lead to, any of the foregoing (a "Pharmacy Acquisition
Transaction") from a bona fide financially capable third party, Beverly may
furnish non-public information to, and negotiate with, such third party only if
(i) Beverly shall have provided two business days' written notice to Capstone of
such proposal and (ii) Beverly's Board of Directors, after having received
advice from its investment banker or bankers and outside counsel to Beverly,
shall have determined that failure to take the proposed action, furnish such
information or to commence negotiations would be inconsistent with such Board of
Directors' fiduciary duties.
SECTION 5.04 NO SOLICITATION BY CAPSTONE.
(a) Capstone agrees that, prior to the Effective Time, it shall not, and
shall not authorize or permit any of its Subsidiaries or any of its or its
Subsidiaries' directors, officers, employees, agents or representatives to,
directly or indirectly, solicit, initiate, facilitate or encourage (including by
way of furnishing or disclosing information) any merger, consolidation, other
business combination involving Capstone or its Subsidiaries, acquisition of all
or any substantial portion of the assets or capital stock of Capstone and its
Subsidiaries taken as a whole, or inquiries or proposals concerning or which may
reasonably be expected to lead to, any of the foregoing (a "Capstone Acquisition
Transaction") or negotiate, explore or otherwise communicate in any way with any
third party (other than Beverly or its affiliates) with respect to any Capstone
Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by this Agreement. Capstone shall
be obligated to immediately advise Beverly of any inquiries or proposals
relating to a Capstone Acquisition Transaction.
(b) Notwithstanding the foregoing, in the event that there is an
unsolicited written proposal for a Capstone Acquisition Transaction from a bona
fide financially capable third party, Capstone may furnish non-public
information to, and negotiate with, such third party only if (i) Capstone shall
have provided two business days' written notice to Beverly of such proposal and
(ii) Capstone's Board of Directors, after having
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received advice from its investment banker or bankers and outside counsel to
Capstone, shall have determined that failure to take the proposed action,
furnish such information or to commence negotiations regarding a Capstone
Acquisition Transaction would be inconsistent with such Board of Directors'
fiduciary duties.
SECTION 5.05 ACCESS TO INFORMATION.
(a) From the date of this Agreement until the Effective Time, Beverly will
give Capstone and its authorized representatives (including counsel,
environmental and other consultants, accountants, auditors, and intellectual
property counsel and agents) reasonable access in light of the terms of this
Agreement during normal business hours to all facilities, personnel and
operations and to all books and records of Beverly and its Subsidiaries (as they
pertain to the Institutional Pharmacy Business), will permit Capstone to make
such inspections as it may reasonably require (including without limitation any
air, water or soil testing or sampling deemed necessary by it) and will cause
its officers and those of its Subsidiaries to furnish Capstone with such
financial and operating data and other information with respect to the
Institutional Pharmacy Business carried on by Beverly and its Pharmacy
Subsidiaries as Capstone may from time to time reasonably request.
(b) From the date of this Agreement until the Effective Time, Capstone will
give Beverly and its authorized representatives (including counsel,
environmental and other consultants, accountants, auditors, and intellectual
property counsel and agents) reasonable access in light of the terms of this
Agreement during normal business hours to all facilities, personnel and
operations and to all books and records of Capstone and its Subsidiaries, will
permit Beverly to make such inspections as it may reasonably require (including
without limitation any air, water or soil testing or sampling deemed necessary
by them) and will cause its officers and those of its Subsidiaries to furnish
Beverly with such financial and operating data and other information with
respect to the businesses and properties of Capstone and its Subsidiaries as
Beverly may from time to time reasonably request.
SECTION 5.06 REGISTRATION STATEMENT AND PROXY STATEMENT. Beverly shall
file with the SEC as soon as is reasonably practicable after the date hereof the
NBHI Registration Document and Capstone shall file with the SEC the Registration
Statement in which the Prospectus/Joint Proxy Statement shall be included.
Capstone and Beverly shall use all commercially reasonable efforts to have the
Registration Statement declared effective by the SEC and the Prospectus/Joint
Proxy Statement cleared by the staff of the SEC as promptly as practicable.
Beverly shall use all commercially reasonable efforts to have the NBHI
Registration Document declared effective by the SEC. Capstone shall also take
any action required to be taken under applicable state blue sky or securities
laws in connection with shares of Capstone Common Stock to be issued as Closing
Consideration. Capstone and Beverly shall promptly furnish to each other all
information, and take such other actions (including without limitation using all
commercially reasonable efforts to provide any required consents of their
respective independent auditors and investment banking advisors), as may
reasonably be requested in connection with any action by any of them in
connection with the actions contemplated by this Section 5.06.
SECTION 5.07 COMMERCIALLY REASONABLE EFFORTS; OTHER ACTIONS.
(a) Subject to the terms and conditions provided in this Agreement and the
Distribution Agreement, Capstone and Beverly shall use all commercially
reasonable efforts to take, or cause to be taken, all other actions and do, or
cause to be done, all other things necessary, proper or appropriate under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement and the Distribution Agreement,
including, without limitation, (i) the filing of Notification and Report Forms
under the HSR Act with the Federal Trade Commission (the "FTC") and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
using all commercially reasonable efforts to respond as promptly as practicable
to all inquiries received from the FTC or the Antitrust Division for additional
information or documentation and (ii) the obtaining of all necessary third party
consents, approvals or waivers which are required in order to consummate the
Merger, the Distribution and the other transactions contemplated hereby and by
the Distribution Agreement. To such party's knowledge Exhibits 5.07(a) and
5.07(b) list all such material consents, approvals or waivers that must be
obtained by Beverly and Capstone, respectively. Capstone shall not take any
action which would cause Beverly to fail to perform its obligations hereunder or
under the
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Distribution Agreement. Beverly shall not take any action which would cause
Capstone to fail to perform its obligations hereunder or under the Distribution
Agreement.
(b) Beverly shall use all commercially reasonable efforts to cause to be
delivered to Capstone a comfort letter of its independent auditors, dated a date
within five days of the effective date of the Registration Statement, in form
reasonably satisfactory to Capstone and customary in scope and substance for
such letters in connection with similar registration statements.
(c) Capstone shall use all commercially reasonable efforts to cause to be
delivered to Beverly a comfort letter of its independent auditors, dated a date
within five days of the effective date of the Registration Statement, in form
reasonably satisfactory to Beverly and customary in scope and substance for such
letters in connection with similar registration statements.
SECTION 5.08 PUBLIC ANNOUNCEMENTS. Before issuing any press release or
otherwise making any public statement with respect to the Merger, the
Distribution or any of the other transactions contemplated hereby, Capstone and
Beverly will consult with, and obtain the consent of, each other as to its form
and substance and shall not issue any such press release or make any such public
statement prior to obtaining such consent, except as may be required by law or
pursuant to any order of any court or governmental agency, tribunal or
regulatory authority.
SECTION 5.09 NOTIFICATION OF CERTAIN MATTERS. Each of Beverly and Capstone
shall give prompt notice to the other party of any notice of, or other
communication relating to, a default or event which, with notice or lapse of
time or both, would become a default, received by Beverly, Capstone or any of
their respective Subsidiaries subsequent to the date of this Agreement and prior
to the Effective Time, which could be reasonably expected to have a Beverly
Material Adverse Effect or Capstone Material Adverse Effect. Each of Beverly and
Capstone shall give prompt notice to the other party of (a) any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the Merger, the Distribution or any
other transactions contemplated by this Agreement or the Distribution Agreement,
or (b) any Beverly Material Adverse Effect or Capstone Material Adverse Effect.
SECTION 5.10 INDEMNIFICATION.
(a) For a period of six years Capstone shall cause the Surviving
Corporation to indemnify, defend and hold harmless the present and former
directors, officers and key employees of Beverly against all losses, claims,
damages, expenses or liabilities arising out of actions or omissions or alleged
actions or omissions occurring at or prior to the Effective Time, to the same
extent and on the same terms and conditions (including with respect to
advancement of expenses) permitted or required under applicable law, Beverly's
Amended and Restated Certificate of Incorporation and By-laws, and applicable
indemnification agreements listed in Section 5.10(a) of the Beverly Disclosure
Statement between Beverly and such respective individuals, all as in effect at
the date hereof.
(b) For a period of six years after the Effective Time and to the
reasonable satisfaction of NBHI, the Surviving Corporation shall cause to be
maintained in effect and shall assume the current policies of directors' and
officers' liability insurance maintained by Beverly with respect to claims
arising from facts or events which occurred before the Effective Time; provided,
however, that if the premiums with respect to such insurance exceed 200% of the
annual premiums paid as of the date hereof by Beverly for such insurance, the
Surviving Corporation shall be obligated to purchase directors' and officers'
liability insurance with the maximum coverage as can be obtained at an annual
premium equal to 200% of the annual premiums paid by Beverly as of the date
hereof.
SECTION 5.11 EXPENSES. Except as set forth in Section 10.05, Capstone, on
the one hand, and Beverly (before the Distribution) and NBHI (after the
Distribution), on the other hand, shall bear their respective expenses incurred
in connection with the Merger and the Distribution, including, without
limitation, the preparation, execution and performance of this Agreement, the
Distribution Agreement and the transactions contemplated hereby, and all fees
and expenses of investment bankers, finders, brokers, agents, representatives,
counsel and accountants. Expenses incurred in printing, mailing and filing
(including without limitation, SEC filing fees, fees related to any state
securities or "blue sky" laws and stock exchange listing application
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fees), (i) as to the Prospectus/Joint Proxy Statement, and Registration
Statement, shall be paid by Capstone and (ii) as to the NBHI Registration
Document shall be paid by NBHI.
SECTION 5.12 STOCK EXCHANGE LISTINGS. Capstone shall use all commercially
reasonable efforts to have the Capstone Common Stock to be issued in connection
with the Merger authorized for quotation on The Nasdaq Stock Market, Inc. or
listed on the New York Stock Exchange subject to notice of issuance.
SECTION 5.13 BEVERLY AND SUBSIDIARY ACTIONS.
(a) Beverly shall not take or omit to take, and shall not cause or permit
any of its Subsidiaries to take or omit to take, any action within its
reasonable control which would (i) cause a breach of any representation or
warranty of Beverly contained in this Agreement or the Distribution Agreement
such that the Closing conditions set forth in Section 7.01 would not be
satisfied or (ii) prevent fulfillment of the conditions in Articles 6 and 7.
(b) Beverly shall not and shall not authorize or permit any of its
Subsidiaries or any of its Subsidiaries' directors, officers, employees, agents
or representatives to amend, modify, waive or withdraw any term of, the
Distribution Agreement prior to the Effective Time without the prior written
consent of Capstone.
(c) Beverly shall use its commercially reasonable efforts to prepare and
submit as soon as practicable after executing this Agreement a request for the
private letter ruling referred to in Section 8.09.
SECTION 5.14 CAPSTONE AND SUBSIDIARY ACTIONS. Capstone shall not take or
omit to take, and shall not cause or permit any of its Subsidiaries to take or
omit to take, any action within its reasonable control which would (i) cause a
breach of any representation or warranty of Capstone contained in this Agreement
such that the Closing conditions set forth in Section 8.01 would not be
satisfied or (ii) prevent fulfillment of the conditions in Articles 6 and 8.
SECTION 5.15 ENVIRONMENTAL MATTERS.
(a) Beverly shall promptly provide Capstone with any Environmental Notices
it receives with respect to the Institutional Pharmacy Business, and shall make
all filings and take all actions necessary to materially comply with all
Environmental Laws, including but not limited to those applicable to the Merger
and other non-routine transactions contemplated hereby. Beverly shall keep
Capstone informed of all actions taken in connection with the foregoing and all
such actions shall be on terms and conditions satisfactory to Capstone whose
consent to such actions shall not be unreasonably withheld.
(b) Capstone shall promptly provide Beverly with any Environmental Notices
it receives and shall make all filings and take all actions necessary to
materially comply with all Environmental Laws, including but not limited to
those applicable to the Merger and other transactions contemplated hereby.
Capstone shall keep Beverly informed of all non-routine actions taken in
connection with the foregoing and all such actions shall be on terms and
conditions satisfactory to Beverly whose consent to such actions shall not be
unreasonably withheld.
SECTION 5.16 ACTIONS REGARDING OUTSTANDING DEBT.
(a) Prior to the Effective Time, Beverly agrees to use its reasonable best
efforts to cause its outstanding indebtedness for borrowed money to be
restructured, modified or amended, as appropriate, to cause such indebtedness to
be assumed by NBHI prior to the Effective Time, and to obtain all necessary
consents, approvals, waivers or other agreements by the holders of such
indebtedness as may be required in order to effect the assignment to and
assumption by NBHI of, and release of Beverly from liability with respect to,
such indebtedness.
(b) Prior to the Effective Time, Beverly and Capstone shall use all
commercially reasonable efforts to cause Beverly's Pharmacy Subsidiaries to
borrow from third party lenders $275,000,000 on terms mutually agreeable to
Beverly and Capstone for the purpose of repaying such amount to Beverly prior to
the Distribution in settlement of the Assumed Pharmacy Indebtedness (as defined
in the Distribution Agreement), which borrowing shall continue after the
Effective Time as an obligation of the Pharmacy Subsidiaries or the Surviving
Corporation.
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SECTION 5.17 RETROACTIVE INSURANCE COVERAGE. Immediately following the
execution hereof, Capstone and Beverly will use their joint best efforts to
expeditiously obtain a commitment for retroactive insurance coverage, which
shall be reasonably acceptable to Beverly, with respect to both known
liabilities and unreported losses which are related to the Institutional
Pharmacy Business which may have occurred or may occur at any time prior to the
Effective Time. Capstone hereby covenants that at the Effective Time, it shall,
at its expense, cause such insurance coverage to be in effect and shall provide
evidence thereof at the Closing.
SECTION 5.18 PREFERRED PROVIDER AGREEMENTS. Beverly and Capstone agree
that as promptly as practicable upon the execution of this Agreement they will
commence negotiations in good faith to reach an agreement or agreements to
provide for the delivery of pharmacy services and products and ancillary
services and products after the Effective Time by Capstone to Beverly long-term
care facilities which will be owned or operated by NBHI after the Time of
Distribution. The forms of such agreements will be initialed by both parties and
attached to a certificate to be signed by the parties and attached to this
Agreement as Exhibit G.
SECTION 5.19 FAILURE TO TAKE ACTION. None of Beverly or Capstone or their
respective Subsidiaries will take any action, or fail to take any action, if
such action (or failure to act) would reasonably be expected to cause the Merger
to fail to qualify as a reorganization within the meaning of Section 368(a) of
the Code.
SECTION 5.20 EXHIBITS, CLOSING STATEMENTS AND SCHEDULES. Beverly and
Capstone agree that as promptly as possible upon the execution of this Agreement
they will negotiate in good faith, finalize and attach all necessary exhibits to
this Agreement and the exhibits and schedules to the Distribution Agreement, to
be completed within five (5) business days of the date hereof.
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF CAPSTONE AND BEVERLY
The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing of each of the following
conditions:
SECTION 6.01 REGISTRATION STATEMENTS. The Registration Statement and the
NBHI Registration Document shall have become effective in accordance with the
provisions of the Securities Act. No stop order suspending the effectiveness of
the Registration Statement and the NBHI Registration Document shall have been
issued by the SEC and remain in effect. All necessary state securities or blue
sky authorizations for the Merger and the Distribution shall have been received.
SECTION 6.02 BEVERLY STOCKHOLDER APPROVAL. The approval of the Merger and
the Distribution, including the execution and performance of this Agreement, the
Distribution Agreement and all of the transactions contemplated hereby or
thereby, by a majority of the outstanding shares of Beverly Common Stock cast at
the Beverly Special Meeting or any adjournment thereof, shall have been
obtained.
SECTION 6.03 CAPSTONE STOCKHOLDER APPROVAL. The approval of the Merger,
including the execution and performance of this Agreement and all of the
transactions contemplated hereby, by a majority of the outstanding shares of
Capstone Common Stock cast at the Capstone Special Meeting or any adjournment
thereof, shall have been obtained.
SECTION 6.04 LISTINGS. The Capstone Common Stock issuable in the Merger
shall have been authorized for quotation on The Nasdaq Stock Market, Inc., or
listed on the New York Stock Exchange subject to official notice of issuance.
SECTION 6.05 CERTAIN PROCEEDINGS. No writ, order, decree or injunction of
a court of competent jurisdiction or governmental entity shall have been entered
against Capstone or Beverly which, and no proceedings therefor shall have been
threatened or commenced by any governmental entity which seek to, prohibit or
restrict the consummation of the Merger or the Distribution or would otherwise
restrict Capstone's or the Surviving Corporation's exercise of full rights to
own and operate the Institutional Pharmacy Business of Beverly.
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SECTION 6.06 DISTRIBUTION. (i) The Distribution Agreement shall have been
executed and shall be in full force and effect on and as of the Effective Time;
and (ii) the Distribution shall have been completed.
SECTION 6.07 DEBT RESTRUCTURE. All action required in order to effect the
restructure, modification and amendment of Beverly's indebtedness for borrowed
money, as contemplated by Section 5.16(a), shall have been completed.
SECTION 6.08 OPINIONS.
(a) Beverly and Capstone shall have received the respective opinions of
Caplin & Drysdale, Chartered, or Ernst & Young, LLP, reasonably acceptable to
Beverly and Capstone, to the effect that:
(i) the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code;
(ii) no gain or loss will be recognized by Capstone or Beverly as a
result of the Merger; and
(iii) no gain or loss will be recognized by Beverly's stockholders
upon the receipt of Capstone Common Stock solely in exchange for Beverly
Common Stock in connection with the Merger (except with respect to cash
received in lieu of a fractional interest in Capstone Common Stock).
(b) Beverly and Capstone shall have received, at Beverly's election, either
a favorable private letter ruling from the IRS or the favorable opinion of
Caplin & Drysdale, Chartered or Ernst & Young, LLP, reasonably acceptable to
Beverly and Capstone, to the effect that:
(i) The transfer by Beverly to NBHI of the Remaining Health Care
Assets, solely in exchange for NBHI Stock, and the assumption by NBHI of
the Remaining Health Care Liabilities of Beverly, followed by Beverly's
distribution of the NBHI Stock to Beverly's stockholders, will constitute a
reorganization within the meaning of Section 368(a)(1)(D) of the Code;
(ii) Beverly will recognize no gain or loss in connection with the
transactions described in (i) above except to the extent that gain or loss
is required to be recognized on intercompany transactions;
(iii) NBHI will recognize no gain or loss upon the receipt of the
Remaining Health Care Assets form Beverly in exchange for the NBHI Stock;
and
(iv) Beverly's stockholders will recognize no gain or loss (and no
amount will be included in the income of Beverly's stockholders) upon the
receipt of the NBHI Stock in the Distribution.
(c) The respective counsels of Beverly and Capstone shall have delivered
opinions covering the matters set forth on Exhibit H-1 and H-2 hereto.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF CAPSTONE
The obligation of Capstone to effect the Merger and to perform its other
obligations to be performed at or subsequent to the Closing shall be subject to
the fulfillment at or prior to the Closing of the following additional
conditions, any one or more of which may be waived by Capstone:
SECTION 7.01 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Beverly contained herein and in the Distribution Agreement
(without regard to any materiality exceptions or provisos contained in this
Agreement or the Distribution Agreement) shall be true and correct in all
material respects on the date of this Agreement, the date of the Distribution
Agreement and the Closing Date as though such representations and warranties
were made at and on such date, except (i) for those untruths or inaccuracies
which would not, singly or in the aggregate, reasonably be expected to have a
Beverly Material Adverse Effect and (ii) for changes expressly permitted or
contemplated by this Agreement or the Distribution Agreement.
SECTION 7.02 PERFORMANCE. Beverly shall have performed and complied in all
material respects with all agreements, obligations, covenants and conditions
required by this Agreement and the Distribution Agreement
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to be performed or complied with by it on or prior to the Closing Date except
for those failures to so perform or comply which would not, singly or in the
aggregate, reasonably be expected to have a Beverly Material Adverse Effect.
SECTION 7.03 CONSENTS AND APPROVALS. All necessary consents and approvals
of, and notifications and disclosures to, and filings and registrations with,
any United States or any other governmental authority or any other third party
required for the consummation of the Merger and the other transactions
contemplated hereby (including without limitation any consents, approvals,
notifications, disclosures, filings and registrations required under any
Environmental Law) shall have been obtained except where failure to obtain such
consents or approvals would not, singly or in the aggregate with all such other
failures, have a Beverly Material Adverse Effect, and any waiting period
applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated.
SECTION 7.04 CERTIFICATES. Beverly shall furnish such certificates of its
officers to evidence compliance with the conditions set forth in Sections 7.01,
7.02 and 7.04 as may be reasonably requested by Capstone.
SECTION 7.05 MATERIAL ADVERSE CHANGE. There shall not have occurred since
December 31, 1996 any event, condition, change, occurrence or circumstance which
has had or is reasonably likely to have, singly or in the aggregate, a Beverly
Material Adverse Effect.
SECTION 7.06 PHARMACY FINANCIAL STATEMENTS. The Pharmacy Subsidiaries'
unaudited consolidated results of operations for the interim period between
January 1, 1997 and the end of the month immediately prior to the month in which
the Effective Time occurs, shall not have materially declined compared to the
forecasted results of operations provided by the Pharmacy Subsidiaries to
Capstone prior to the date of this Agreement.
SECTION 7.07 AUDITORS' LETTER. Capstone shall have received from Beverly's
independent auditors a letter dated the Closing Date confirming the matters set
forth in the letter contemplated by Section 5.07(b).
SECTION 7.08 NON-COMPETITION AGREEMENT. Capstone shall have received from
NBHI a non-competition agreement in the form attached as Exhibit 7.08.
SECTION 7.09 WORKING CAPITAL. The Pharmacy Subsidiaries' unaudited
consolidated working capital (defined as consolidated cash, cash equivalents,
accounts receivable and inventory, less accounts payable) shall not have
declined below the level of such working capital reflected in the unaudited
Institutional Pharmacy Business Financial Statements set forth in Section 4.12
of the Beverly Disclosure Statement, except for such changes (i) attributable to
decline in inventories resulting from purchases under the Prime Vendor Service
Agreement dated as of April 3, 1997 between Pharmacy Corporation of America
("PCA") and Bergen Brunswig Drug Company (a copy of which is set forth in
Section 4.21 of the Beverly Disclosure Statement, and (ii) as do not singly or
in the aggregate constitute a Beverly Material Adverse Effect.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF BEVERLY
The obligations of Beverly under this Agreement to effect the Merger shall
be subject to the fulfillment on or before the Closing Date of each of the
following additional conditions, any one or more of which may be waived by
Beverly:
SECTION 8.01 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Capstone contained herein (without regard to any materiality
exceptions or provisos therein) shall be true and correct in all material
respects on the date of this Agreement and the Closing Date as though such
representations and warranties were made at and on such date, except (i) for
those untruths or inaccuracies which would not, singly or in the aggregate,
reasonably be expected to have a Capstone Material Adverse Effect and (ii) for
changes permitted or contemplated by this Agreement.
SECTION 8.02 PERFORMANCE. Capstone shall have performed and complied in
all material respects with all agreements, obligations, covenants and conditions
required by this Agreement to be performed or complied
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with by it on or prior to the Closing Date except for those failures to so
perform or comply which would not, singly or in the aggregate, reasonably be
expected to have a Capstone Material Adverse Effect.
SECTION 8.03 CONSENTS AND APPROVALS. All necessary consents and approvals
of, and notifications and disclosures to, and filings and registrations with,
any United States or any other governmental authority or any other third party
required for the consummation of the Merger and the other transactions
contemplated hereby (including without limitation any consents, approvals,
notifications, disclosures, filings and registrations required under any
Environmental Law) shall have been obtained except where failure to obtain such
consents or approvals would not, singly or in the aggregate with all such other
failures, have a Capstone Material Adverse Effect, and any waiting period
applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated.
SECTION 8.04 CERTIFICATES. Capstone shall furnish such certificates of its
officers to evidence compliance with the conditions set forth in Sections 8.01,
8.02 and 8.04 as may be reasonably requested by Beverly.
SECTION 8.05 MATERIAL ADVERSE CHANGE. There shall not have occurred since
December 31, 1996 any event, condition, change, occurrence or circumstance which
has had or is reasonably likely to have, singly or in the aggregate, a Capstone
Material Adverse Effect.
SECTION 8.06 INTERIM QUARTERLY RESULTS. Capstone's unaudited consolidated
results of operations for the interim period between January 1, 1997 and the end
of the month immediately prior to the month in which the Effective Time occurs,
shall not have materially declined compared to the forecasted results of
operations provided by Capstone to Beverly prior to the date of this Agreement.
SECTION 8.07 VOTING AGREEMENT. Concurrently with the execution of this
Agreement; Counsel shall have entered into the Voting Agreement in the form
attached as Exhibit B, and each such party shall have performed and complied
with its obligations under the Voting Agreement.
SECTION 8.08 REPAYMENT OF INDEBTEDNESS. The Pharmacy Subsidiaries shall
have repaid to Beverly the Assumed Pharmacy Indebtedness described in Section
5.16(b) hereof.
SECTION 8.09 AUDITORS' LETTER. Beverly shall have received from Capstone's
independent auditors a letter dated the Closing Date confirming the matters set
forth in the letter contemplated by Section 5.07(c).
ARTICLE IX
CLOSING
SECTION 9.01 TIME AND PLACE. Subject to the provisions of Articles VI,
VII, VIII and X, the closing of the Merger (the "Closing") shall take place at
the offices of Giroir, Gregory, Holmes & Hoover, plc, Little Rock, Arkansas, or
such other place as the parties may agree upon, as soon as practicable but in no
event later than 9:30 A.M., local time, on the second business day after the
date on which each of the conditions set forth in Articles VI, VII and VIII have
been satisfied or waived by the party or parties entitled to the benefit of such
conditions; or at such other place, at such other time, or on such other date as
Capstone and Beverly may mutually agree. The date on which the Closing actually
occurs is herein referred to as the "Closing Date."
SECTION 9.02 FILINGS AT THE CLOSING. Subject to the provisions of Articles
VI, VII, VIII and X hereof, Beverly, and Capstone shall cause to be executed at
the Closing the Certificate of Merger and shall cause the Certificate of Merger
to be filed and recorded in accordance with the applicable provisions of the
Delaware Act, and shall take any and all other lawful actions and do any and all
other lawful things necessary to cause the Merger to become effective.
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ARTICLE X
TERMINATION AND ABANDONMENT
SECTION 10.01 TERMINATION. This Agreement may be terminated and the Merger
may be abandoned any time prior to the Effective Time, whether before or after
approval by the stockholders of Beverly or Capstone:
(a) by mutual consent of the Boards of Directors of Capstone and
Beverly;
(b) by either Capstone or Beverly if, without fault of such
terminating party, the Merger shall not have been consummated on or before
January 31, 1998, which date may be extended by mutual consent of the
parties hereto; provided, that if the only conditions remaining to be
satisfied on January 31, 1998 are (i) the receipt of a favorable private
letter ruling from IRS regarding the Distribution, as contemplated by
Section 8.09, (ii) the conditions expressed in Section 6.08 and (iii) the
Distribution, and if any of such conditions shall not be waived by the
party for whose benefit the condition is expressed, then the date on which
either Capstone or Beverly may terminate this Agreement for failure of the
Merger to be consummated in accordance with this Agreement shall be
extended to and including April 30, 1998;
(c) by either Capstone or Beverly, if any court of competent
jurisdiction in the United States or other governmental body in the United
States, other than at the request of the parties, or any affiliate thereof,
seeking to terminate this Agreement pursuant to this clause (c), shall have
issued an order (other than a temporary restraining order), decree or
ruling or taken any other action restraining, enjoining or otherwise
prohibiting the Merger or the Distribution, and such order, decree, ruling
or other action shall have become final and nonappealable;
(d) by either Capstone or Beverly, if the approval of a majority of
the outstanding shares of Beverly Common Stock cast at the Beverly Special
Meeting or any adjournment thereof is not obtained with respect to each of
the Merger and the Distribution; or
(e) by either Capstone or Beverly, if the approval of a majority of
the outstanding shares of Capstone Common Stock cast at the Capstone
Special Meeting or any adjournment thereof is not obtained with respect to
the Merger.
SECTION 10.02 TERMINATION BY CAPSTONE. This Agreement may be terminated
and the Merger may be abandoned by action of the Board of Directors of Capstone,
at any time prior to the Effective Time, before or after the approval by the
stockholders of Capstone, if (a) Beverly shall have failed to comply in any
material respect with any of the covenants or agreements contained in Articles I
and V of this Agreement to be complied with or performed by Beverly at or prior
to such date of termination, (b) there exists a breach or breaches of any
representation or warranty of Beverly contained in this Agreement or the
Distribution Agreement such that the Closing condition set forth in Section 7.01
would not be satisfied; provided, however, that if such breach or breaches are
capable of being cured prior to the Effective Time, such breaches shall not have
been cured within 15 calendar days of delivery to Beverly of written notice of
such breach or breaches, (c) Beverly shall have furnished or disclosed
non-public information to, or commenced negotiations with, a third party with
respect to a Pharmacy Acquisition Transaction or Beverly Business Combination
Transaction (as hereinafter defined) or shall have resolved to do either of the
foregoing and publicly disclosed such resolution, (d) the Board of Directors of
Beverly shall have withdrawn, changed, modified in any manner or taken action
inconsistent with its recommendation of the Distribution Agreement, the
Distribution, this Agreement, the Merger or the other transactions contemplated
hereby or thereby or shall have resolved to do any of the foregoing and publicly
disclosed such resolution; or (e) a definitive agreement with respect to a
Capstone Acquisition Transaction or Capstone Business Combination Transaction
(as hereinafter defined) shall have been negotiated and Capstone's Board of
Directors, after having received advice from its investment banker or bankers
and outside counsel to Capstone, shall have determined in good faith that
failure to terminate this Agreement would be inconsistent with the Board's
fiduciary duties; provided, however, that two business days' prior written
notice shall have been given to Beverly (which notice shall include the material
terms and conditions, and financing arrangements of, and the identity of the
third party proposing, the
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Capstone Acquisition Transaction or Capstone Business Combination Transaction)
and that prior to terminating this Agreement Capstone shall have made all the
Capstone Payments required by the terms of Section 10.05(c) hereof.
SECTION 10.03 TERMINATION BY BEVERLY. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the stockholders of Beverly, by action of the Board of the
Directors of Beverly, if (a) Capstone shall have failed to comply in any
material respect with any of the covenants or agreements contained in Articles I
and V of this Agreement to be complied with or performed by Capstone at or prior
to such date of termination, (b) there exists a breach or breaches of any
representation or warranty of Capstone contained in this Agreement such that the
Closing conditions set forth in Section 8.01 would not be satisfied; provided,
however, that if such breach or breaches are capable of being cured prior to the
Effective Time, such breaches shall not have been cured within 15 calendar days
of delivery to Capstone of written notice of such breach or breaches, (c)
Capstone shall have furnished or disclosed non-public information to, or
commenced negotiations with, a third party with respect to a Capstone
Acquisition Transaction or Capstone Business Combination Transaction or shall
have resolved to do either of the foregoing and publicly disclosed such
resolution, (d) the Board of Directors of Capstone shall have withdrawn,
changed, modified in any manner or taken action inconsistent with its
recommendation of this Agreement and the Merger or shall have resolved to do any
of the foregoing and publicly disclosed such resolution, (e) a definitive
agreement with respect to a Pharmacy Acquisition Transaction or a Beverly
Business Combination Transaction (as hereinafter defined) shall have been
negotiated and Beverly's Board of Directors, after having received advice from
its investment banker or bankers and outside counsel to Beverly, shall have
determined in good faith that failure to terminate this Agreement would be
inconsistent with the Board's fiduciary duties; provided, however, that two
business days' prior written notice shall have been given to Capstone (which
notice shall include the material terms and conditions, and financing
arrangements of, and the identity of the third party proposing, the Pharmacy
Acquisition Transaction or the Beverly Business Combination Transaction) and
that prior to terminating this Agreement Beverly shall have made all the Beverly
Payments required by the terms of Section 10.05(b) hereof; or (f) Counsel shall
have breached its obligations pursuant to Section 1.2 of the Voting Agreement.
SECTION 10.04 PROCEDURE FOR TERMINATION. In the event of termination and
abandonment of the Merger by Capstone or Beverly pursuant to this Article X,
written notice thereof shall forthwith be given to the other.
SECTION 10.05 EFFECT OF TERMINATION AND ABANDONMENT.
(a) In the event of termination of this Agreement and abandonment of the
Merger pursuant to this Article X, no party hereto (or any of its directors or
officers) shall have any liability or further obligation to any other party to
this Agreement, except as provided in Section 5.11 and this Section 10.05, and
except that nothing herein shall relieve any party from liability for any breach
of this Agreement.
(b) In the event of (i) a termination of this Agreement by Beverly pursuant
to Section 10.01(b), or (c) or by either party hereto pursuant to Section
10.01(d) and if prior thereto any person shall have made a bona fide proposal
concerning a Pharmacy Acquisition Transaction or a Beverly Business Combination
Transaction or (ii) any termination of this Agreement by Capstone pursuant to
Section 10.02(a), (b), (c) or (d) or (iii) any termination of this Agreement by
Beverly pursuant to Section 10.03(e), then Beverly shall promptly pay Capstone
by wire transfer of immediately available funds to an account specified by
Capstone up to $2,000,000 for all documented fees and expenses incurred by
Capstone (including the fees and expenses of counsel, accountants, consultants
and advisors) in connection with this Agreement and the transactions
contemplated hereby (the "Beverly Expense Payments"). In the event of a
termination of this Agreement by Beverly pursuant to Section 10.03(e), Beverly
shall be obligated to pay Capstone an additional fee of $35,000,000 (the
"Beverly Termination Payment"), payable in immediately available funds prior to
and as a condition of such termination and entering into the transaction
contemplated by such definitive agreement (the amount of such payments and the
manner specified herein for making such payments being collectively called the
"Beverly Payments"). To the extent a Beverly Termination Payment has not already
become payable and been paid and if, prior to any termination described in
clauses (i) or (ii) above, any person shall have submitted a bona fide proposal
concerning a Pharmacy Acquisition Transaction or Beverly Business
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Combination Transaction and within 18 months after the termination of this
Agreement, Beverly or any of its Subsidiaries proposes to enter into a
definitive agreement with a third party with respect to a Pharmacy Acquisition
Transaction or Beverly Business Combination Transaction or a Pharmacy
Acquisition Transaction or Beverly Business Combination Transaction is proposed
to be effected, then Beverly, prior to entering into any such definitive
agreement or any such Pharmacy Acquisition Transaction or Beverly Business
Combination Transaction being effected, shall be obligated to pay Capstone an
additional fee of $35,000,000 payable in immediately available funds prior to
and as a condition of entering into such definitive agreement for a Pharmacy
Acquisition Transaction or Beverly Business Combination Transaction, to an
account specified by Capstone. As used in this Section 10.05, the term "Beverly
Business Combination Transaction" shall mean any of the following involving
Beverly or any Pharmacy Subsidiary that is material to the business, results of
operation, prospects or financial condition of the Institutional Pharmacy
Business taken as a whole: (1) any merger, consolidation, share exchange,
business combination or other similar transaction (other than the Merger) which
includes the Remaining Health Care Business; (2) any sale, lease, exchange,
transfer or other disposition of 25% or more of the assets of Beverly (other
than assets related to the Remaining Health Care Business) and its Pharmacy
Subsidiaries, taken as a whole, in a single transaction or series of
transactions; or (3) the acquisition by a person or entity, or any "group" (as
such term is defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of beneficial ownership of 33 1/3% or more of Beverly
Common Stock, whether by tender offer, exchange offer or otherwise. In the event
that this Agreement is terminated without Closing, and Beverly either (i)
subsequently distributes all or part of the stock ("spin-off") of PCA or its
successors or any other entity primarily engaged in operating Beverly's
Institutional Pharmacy Business, to Beverly stockholders pro rata, or (ii)
engages an Underwriter with respect to a bona fide firm commitment underwriting
concerning a public offering of securities of PCA or its successor or any other
entity primarily engaged in operating Beverly's Institutional Pharmacy Business
at any time after the date of this Agreement and within six (6) months after the
termination of this Agreement, and (iii) a termination of this Agreement by
Beverly occurs pursuant to Sections 10.01(b) or 10.01(c) or by either party
hereto pursuant to Section 10.01(d), and such public offering occurs at any time
within eighteen (18) months of such termination or such spin-off occurs within
six (6) months after such termination, then Beverly shall cause the Beverly
Termination Payment to be paid to Capstone concurrently with the consummation of
such public offering or spin-off, as the case may be.
(c) In the event of (i) a termination of this Agreement by Capstone
pursuant to Section 10.01(b) or, (c) or by either party pursuant to Section
10.01(e) and if prior thereto any person shall have made a bona fide proposal
concerning a Capstone Acquisition Transaction or Capstone Business Combination
Transaction (as hereinafter defined) or (ii) any termination of this Agreement
by Beverly pursuant to Section 10.03(a), (b), (c), (d) or (f) or (iii) any
termination of this Agreement by Capstone pursuant to Section 10.02(e), then
Capstone shall promptly pay Beverly by wire transfer of immediately available
funds to an account specified by Beverly up to $2,000,000 for all documented
fees and expenses incurred by Beverly (including the fees and expenses of
counsel, accountants, consultants and advisors) in connection with this
Agreement, the Distribution Agreement and the transactions contemplated hereby
or thereby (the "Capstone Expense Payments"). In the event of a termination of
this Agreement pursuant to Section 10.02(e), Capstone shall be obligated to pay
Beverly an additional fee of $35,000,000 (the "Capstone Termination Payment"),
payable in immediately available funds prior to and as a condition of such
termination and entering into the Capstone Acquisition Transaction or Capstone
Business Combination Transaction contemplated by such definitive agreement (the
amount of such payments and the manner specified herein for making such payments
being collectively called the "Capstone Payments"). To the extent a Capstone
Termination Payment has not already become payable and been paid and if, prior
to any termination described in clauses (i) or (ii) above, any person shall have
submitted a bona fide proposal concerning a Capstone Business Combination
Transaction and within 18 months after the termination of this Agreement,
Capstone or any of its Subsidiaries proposes to enter into a definitive
agreement with a third party with respect to a Capstone Acquisition Transaction
Capstone or Capstone Business Combination Transaction or a Capstone Acquisition
Transaction or Capstone Business Combination Transaction is proposed to be
effected, then Capstone, prior to entering into any such definitive agreement or
any such Capstone Acquisition Transaction or Capstone Business Combination
Transaction being effected, shall be obligated to pay Beverly an additional fee
of $35,000,000 payable by wire
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transfer of immediately available funds to an account specified by Beverly. As
used in this Section 10.05, the term "Capstone Business Combination Transaction"
shall mean any of the following involving Capstone or any Subsidiary that is
material to the business, results of operation, prospects or financial condition
of Capstone and its Subsidiaries taken as a whole: (1) any merger,
consolidation, share exchange, business combination or other similar transaction
(other than the Merger); (2) any sale, lease, exchange, transfer or other
disposition of 25% or more of the assets of Capstone and its Subsidiaries, taken
as a whole, in a single transaction or series of transactions; or (3) the
acquisition by a person or entity, or any "group" (as such term is defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder) of
beneficial ownership of 33 1/3% or more of Capstone Common Stock, whether by
tender offer, exchange offer or otherwise.
ARTICLE XI
DEFINITIONS
SECTION 11.01 TERMS DEFINED IN THIS AGREEMENT. The following capitalized
terms used herein shall have the meanings ascribed in the indicated sections.
<TABLE>
<CAPTION>
<S> <C>
Affiliates.................................................. 4.07
Agreement................................................... Preamble
Antitrust Division.......................................... 5.07(a)
Assumed Pharmacy Indebtedness............................... Distribution Agreement
Average Market Value........................................ 2.04
Beverly..................................................... Preamble
Beverly Acquisition Transaction............................. 5.03(a)
Beverly Business Combination Transaction.................... 10.05(b)
Beverly Common Stock........................................ 2.01(a)
Beverly Compensation and Benefit Plans...................... 4.03(b)
Beverly Contracts........................................... 4.03(b)
Beverly Disclosure Statement................................ Article IV
Beverly Employee Benefit Plans.............................. 4.27(c)
Beverly Expense Payments.................................... 10.05(b)
Beverly Licenses............................................ 4.08
Beverly Material Adverse Effect............................. 4.01
Beverly Option Plans........................................ 4.15(a)
Beverly Options............................................. 4.15(a)
Beverly Pension Benefit Plans............................... 4.27(a)
Beverly Permitted Encumbrances.............................. 4.19
Beverly Pharmacy Contracts.................................. 4.32(b)
Beverly Preferred Stock..................................... 4.15(a)
Beverly SEC Reports......................................... 4.11(a)
Beverly Special Meeting..................................... 1.05(a)
Beverly Termination Payment................................. 10.05(b)
Beverly Welfare Plans....................................... 4.27(b)
Capstone.................................................... Preamble
Capstone Acquisition Transaction............................ 5.04(a)
Capstone Balance Sheet...................................... 3.18
Capstone Business Combination Transaction................... 10.02
Capstone Common Stock....................................... 2.01(a)
Capstone Compensation and Benefit Plans..................... 3.03(b)
Capstone Contracts.......................................... 3.03(b)
Capstone Disclosure Statement............................... Article III
Capstone Employee Benefit Plans............................. 3.26(c)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Capstone Expense Payments................................... 10.05(c)
Capstone Licenses........................................... 3.07
Capstone Material Adverse Effect............................ 3.01
Capstone Option Plans....................................... 3.14(a)
Capstone Options............................................ 3.14(a)
Capstone Pension Benefit Plans.............................. 3.26(a)
Capstone Permitted Encumbrances............................. 3.18
Capstone Pharmacy Contracts................................. 3.31(b)
Capstone Preferred Stock.................................... 3.14(a)
Capstone SEC Reports........................................ 3.10(a)
Capstone Special Meeting.................................... 1.05(b)
Capstone Termination Payment................................ 10.05(c)
Capstone Warrant............................................ 3.14(a)
Capstone Welfare Plans...................................... 3.26(b)
CERCLA...................................................... 3.27(d)
Certificates................................................ 2.02(a)
circumstance (Capstone)..................................... 3.01
circumstance (Beverly)...................................... 4.01
Closing..................................................... 9.01
Closing Consideration....................................... 2.01(a)
Closing Date................................................ 9.01
COBRA....................................................... 3.26(m)
Code........................................................ 3.25
Constituent Corporations.................................... Preamble
Conversion Number........................................... 2.01(a)
Convertible Debentures...................................... 4.15(a)
Counsel..................................................... Recitals
Delaware Act................................................ 1.01(a)
Distribution................................................ Recitals
Distribution Agreement...................................... Recitals
Employee Benefit Matters Agreement.......................... Distribution Agreement
Environment................................................. 3.27(h)(i)
Environmental Authorizations................................ 3.27(a)
Environmental Laws.......................................... 3.27(h)(ii)
Environmental Notice........................................ 3.27(h)(iii)
ERISA....................................................... 3.26(a)
ERISA Affiliate............................................. 3.26(a)
Exchange Act................................................ 3.08
FTC......................................................... 5.07(a)
Hazardous Material.......................................... 3.27(h)(iv)
HSR Act..................................................... 3.03(a)
Institutional Pharmacy Liabilities.......................... Distribution Agreement
Intellectual Property Rights................................ 3.24
IRS......................................................... 3.26(e)
Nasdaq...................................................... 2.04
NBHI........................................................ Recitals
NBHI Registration Document.................................. 4.09(b)
NBHI Stock.................................................. Recitals
PBGC........................................................ 3.26(i)
Pharmacy Acquisition Transaction............................ 5.03(a)
Pharmacy Subsidiaries....................................... Distribution Agreement
Prospectus/Joint Proxy Statement............................ 1.05(a)
Registration Statement...................................... 3.08
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Remaining Health Care Assets................................ Distribution Agreement
Remaining Health Care Business.............................. Distribution Agreement
Remaining Health Care Liabilities........................... Distribution Agreement
Restructuring............................................... Recitals
Rights...................................................... 4.15(a)
Rights Agreement............................................ 4.15(a)
SEC......................................................... 3.08
Securities Act.............................................. 3.08
spin-off.................................................... 10.05(b)
Tax or Taxes................................................ 3.25
Tax Returns................................................. 3.25
Time of Distribution........................................ Distribution Agreement
Transferred Employees....................................... 2.03(a)
Voting Agreement............................................ Recitals
</TABLE>
ARTICLE XII
MISCELLANEOUS
SECTION 12.01 AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified or supplemented only by written agreement of
Capstone and Beverly at any time prior to the Effective Time with respect to any
of the terms contained herein; provided, however, that after this Agreement is
adopted by the stockholders of Beverly or Capstone, no such amendment or
modification shall change the amount or form of the Closing Consideration.
SECTION 12.02 WAIVER OF COMPLIANCE; CONSENTS. Any failure of Capstone, on
the one hand, or Beverly, on the other hand, to comply with any obligation,
covenant, agreement or condition herein may be waived by Beverly or Capstone,
respectively, only by a written instrument signed by the party granting such
waiver, but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure. Whenever this
Agreement requires or permits consent by or on behalf of any party hereto, such
consent shall be given in writing in a manner consistent with the requirements
for a waiver of compliance as set forth in this Section 12.02.
SECTION 12.03 SURVIVABILITY; INVESTIGATIONS. The respective
representations and warranties of Capstone and Beverly contained herein or in
any certificates or other documents delivered prior to or at the Closing shall
not be deemed waived or otherwise affected by any investigation made by any
party hereto and shall not survive the Closing.
SECTION 12.04 NOTICES. All notices and other communications hereunder
shall be in writing and shall be delivered personally, by next-day courier or
mailed by registered or certified mail (return receipt requested) with first
class postage prepaid, or telecopied with written machine generated confirmation
of receipt, to the parties at the addresses specified below (or at such other
address for a party as shall be specified by like notice; provided, that notices
of a change of address shall be effective only upon receipt thereof). Any such
notice shall be effective upon receipt, if personally delivered or telecopied,
one day after delivery to a courier for next-day delivery, or three days after
mailing, if deposited in the U.S. mail, first class postage prepaid.
(a) if to Beverly, to
Beverly Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919-1000
ATTN: Scott M. Tabakin
Telephone: (501) 484-8907
Facsimile: (501) 484-8489
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with copy to:
Giroir, Gregory, Holmes & Hoover, plc
111 Center Street, Suite 1900
Little Rock, AR 72201
ATTN: H. Watt Gregory, III, Esq.
Telephone: (501) 372-3000
Facsimile: (501) 374-2380
(b) if to Capstone, to
Capstone Pharmacy Services, Inc.
9901 East Valley Ranch Parkway
Suite 3001
Irving, TX 75063
ATTN: R. Dirk Allison, President & CEO
Telephone: (972) 401-1541
Facsimile: (972) 401-2972
with copy to:
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, TN 37238
ATTN: Mark Manner, Esq.
Telephone: (615) 256-0500
Facsimile: (615) 251-1057
SECTION 12.05 ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties, nor
is this Agreement intended to confer any rights or remedies hereunder upon any
other person except the parties hereto and, with respect to Section 5.10, the
officers and directors of Beverly.
SECTION 12.06 GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Delaware (regardless of the laws that might otherwise govern
under applicable Delaware principles of conflicts of law) as to all matters,
including but not limited to matters of validity, construction, effect,
performance and remedies.
SECTION 12.07 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 12.08 SEVERABILITY. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall only
apply as to such party in the specific jurisdiction where such judgment shall be
made.
SECTION 12.09 INTERPRETATION. The article and section headings contained
in this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement. As used in this Agreement, (i) the term
"person" shall mean and include an individual, a partnership, a joint venture, a
corporation, a trust, an association, a company, an unincorporated organization,
a government or any department, political subdivision or agency thereof; and
(ii) the term "Subsidiary" of any specified corporation shall mean any
corporation of which a majority of the outstanding securities having ordinary
voting power to elect a majority of the board of directors is directly or
indirectly beneficially owned by such specified corporation or any other person
of which a majority of the equity interests therein is, directly or indirectly,
owned by such specified corporation.
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SECTION 12.10 ENTIRE AGREEMENT. This Agreement, including the exhibits
hereto and the documents and instruments referred to herein (including the
Confidentiality Agreement dated December 10, 1996 between Capstone and Beverly),
embodies the entire agreement and understanding of the parties hereto in respect
of the subject matter contained herein and supersedes all prior agreements and
the understandings between the parties with respect to such subject matter.
There are no representations, promises, warranties, covenants, or undertakings,
other than those expressly set forth or referred to herein and therein.
SECTION 12.11 CHOICE OF FORUM. Any litigation commenced by either party
hereto or its successors and assigns and related to this Agreement may be
maintained only in the United States District Court, District of Delaware or in
a Delaware state court, and each party hereby irrevocably consents and submits
for the purpose of such litigation to the jurisdiction of that federal or state
court and irrevocably waives any objection the party may have based upon
improper venue, forum non conveniens, or other similar doctrines or rules.
IN WITNESS WHEREOF, Capstone and Beverly have caused this Agreement to be
signed by their respective duly authorized officers as of the date first above
written.
CAPSTONE PHARMACY SERVICES, INC.
By:
----------------------------------
Name:
Title:
BEVERLY ENTERPRISES, INC.
By:
----------------------------------
Name:
Title:
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ANNEX C
AGREEMENT AND PLAN OF DISTRIBUTION
BY AND AMONG
BEVERLY ENTERPRISES, INC.
NEW BEVERLY HOLDINGS, INC.
AND
CAPSTONE PHARMACY SERVICES, INC.
DATED AS OF
APRIL 15, 1997
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
DEFINITIONS
Section 1.1 General..................................................... C-4
Section 1.2 Incorporation of Merger Agreement Definitions............... C-9
Section 1.3 References; Interpretation.................................. C-9
ARTICLE II
DISTRIBUTION AND OTHER TRANSACTIONS; CERTAIN COVENANTS
Section 2.1 Transfer of Assets and Liabilities.......................... C-9
(a) Certain Transactions........................................ C-9
(b) Exchange of Stock with Beverly.............................. C-9
(c) Charters; By-laws........................................... C-9
(d) Directors; Officers......................................... C-9
(e) Certain Licenses and Permits................................ C-9
(f) Transfer of Agreements...................................... C-9
(g) Services Agreement.......................................... C-10
(h) Delivery of Shares to Transfer Agent........................ C-10
(i) Assumed Pharmacy Indebtedness............................... C-10
(j) Other Transactions.......................................... C-10
Section 2.2 Certain Financial and Other Arrangements.................... C-10
(a) Intercompany Accounts....................................... C-10
(b) Operations in Ordinary Course............................... C-11
Section 2.3 Assumption of Indebtedness; Payment or Provision for Certain
Debts; Settlement of Expenses and Other Items............... C-11
Section 2.4 Assumption and Satisfaction of Liabilities; Management
Responsibility for Shared Liabilities; Obligations, Rights
and Assets Relating to Shared Liabilities................... C-12
Section 2.5 Resignations................................................ C-12
Section 2.6 Further Assurances.......................................... C-12
Section 2.7 No Representations or Warranties............................ C-13
Section 2.8 Guarantees.................................................. C-14
Section 2.9 Witness Services............................................ C-14
Section 2.10 Certain Post-Distribution Transactions...................... C-14
Section 2.11 Directors and Officers Liability Insurance.................. C-14
Section 2.12 Insurance................................................... C-14
Section 2.13 Ancillary Agreements........................................ C-14
Section 2.14 Listing of Shares........................................... C-15
ARTICLE III
INDEMNIFICATION
Section 3.1 Indemnification by Beverly.................................. C-15
Section 3.2 Indemnification by NBHI..................................... C-15
Section 3.3 Limitations on Indemnification Obligations.................. C-15
Section 3.4 Procedures for Indemnification.............................. C-15
</TABLE>
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Section 3.5 Indemnification Payments.................................... C-17
Section 3.6 Other Adjustments........................................... C-17
Section 3.7 Survival of Indemnities..................................... C-17
ARTICLE IV
ACCESS TO INFORMATION
Section 4.1 Provision of Corporate Records.............................. C-17
Section 4.2 Access to Information....................................... C-17
Section 4.3 Reimbursement; Other Matters................................ C-18
Section 4.4 Confidentiality............................................. C-18
ARTICLE V
INSURANCE
Section 5.1 Policies and Rights Included Within Assets; Maintenance of
Coverage.................................................... C-18
Section 5.2 Post-Distribution Date Claims Against NBHI.................. C-19
Section 5.3 Administration; Other Matters............................... C-19
(b) Allocation of Insurance Proceeds............................ C-19
Section 5.4 Agreement for Waiver of Conflict and Shared Defense......... C-19
Section 5.5 Cooperation................................................. C-19
ARTICLE VI
DISPUTE RESOLUTION
Section 6.1 Distribution Agreement Disputes............................. C-19
Section 6.2 Arbitration in Accordance with American Arbitration
Association Rules........................................... C-20
Section 6.3 Final and Binding Awards.................................... C-20
Section 6.4 Costs of Arbitration........................................ C-20
Section 6.5 Settlement by Mutual Agreement.............................. C-20
ARTICLE VII
MISCELLANEOUS
Section 7.1 Complete Agreement; Construction............................ C-20
Section 7.2 Counterparts................................................ C-20
Section 7.3 Survival of Agreements...................................... C-20
Section 7.4 Notices..................................................... C-20
Section 7.5 Waivers..................................................... C-21
Section 7.6 Amendments.................................................. C-21
Section 7.7 Assignment.................................................. C-21
Section 7.8 Successors and Assigns...................................... C-21
Section 7.9 Termination................................................. C-22
Section 7.10 Subsidiaries................................................ C-22
Section 7.11 Third Party Beneficiaries................................... C-22
Section 7.12 Attorney Fees............................................... C-22
Section 7.13 Title and Headings.......................................... C-22
Section 7.14 Schedules................................................... C-22
Section 7.15 Specific Performance........................................ C-22
Section 7.16 Governing Law............................................... C-22
Section 7.17 Severability................................................ C-22
Exhibit A -- Plan of Restructuring
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AGREEMENT AND PLAN OF DISTRIBUTION
THIS AGREEMENT AND PLAN OF DISTRIBUTION (the "Distribution Agreement"),
dated as of April 15, 1997 by and among Beverly Enterprises, Inc., a Delaware
corporation (the "Company" or "Beverly"), New Beverly Holdings, Inc., a Delaware
corporation ("NBHI") and Capstone Pharmacy Services, Inc., a Delaware
corporation ("Capstone").
WITNESSETH:
WHEREAS, the Company and Capstone Pharmacy Services, Inc., a Delaware
corporation ("Capstone"), previously entered into an Agreement and Plan of
Merger, dated as of April 15, 1997 (the "Merger Agreement"), providing for the
merger (the "Merger") of the Company's Institutional Pharmacy Business with
Capstone;
WHEREAS, prior to the Effective Time (as defined in the Merger Agreement)
of the Merger the Company intends to transfer its Remaining Health Care Business
(as hereinafter defined) to NBHI in exchange for the issuance of shares of NBHI
Common Stock;
WHEREAS, the Company's Board of Directors, subject to the approval of the
Company's stockholders, expects to complete the Distribution (as hereinafter
defined) immediately prior to the Effective Time of the Merger; and
WHEREAS, the purpose of the Distribution is to make possible the Merger by
divesting the Company of the Remaining Health Care Business, with which Capstone
is unwilling to merge, and this Distribution Agreement sets forth the various
agreements between Beverly and NBHI relating to the separation of the
Institutional Pharmacy Business from the Remaining Health Care Business.
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements set forth herein, and
intending to be legally bound (subject to shareholder approval), the parties
hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 GENERAL. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"Accrued Interest Cost" shall mean, with respect to the Assumed Pharmacy
Indebtedness, an amount equal to the Assumed Pharmacy Indebtedness multiplied by
nine per cent (9%) per annum for the period between the date hereof and the
Distribution Date.
"Action" shall mean any action, suit, claim, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency, body or commission or any arbitration
tribunal.
"Affiliate" shall mean, when used with respect to a specified Person,
another Person that directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the Person
specified.
"Ancillary Agreements" shall mean, collectively, all of the written
agreements, instruments, understandings, assignments or other arrangements
(other than this Distribution Agreement and the Merger Agreement) entered or to
be entered into in connection with the transactions contemplated hereby,
including, without limitation, the Transfer and Assumption Instruments, the
Employee Benefit Matters Agreement, the Tax Allocation Agreement, the Interim
Services Agreement and the Non-Competition Agreement, all in the respective
forms attached hereto as exhibits, and as any of such agreements may be
subsequently modified or amended, together with any additional or supplemental
agreement entered into by the parties in connection with or to facilitate the
Distribution; provided, however, that in no event shall any agreement constitute
an
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Ancillary Agreement or be further modified or amended unless consented to by
each of Beverly, NBHI and Capstone.
"Assignee" shall have the meaning as defined in Section 2.1(f)(ii).
"Assumed Pharmacy Indebtedness" shall mean the principal sum of
$275,000,000, which amount is included as part of the pro forma Institutional
Pharmacy Liabilities in the Institutional Pharmacy Business Financial Statements
set forth in the Beverly Disclosure Statement, and which amount is to be paid to
Beverly by one or more of the Pharmacy Subsidiaries on or prior to the
Distribution Date.
"Beverly Common Stock" shall mean the common stock, $.10 par value, of
Beverly.
"Beverly Disclosure Statement" shall mean the Disclosure Statement
delivered by Beverly to Capstone prior to or contemporaneously with Beverly's
execution and delivery of the Merger Agreement.
"Beverly Indemnitees" shall mean Beverly (and after the Effective Time of
the Merger, Capstone as successor to Beverly), each Pharmacy Subsidiary, the
directors and officers of Beverly and the Pharmacy Subsidiaries and each of the
heirs, executors, successors and assigns of any of the foregoing.
"Beverly Policy" or "Beverly Policies" shall mean any one or more Policies
which are or at any time were maintained by or on behalf of or for the benefit
or protection of Beverly or NBHI or any of their respective predecessors or
Subsidiaries which relate to any Shared Liability, the Remaining Health Care
Business or the Institutional Pharmacy Business, or current or past directors,
officers, employees or agents of any of the foregoing businesses.
"Capstone Common Stock" shall mean the common stock, $.01 par value, of
Capstone.
"Capstone Liabilities" shall mean Liabilities of Capstone, if any, under
the Merger Agreement and this Agreement.
"Claims Administration" shall mean the processing of claims made under the
Beverly Policies, including, without limitation, the reporting of claims to the
insurance carriers, as well as the management and defense of claims and
providing for appropriate releases upon settlement of claims.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any successor
legislation.
"Commission" shall mean the Securities and Exchange Commission.
"D&O Insurance Policies" shall have the meaning as defined in Section 2.11.
"Distribution" shall mean the distribution on the Distribution Date to
holders of record of shares of Beverly Common Stock as of the Distribution
Record Date of the NBHI Common Stock owned by Beverly on the basis of one whole
share of NBHI Common Stock for each outstanding whole share of Beverly Common
Stock.
"Distribution Agreement Dispute" shall have the meaning as defined in
Article VI.
"Distribution Date" shall mean such date as may hereafter be determined by
Beverly's Board of Directors as the date on which the Distribution shall be
effected.
"Distribution Record Date" shall mean such date as may hereafter be
determined by Beverly's Board of Directors as the record date for determining
the stockholders of Beverly entitled to receive the Distribution.
"Employee Benefit Matters Agreement" shall mean that certain Employee
Benefit Matters Agreement to be dated as of the Distribution Date among Beverly,
NBHI and Capstone, setting forth the manner in which various employee benefit
plans and entitlements will be treated in connection with the Distribution.
"Indemnifiable Losses" shall mean any and all losses, Liabilities, claims,
damages, penalties, fines, demands, awards and judgments, including reasonable
costs and expenses (including, without limitation, attorneys' fees and any and
all out-of-pocket expenses) whatsoever reasonably incurred in investigating,
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preparing for or defending against any Actions or potential Actions involving an
Indemnifiable Loss, incurred by an Indemnitee.
"Indemnifying Party" shall have the meaning as defined in Section 3.3.
"Indemnitee" shall have the meaning as defined in Section 3.3.
"Institutional Pharmacy Assets" shall mean, collectively, all the rights
and assets of Beverly and its Subsidiaries that are used primarily in the
conduct of the Institutional Pharmacy Business, including, without limitation,
(i) the assets included on the balance sheet dated as of December 31, 1996,
forming part of the Institutional Pharmacy Business Financial Statements,
prepared on a pro forma basis to give effect to the Distribution and included in
the Beverly Disclosure Statement attached to the Merger Agreement, and not
disposed of in the ordinary course of business prior to the Distribution Date,
(ii) any assets acquired by Beverly or any of its Subsidiaries that are used
primarily in the conduct of the Institutional Pharmacy Business from December
31, 1996 to the Distribution Date and not disposed of in the ordinary course of
business, (iii) all the outstanding capital stock or other interests of Beverly
in the Subsidiaries listed on Schedule 1.1(b) and (iv) rights arising pursuant
to the Beverly Policies to the extent set forth in Article V hereof.
Notwithstanding the foregoing, the Institutional Pharmacy Assets shall not
include any assets retained by or to be transferred to NBHI or any of the NBHI
Subsidiaries, or intended to be so retained or transferred, as the case may be,
pursuant to the terms of the Merger Agreement, this Distribution Agreement or
any Ancillary Agreement.
"Institutional Pharmacy Business" shall mean the business of providing
pharmaceutical products and services by Beverly through its Pharmacy
Subsidiaries (including but not limited to Medicare Part B services and
supplies), primarily to health care institutions, including but not limited to
certain sub-acute and long-term health care facilities forming part of the
Remaining Health Care Business conducted by Beverly.
"Institutional Pharmacy Liabilities" shall mean, collectively: (i) the
Liabilities included on the balance sheet dated as of December 31, 1996, forming
part of the Institutional Pharmacy Business Financial Statements, prepared on a
pro forma basis to give effect to the Distribution and included in the Beverly
Disclosure Statement attached to the Merger Agreement, and any Liabilities of
the same kind or nature incurred by Beverly or any of its Subsidiaries relating
primarily to or arising primarily in connection with the conduct of the
Institutional Pharmacy Business from December 31, 1996 to the Distribution Date,
other than indebtedness for borrowed money (except as may otherwise be permitted
elsewhere herein or in the Merger Agreement to be shown as an Institutional
Pharmacy Liability); (ii) all the Liabilities of Beverly and the Pharmacy
Subsidiaries, if any, under this Distribution Agreement and any of the Ancillary
Agreements, other than as set forth in Section 3.2(c), (iii) all the Liabilities
of Beverly or its Subsidiaries (whenever arising, whether prior to, at or
following the Distribution Date) to the extent the Liabilities arise out of or
in connection with or otherwise relate primarily to (a) the management or
conduct before or after the Distribution Date of the Institutional Pharmacy
Business or (b) any properties owned, leased, operated or otherwise used
primarily in the conduct of the Institutional Pharmacy Business at any time;
(iv) the Assumed Pharmacy Indebtedness, together with any other indebtedness
outstanding at the Distribution Date that is described on Schedule 2.3; (v) the
Pharmacy Employment, Compensation and Benefit Obligations (hereinafter defined)
(the Liabilities listed in clauses (i) through (v) above are collectively
referred to as the "True Beverly Liabilities") and (vi) one-half (1/2) of the
amount of all Shared Liabilities unless otherwise allocated in this Distribution
Agreement.
"Insurance Administration" shall mean, with respect to each Beverly Policy,
the accounting for Insurance Proceeds, premiums, defense costs, indemnity
payments, deductibles and retentions, as appropriate, under the terms and
conditions of each of the Beverly Policies; and the report to excess insurance
carriers of any losses or claims which may cause the per occurrence, per claim
or aggregate limits of any Beverly Policy to be exceeded, and the distribution
of Insurance Proceeds as contemplated by this Distribution Agreement.
"Insurance Proceeds" shall mean those monies (i) received by an insured
from an insurance carrier or (ii) paid by an insurance carrier on behalf of an
insured.
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"Insured Claims" shall mean those Liabilities that, individually or in the
aggregate, are covered within the terms and conditions of any of the Beverly
Policies, whether or not subject to deductibles, co-insurance, uncollectability
or premium adjustments, but only to the extent that such Liabilities are within
applicable Beverly Policy limits, including aggregates.
"Liabilities" shall mean any and all debts, liabilities and obligations,
absolute or contingent, matured or unmatured, liquidated or unliquidated,
accrued or unaccrued, known or unknown, whenever arising, including, without
limitation, those debts, liabilities and obligations arising under any law,
rule, regulation, Action, order or consent decree of any court, any governmental
or other regulatory or administrative agency or commission or any award of any
arbitration tribunal, and those arising under any contract, guarantee,
commitment or undertaking.
"NBHI Common Stock" shall mean the common stock, $.10 par value, of NBHI.
"NBHI Indemnitees" shall mean NBHI, each NBHI Subsidiary, the directors and
officers of NBHI and the NBHI Subsidiaries and each of the heirs, executors,
successors and assigns of any of the foregoing.
"NBHI Subsidiaries" shall mean all of the subsidiaries of Beverly other
than NBHI and the Pharmacy Subsidiaries, including, without limitation, those
Subsidiaries listed on Schedule 1.1(a) hereto.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an association, a company, an unincorporated
organization, a government or any department, political subdivision or agency
thereof.
"Pharmacy Employment, Compensation and Benefit Obligations" shall mean all
employment, compensation and benefit agreements, arrangement and plans relating
to employees or former employees of the Institutional Pharmacy Business,
including without limitation all employment contracts, change of control
agreements, severance and indemnity agreements or arrangements with such
employees or former employees; all employee benefit plans (or portions of plans)
maintained for the benefit of such employees or former employees; and all grants
and awards (including performance awards) under any Stock Incentive, Long Term
Incentive and Stock Option Plans relating to such employees or former employees.
"Pharmacy Subsidiaries" shall mean those subsidiaries of Beverly listed on
Schedule 1.1(b) hereto, together with any entities acquired by Beverly or any of
the Pharmacy Subsidiaries as part of Beverly's growth plans with respect to the
Institutional Pharmacy Business between the date of this Agreement and the
Distribution Date.
"Policy" or "Policies" shall mean any or all insurance policies and
insurance contracts of any kind (other than life and benefits policies or
contracts), including, without limitation, primary, excess and umbrella
policies, comprehensive general liability, fiduciary liability, automobile,
aircraft, property and casualty, environmental, workers' compensation and
employee dishonesty insurance policies and bonds and captive insurance company
arrangements, together with the rights, benefits and privileges thereunder.
"Prospectus/Joint Proxy Statement" shall mean the Prospectus/Joint Proxy
Statement contained in the Registration Statement on Form S-4 relating to the
shares of Capstone Common Stock to be issued in connection with the Merger and
sent to the holders of shares of Beverly Common Stock and Capstone Common Stock
in connection with obtaining Beverly and Capstone stockholder approval of, among
other things, the Distribution and the Merger, including any amendment or
supplement thereto.
"Records" shall have the meaning as defined in Section 4.1(a).
"Remaining Health Care Assets" shall mean, collectively, all the rights and
assets of Beverly and its Subsidiaries immediately prior to the Distribution
Date that are not Institutional Pharmacy Assets, including, without limitation,
(i) all outstanding capital stock or other interests of Beverly in the Beverly
Subsidiaries listed on Schedule 1.1(a), (ii) the right to the name "Beverly" and
the other trademarks, trade names, logos, symbols and similar marks listed in
Schedule 1.1(d) and (iii) rights arising pursuant to the Beverly Policies to the
extent set forth in Article V hereof. Notwithstanding the foregoing, the
Remaining Health Care Assets
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shall not include any assets to be transferred to or retained by Beverly or any
of the Pharmacy Subsidiaries pursuant to the terms of any Ancillary Agreement.
"Remaining Health Care Business" shall mean the long-term acute care,
hospice, sub-acute, exempt hospital and skilled nursing facilities,
rehabilitation therapy and consulting services, home health care, assisted
living, physician practice management and other health care and related services
and businesses, other than the Institutional Pharmacy Business, conducted by
Beverly, NBHI and their respective Subsidiaries and successors.
"Remaining Health Care Liabilities" shall mean, collectively, (i) all of
the Liabilities of Beverly and its Subsidiaries immediately prior to the
Distribution on the Distribution Date other than the Institutional Pharmacy
Liabilities, (ii) all the Liabilities of NBHI and the NBHI Subsidiaries, if any,
under this Distribution Agreement and any of the Ancillary Agreements, (iii)
Liabilities of Beverly, if any, under the Merger Agreement (the Liabilities
listed in clauses (i) through (iii) above being collectively referred to as the
"True NBHI Liabilities") and (iv) one-half (1/2) of the amount of all Shared
Liabilities unless otherwise allocated in this Distribution Agreement. .
"Services Agreement" shall mean the Interim Services Agreement to be dated
as of the Distribution Date by and between NBHI, Beverly and Capstone, pursuant
to which NBHI shall provide on an interim basis, during a reasonable transition
period following the Distribution, for the benefit of Capstone as the successor
to Beverly, such services (at fair market value) as may be requested from time
to time by Capstone as were provided on a centralized basis by Beverly for the
benefit of Beverly and its Subsidiaries prior to the Distribution.
"Settling Party" shall have the meaning as defined in Section 2.4(b).
"Shared Liability" means any Liability of the parties hereto or their
respective Subsidiaries (whether arising prior to, on or following the
Distribution Date) (i) which is not a True Beverly Liability, True NBHI
Liability or Capstone Liability or (ii) the responsibility for which is
separately allocated between Beverly and NBHI in this Distribution Agreement or
the Ancillary Agreements. Shared Liability includes, without limitation, the
Shared Liabilities listed on Schedule 1.1(c) hereto.
"Solicitation" shall have the meaning set forth in Section 2.3(b).
"Subsidiary" shall mean any Person of which another Person (i) owns,
directly or indirectly, ownership interests sufficient to elect a majority of
the Board of Directors (or persons performing similar functions (irrespective of
whether at the time any other class or classes of ownership interests of such
Person shall or might have such voting power upon the occurrence of any
contingency) or (ii) is a general partner or an entity performing similar
functions (e.g., a trustee).
"Tax" or "Taxes" shall mean all federal, state, local and foreign taxes,
duties, levies, charges and assessments of any nature, including social security
payments and deductibles relating to wages, salaries and benefits and payments
to subcontractors (to the extent required under applicable Tax law), and also
including all interest, penalties and additions imposed with respect to such
amounts.
"Tax Allocation Agreement" shall mean the Tax Allocation and
Indemnification Agreement to be dated as of the Distribution Date among Beverly
and NBHI and the other Subsidiaries of Beverly named therein.
"Third Party Claim" shall have the meaning as set forth in Section 3.4.
"Time of Distribution" shall mean the time on the Distribution Date as of
which the Distribution is effective, and unless otherwise agreed between the
parties, shall be immediately prior to the Effective Time.
"Transfer Agent" shall mean The Bank of New York, and its successors and
assigns.
"Transfer and Assumption Instruments" shall mean, collectively, the various
agreements, instruments and other documents to be entered into among or between
any of Beverly, NBHI, the Pharmacy Subsidiaries and the NBHI Subsidiaries and
approved by Capstone (which approval shall not be unreasonably withheld) to
effect the transfer of assets and the assumption of Liabilities relating to the
Remaining Health Care
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Business and the Institutional Pharmacy Business in the manner contemplated by
this Distribution Agreement, including, without limitation, real estate transfer
documents and leases and all other instruments, documents and agreements
delivered in accordance with Section 2.6 hereof.
"True Beverly Liabilities" shall have the meaning as set forth under
"Institutional Pharmacy Liabilities."
"True NBHI Liabilities" shall have the meaning as set forth under
"Remaining Health Care Liabilities."
SECTION 1.2 INCORPORATION OF MERGER AGREEMENT DEFINITIONS. Except where
otherwise defined herein, capitalized terms used herein shall have the same
definitions as such terms have in the Merger Agreement.
SECTION 1.3 REFERENCES; INTERPRETATION. References to a "Schedule" or an
"Exhibit" are, unless otherwise specified, to one of the Schedules or Exhibits
attached to this Distribution Agreement, and references to a "Section" are,
unless otherwise specified, to one of the Sections of this Distribution
Agreement.
ARTICLE II
DISTRIBUTION AND OTHER TRANSACTIONS; CERTAIN COVENANTS
SECTION 2.1 TRANSFER OF ASSETS AND LIABILITIES.
(a) Certain Transactions. On or prior to the Distribution Date Beverly
shall, on behalf of itself and its Subsidiaries, transfer to NBHI all of
Beverly's right, title and interest in the Remaining Health Care Assets in the
manner contemplated by the internal restructuring plan attached hereto as
Exhibit A and incorporated herein by reference (the "Restructuring") and, as
between NBHI and Beverly, NBHI or its Subsidiaries shall assume and be
responsible for the Remaining Health Care Liabilities.
(b) Exchange of Stock with Beverly. On or prior to the Distribution Date
NBHI shall issue to Beverly, in exchange for the contribution to NBHI of the
Remaining Health Care Assets, such number of shares of NBHI Common Stock as
shall be required to effect the Distribution, as certified by the Transfer
Agent. In connection therewith Beverly shall deliver to NBHI for cancellation
the share certificate currently held by Beverly representing shares of NBHI
Common Stock.
(c) Charters; By-laws. On or prior to the date of filing of the NBHI
Registration Document with the Commission, all necessary actions shall have been
taken to provide for the adoption of the form of Certificate of Incorporation
and Bylaws filed or to be filed by NBHI with the Commission.
(d) Directors; Officers. On or prior to the Distribution Date, Beverly, as
the sole stockholder of NBHI, (i) shall have taken all necessary action by
written consent to elect to the Board of Directors of NBHI, the individuals to
be identified in the Prospectus/Joint Proxy Statement as directors of NBHI,
effective upon the Distribution, and (ii) shall have caused the directors of
NBHI to elect as officers of NBHI the individuals to be identified in the
Prospectus/Joint Proxy Statement as the officers of NBHI, effective upon the
Distribution.
(e) Certain Licenses and Permits. On or prior to the Distribution Date or
as soon as reasonably practicable thereafter, all transferable licenses, permits
and authorizations issued by governmental or regulatory entities which relate to
the Remaining Health Care Business but which are held in the name of Beverly or
any of the Pharmacy Subsidiaries, shall be duly and validly transferred by
Beverly (or such Pharmacy Subsidiaries) to NBHI or such NBHI Subsidiary as NBHI
may designate.
(f) Transfer of Agreements.
(i) On or prior to the Distribution Date, subject to the limitations
set forth in this Section 2.1(f), Beverly will, and it will cause the
Pharmacy Subsidiaries to, assign, transfer and convey to NBHI or such NBHI
Subsidiary as NBHI may designate, all of Beverly's or such Pharmacy
Subsidiary's respective right, title and interest in and to any and all
agreements that do not relate primarily to the Institutional Pharmacy
Business, to the extent such agreements were not previously so transferred
in connection with the transactions contemplated by Sections 2.1(a) and
2.1(b) hereof.
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(ii) The assignee of any agreement assigned in whole or in part
hereunder (an "Assignee") shall assume and agree to pay, perform, and fully
discharge all obligations of the assignor under such agreement and shall
indemnify the assignor against any and all liabilities in connection
therewith.
(iii) Notwithstanding anything in this Distribution Agreement to the
contrary, this Distribution Agreement shall not constitute an agreement to
assign any agreement, in whole or in part, or any rights thereunder if the
agreement to assign or any attempted assignment, without the consent of a
third party, would constitute a breach thereof or in any way adversely
affect the rights of the Assignee thereof; provided, however, that the
provisions of Section 2.6 shall be applicable thereto.
(g) Services Agreement. On or prior to the Distribution Date, Beverly and
NBHI will execute and deliver the Services Agreement setting forth the terms
upon which NBHI shall, subsequent to the Distribution Date, provide such
centralized office and staff support services to Beverly (and Capstone as the
successor to Beverly) as may be determined by the parties to be appropriate and
as may be requested by Capstone from time to time during the transition after
the Distribution Date until such time (not to exceed the term established in
such agreement) as Capstone, as the successor to Beverly, shall no longer
require such services.
(h) Delivery of Shares to Transfer Agent. Beverly shall deliver to the
Transfer Agent on or prior to the Distribution Date the share certificates
representing the shares of NBHI Common Stock issued to Beverly by NBHI pursuant
to Section 2.1(b), and shall instruct the Transfer Agent to distribute, on or as
soon as practicable following the Distribution Date, such NBHI Common Stock to
holders of record of shares of Beverly Common Stock on the Distribution Record
Date as further contemplated by the Prospectus/Joint Proxy Statement and herein.
NBHI shall provide all share certificates that the Transfer Agent shall require
in order to effect the Distribution.
(i) Assumed Pharmacy Indebtedness. On or prior to the Distribution Date,
Beverly and the Pharmacy Subsidiaries shall cause the Assumed Pharmacy
Indebtedness to be separately incurred by the Pharmacy Subsidiaries, pursuant to
agreements and instruments approved by Beverly, the appropriate Pharmacy
Subsidiaries, NBHI, Capstone and the appropriate lenders, and the Pharmacy
Subsidiaries shall borrow sufficient funds from third party lenders to pay to
Beverly in full, prior to the Distribution, an amount equal to the Assumed
Pharmacy Indebtedness and the Accrued Interest Cost.
(j) Other Transactions.
(i) On or prior to the Distribution Date, Beverly will, and it will
cause the Pharmacy Subsidiaries to, assign, transfer and convey to NBHI (or
such NBHI Subsidiary as NBHI may direct) all of Beverly's right, title and
interest in and to (a) all items of Beverly's intellectual property except
for those items listed on Schedule 2.1(j), which shall be retained by
Beverly and (b) all real estate leases, utility accounts, trade
organization memberships, vendor service contracts, warranty contracts and
items of a similar nature except for those items listed on Schedule 2.1(j),
which shall be retained by Beverly.
(ii) On or prior to the Distribution Date, Beverly and the Pharmacy
Subsidiaries shall take or cause to be taken such action as shall be
necessary to assign and transfer all pending litigation, arbitration,
mediation and matters of a similar nature ("Pending Litigation Matters") to
NBHI or such NBHI Subsidiary as NBHI may designate, including, without
limitation, instructing counsel of record to enter appropriate motions or
pleadings to accomplish the foregoing, except for such Pending Litigation
Matters which involve the Institutional Pharmacy Business, which shall be
retained by Beverly. NBHI and Beverly will each indemnify the other against
any and all Liabilities incurred in connection with any of the Pending
Litigation Matters for which it is responsible pursuant to this Section
2(j)(ii) following the Time of Distribution, and each of Beverly and NBHI
shall, subsequent to the Distribution Date, be solely responsible for the
prosecution, defense, settlement or other conduct of Pending Litigation
Matters as are to be retained by each of them pursuant to this Section
2(j)(ii).
SECTION 2.2 CERTAIN FINANCIAL AND OTHER ARRANGEMENTS.
(a) Intercompany Accounts. At the Time of Distribution, all intercompany
receivables, payables and loans (other than receivables, payables, loans, debits
and credits otherwise specifically provided for in any of
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the Ancillary Agreements or hereunder, including but not limited to the Assumed
Pharmacy Indebtedness and related Accrued Interest Cost and the other payments
to be made pursuant to Section 2.3(c)), including, without limitation, in
respect of any cash balances, any cash balances representing deposited checks or
drafts for which only a provisional credit has been allowed or any cash held in
any centralized cash management system, between Beverly and any of its
Subsidiaries (other than the Pharmacy Subsidiaries), on the one hand, and the
Pharmacy Subsidiaries, on the other hand, shall be netted out, in each case in
such manner and amount as may be agreed in writing by duly authorized
representatives of Beverly, Capstone and NBHI; and (i) the resulting net balance
due, if any, from the Pharmacy Subsidiaries to Beverly and any of its
Subsidiaries (other than the Pharmacy Subsidiaries) shall be contributed to the
appropriate Pharmacy Subsidiaries as additional capital; and (ii) the resulting
net balance due, if any, from Beverly and any of its Subsidiaries (other than
the Pharmacy Subsidiaries) shall be distributed to Beverly as a dividend.
(b) Operations in Ordinary Course. Each of Beverly and NBHI covenants and
agrees that, except as otherwise provided in any the Merger Agreement, this
Distribution Agreement or any Ancillary Agreement, during the period from the
date of this Distribution Agreement through the Distribution Date, it will, and
will cause any entity that is a Subsidiary of such party at any time during such
period to, conduct its business in a manner substantially consistent with
current and past operating practices and in the ordinary course, including,
without limitation, with respect to the payment and administration of accounts
payable and the collection and administration of accounts receivable, the
purchase of capital assets and equipment, the management of inventories, cash
management practices, the allocation of interest, corporate overhead, costs of
legal, insurance and other centralized functions and shall, at all times prior
to the Distribution Date, conduct its business in a manner consistent with the
provisions of Section 5.01 of the Merger Agreement.
SECTION 2.3 ASSUMPTION OF INDEBTEDNESS; PAYMENT OR PROVISION FOR CERTAIN
DEBTS; SETTLEMENT OF EXPENSES AND OTHER ITEMS.
(a) Beverly and NBHI shall take such action as shall be necessary or
appropriate to cause NBHI or the appropriate NBHI Subsidiary to assume all of
the items of Beverly's consolidated indebtedness other than (i) the Assumed
Pharmacy Indebtedness and related Accrued Interest Cost, (ii) the Closing Debt
(as defined in Section 2.3(d), (iii) other permitted indebtedness constituting
Institutional Pharmacy Liabilities and (iv) those capital leases and other
items, if any, listed on Schedule 2.3(a).
(b) Prior to the Time of Distribution, Beverly, and after the Time of
Distribution, NBHI, shall pay or cause to be paid, or otherwise provide for by
bond, indemnification or other appropriate assurances, in each case,
satisfactory to Capstone, to the extent Beverly or NBHI is unable to effect
releases of Beverly and the Pharmacy Subsidiaries from liability thereunder, all
Beverly or NBHI indebtedness or other non-contingent liabilities as to which
Beverly or any of the Pharmacy Subsidiaries is a direct obligor, other than the
Assumed Pharmacy Indebtedness and Institutional Pharmacy Liabilities.
(c) In connection with accomplishing the various transactions contemplated
by the Merger Agreement, this Distribution Agreement and the Ancillary
Agreements, NBHI shall provide an accounting to Capstone of the settlement of
the intercompany accounts described in Section 2.2(a) as soon as reasonably
practicable following the Effective Time of the Merger. To the extent that the
aggregate cash collected by Beverly from the Pharmacy Subsidiaries during the
period from the date of this Agreement to the Distribution Date, is greater than
the sum of (i) the Assumed Pharmacy Indebtedness and the related Accrued
Interest Cost, (ii) Beverly's normal management fees collected from the Pharmacy
Subsidiaries during such period in amounts consistent with past practices in the
ordinary course of business, and (iii) the Closing Debt pursuant to the
provisions of Section 2.3(d) hereof (collectively, the "Beverly Interim Period
Cash Entitlements"), then NBHI shall reimburse Capstone for the amount in excess
of the Beverly Interim Period Cash Entitlements. To the extent that the amount
of Beverly Interim Period Cash Entitlements is in excess of the aggregate cash
collected by Beverly from the Pharmacy Subsidiaries during the period from the
date of this Agreement to the Distribution Date, Capstone shall reimburse NBHI
for the amount of such difference.
(d) Prior to or contemporaneously with the accounting described in Section
2.3(c), representatives of Capstone and NBHI shall determine jointly the amount
of Beverly's indebtedness incurred in connection with the acquisition of
Institutional Pharmacy Businesses approved by Capstone during the period
commencing on
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the date of this Agreement and ending at the Distribution Date, which amount
shall be in addition to the Assumed Pharmacy Indebtedness (such foregoing
amounts exclusive of the Assumed Pharmacy Indebtedness are referred to
collectively as "Closing Debt"). NBHI shall be reimbursed for the Closing Debt
pursuant and subject to the provisions of Section 2.3(c).
(e) Settlement of amounts payable between Capstone and NBHI pursuant to
Section 2.3(c) shall be made within one business day after the parties shall
have approved the net amount to be paid, by wire transfer of immediately
available funds to an account designated by the person entitled to receive such
payment.
SECTION 2.4 ASSUMPTION AND SATISFACTION OF LIABILITIES; MANAGEMENT
RESPONSIBILITY FOR SHARED LIABILITIES; OBLIGATIONS, RIGHTS AND
ASSETS RELATING TO SHARED LIABILITIES.
(a) Except as otherwise specifically set forth in any Ancillary Agreement,
at all times from and after the Time of Distribution, (i) Beverly shall, and
shall cause the Pharmacy Subsidiaries and any and all successors and assigns to
assume, pay, perform and discharge all Institutional Pharmacy Liabilities as and
when due, (ii) Capstone shall, and shall cause any and all successors and
assigns to assume, pay, perform and discharge all Capstone Liabilities as and
when due, and (ii) NBHI shall, and shall cause the NBHI Subsidiaries and any and
all successors and assigns to assume, pay, perform and discharge all Remaining
Health Care Liabilities as and when due.
(b) NBHI and Beverly (and Capstone as successor to Beverly) shall each
direct its own defense of any Shared Liability at its own expense; provided,
however, that (i) each party shall provide the other with copies of all
pleading, motions, items of correspondence and other documentation pertaining to
any Shared Liability contemporaneously with the first release of any such
material and (ii) no party hereto (or its successor) will admit any liability
with respect to, or settle, compromise or discharge, any Shared Liability
without the other party's prior written consent (which consent shall not be
unreasonably withheld) except as hereinafter provided. Any party seeking to
settle, compromise or discharge a Shared Liability (a "Settling Party") shall
have the right to settle, compromise or discharge a Shared Liability without the
other party's consent if the Settling Party releases the non-settling party from
any obligation in respect of the Settling Party's portion of such Shared
Liability and indemnifies the non-settling party against any and all liabilities
in connection therewith and such settlement, compromise or discharge would not
otherwise adversely affect the non-settling party.
(c) Upon the compromise, settlement or other resolution of any Shared
Liability, except as otherwise provided in the last sentence of clause (b) of
this Section 2.4, NBHI and Beverly (and Capstone as the successor to Beverly)
shall share in any obligation or liability arising as a result thereof in the
same proportion in which the Shared Liability is shared. The parties hereto
shall share in any rights and assets (including, without limitation, recoveries,
claims, rights of subrogation and proceeds of asset sales) that relate to Shared
Liabilities in the same proportion in which the related Shared Liability is
shared.
SECTION 2.5 RESIGNATIONS. Beverly shall cause all its officers who shall
not continue as employees of NBHI subsequent to the Distribution Date to resign,
effective as of the Distribution Date, from all positions as directors or
officers of NBHI or as officers or directors of any NBHI Subsidiary in which
they serve. NBHI shall cause all its officers who shall not continue as
employees of Beverly subsequent to the Distribution Date to resign, effective as
of the Distribution Date, from all positions as directors or officers of Beverly
or as officers or directors of any Pharmacy Subsidiary in which they serve.
SECTION 2.6 FURTHER ASSURANCES.
(a) In case at any time after the Distribution Date any further action is
reasonably necessary or desirable to carry out the purposes of this Distribution
Agreement and the Ancillary Agreements, the proper officers of each party to
this Distribution Agreement shall take, or cause the proper officers of their
respective Subsidiaries to take, all such necessary action. Without limiting the
foregoing, Capstone, Beverly and NBHI shall, and shall cause their respective
Subsidiaries to, use their commercially reasonable efforts to obtain all
required consents and approvals of third parties, to enter into all amendatory
agreements and to make all filings and applications that may be required for the
consummation of the transactions contemplated by this
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Distribution Agreement, the Merger Agreement and the Ancillary Agreements,
including, without limitation, all applicable governmental and regulatory
filings.
(b) In the event that subsequent to the Distribution Date, Beverly (or
Capstone as successor to Beverly) or any Pharmacy Subsidiaries shall either (i)
receive written notice from NBHI that certain assets or Liabilities of Beverly
or any Pharmacy Subsidiaries which properly constitute Remaining Health Care
Assets or Remaining Health Care Liabilities were not transferred to NBHI on or
prior to the Distribution Date or (ii) determine that certain assets or
Liabilities of Beverly or any Pharmacy Subsidiaries which properly constitute
Remaining Health Care Assets or Remaining Health Care Liabilities were not
transferred to NBHI on or prior to the Distribution Date, then as promptly as
practical thereafter, Beverly shall, and shall cause the Pharmacy Subsidiaries
to, take all steps reasonably necessary to (A) transfer and deliver any and all
of such assets to NBHI without the payment by NBHI of any consideration therefor
or (B) assign and transfer any and all such Liabilities to NBHI which shall
assume and discharge the same without payment to or by Beverly of any
consideration in respect thereof. In the event that, subsequent to the
Distribution Date, NBHI or any NBHI Subsidiaries shall either (i) receive
written notice from Beverly or any of the Pharmacy Subsidiaries that certain
assets or Liabilities were transferred to NBHI which properly constitute
Institutional Pharmacy Assets or Institutional Pharmacy Liabilities or (ii)
determine that certain assets or Liabilities were transferred to NBHI which
properly constitute Institutional Pharmacy Assets or Institutional Pharmacy
Liabilities were transferred to NBHI, then as promptly as practicable
thereafter, NBHI shall, and shall cause the NBHI Subsidiaries to, take all steps
reasonably necessary to (A) transfer and deliver any and all such assets to
Beverly or the Pharmacy Subsidiaries without the payment by Beverly of any
consideration therefor or (B) assign and transfer any and all such liabilities
to Beverly which shall assume and discharge the same without payment to or by
NBHI of any consideration in respect thereof.
(c) Nothing in this Distribution Agreement shall be deemed to require the
transfer of any assets or the assumption of any Liabilities which by their terms
or operation of law cannot be transferred; provided, however, that the parties
hereto and their respective Subsidiaries shall cooperate to seek to obtain any
necessary consents or approvals for the transfer of all assets and Liabilities
contemplated to be transferred pursuant to this Article II. In the event that
any such transfer of assets or Liabilities has not been consummated as of the
Distribution Date, from and after the Distribution Date the party retaining such
asset shall hold such asset in trust for the use and benefit of the party
entitled thereto (at the expense of the party entitled thereto, with the party
retaining such asset to be promptly reimbursed all reasonable expenses incurred
in holding such asset) or retain such Liability for the account of the party by
whom such Liability is to be assumed pursuant hereto, as the case may be (at the
expense of the party by which such Liability is to be assessed, with the party
retaining such Liability to be promptly reimbursed all reasonable expenses
incurred in retaining such Liability), and take such other action as may be
reasonably requested by the party to whom such asset is to be transferred, or by
whom such Liability is to be assumed, as the case may be, in order to place such
party, insofar as is reasonably possible, in the same position as would have
existed had such asset or Liability been transferred as contemplated hereby. As
and when any such asset or Liability becomes transferable, such transfer shall
be effected forthwith. As of the Distribution Date, each party hereto shall be
deemed to have acquired complete and sole beneficial ownership over all of the
assets held by it, together with all rights, powers and privileges incident
thereto, and shall be deemed to have assumed in accordance with the terms of
this Distribution Agreement all of the Liabilities, and all duties, obligations
and responsibilities incident thereto, which such party is entitled to acquire
or required to assume pursuant to the terms of this Distribution Agreement.
Notwithstanding anything to the contrary contained herein, Capstone shall have
no Liability under this Agreement if the Merger does not occur.
SECTION 2.7 NO REPRESENTATIONS OR WARRANTIES. Each of the parties hereto
understands and agrees that, except as otherwise expressly provided in the
Merger Agreement, no party hereto is, in this Distribution Agreement or in any
other agreement or document contemplated by this Distribution Agreement or
otherwise, making any representation or warranty whatsoever, including, without
limitation, as to title, value or legal sufficiency. It is also agreed and
understood that all assets either transferred to or retained by the parties, as
the case may be, shall be "as is, where is" and that (subject to Section 2.6)
the party to which such assets are to be transferred hereunder shall bear
economic and legal risk that any conveyances of such assets shall prove
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to be insufficient or that such party's or any Subsidiary's title to any such
assets shall be other than good and marketable and free from encumbrances.
SECTION 2.8 GUARANTEES. Except as otherwise specified in any Ancillary
Agreement, each of Beverly and NBHI shall use its best reasonable efforts to
have, on or prior to the Distribution Date, or as soon as practicable
thereafter, (a) Beverly and any of the Pharmacy Subsidiaries removed as
guarantor of or obligor for any Remaining Health Care Liability and (b) NBHI and
any of the NBHI Subsidiaries removed as a guarantor of or obligor for any
Institutional Pharmacy Liability.
SECTION 2.9 WITNESS SERVICES. At all times from and after the Distribution
Date, each of Beverly and NBHI shall use their commercially reasonable efforts
to make available to the other, upon reasonable written request, its and its
Subsidiaries' officers, directors, employees and agents as witnesses to the
extent that (a) such persons may reasonably be required in connection with the
prosecution or defense of any Action in which the requesting party may from time
to time be involved and (b) there is no conflict of interest in the Action
between the requesting party and Beverly or NBHI, as applicable. A party
providing witness services to the other party under this Section shall be
entitled to receive from the recipient of such services, upon the presentation
of invoices therefor, payments for such amounts, relating to supplies,
disbursements and other out-of-pocket expenses and direct costs of employees who
are witnesses, as may be reasonably incurred in providing such witness services.
SECTION 2.10 CERTAIN POST-DISTRIBUTION TRANSACTIONS.
(a) Beverly (and Capstone as Beverly's successor) shall comply and
otherwise not take any action inconsistent with each representation, covenant
and statement made, or to be made, to Beverly's tax counsel in connection with
such firm's rendering of an opinion to Beverly and NBHI as to certain tax
aspects of the Distribution.
(b) NBHI shall comply with and otherwise not take any action inconsistent
with each representation, covenant and statement made, or to be made, to NBHI's
tax counsel in connection with such firm's rendering of an opinion to Beverly
and NBHI as to certain tax aspects of the Distribution.
SECTION 2.11 DIRECTORS AND OFFICERS LIABILITY INSURANCE. From and after
the Distribution Date to the sixth anniversary of the Distribution Date, Beverly
(and Capstone as the successor to Beverly) will maintain in full force and
effect in such manner as is contemplated by Section 5.10 of the Merger
Agreement, all indemnification agreements, charter and by-law provisions and
Beverly Policies providing directors and officers liability insurance ("D&O
Insurance Policies") (or, through the purchase of a runoff policy, the full
benefits and coverage of such D&O Insurance Policies) and shall not consent to
any amendment of the terms of such agreements, provisions or policies that may
be adverse to any persons covered by such insurance except as may otherwise be
permitted by Section 5.10 of the Merger Agreement. All premium costs associated
or incurred in connection with obtaining and maintaining the D&O Policies or
runoff policy, as applicable, shall be deemed a Shared Liability, the allocation
for payment of which is set forth on Schedule 1.1(c) hereto. The provisions of
this Section 2.11 are intended for the benefit of, and shall be enforced by,
each of the persons covered by the D&O Insurance Policies.
SECTION 2.12 INSURANCE. Except as contemplated by Article V hereof and the
Merger Agreement, any and all omnibus coverage of Beverly and its Subsidiaries
as it applies to the Institutional Pharmacy Business under Beverly Policies will
terminate (and will not be replaced) as of the Time of Distribution, and from
and after the Time of Distribution NBHI shall operate pursuant to such
continuing coverage as the Board of Directors of NBHI may deem necessary or
appropriate for the Remaining Health Care Business.
SECTION 2.13 ANCILLARY AGREEMENTS. Effective as of the Distribution Date,
each of Beverly and NBHI shall enter into, and/or (where applicable) shall cause
their respective Subsidiaries to enter into, the Ancillary Agreements and,
subject to Capstone's prior approval, which shall not be unreasonably withheld,
any other agreements in respect of the Distribution reasonably necessary or
appropriate in connection with the transactions contemplated hereby and thereby.
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SECTION 2.14 LISTING OF SHARES. Beverly shall use its reasonable best
efforts to list the shares of NBHI Common Stock to be issued pursuant to the
Distribution on the New York Stock Exchange, subject to official notice of
issuance, or to have such shares designated as a national market system security
on the interdealer quotation system by the National Association of Securities
Dealers, Inc.
ARTICLE III
INDEMNIFICATION
SECTION 3.1 INDEMNIFICATION BY BEVERLY. Subsequent to the Distribution
Date, except as otherwise specifically set forth in any provision of this
Distribution Agreement or of any Ancillary Agreement, Beverly (and Capstone as
Beverly's successor) shall indemnify, defend and hold harmless the NBHI
Indemnitees from and against any and all Indemnifiable Losses of the NBHI
Indemnitees arising out of, by reason of or otherwise in connection with (a) the
Institutional Pharmacy Liabilities, (b) the breach, whether before or after the
Distribution Date, by Beverly or the Pharmacy Subsidiaries of any provision of
this Distribution Agreement or any Ancillary Agreement or (c) any Capstone
Liabilities.
SECTION 3.2 INDEMNIFICATION BY NBHI. Subsequent to the Distribution Date,
except as otherwise specifically set forth in any provision of this Distribution
Agreement or of any Ancillary Agreement, NBHI shall indemnify, defend and hold
harmless the Beverly Indemnitees from and against any and all Indemnifiable
Losses of the Beverly Indemnitees arising out of, by reason of or otherwise in
connection with (a) the Remaining Health Care Liabilities, (b) the breach,
whether before or after the Distribution Date, by NBHI or the NBHI Subsidiaries
of any provision of this Distribution Agreement or any Ancillary Agreement, or
(c) the NBHI Registration Document (as defined in the Merger Agreement) that
shall be prepared by NBHI and filed with the Commission pertaining to the
registration of the NBHI Common Stock to be issued in the Distribution.
SECTION 3.3 LIMITATIONS ON INDEMNIFICATION OBLIGATIONS.
(a) The amount that any party (an "Indemnifying Party") is or may be
required to pay to any other person (an "Indemnitee") pursuant to Section 3.1 or
Section 3.2, as applicable, shall be reduced (retroactively or prospectively) by
any Insurance Proceeds or other amounts actually recovered by or on behalf of
such Indemnitee in respect of the related Indemnifiable Loss. If an Indemnitee
shall have received the payment required by this Distribution Agreement from an
Indemnifying Party in respect of an Indemnifiable Loss and shall subsequently
receive Insurance Proceeds or other amounts in respect of such Indemnifiable
Loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal to
the amount of such Insurance Proceeds or other amounts actually received, up to
the aggregate amount of any payments received from such Indemnifying Party
pursuant to this Distribution Agreement in respect of such Indemnifiable Loss.
(b) Any loss, liability, claim, damage, demand, cost or expense relating to
or arising out of information contained in the Prospectus/Joint Proxy Statement
that does not specifically relate to either Capstone, on the one hand, or NBHI
or Beverly, on the other hand, shall constitute a Shared Liability for purposes
of this Distribution Agreement and no party hereto or its successor shall be
entitled to indemnification in respect thereof.
SECTION 3.4 PROCEDURES FOR INDEMNIFICATION.
(a) If a claim or demand is made against an Indemnitee by any person, other
than Capstone, who is not a party to this Distribution Agreement (a "Third Party
Claim") as to which such Indemnitee is entitled to indemnification pursuant to
this Distribution Agreement, such Indemnitee shall notify the Indemnifying Party
in writing, and in reasonable detail, of the Third Party Claim promptly (and in
any event within 20 business days) after receipt by such Indemnitee of written
notice of the Third Party Claim; provided, however, that failure to give such
notification within such 20 business day period shall not affect the
indemnification provided hereunder except to the extent the Indemnifying Party
shall have been actually prejudiced as a result of such failure (except that the
Indemnifying Party shall not be liable for any expenses incurred during the
period in which the Indemnitee failed to give such notice). Thereafter, the
Indemnitee shall deliver to the
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Indemnifying Party, promptly (and in any event within 20 business days) after
the Indemnitee's receipt thereof, copies of all notices and documents (including
court papers) received by the Indemnitee relating to the Third Party Claim.
(b) If a Third Party Claim is made against an Indemnitee, the Indemnifying
Party shall be entitled to participate in the defense thereof and, if it so
chooses and acknowledges in writing its obligation to indemnify the Indemnitee
therefor, to assume the defense thereof with counsel selected by the
Indemnifying Party; provided that such counsel is not reasonably objected to by
the Indemnitee. Should the Indemnifying Party so elect to assume the defense of
a Third Party Claim, the Indemnifying Party shall not be liable to the
Indemnitee for legal or other expenses subsequently incurred by the Indemnitee
in connection with the defense thereof except as otherwise expressly provided
for in Section 2.9 of this Distribution Agreement. If the Indemnifying Party
assumes such defense, the Indemnitee shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnifying Party, it being understood that the
Indemnifying Party shall control such defense. The Indemnifying Party shall be
liable for the fees and expenses of counsel employed by the Indemnitee (i) for
any period during which the Indemnifying Party has failed to assume the defense
thereof (other than during the 20 business day period prior to the time the
Indemnitee shall have given notice of the Third Party Claim as provided above)
or (ii) in the event the Indemnitee reasonably determines, based on the advice
of its counsel that there shall exist a conflict of interest between the
Indemnitee and the Indemnifying Party or that there are defenses available to
the Indemnitee that are not available to the Indemnifying Party, the effect of
which shall be to make it impractical for the Indemnitee and the Indemnifying
Party to be jointly represented by the same counsel, in which case the
Indemnifying Party shall be liable for the fees and expenses of one counsel for
all Indemnitees in any single or series of related Actions. If the Indemnifying
Party so elects to assume the defense of any Third Party Claim, the Indemnitee
shall cooperate with the Indemnifying Party in the defense or prosecution
thereof.
(c) If the Indemnifying Party acknowledges in writing liability for
indemnification of a Third Party Claim, then in no event will the Indemnitee
admit any liability with respect to, or settle, compromise or discharge, any
Third Party Claim without the Indemnifying Party's prior written consent;
provided, however, that the Indemnitee shall have the right to settle,
compromise or discharge such Third Party Claim without the consent of the
Indemnifying Party if the Indemnitee releases the Indemnifying Party from its
indemnification obligation hereunder with respect to such Third Party Claim and
such settlement, compromise or discharge would not otherwise adversely affect
the Indemnifying Party. If the Indemnifying Party acknowledges in writing
liability for indemnification of a Third Party Claim, the Indemnitee will agree
to any settlement, compromise or discharge of a Third Party Claim that the
Indemnifying Party may recommend that by its terms (i) obligates the
Indemnifying Party to pay the full amount of the liability in connection with
such Third Party Claim, (ii) releases the Indemnitee completely in connection
with such Third Party Claim and (iii) would not otherwise adversely affect the
Indemnitee; provided, however, that the Indemnitee may refuse to agree to any
such settlement, compromise or discharge and may assume the defense of such
Third Party Claim if the Indemnitee agrees (A) that the Indemnifying Party's
indemnification obligation with respect to such Third Party Claim shall not
exceed the amount that would have been required to be paid by or on behalf of
the Indemnifying Party in connection with such settlement, compromise or
discharge and (B) to assume all costs and expenses thereafter incurred in
connection with the defense of such Third Party Claim (other than those
contemplated by subclause (A) herein above).
(d) Notwithstanding the foregoing, the Indemnifying Party shall not be
entitled to assume the defense of any Third Party Claim (and shall be liable for
the fees and expenses of counsel incurred by the Indemnitee in defending such
Third Party Claim) if the Third Party Claim seeks an order, injunction or other
equitable relief or relief other than money damages against the Indemnitee which
the Indemnitee reasonably determines, based on the advice of its counsel, cannot
be separated from any related claim for money damages. If such equitable or
other relief portion of the Third Party Claim can be so separated from the claim
for money damages, the Indemnifying Party shall be entitled to assume the
defense of the portion relating to money damages.
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SECTION 3.5 INDEMNIFICATION PAYMENTS. Indemnification required by this
Article III shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or loss,
liability, claim, damage or expense is incurred.
SECTION 3.6 OTHER ADJUSTMENTS.
(a) The amount of any Indemnifiable Loss shall be (i) increased to take
into account any net Tax cost actually incurred by the Indemnitee arising from
any payments received from the Indemnifying Party (grossed up for such increase)
and (ii) reduced to take account of any net Tax benefit or recovery of insurance
proceeds actually realized by the Indemnitee arising from the incurrence or
payment of any such Indemnifiable Loss. In computing the amount of such Tax cost
or Tax benefit, the Indemnitee shall be deemed to recognize all other items of
income, gain, loss, deduction or credit before recognizing any item arising from
the receipt of any payment with respect to an Indemnifiable Loss or the
incurrence or payment of any Indemnifiable Loss.
(b) In addition to any adjustments required pursuant to Section 3.3 hereof
or clause (a) of this Section 3.6, if the amount of any Indemnifiable Loss
shall, at any time subsequent to the payment required by this Distribution
Agreement, be reduced by recovery, settlement or otherwise, the amount of such
reduction, less any expenses incurred in connection therewith, shall promptly be
repaid by the Indemnitee to the Indemnifying Party, up to the aggregate amount
of any payments received from such Indemnifying Party pursuant to this
Distribution Agreement in respect of such Indemnifiable Loss.
SECTION 3.7 SURVIVAL OF INDEMNITIES. The obligations of Beverly and NBHI
under this Article III shall survive the sale or other transfer by either of
them of any assets or businesses or the assignment by either of them of any
Liabilities, with respect to any Indemnifiable Loss of any Indemnitee related to
such assets, businesses or Liabilities and shall be binding on the successors
and assigns of all, or substantially all, of their respective assets and
business.
ARTICLE IV
ACCESS TO INFORMATION
SECTION 4.1 PROVISION OF CORPORATE RECORDS.
(a) Unless otherwise specified in the procedures set forth in Schedule
4.3(b) hereto, after the Distribution Date, upon the prior written request by
NBHI for specific and identified agreements, documents, books, records or files
(collectively, "Records") relating to or affecting NBHI, Beverly shall arrange,
as soon as reasonably practicable following the receipt of such request, for the
provision of appropriate copies of such Records (or the originals thereof if
NBHI has a reasonable need for such originals) in the possession of Beverly or
any of its Subsidiaries, but only to the extent such items are not already in
the possession of NBHI.
(b) Unless otherwise specified in the procedures set forth in Schedule
4.3(b) hereto, after the Distribution Date, upon the prior written request by
Beverly for specific and identified Records relating to or affecting Beverly or
any Pharmacy Subsidiary, NBHI shall arrange, as soon as reasonably practicable
following the receipt of such request, for the provision of appropriate copies
of such Records (or the originals thereof if Beverly has a reasonable need for
such originals) in the possession of NBHI or any of its Subsidiaries, but only
to the extent such items are not already in the possession of Beverly.
SECTION 4.2 ACCESS TO INFORMATION.
(a) Unless otherwise specified in the procedures set forth in Schedule
4.3(b) hereto, from and after the Distribution Date, each of Beverly and NBHI
shall afford to the other and its authorized accountants, counsel and other
designated representatives reasonable access during normal business hours,
subject to appropriate restrictions for classified, privileged or confidential
information, to the personnel, properties, books and records of such party and
its Subsidiaries insofar as such access is reasonably required by the other
party.
(b) Each of Beverly and NBHI shall afford to the other access during normal
business hours to their respective properties, subject to appropriate
restrictions and limitations, and will consult and cooperate with
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each other for the purpose of conducting air, water or soil testing reasonably
necessary in connection with the determination and fulfillment of
indemnification obligations or in connection with Shared Liabilities under this
Distribution Agreement.
SECTION 4.3 REIMBURSEMENT; OTHER MATTERS.
(a) Except to the extent otherwise contemplated by any Ancillary Agreement
and except as limited by any indemnification obligation set forth in this
Distribution Agreement, a party providing Records or access to information or
properties under this Article IV shall be entitled to receive from the
recipient, upon the presentation of invoices therefor, payments for such
amounts, relating to supplies, disbursements and other out-of-pocket expenses,
as may be reasonably incurred in providing such Records or access to information
or properties.
(b) The parties hereto shall comply with those document retention policies
as shall be set forth in Schedule 4.3(b) hereto.
SECTION 4.4 CONFIDENTIALITY. Each of (a) Beverly and the Pharmacy
Subsidiaries and (b) NBHI and the NBHI Subsidiaries shall not use or permit the
use of (without the prior written consent of the other) and shall hold, and
shall cause its consultants and advisors to hold, in strict confidence, all
information concerning the other party in its possession, its custody or under
its control (except to the extent that (i) such information has been in the
public domain through no fault of such party or (ii) such information has been
later lawfully acquired from other sources by such party or (iii) this
Distribution Agreement or any other Ancillary Agreement or any other agreement
entered into pursuant hereto permits the use or disclosure of such information)
to the extent such information (A) relates to the period up to the Distribution
Date, (B) relates to any Ancillary Agreement or (C) is obtained in the course of
performing pursuant to any Ancillary Agreement, and each party shall not
(without the prior written consent of the other) otherwise release or disclose
such information to any other person, except such party's auditors, consultants
or attorneys, unless compelled to disclose such information by judicial or
administrative process or unless such disclosure is required by law and such
party has used commercially reasonable efforts to consult with the other
affected party prior to such disclosure. To the extent that a party hereto is
compelled by judicial or administrative process to disclose such information
under circumstances in which any evidentiary privilege would be available, such
party agrees to assert (or permit the other party a commercially reasonable
opportunity to assert) such privilege in good faith prior to making such
disclosure. Each of the parties hereto agrees to consult with the other party in
connection with any such judicial or administrative process, including, without
limitation, in determining whether any privilege is available, and further
agrees to allow such other party and its counsel to participate in any hearing
or other proceeding (including, without limitation, any appeal of an initial
order to disclose) in respect of such disclosure and assertion of privilege.
ARTICLE V
INSURANCE
SECTION 5.1 POLICIES AND RIGHTS INCLUDED WITHIN ASSETS; MAINTENANCE OF
COVERAGE.
(a) The Remaining Health Care Assets shall include any and all rights of an
insured party under each of the Beverly Policies, subject to the terms of such
Beverly Policies and any limitations or obligations of NBHI contemplated by this
Article V, specifically including rights of indemnity and the right to be
defended by or at the expense of the insurer, with respect to all claims, suits,
actions, proceedings, injuries, losses, liabilities, damages and expenses
incurred or claimed to have been incurred prior to the Distribution Date by any
party in or in connection with the conduct of the Remaining Health Care Business
which claims are asserted subsequent to the Distribution Date.
(b) Except as otherwise agreed to in writing between Beverly and NBHI
(which agreement shall be acknowledged and consented to by Capstone), Beverly
shall maintain in effect until the Distribution Date all Beverly Policies (as
renewed consistent with past practice) in effect as of the date hereof and the
insurance coverages and limits will be maintained at substantially the same
levels as are reflected on the schedule of
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Beverly Policies attached hereto as Schedule 5.1(b). Subsequent to the
Distribution Date, the parties hereto will be responsible for maintaining their
respective risk management programs.
SECTION 5.2 POST-DISTRIBUTION DATE CLAIMS AGAINST NBHI. If, subsequent to
the Time of Distribution, any person shall assert a claim against NBHI or any of
the NBHI Subsidiaries (including, without limitation, where NBHI or the NBHI
Subsidiaries are co-defendants with other persons) with respect to any claim,
suit, action, proceeding, injury, loss, liability, damage or expense incurred or
claimed to have been incurred prior to the Time of Distribution in or in
connection with the conduct of the Remaining Health Care Business, and which
claim, suit, action, proceeding, injury, loss, liability, damage or expense may
arise out of an insured or insurable occurrence under one or more of the Beverly
Policies, Beverly shall, at the time such claim is asserted, to the extent any
such Beverly Policy may require that Insurance Proceeds thereunder be collected
directly by the party against whom the Insured Claim is asserted, be deemed to
designate, without need of further documentation, NBHI as the agent and
attorney-in-fact to assert and to collect any related Insurance Proceeds under
such Beverly Policy, and shall further be deemed to assign, without need of
further documentation, to NBHI any and all rights of an insured party under such
Beverly Policy with respect to such asserted claim, specifically including
rights of indemnity and the right to be defended by or at the expense of the
insurer and the right to any applicable Insurance Proceeds thereunder.
SECTION 5.3 ADMINISTRATION; OTHER MATTERS.
(a) From and after the Time of Distribution, NBHI shall be responsible for
(i) Insurance Administration of the Beverly Policies as related to the Remaining
Health Care Business and (ii) Claims Administration under such Beverly Policies
with respect to Remaining Health Care Liabilities that relate to claims asserted
prior to the Distribution Date. NBHI shall be responsible for any premiums,
deductibles and retentions in respect of such Beverly Policies as related to the
Remaining Health Care Business, and the cost of any such claims shall be the
sole responsibility and obligation of NBHI, including, without limitation,
claims (and related costs and expenses) that exceed the limits of the applicable
Beverly Policy or where the limits of the applicable Beverly Policy have been
exhausted, and any resulting actuarial gains or losses shall inure solely to
NBHI.
(b) Allocation of Insurance Proceeds. Insurance Proceeds received with
respect to claims, costs and expenses under the Beverly Policies shall be paid
to NBHI.
SECTION 5.4 AGREEMENT FOR WAIVER OF CONFLICT AND SHARED DEFENSE. With
respect to any claims asserted subsequent to the Time of Distribution that
relate to occurrences prior to the Time of Distribution arising out of or in
connection with the Institutional Pharmacy Business if Beverly and NBHI are
named as co-defendants in respect of such claim then, at the election of NBHI,
the Claims Administration relating thereto will be shared equally by Beverly and
NBHI and any waiver of a conflict of interest necessary to the conduct of the
joint defense shall be deemed waived. Nothing in this Section 5.4 shall be
construed to limit or otherwise alter in any way the obligations of the parties
to this Distribution Agreement, including those created by this Distribution
Agreement, the Merger Agreement, by operation of law or otherwise.
SECTION 5.5 COOPERATION. The parties agree to use their commercially
reasonable efforts to cooperate with respect to the various insurance matters
contemplated by this Agreement.
ARTICLE VI
DISPUTE RESOLUTION
SECTION 6.1 DISTRIBUTION AGREEMENT DISPUTES. In the event of a
controversy, dispute or claim arising out of, in connection with, or in relation
to the interpretation, performance, nonperformance, validity or breach of this
Distribution Agreement or otherwise arising out of, or in any way related to
this Distribution Agreement, including, without limitation, any claim based on
contract, tort, statute or constitution (singly, a "Distribution Agreement
Dispute" and collectively, "Distribution Agreement Disputes"), the party
asserting the Distribution Agreement Dispute shall give written notice to the
other party of the existence and nature of such Distribution Agreement Dispute.
Thereafter, the general counsels (or other designated representatives)
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of the respective parties shall negotiate in good faith for a period no less
than 60 days after the date of the notice in an attempt to settle such
Distribution Agreement Dispute. If after such 60 calendar day period such
representatives are unable to settle such Distribution Agreement Dispute, any
party hereto may commence arbitration by giving written notice to all other
party that such Distribution Agreement Dispute has been referred to the American
Arbitration Association for arbitration in accordance with the provisions of
this Article.
SECTION 6.2 ARBITRATION IN ACCORDANCE WITH AMERICAN ARBITRATION
ASSOCIATION RULES. All Distribution Agreement Disputes shall be settled by
arbitration in Dallas, Texas, before a single arbitrator in accordance with the
rules of the American Arbitration Association (the "Rules"). The arbitrator
shall be selected by the mutual agreement of all parties, but if they do not so
agree within twenty (20) days after the date of the notice of arbitration
referred to above, the selection shall be made pursuant to the Rules from the
panels of arbitrators maintained by the American Arbitration Association. The
arbitrator shall be an individual with substantial professional experience with
regard to resolving or settling sophisticated commercial disputes.
SECTION 6.3 FINAL AND BINDING AWARDS. Any award rendered by the arbitrator
shall be conclusive and binding upon the parties hereto; provided, however, that
any such award shall be accompanied by a written opinion of the arbitrator
giving the reasons for the award. This provision for arbitration shall be
specifically enforceable by the parties and the decision of the arbitrator in
accordance therewith shall be final and binding, and there shall be no right of
appeal therefrom. The parties agree to comply with any award made in any such
arbitration proceedings that has become final in accordance with the Rules, and
agree to the entry of a judgment in any jurisdiction upon any award rendered in
such proceedings becoming final under the Rules.
SECTION 6.4 COSTS OF ARBITRATION. In the award the arbitrator shall
allocate, in his or her discretion, among the parties to the arbitration all
costs of the arbitration, including, without limitation, the fees and expenses
of the arbitrator and reasonable attorneys' fees, costs and expert witness
expenses of the parties. Absent such an allocation by the arbitrator, each party
shall pay its own expenses of arbitration, and the expenses of the arbitrator
shall be equally shared.
SECTION 6.5 SETTLEMENT BY MUTUAL AGREEMENT. Nothing contained in this
Article shall prevent the parties from settling any Distribution Agreement
Dispute by mutual agreement at any time.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 COMPLETE AGREEMENT; CONSTRUCTION. This Distribution Agreement,
including the Schedules and the Ancillary Agreements constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all previous negotiations, commitments and writings with respect to
such subject matter. In the event of any inconsistency between this Distribution
Agreement and any Schedule hereto, the Schedule shall prevail. In the event and
to the extent that there shall be a conflict between the provisions of this
Distribution Agreement and the Schedules and the provisions of (i) the Merger
Agreement, the Merger Agreement shall control and (ii) an Ancillary Agreement,
such Ancillary Agreement shall control; provided, however, that the provisions
of this Distribution Agreement shall govern in the event of and to the extent of
any conflict between the provisions of this Distribution Agreement and the
provisions of the Transfer and Assumption Instruments.
SECTION 7.2 COUNTERPARTS. This Distribution Agreement may be executed in
one or more counterparts, each of which shall be considered one and the same
agreement, and shall become effective when one or more such counterparts have
been signed by each of the parties and delivered to the other parties.
SECTION 7.3 SURVIVAL OF AGREEMENTS. Except as otherwise contemplated by
this Distribution Agreement, all covenants and agreements of the parties
contained in this Distribution Agreement shall survive the Distribution Date.
SECTION 7.4 NOTICES. All notices and other communications hereunder shall
be in writing and hand delivered or mailed by registered or certified mail
(return receipt requested) or sent by any means of
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electronic message transmission with delivery confirmed (by voice or automatic
machine generated confirmation) to the parties at the following address (or at
such other addresses for a party as shall be specified by like notice) and will
be deemed given on the date on which such notice is received:
To Beverly (before the Distribution Date) or NBHI:
c/o Beverly Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919-1000
Attention: Chairman of the Board
Telephone: (501) 452-6712
Facsimile: (501) 452-5131
with a copy to:
Giroir, Gregory, Holmes & Hoover, plc
111 Center Street, Suite 1900
Little Rock, Arkansas 72201
Attention: H. Watt Gregory, III
Telephone: (501) 372-3000
Facsimile: (501) 374-2380
To Beverly (after the Distribution Date) or Capstone:
Capstone Pharmacy Services, Inc.
9901 East Valley Ranch Parkway, Suite 3001
Irving, TX 75063
Attention: R. Dirk Allison, President & CEO
Telephone: (972) 401-1541
Facsimile: (972) 401-2972
with a copy to:
Harwell, Howard, Hyne, Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, TN 37238
Attention: Mark Manner
Telephone: (615) 256-0500
Facsimile: (615) 251-1059
SECTION 7.5 WAIVERS. The failure of either party to require strict
performance by the other party of any provision in this Distribution Agreement
will not waive or diminish that party's right to demand strict performance
thereafter of that or any other provision hereof.
SECTION 7.6 AMENDMENTS. Subject to the terms of Section 7.9 hereof, this
Distribution Agreement and the Ancillary Agreements may not be modified or
amended except by an agreement in writing signed by the parties and, for so long
as the Merger Agreement shall be in effect, approved by Capstone.
SECTION 7.7 ASSIGNMENT. This Distribution Agreement shall be assignable in
whole in connection with a merger or consolidation or the sale of all or
substantially all the assets of a party hereto. Otherwise this Distribution
Agreement shall not be assignable, in whole or in part, directly or indirectly,
by any party hereto without the prior written consent of the other party, and
any attempt to assign any rights or obligations arising under this Distribution
Agreement without such consent shall be void.
SECTION 7.8 SUCCESSORS AND ASSIGNS. The provisions of this Distribution
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns, including,
without limitation, Capstone.
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SECTION 7.9 TERMINATION. This Agreement (including, without limitation,
Section 2.11 and Article III hereof) may be terminated and the Distribution may
be amended, modified or abandoned at any time prior to the Distribution by and
in the sole discretion of Beverly without the approval of NBHI or the
stockholders of Beverly. In the event of such termination, no party shall have
any liability of any kind to any other party or any other person. After the
Distribution, this Distribution Agreement may not be terminated except by an
agreement in writing signed by the parties; provided, however, that Section 2.11
shall not be terminated or amended after the Distribution in respect of the
third party beneficiaries thereto without the consent of such persons.
SECTION 7.10 SUBSIDIARIES. Each of the parties hereto shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements and
obligations set forth herein to be performed by any Subsidiary of such party or
by any entity that is contemplated to be a Subsidiary of such party on and after
the Distribution Date.
SECTION 7.11 THIRD PARTY BENEFICIARIES. The parties expressly acknowledge
that at the Effective Time Beverly will be merged with and into Capstone, all
obligations of Beverly hereunder shall become obligations of Capstone, and
actions of Beverly hereunder to be taken after the Distribution Date shall be
taken by Capstone. Except as provided in Section 2.11 relating to directors' and
officers' liability insurance, this Distribution Agreement is solely for the
benefit of the parties hereto and their respective Subsidiaries and Affiliates
and permitted successors and assigns and shall not be deemed to confer upon
third parties any remedy, claim, liability, reimbursement, claim of action or
other right in excess of those existing without reference to this Distribution
Agreement.
SECTION 7.12 ATTORNEY FEES. Except as contemplated by an arbitrator's
decision pursuant to Article VI hereof, a party in breach of this Distribution
Agreement shall, on demand, indemnify and hold harmless the other party hereto
for and against all reasonable out-of-pocket expenses, including, without
limitation, reasonable legal fees, incurred by such other party by reason of the
enforcement and protection of its rights under this Distribution Agreement. The
payment of such expenses is in addition to any other relief to which such other
party may be entitled hereunder or otherwise.
SECTION 7.13 TITLE AND HEADINGS. Titles and headings to sections herein
are inserted for the convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Distribution
Agreement.
SECTION 7.14 SCHEDULES. The Schedules shall be construed with and as an
integral part of this Distribution Agreement to the same extent as if the same
had been set forth verbatim herein.
SECTION 7.15 SPECIFIC PERFORMANCE. Each of the parties hereto acknowledges
that there is no adequate remedy at law for failure by such parties to comply
with the provisions of this Distribution Agreement and that such failure would
cause immediate harm that would not be adequately compensable in damages, and
therefore agree that their agreements contained herein may be specifically
enforced without the requirement of posting a bond or other security, in
addition to all other remedies available to the parties hereto under this
Distribution Agreement.
SECTION 7.16 GOVERNING LAW. This Distribution Agreement shall be governed
by and construed in accordance with the laws of the state of Delaware applicable
to contracts executed in and to be performed in that state.
SECTION 7.17 SEVERABILITY. In the event any one or more of the provisions
contained in this Distribution Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions, the economic effect of which shall, to the greatest extent
possible, approximate that of the invalid, illegal or unenforceable provisions.
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IN WITNESS WHEREOF, the parties have caused this Distribution Agreement to
be duly executed as of the day and year first written above.
BEVERLY ENTERPRISES, INC.
By:
----------------------------------
Name:
Title:
NEW BEVERLY HOLDINGS, INC.
By:
----------------------------------
Name:
Title:
CAPSTONE PHARMACY SERVICES, INC.
By:
----------------------------------
Name:
Title:
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EXHIBIT A
INTERNAL BEVERLY RESTRUCTURING PLAN
The following is an outline of the restructuring action (the
"Restructuring") that will be taken prior to and to facilitate the Distribution
and the Merger. Capitalized terms used in this Plan and not otherwise defined
shall have the meanings ascribed thereto in the Agreement and Plan of Merger
dated as of April 15, 1997 (the "Merger Agreement") by and between Beverly
Enterprises, Inc., a Delaware corporation ("BEI") and Capstone Pharmacy
Services, Inc., a Delaware corporation ("Capstone").
1. New Beverly Holdings, Inc., a Delaware corporation ("NBHI"), a first-tier
subsidiary of BEI shall be authorized to provide for the issuance of the
number of shares of capital stock, and reservation of sufficient authorized
but unissued shares of capital stock, of NBHI to BEI stockholders and other
holders of interests convertible or exercisable into shares of BEI, as may be
required to cause BEI's compliance with the terms and conditions of the
Merger Agreement and the Agreement and Plan of Distribution dated as of April
15, 1997 by and between BEI and NBHI, and (iii) provide for sufficient
additional authorized classes or series within any class of capital stock or
other rights or interests therein, as may be deemed appropriate by the boards
of directors of BEI and NBHI and the stockholder of NBHI.
2. BEI will transfer or contribute all of the stock of the corporations engaged
in the Remaining Health Care Business, which are subsidiaries of BEI, to NBHI
as set forth on Schedule 1.1(a) to the Distribution Agreement.
3. BEI will transfer to NBHI any assets that are owned by BEI, its wholly owned
first-tier subsidiary, Pharmacy Corporation of America, a Delaware
corporation ("PCA"), or any of their then existing pharmacy subsidiaries,
including those set forth on Schedule 1.1(b) to the Distribution Agreement,
that are not used or useful in the conduct of the institutional pharmacy
business, as soon as practicable, and in any event prior to the Distribution.
4. Any institutional pharmacy assets owned by BEI or any of its subsidiaries
engaged in the Remaining Health Care Business which are used or useful in the
conduct of the institutional pharmacy business will be transferred and
delivered to PCA, as soon as practicable and in any event prior to the
Distribution.
[STEPS 1 THROUGH 4 WILL BE TAKEN AS SOON AS PRACTICABLE
ONCE THE MERGER AGREEMENT HAS BEEN SIGNED
OR APPROVED BY BEI'S STOCKHOLDERS, AS APPROPRIATE.]
5. It is anticipated that as soon as practicable after stockholder approval of
the Merger and the Distribution, PCA will borrow approximately $275 million
from an unrelated third party or parties. PCA will use the proceeds from such
borrowing to repay intercompany indebtedness to BEI. Any cash in excess of
the intercompany indebtedness will be distributed prior to the Distribution
as a dividend to BEI. BEI will then contribute any such cash to NBHI. The
payments will be eliminated from BEI's taxable income under the provisions of
the consolidated return regulations.
6. BEI will use all of the cash distributed to BEI by PCA to pay down BEI
indebtedness.
7. BEI will distribute all of the stock of NBHI to BEI's stockholders pro rata.
8. BEI will merge with and into Capstone, with Capstone as the survivor.
9. NBHI will change its name to Beverly Enterprises, Inc.
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ANNEX D
[MERRILL LYNCH LETTERHEAD]
April 15, 1997
Board of Directors
Beverly Enterprises, Inc.
1200 South Waldron Road
Fort Smith, AR 72903
Members of the Board:
You have informed us that Beverly Enterprises, Inc. (the "Company"), New
Beverly Holdings, Inc., a wholly owned subsidiary of the Company ("NBHI"), and
Capstone Pharmacy Services, Inc. ("Capstone") propose to enter into an Agreement
and Plan of Merger (the "Agreement") pursuant to which, after the completion of
the Restructuring and Distribution described below, the Company will be merged
(the "Merger") with and into Capstone. In the Merger, each outstanding share of
common stock, $.10 par value, of the Company (the "Company Common Stock") will
be converted into the right to receive a number, expressed to four decimal
places, (the "Exchange Ratio") of newly issued shares of common stock, $.01 par
value, of Capstone (the "Capstone Common Stock") equal to the quotient of
50,000,000 divided by the number of shares of Company Common Stock issued and
outstanding immediately prior to the effective time of the Merger.
You have also informed us that prior to the Merger the Company will
restructure its assets and businesses (the "Restructuring") pursuant to an
Agreement and Plan of Distribution (the "Distribution Agreement") which provides
for the company to transfer all of its assets and liabilities other than those
relating primarily to the institutional pharmacy business of the Company and its
subsidiaries to NBHI, and for the Company to distribute the common stock of NBHI
to its stockholders (the "Distribution").
You have asked us whether, in our opinion, the Exchange Ratio in the Merger
is fair to the holders of the Company Common Stock from a financial point of
view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information that we deemed relevant relating to the Company and Capstone
and the respective industries in which they operate;
(2) Reviewed certain information, including financial forecasts
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the Company (after giving effect to the Restructuring and the
Distribution) and Capstone, as well as the amount and timing of the cost
savings, related expenses and synergies expected to result from the Merger
(the "Expected Synergies"), furnished to us by the Company and Capstone;
(3) Conducted discussions with members of senior management and
representatives of the Company and Capstone concerning the businesses and
prospects of the Company (after giving effect to the Restructuring and the
Distribution) and Capstone, including after giving effect to the Merger;
(4) Reviewed the historical market prices and trading activity for the
Capstone Common Stock and compared them with those of certain publicly
traded companies that we deemed to be comparable to Capstone, including
after giving effect to the Merger;
(5) Compared the historical and projected results of operations of the
Company (after giving effect to the Restructuring and the Distribution) and
Capstone, including, with respect to projected results of operations, after
giving effect to the Merger, with those of certain companies that we deemed
to be comparable to the Company (after giving effect to the Restructuring
and the Distribution) and Capstone, including after giving effect to the
Merger;
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(6) Compared the proposed financial terms of the Merger with the
financial terms of certain other mergers and acquisitions that we deemed to
be relevant;
(7) Reviewed a draft of the Agreement in the form provided to us and
we have assumed that the final form of such agreement will not vary in any
manner that is material to our analysis; and
(8) Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market and
monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available and have further
relied on the assurances of management of the Company and Capstone that they are
not aware of any facts that would make such information inaccurate or
misleading. We have not assumed any responsibility for independently verifying
such information and we have not undertaken an independent evaluation or
appraisal of any of the assets or liabilities of the Company or Capstone or been
furnished with any such evaluation or appraisal, nor have we conducted a
physical inspection of the properties or facilities of the Company or Capstone.
With respect to the financial forecast information, including the Expected
Synergies, furnished to or discussed with us by the Company, Capstone or their
representatives, we have assumed that they have been reasonably prepared and
reflect the best currently available estimates and judgment of the Company's and
Capstone's managements as to the expected future financial performance of the
Company (after taking into account the Restructuring and the Distribution) or
Capstone, including after giving effect to the Merger and the Expected
Synergies. We express no opinion as to such financial forecast information or
the assumptions on which they were based. We have further assumed that the
Merger will qualify as a tax-free reorganization for United States Federal
income tax purposes.
For purposes of rendering this opinion we have assumed, in all respects
material to our analysis, that the representations and warranties of each party
to the Agreement and all related documents and instruments (collectively, the
"Documents") contained therein are true and correct, that each party to the
Documents will perform all of the covenants and agreements required to be
performed by such party under such Documents and that all conditions to the
consummation of the Merger will be satisfied without waiver thereof.
Our opinion is necessarily based upon market, economic and other conditions
as they exist on, and can be evaluated as of, the date hereof. Our opinion does
not constitute a recommendation to any stockholder as to how such stockholder
should vote on the proposed Merger or any matter related thereto. In addition,
our opinion does not in any manner address either the price at which the
Capstone Common Stock will trade following the announcement or consummation of
the Merger or any aspect of the Restructuring and the Distribution, including,
without limitation, their fairness or the price at which the shares of NBHI will
trade following the Restructuring and the Distribution.
We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger. In addition, the Company has
agreed to indemnify us for certain liabilities arising out of our engagement. We
have, in the past, provided financial advisory and/or financing services to the
Company and may continue to do so and have received, and may receive, fees for
the rendering of such services. In the ordinary course of our business, we may
actively trade in the securities of the Company and Capstone (and anticipate
trading after the Merger in the securities of Capstone and/or NBHI) for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities.
On the basis of and subject to the foregoing, we are of the opinion, as of
the date hereof, that the Exchange Ratio is fair from a financial point of view
to the holders of the Company Common Stock.
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This opinion is for the use and benefit of the Board of Directors of the
Company in its evaluation of the Merger and shall not be used for any other
purpose without our prior written consent.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By: /s/ RICHARD P. JOHNSON
----------------------------------
Name: Richard P. Johnson
Title: Managing Director
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ANNEX E
[STEPHENS INC. LETTERHEAD]
April 15, 1997
Board of Directors
Beverly Enterprises, Inc.
1200 South Waldron Road
Fort Smith, AR 72903
Members of the Board:
We have acted as your financial advisor in connection with the proposed
merger of Beverly Enterprises, Inc. (the "Company") with Capstone Pharmacy
Services, Inc. ("Capstone"). In that regard, you have informed us that the
Company, New Beverly Holdings, Inc., a wholly-owned subsidiary of the Company
("NBHI"), and Capstone propose to enter into an Agreement and Plan of Merger
(the "Agreement") pursuant to which, after the completion of the Restructuring
and Distribution described below, the Company will be merged (the "Merger") with
and into Capstone. In the Merger, each outstanding share of common stock, $.10
par value, of the Company (the "Company Common Stock") will be converted into
the right to receive a number, expressed to four decimal places, (the "Exchange
Ratio") of newly issued shares of common stock, $.01 par value, of Capstone (the
"Capstone Common Stock") equal to the quotient of 50,000,000 divided by the
number of shares of Company Common Stock issued and outstanding immediately
prior to the effective time of the Merger.
You have also informed us that prior to the Merger the Company will
restructure its assets and businesses (the "Restructuring") pursuant to an
Agreement and Plan of Distribution (the "Distribution Agreement") which provides
for the Company to transfer all of its assets and liabilities other than those
relating primarily to the institutional pharmacy business of the Company and its
subsidiaries to NBHI, and for the Company to distribute the common stock of NBHI
to its stockholders (the "Distribution").
You have requested our opinion as to the fairness of the Exchange Ratio in
the Merger to the holders of the Company Common Stock from a financial point of
view.
In connection with rendering our opinion, we have, among other things:
1. Reviewed certain publicly available business and financial
information that we deemed relevant relating to the Company and Capstone
and the respective industries in which they operate;
2. Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the Company (after giving effect to the Restructuring and the
Distribution) and Capstone furnished to us by the Company and Capstone, as
well as the amount and timing of the cost savings, related expenses and
synergies expected to result from the Merger (the "Expected Synergies");
3. Conducted discussions with members of senior management and
representatives of the Company and Capstone concerning the businesses and
prospects of the Company (after giving effect to the Restructuring and the
Distribution) and Capstone, including after giving effect to the Merger;
4. Reviewed the historical market prices and trading activity for the
Capstone Common Stock and compared them with those of certain publicly
traded companies that we deemed to be comparable to Capstone, including
after giving effect to the Merger;
5. Compared the historical and projected results of operations of the
Company (after giving effect to the Restructuring and the Distribution) and
Capstone, including, with respect to the projected results of operations,
after giving effect to the Merger, with those of certain companies that we
deemed to be comparable to the Company (after giving effect to the
Restructuring and the Distribution) and Capstone,
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including after giving effect to the Merger;
6. Compared the proposed financial terms of the Merger with the
financial terms of certain other mergers and acquisitions that we deemed to
be relevant;
7. Reviewed a draft of the Agreement in the form provided to us and we
have assumed that the final form of such agreement will not vary in any
manner that is material to our analysis; and
8. Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market and
monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available and have further
relied on the assurances of management of the Company and Capstone that they are
not aware of any facts that would make such information inaccurate or
misleading. We have not assumed any responsibility for independently verifying
such information and we have not undertaken an independent evaluation or
appraisal of any of the assets or liabilities of the Company or Capstone or been
furnished with any such evaluation or appraisal, nor have we conducted a
physical inspection of the properties or facilities of the Company or Capstone.
With respect to the financial forecast information, including the Expected
Synergies, furnished to or discussed with us by the Company, Capstone or their
representatives, we have assumed that they have been reasonable prepared and
reflect the best currently available estimates and judgment of the Company's and
Capstone's managements as to the expected future financial performance of the
Company (after taking into account the Restructuring and the Distribution) or
Capstone, including after giving effect to the Merger and the Expected
Synergies. We express no opinion as to such financial forecast information or
the assumptions on which they were based. We have further assumed that the
Merger will qualify as a tax-free reorganization for United States Federal
income tax purposes.
For purposes of rendering this opinion we have assumed, in all respects
material to our analysis, that the representations and warranties of each party
to the Agreement and all related documents and instruments (collectively, the
"Documents") contained therein are true and correct, that each party to the
Documents will perform all of the covenants and agreements required to be
performed by such party under such Documents and that all conditions to the
consummation of the Merger will be satisfied without waiver thereof.
Our opinion is necessarily based upon market, economic and other conditions
as they exist on, and can be evaluated as of, the date hereof. Our opinion does
not constitute a recommendation to any stockholder as to how such stockholder
should vote on the proposed Merger or any matter related thereto. In addition,
our opinion does not in any manner address either the price at which the
Capstone Common Stock will trade following the announcement or consummation of
the Merger or any aspect of the Restructuring and the Distribution, including,
without limitation, their fairness or the price at which the shares of NBHI will
trade following the Restructuring and the Distribution.
We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger. In addition, the Company has
agreed to indemnify us for certain liabilities arising out of our engagement. As
part of our investment banking business, we regularly issue fairness opinions
and are continually engaged in the valuation of companies and their securities
in connection with business reorganizations, private placements, negotiated
underwritings, mergers and acquisitions and valuations for estate, corporate and
other purposes. We are familiar with the Company and regularly provide
investment banking services to it and issue periodic research reports regarding
its business activities and prospects. In the ordinary course of business,
Stephens Inc. and its affiliates at any time may hold long or short positions,
and may trade or otherwise effect transactions as principal or for the accounts
of customers, in debt or equity securities or options on securities of the
Company and Capstone (and anticipate trading after the Merger in the securities
of the parties to the Merger).
Based on the foregoing and our general experience as investment bankers,
and subject to the qualifications stated herein, we are of the opinion on the
date hereof that the Exchange Ratio is fair from a financial
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<PAGE> 464
point of view to the holders of the Company Common Stock.
This opinion is for the use and benefit of the Board of Directors of the
Company in its evaluation of the Merger and shall not be used for any other
purpose without our prior written consent.
Very truly yours,
/s/ Stephens Inc.
E-3
<PAGE> 465
ANNEX F
[ADIRONDACK LETTERHEAD]
Board of Directors
Capstone Pharmacy Services, Inc.
9901 E. Valley Ranch Parkway
Suite 3001
Irving, Texas 75063
Members of the Board:
You have informed us that Beverly Enterprises, Inc. ("Beverly") and New
Beverly Holdings, Inc. ("NBHI") have entered into an Agreement and Plan of
Distribution dated as of April 15, 1997 (the "Distribution Agreement"), which
provides, among other things, for Beverly's transfer of all of the Remaining
Health Care Assets and Remaining Health Care Liabilities of Beverly and its
subsidiaries (each as defined in the Distribution Agreement) to NBHI in exchange
for the issuance of shares of common stock of NBHI (the "Restructuring"). In
addition, you have informed us that Capstone Pharmacy Services, Inc.
("Capstone") and Beverly have entered into an Agreement and Plan of Merger dated
as of April 15, 1997 (the "Merger Agreement"), which provides, among other
things, for the merger of Beverly with and into Capstone (the "Merger"), with
Capstone as the surviving corporation, that immediately prior to the
consummation of the Merger, Beverly shall distribute all of the capital stock of
NBHI to Beverly's shareholders (the "Distribution,"), and that at the time of
the Merger, Beverly will not have any material liabilities or contingencies
other than no more than $275,000,000 of indebtedness for borrowed money. As set
forth more fully in the Merger Agreement, as a result of the Merger, Capstone
will issue 50 million shares of common stock to Beverly shareholders and each
share of common stock, without par value, of Beverly (the "Beverly Common
Stock") will be converted into the right to receive that portion of one share of
common stock, par value $.01 per share, of Capstone (the "Capstone Common
Stock") equal to the quotient of 50,000,000 divided by the number of Beverly
Common Stock outstanding immediately prior to the Effective Time of the
transaction (the "Exchange Rate"). You have also informed us that the
Restructuring, the Distribution and the Merger are expected to be tax-free to
each of Capstone and Beverly and to their respective shareholders.
You have requested that we render our opinion as to the fairness, from a
financial point of view, to Capstone of the Consideration being provided in the
Merger.
In arriving at the opinion set forth below, we have, among other things:
a. reviewed the Merger Agreement and the Distribution Agreement;
b. reviewed certain publicly available business and financial
information that we deemed relevant relating to Capstone and Beverly after
the distribution and the respective industries in which they operate;
c. reviewed certain internal non-public financial and operating data
provided to us by the managements of Capstone and Beverly relating to the
businesses of Capstone and the Institutional Pharmacy Business of Beverly,
including projections of future financial results of such businesses
prepared by Capstone and Beverly;
d. discussed with members of Capstone's and Beverly's senior
managements, Capstone's and the Beverly Institutional Pharmacy Business'
operations, historical financial statements and future prospects, before
and after giving effect to the Distribution and the Merger, as well as
their views of the business, operational and strategic benefits and other
implications of the Distribution and the Merger, including the level of
synergies reasonably obtainable upon consummation of the Merger;
e. compared the financial and operating performance of Capstone and
the Institutional Pharmacy Business of Beverly with publicly available
information concerning certain other companies we deemed comparable and
reviewed the relevant historical stock prices and trading volumes of the
Capstone
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<PAGE> 466
Common Stock, to the extent we deemed relevant, the Beverly Common Stock
and certain publicly traded securities of such other companies;
f. reviewed the financial terms of certain recent business
combinations and acquisition transactions we deemed reasonably comparable
to the Merger and otherwise relevant to our inquiry; and
g. made such other analysis and examination as we have deemed
necessary or appropriate.
We have assumed and relied upon, without assuring any responsibility for
verification, the accuracy and completeness of all of the financial and other
information provided to, discussed with, or reviewed by or for us, or publicly
available for purposes of this opinion and have further relied upon the
assurances of management of Capstone and Beverly that they are not aware of any
facts that will make such information inaccurate or misleading. We have neither
made nor obtained any independent evaluations or appraisals of the assets or
liabilities of Capstone or Beverly, nor have we conducted a physical inspection
of the properties and facilities of Capstone or Beverly. We have assumed that
the financial projections and estimates of reasonably obtainable synergies
provided to us by Capstone and Beverly have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of Capstone and Beverly as to the future financial performance of
Capstone and the Institutional Pharmacy Business of Beverly, as the case may be
(including after taking into account the impact of the Distribution and the
Merger). We express no view as to such projections and estimates of reasonably
obtainable synergies or the assumptions on which they were based.
For purposes of rendering our opinion we have assumed, with your consent,
that the synergies described by Capstone as being reasonably obtainable will be
obtained and that the representations and warranties of each party to the Merger
Agreement contained therein are true and correct, that each party to the Merger
Agreement and to the Distribution Agreement will perform all of the covenants
and agreements required to be performed by such party under such agreements and
that all conditions to the consummation of the Merger (including, without
limitation, the completion of the Distribution) will be satisfied without waiver
thereof. We have also assumed that all material governmental, regulatory or
other consents and approvals will be obtained in connection with the
Distribution and the Merger and that in the course of obtaining any necessary
governmental, regulatory or other consents and approvals, or any amendments,
modifications or waivers to any documents to which either of Capstone or Beverly
are party, no restrictions will be imposed or amendments, modifications or
waivers made that would have any material adverse effect on the contemplated
benefits to Capstone of the Merger.
Our opinion herein is necessarily based on market, economic and other
conditions as they exist and can be evaluated on the date of this letter. Our
opinion is limited to the fairness, from a financial point of view, to Capstone
of the Exchange Ratio in the Merger and we express no opinion as to the merits
of the underlying decision by Capstone to engage in the Merger. This opinion
does not constitute a recommendation to any Capstone shareholder as to how such
shareholder should vote with respect to the Merger or the transaction related
thereto.
Adirondack Capital Advisors, LLC ("ACA"), as part of its financial advisory
business, is engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, principal investments, private
placements and other purposes. We are familiar with the company having acted as
its financial advisor in other transactions as well as in connection with, and
having participated in, certain of the negotiations leading to the Merger
Agreement. We will receive a fee for our services, a portion of which is payable
upon our rendering this opinion. In addition, Capstone has agreed to indemnify
us for certain liabilities arising out of our engagement.
Based upon and subject to the foregoing, we are of the opinion, as of the
date hereof, that the Consideration being provided in the Merger is fair, from a
financial point of view, to Capstone.
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<PAGE> 467
This opinion is for the use and benefit of the Board of Directors of
Capstone in its evaluation of the Merger and shall not be used for any other
purpose without the prior consent of ACA.
Very Truly Yours,
Adirondack Capital Advisors, LLC
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<PAGE> 468
ANNEX G
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION
OF
CAPSTONE PHARMACY SERVICES, INC.
Capstone Pharmacy Services, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify:
The amendment to the Corporation's Certificate of Incorporation set forth
in the following resolution approved by the Corporation's Board of Directors and
Stockholders was duly adopted in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware.
RESOLVED, that the Certificate of Incorporation of the Corporation be
amended by striking Section 1 of Article Fourth in its entirety and
replacing therefor the following:
1. The maximum number of shares of stock which the Corporation
shall have the authority to issue is three hundred million (300,000,000)
shares of Common Stock having a par value of $0.01 per share, which
shares shall not be subject to any preemptive rights, and five hundred
thousand (500,000) shares of preferred stock having a par value of $0.01
per share.
FURTHER RESOLVED, that the Certificate of Incorporation of the Corporation
be amended by adding Section 6 to Article Eighth, setting forth the
following:
6. Notwithstanding any other provisions of this Certificate of
Incorporation or the Bylaws of the Corporation, and not withstanding the
fact that some lesser percentage may be specified by law, special
meetings of the shareholders, may be called only by a majority of the
board of directors or by the holders of not less than twenty-five
percent (25%) of all the shares entitled to vote at such meeting, the
place of said meetings shall be designated by the directors, and the
business transacted at special meetings of the shareholders of the
corporation shall be confined to the business stated in the notice given
to the shareholders.
FURTHER RESOLVED, that the Certificate of Incorporation of the Corporation
be amended by adding Section 5 to Article Ninth, setting forth the
following:
5. The Board of Directors shall be divided into three classes,
designated Class 1, Class 2 and Class 3. Each class shall consist, as
nearly as may be possible, of one-third of the number of directors
constituting the Board of Directors. The term of the office for Class 1
directors will first expire at the first annual meeting of the
stockholders next following the date of adoption of this resolution; the
term of office of Class 2 directors will first expire at the second
annual meeting of stockholders next following the date of adoption of
this resolution; and the term of office of Class 3 directors will first
expire at the third annual meeting of stockholders next following the
date of adoption of this resolution, and in each case until their
successors are duly elected and qualified. At each annual meeting of
stockholders commencing with the first annual meeting of stockholders
next following the date of adoption of this resolution, successors to
the class of directors whose terms expire at the annual meeting of
stockholders shall be elected by stockholders for a three-year term and
until their successors are duly elected and qualified. Except as
otherwise provided herein or in the Bylaws, increases in the size of the
Board of Directors shall be distributed among the classes so as to
render the class as nearly equal in size as practicable. Whenever the
holders of preferred stock issued pursuant to this Certificate of
Incorporation or the resolution or resolutions adopted by a majority of
the Board of Directors then in office providing for the issue of shares
of preferred stock shall have the right, voting as a separate class, to
elect directors, the election, term of office, filling of vacancies and
other terms of such directorships shall be governed by the terms of this
Certificate of Incorporation
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<PAGE> 469
or such resolution or resolutions, as the case may be, and such
directorships shall not be divided into serial classes or otherwise
subject to this Section 5 unless expressly so provided therein.
The foregoing amendments were adopted by the Corporation's Board of
Directors on , 1997 and Stockholders on , 1997.
The Certificate of Amendment is filed by authority of the duly elected
Board of Directors and Stockholders in accordance with Section 242 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, this Certificate of Amendment has been executed by the
Corporation's authorized officers this day of , 1997.
CAPSTONE PHARMACY SERVICES, INC.
------------------------------------
R. Dirk Allison
President and Chief Executive
Officer
ATTEST:
- ------------------------------------
James D. Shelton, Secretary
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<PAGE> 470
ANNEX H
1997
INCENTIVE
STOCK
PLAN
OF
CAPSTONE*
- ---------------
* To be filed by amendment
<PAGE> 471
ANNEX I
NEW BEVERLY HOLDINGS, INC.
1997 LONG-TERM INCENTIVE PLAN
SECTION 1. PURPOSE
New Beverly Holdings, Inc. (hereinafter referred to as the "Company"), a
Delaware corporation, hereby establishes the 1997 Long-Term Incentive Plan (the
"Plan") to promote the interests of the Company and its stockholders through the
(i) attraction and retention of executive officers and other key employees
essential to the success of the Company; (ii) motivation of executive officers
and other key employees using performance-related incentives linked to
longer-range performance goals and the interests of Company stockholders; and
(iii) enabling of such employees to share in the long-term growth and success of
the Company. The Plan permits the grant of Nonqualified Stock Options, Incentive
Stock Options (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended), Stock Appreciation Rights, Restricted Stock,
Restricted Stock Units, Performance Shares, Performance Units, Bonus Stock, and
any other Stock Unit Awards or stock-based forms of awards as the Committee may
determine in its sole and complete discretion at the time of grant.
SECTION 2. DEFINITIONS
Except as otherwise defined in the Plan, the following terms shall have the
meanings set forth below:
2.1 "Affiliate" shall have the meaning ascribed to such term in Rule
12b-2 under the Exchange Act.
2.2 "Agreement" means a written agreement implementing the grant of
each Award signed by an authorized officer of the Company and by the
Participant.
2.3 "Award" means, individually or collectively, a grant under this
Plan of any one of Nonqualified Stock Options, Incentive Stock Options,
Stock Appreciation Rights, Restricted Stock, Restricted Stock Units,
Performance Shares, Performance Units, Bonus Stock or Other Stock Unit
Awards.
2.4 "Award Date" or "Grant Date" means the date on which an Award is
made by the Committee under this Plan.
2.5 "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 under the Exchange Act.
2.6 "Board" or "Board of Directors" means the Board of Directors of
the Company.
2.7 "Bonus Stock" means an Award granted pursuant to Section 10 of the
Plan expressed as a Share which may or may not be subject to restrictions.
2.8 "Cashless Exercise" means the exercise of an Option by the
Participant through the use of a brokerage firm to make payment to the
Company of the Exercise Price, either from the proceeds of a loan to the
Participant from the brokerage firm or from the proceeds of the sale of
Stock issued pursuant to the exercise of the Option, following which, upon
receipt of such payment, the Company delivers the exercised Shares to the
brokerage firm.
2.9 "Change in Control" shall be deemed to have occurred if the
conditions set forth in any one of the following paragraphs shall have been
satisfied:
(a) Any person, corporation or other entity or group, including any
"group" as defined in Section 13(d)(3) of the Exchange Act, becomes the
beneficial owner of Shares having 30% or more of the total number of
votes that may be cast for the election of directors of the Company; or
(b) As the result of, or in connection with, any tender or exchange
offer, merger or other business combination, sale of assets or contested
election, or any combination of the foregoing (a "Transaction"), the
persons who were directors of the Company before the Transaction shall
cease to constitute a majority of the Board of Directors of the Company
or any successor to the Company or its assets; or
(c) If at any time (i) the Company shall consolidate with, or merge
with, any other Person and the Company shall not be the continuing or
surviving corporation, (ii) any Person shall consolidate
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<PAGE> 472
with, or merge with, the Company, and the Company shall be the
continuing or surviving corporation and in connection therewith, all or
part of the outstanding stock shall be changed into or exchanged for
stock or other securities of any other Person or cash or any other
property, (iii) the Company shall be a party to a statutory share
exchange with any other Person after which the Company is a Subsidiary
of any other Person, or (iv) the Company shall sell or otherwise
transfer 50% or more of the assets or earnings power of the Company and
its Subsidiaries (taken as a whole) to any Person or Persons.
2.10 "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
2.11 "Committee" means the Compensation Committee of the Board which
will administer the Plan pursuant to Section 3 herein, provided however,
any member who is not both a "Non-Employee director" within the meaning of
Rule 16b-3 and an "outside director" within the meaning of Section 162(m)
shall not serve as a Committee member for the purpose of this Plan unless
there would otherwise be less than two members of the Committee.
2.12 "Common Stock" or "Stock" means the Common Stock of the Company,
with a par value of $.10 per share, or such other security or right or
instrument into which such Common Stock may be changed or converted in the
future.
2.13 "Company" means New Beverly Holdings, Inc., including all
Affiliates and wholly owned Subsidiaries, or any successor thereto.
2.14 "Covered Participant" means a Participant who is a "covered
employee" as identified in Section 162(m)(3) of the Code, and the
regulations promulgated thereunder, or who the Committee believes will be
such a covered employee for a Performance Period.
2.15 "Department" means the Compensation and Benefits Department of
the Company.
2.16 "Designated Beneficiary" means the beneficiary designated by the
Participant, pursuant to procedures established by the Department, to
receive amounts due to the Participant in the event of the Participant's
death. If the Participant does not make an effective designation, then the
Designated Beneficiary will be deemed to be the Participant's estate.
2.17 "Disability" means (i) the mental or physical disability, either
occupational or non-occupational in origin, of the Participant defined as
"Total Disability" in the Disability Plan of the Company currently in
effect and as amended from time to time; or (ii) a determination by the
Committee of "Total Disability" based on medical evidence that precludes
the Participant from engaging in any occupation or employment for wage or
profit for at least twelve months and appears to be permanent.
2.18 "Divestiture" means the sale of, outsourcing of, or closing by,
the Company of the business operations in which the Participant is
employed, or the elimination of the Participant's position at the Company's
discretion.
2.19 "Early Retirement" means retirement of a Participant from
employment with the Company after age 55, but prior to age 65, as approved
by the Committee.
2.20 "Exchange Act" means the Securities Exchange Act of 1934, as in
effect and amended from time to time, or any successor statute thereto,
together with any rules, regulations, and interpretations promulgated
thereunder or with respect thereto.
2.21 "Executive Officer" means any employee designated by the Company
as an officer or any employee covered by Rule 16b-3 of the Exchange Act.
2.22 "Exercise Price" means the price per share determined on the
Grant Date by the Committee, provided that the Exercise Price shall not be
less than 100% of Fair Market Value on the Grant Date; except that the
Committee in its sole discretion may waive the preceding limitation with
respect to Awards granted upon the assumption of, or in substitution for,
similar awards of another company with which the Company participates in an
acquisition, separation or similar corporate transaction.
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2.23 "Fair Market Value" means, on a given date, the closing price of
Stock as reported on the New York Stock Exchange composite tape on such day
or, if no Shares were traded on the New York Stock Exchange on such day,
then on the next preceding day that Stock was traded on such exchange, all
as reported by such source as the Committee may select. As to the Awards
granted to Participants in connection with the assumption of awards
previously granted by Beverly Enterprises, Inc. (BEI) pursuant to the
Employee Benefits Matters Agreement dated April 15, 1997 among BEI, the
Company and Capstone Pharmacy Services, Inc., (the "Employee Benefits
Agreement"), Fair Market Value shall have the definition contained therein.
2.24 "Full-time Employee" means an employee designated by the
Company's Department as being a "permanent, full-time employee" who is
eligible for all plans and programs of the Company provided for such
employees. This designation excludes all part-time, temporary, or contract
employees or consultants to the Company.
2.25 "Incentive Stock Option" or "ISO" means an option to purchase
Stock, granted under Section 6 herein, which is designated as an incentive
stock option and is intended to meet the requirements of Section 422 of the
Code.
2.26 "Key Employee" means an officer or other key employee of the
Company or its Subsidiaries, who, in the opinion of the Committee, can
contribute significantly to the growth and profitability of, or perform
services of major importance to, the Company and its Subsidiaries.
2.27 "Nonqualified Stock Option" or "NQSO" means an option to purchase
Stock, granted under Article 6 herein, which is not intended to be an
Incentive Stock Option.
2.28 "Normal Retirement" means the retirement of any Participant at
age 65 or at some earlier date if approved by the Committee.
2.29 "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
2.30 "Other Stock Unit Award" means awards, granted pursuant to
Section 11, of Stock or other securities that are valued in whole or in
part by reference to, or are otherwise based on, Shares or other securities
of the Company.
2.31 "Participant" means a Key Employee or consultant, or service
provider to the Company who has been granted an Award under the Plan, or as
the context requires, a Permitted Transferee.
2.32 "Performance Award" means a performance-based Award, which may be
in the form of either Performance Shares or Performance Units.
2.33 "Performance Criteria" or "Performance Goals" or "Performance
Measures" means the objectives established by the Committee for a
Performance Period, for the purpose of determining when an Award subject to
such objectives is earned, which shall consist of any one or more of the
following business or financial goals of the Company: absolute or relative
increases in total stockholder return, economic value added, return on
capital employed, revenues, sales, net income, earnings per share, return
on equity, cash flow, operating margin, or net worth of the Company, any of
its Subsidiaries, divisions or other areas of the Company.
2.34 "Performance Period" means the time period designated by the
Committee during which performance goals must be met.
2.35 "Performance Share" means an Award, designated as a Performance
Share, granted to a Participant pursuant to Section 9 herein, the value of
which is determined, in whole or in part, by the value of Company Stock in
a manner deemed appropriate by the Committee and described in the
Agreement.
2.36 "Performance Unit" means an Award, designated as Performance
Unit, granted to a Participant pursuant to Section 9 herein, the value of
which is determined, in whole or in part, by the attainment
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of pre-established goals relating to the Company's financial or operating
performance as deemed appropriate by the Committee and described in the
Agreement.
2.37 "Permitted Transferee" means any transferee of a Nonqualified
Stock Option pursuant to a transfer that is approved by the Committee in
accordance with Section 14.4 and the Plan.
2.38 "Period of Restriction" means the period during which the
transfer of Shares of Restricted Stock is restricted, pursuant to Section 8
herein.
2.39 "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d).
2.40 "Plan" means the New Beverly Holdings, Inc. 1997 Long-Term
Incentive Plan as herein described and as hereafter from time to time
amended.
2.41 "Restricted Stock" means an Award of Stock granted to a
Participant pursuant to Section 8 herein.
2.42 "Restricted Stock Unit" means a fixed or variable right to
acquire Stock, which may or may not be subject to restrictions,
contingently awarded under Section 8 of the Plan.
2.43 "Rule 16b-3 " means Rule 16b-3 of the General Rules and
Regulations under the Exchange Act, as amended from time to time, or any
successor thereto.
2.44 "Section 16" means Section 16 of the Exchange Act, or any
successor section under the Exchange Act, as amended from time to time and
as interpreted by regulations and rules promulgated thereunder from time to
time.
2.45 "Section 162(m)" means Section 162(m) of the Code, or any
successor section under the Code, as amended from time to time and as
interpreted by final or proposed regulations promulgated thereunder from
time to time.
2.46 "Securities Act" means the Securities Act of 1933 and the rules
and regulations promulgated thereunder, or any successor law, as amended
from time to time.
2.47 "Shares" means shares of the Common Stock of the Company.
2.48 "Stock Appreciation Right" means the right to receive an amount
equal to the excess of the Fair Market Value of a share of Stock (as
determined on the date of exercise) over the Exercise Price of a related
Option or the Fair Market Value of the Stock on the Date of Grant of the
Stock Appreciation Right.
2.49 "Subsidiary" means a corporation in which the Company owns,
either directly or through one or more of its Subsidiaries, at least 50% of
the total combined voting power of all classes of stock.
SECTION 3. ADMINISTRATION
3.1 The Committee. The Plan shall be administered and interpreted by the
Committee which shall have full authority and all powers necessary or desirable
for such administration. The express grant in this Plan of any specific power to
the Committee shall not be construed as limiting any power or authority of the
Committee. In its sole and complete discretion the Committee may adopt, alter,
suspend and repeal such administrative rules, regulations, guidelines, and
practices governing the operation of the Plan as it shall from time to time deem
advisable. In addition to any other powers and, subject to the provisions of the
Plan, the Committee shall have the following specific powers: (i) to determine
the terms and conditions upon which the Awards may be made and exercised; (ii)
to determine all terms and provisions of each Agreement, which need not be
identical for all types of Awards nor for the same type of Award to different
participants; (iii) to construe and interpret the Agreements and the Plan; (iv)
to establish, amend, or waive rules or regulations for the Plan's
administration; (v) to accelerate the exercisability of any Award, the length of
a Performance Period or the termination of any Period of Restriction; (vi) to
provide for the grant of Awards upon the assumption of, or in substitution for,
similar awards granted by an acquired or other company with which the
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Company participates in an acquisition, separation, or similar corporate
transaction; and (vii) to make all other determinations and take all other
actions necessary or advisable for the administration of the Plan. The Committee
may take action by a meeting in person, by unanimous written consent, or by
meeting with the assistance of communications equipment which allows all
Committee members participating in the meeting to communicate in either oral or
written form. The Committee may seek the assistance or advice of any persons it
deems necessary to the proper administration of the Plan.
3.2 Selection of Participants. The Committee shall have sole and complete
discretion in determining those Key Employees or other persons who shall
participate in the Plan. The Committee may request recommendations for
individual Awards from the Chief Executive Officer of the Company and may
delegate to the Chief Executive Officer of the Company the authority to make
Awards to Participants who are not Executive Officers of the Company or Covered
Participants, subject to a fixed maximum Award amount for such a group and a
maximum Award amount for any one Participant, as determined by the Committee.
Awards made to the Executive Officers or Covered Participants shall be
determined by the Committee.
3.3 Committee Decisions. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan shall be final, conclusive, and
binding upon all persons, including the Company, its stockholders, employees,
Participants, and Designated Beneficiaries, except when the terms of any sale or
award of shares of Stock or any grant of rights or Options under the Plan are
required by law or by the Articles of Incorporation or Bylaws of the Company to
be approved by the Company's Board of Directors or stockholders prior to any
such sale, award or grant.
3.4 Rule 16b-3 Requirements. Notwithstanding any other provision of the
Plan, the Committee may impose such conditions on any Award, and the Board may
amend the Plan in any such respects, as may be required to satisfy the
requirements of Rule 16b-3 or Section 162(m).
3.5 Indemnification of Committee. In addition to such other rights of
indemnification as they may have as directors or as members of the Committee,
the members of the Committee shall be indemnified by the Company against
reasonable expenses incurred from their administration of the Plan. Such
reasonable expenses include, but are not limited to, attorneys' fees actually
and reasonably incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Award granted or made hereunder, and against all
reasonable amounts paid by them in settlement thereof or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, if such
members acted in good faith and in a manner which they believed to be in, and
not opposed to, the best interests of the Company and its Subsidiaries.
SECTION 4. ELIGIBILITY
The Committee in its sole and complete discretion shall determine the Key
Employees, including officers, or other persons who shall be eligible for
participation under the Plan, subject to the following limitations: (i) no
Non-Employee director of the Company shall be eligible to participate under the
Plan; (ii) no member of the Committee shall be eligible to participate under the
Plan; (iii) no person owning, directly or indirectly, more than 5% of the total
combined voting power of all classes of stock of the Company shall be eligible
to participate under the Plan; and (iv) only Full-Time Employees shall be
eligible to receive Incentive Stock Options under the Plan; provided, however,
that Incentive Stock Options may be granted for ISOs assumed pursuant to the
Employee Benefits Agreement, without regard to whether the grantee is a
Full-Time Employee.
SECTION 5. SHARES SUBJECT TO THE PLAN
5.1 Number of Shares. The maximum aggregate number of Shares that may be
issued pursuant to Awards made under the Plan shall not exceed eleven million
(11,000,000) Shares, which may be in any combination of Options, Stock
Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance
Shares, Performance Units, Bonus Stock, or Other Stock Unit Awards. No more than
5.5 million Shares may be issued pursuant to Awards of Restricted Stock,
Restricted Stock Units, Performance Shares, Performance
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Units, Bonus Stock or Other Stock Unit Awards. Shares of Common Stock may be
available from the authorized but unissued Shares or Shares acquired by the
Company, including Shares purchased in the open market. Except as provided in
this Section 5, the issuance of Shares in connection with the exercise of, or as
other payment for, Awards under the Plan shall reduce the number of Shares
available for future Awards under the Plan.
5.2 Additional Limitations. Notwithstanding the foregoing provisions of
this Section 5, (a) the maximum number of shares of Common Stock in respect of
which Incentive Stock Options may be granted shall be 5.5 million shares, and
(b) no individual Participant may receive in any calendar year Stock Options and
Stock Appreciation Rights relating, in the aggregate, to more than 1.1 million
shares of Common Stock plus any Unused Carryover (as defined below). In the
event of a change in the shares of Common Stock of the Company that is limited
to a change in the designation thereof to "Capital Stock" or other similar
designation, or to a change in the par value thereof, or from par value to no
value, without increase or decrease in the number of issued shares, the shares
resulting from any such change shall be deemed to be shares of Common Stock for
purposes of the Plan. No fractional shares of Common Stock shall be issued under
the Plan unless the Committee determines otherwise.
5.3 Lapsed Awards of Forfeited Shares. Except as provided below, in the
event that (i) any Option or other Award granted under the Plan terminates,
expires, or lapses for any reason other than exercise of the Award, or is
settled in cash in lieu of Common Stock, or (ii) if Shares issued pursuant to
the Awards are cancelled or forfeited for any reason, such Shares subject to
such Award shall thereafter be again available for grant of an Award under the
Plan; provided further that if, after grant, the Exercise Price of an Option (or
the base price of a Stock Appreciation Right) is reduced, the transaction shall
be treated as a cancellation of the Option (or the Stock Appreciation Right) and
a grant of a new Option (or Stock Appreciation Right) for purposes of Section
5.2. Notwithstanding the above, with respect to Covered Participants, Options
may not be granted that exceed the maximum number of Shares for which Options
may be issued to the Participants hereunder, and cancelled Shares shall continue
to be counted against the maximum aggregate number of Shares that may be granted
pursuant to Awards.
5.4 Unused Carryover. For purposes of this Plan, "Unused Carryover" means,
for any calendar year (beginning with the 1998 calendar year), the maximum
number of shares of Common Stock with respect to which Options and/or Stock
Appreciation Rights could have been granted to the Participant under the Plan in
the previous calendar year in accordance with this Section 5 (taking into
account any Unused Carryover available in such previous calendar year), reduced
by the number of shares of Common Stock with respect to which Options and/or
Stock Appreciation Rights actually were granted to the Participant in such
previous calendar year. If the Participant is not eligible for an Award in a
calendar year in accordance with the terms and conditions of the Plan, that
calendar year shall be disregarded for purposes of this Section 5.4, and an
Unused Carryover shall not be created or increased in that calendar year. There
shall be no Unused Carryover to the 1997 calendar year.
5.5 Delivery of Shares as Payment. In the event a Participant pays for any
Option or other Award granted under the Plan through the delivery of previously
acquired Shares, the number of Shares available for Awards under the Plan shall
be increased by the number of shares surrendered by the Participant.
5.6 Capital Adjustments. The number and class of Shares subject to each
outstanding Award, the Exercise Price and the aggregate number, type and class
of Shares for which Awards thereafter may be made shall be subject to
adjustment, if any, as the Committee deems appropriate, based on the occurrence
of a number of specified and non-specified events. Such specified events are
discussed in this Section 5.6, but such discussion is not intended to provide an
exhaustive list of such events which may necessitate such adjustments, In
addition, the Committee may treat different Participants and different Awards
differently, and may condition any adjustment on the execution of an appropriate
waiver and release agreement.
(a) If the outstanding Shares are increased, decreased or exchanged
through merger, consolidation, sale of all or substantially all of the
property of the Company, reorganization, recapitalization,
reclassification, stock dividend, stock split or other distribution in
respect to such Shares, for a different number of Shares or type of
securities, or if additional Shares or new or different Shares or other
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securities are distributed with respect to such Shares, an appropriate and
proportionate adjustment shall be made in: (i) the maximum number of Shares
available for the Plan as provided in Section 5.1 herein, (ii) the type of
shares or other securities available for the Plan, (iii) the number of
shares of Stock subject to any then outstanding Awards under the Plan, and
(iv) the price (including Exercise Price) for each Share (or other kind of
shares or securities) subject to then outstanding Awards, but without
change in the aggregate purchase price as to which such Options remain
exercisable or Restricted Stock releasable.
(b) In the event other events not specified above in this Section 5.6,
such as any extraordinary cash dividend, split-up, spin-off, combination,
exchange of shares, warrants or rights offering to purchase Common Stock,
or other similar corporate event, affect the Common Stock such that an
adjustment is necessary to maintain the benefits or potential benefits
intended to be provided under this Plan, then the Committee in its
discretion may make adjustments to any or all of (i) the number and type of
shares which thereafter may be optioned and sold or awarded or made subject
to Stock Appreciation Rights under the Plan, (ii) the Exercise Price of any
Award made under the Plan thereafter, and (iii) the number and Exercise
Price of each Share (or other kind of shares or securities) subject to the
then outstanding awards, but without change in the aggregate purchase price
as to which such Options remain exercisable or Restricted Stock releasable.
(c) Any adjustment made by the Committee pursuant to the provisions of
this Section 5.6, subject to approval by the Board of Directors, shall be
final, binding and conclusive. A notice of such adjustment, including
identification of the event causing such an adjustment, the calculation
method of such adjustment, and the change in price and the number of shares
of Stock, or securities, cash or property purchasable subject to each Award
shall be sent to each Participant. No fractional interests shall be issued
under the Plan based on such adjustments.
SECTION 6. STOCK OPTIONS
6.1 Grant of Stock Options. Subject to the terms and provisions of the Plan
and applicable law, the Committee, at any time and from time to time, may grant
Options to such Key Employees and other persons as it shall determine. The
Committee shall have sole and complete discretion in determining the type of
Option granted, the Exercise Price, the duration of the Option, the number of
Shares to which the Option pertains, any conditions imposed upon the
exercisability of the Options, the conditions under which the Option may be
terminated and such other provisions as may be warranted to comply with the law
or rules of any securities trading system or stock exchange. Each Option grant
shall have such specified terms and conditions detailed in an Agreement. The
Agreement shall specify whether the Option is intended to be an Incentive Stock
Option within the meaning of Section 422 of the Code, or a Nonqualified Stock
Option not intended to be within the provisions of Section 422 of the Code.
6.2 Exercise Price. The Exercise Price per Share covered by an Option shall
be determined at the time of grant by the Committee, subject to the limitation
that the Exercise Price shall not be less than 100% of Fair Market Value on the
Grant Date. However, Options granted upon the assumption of, or in substitution
for, options of another company with which the Company participates in an
acquisition, separation or similar corporate transaction may be issued at an
Exercise Price less than 100% of the Fair Market Value.
6.3 Exercisability. Options granted under the Plan shall be exercisable at
such times and be subject to such restrictions and conditions as the Committee
shall determine, which will be specified in the Agreement and need not be the
same for each Participant. However, no Option granted under the Plan may be
exercisable after the expiration of ten years from the Grant Date.
6.4 Method of Exercise. Options shall be exercised by the delivery of a
written notice from the Participant to the Company in the form prescribed by the
Committee setting forth the number of Shares with respect to which the Option is
to be exercised, accompanied by full payment of the Exercise Price for the
Shares. The Exercise Price shall be payable to the Company in full in cash, or
its equivalent, or, to the extent permitted by applicable law and not in
violation of any instrument or agreement to which the Company is a party, by
delivery of Shares (not subject to any security interest or pledge) valued at
Fair Market Value at the
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time of exercise, or by a combination of the foregoing, or in any other form of
payment acceptable to the Committee. The Committee reserves the right to require
any Shares delivered by the Participant in full or partial payment of the
Exercise Price to be limited to those Shares already owned by the Participant
for at least six (6) months. In addition, at the request of the Participant, and
subject to applicable laws and regulations, the Company may (but shall not be
required to) cooperate in a Cashless Exercise of the Option. In addition, the
Committee may, in its sole discretion, also permit other forms of "cashless
exercise," including withholding from the Shares to be otherwise issued that
number of Shares needed to pay the Exercise Price. As soon as practicable, after
receipt of written notice and payment, the Company shall deliver to the
Participant stock certificates in an appropriate amount based upon the number of
Shares with respect to which the Option is exercised, issued in the
Participant's name.
SECTION 7. STOCK APPRECIATION RIGHTS
7.1 Grant of Stock Appreciation Rights. Subject to the terms and provisions
of the Plan and applicable law, the Committee, at any time and from time to
time, may grant freestanding Stock Appreciation Rights, Stock Appreciation
Rights in tandem with an Option, or Stock Appreciation Rights in addition to an
Option. Stock Appreciation Rights granted in tandem with an Option or in
addition to an Option may be granted at the time the Option is granted or at a
later time. No Stock Appreciation Rights granted under the Plan may be
exercisable after the expiration of ten years from the Grant Date.
7.2 Exercise Price. The Exercise Price of each Stock Appreciation Right
shall be determined on the Grant Date by the Committee, subject to the
limitation that the Exercise Price shall not be less than 100% of Fair Market
Value on the Grant Date. However, Stock Appreciation Rights issued upon
assumption of, or in substitution for, stock appreciation rights of a company
with which the Company participates in an acquisition, separation or similar
corporate transaction may be issued at an Exercise Price less than 100% of the
Fair Market Value.
7.3 Exercise. The Participant is entitled to receive an amount equal to the
excess of the Fair Market Value over the Exercise Price thereof on the date of
exercise of the Stock Appreciation Right.
7.4 Payment. Payment upon exercise of the Stock Appreciation Right shall be
made in the form of cash, Shares, or a combination thereof, as determined in the
sole and complete discretion of the Committee. However, if any payment in the
form of Shares results in a fractional share, the payment for the fractional
share shall be made in cash.
SECTION 8. RESTRICTED STOCK AND RESTRICTED STOCK UNITS
8.1 Grant of Restricted Stock. Subject to the terms and provisions of the
Plan and applicable law, the Committee, at any time and from time to time, may
grant Shares of Restricted Stock and Restricted Stock Units under the Plan to
such Participants, and in such amounts and for such duration of the Period of
Restriction and/or conditions of removal of restrictions as it shall determine.
Participants receiving Restricted Stock and Restricted Stock Units are not
required to pay the Company therefor (except for applicable tax withholding).
8.2 Restricted Stock Agreement. Each Restricted Stock and Restricted Stock
Unit grant shall be evidenced by an Agreement that shall specify the Period of
Restriction; the conditions which must be satisfied prior to removal of the
restriction; the number of Shares of Restricted Stock granted; and such other
provisions as the Committee shall determine. The Committee may specify, but is
not limited to, the following types of restrictions in the Agreement: (i)
restrictions on acceleration or achievement of terms of vesting based on any
business or financial goals of the Company, including, but not limited to,
absolute or relative increases in total stockholder return, revenues, sales, net
income, earnings per share, return on equity, cash flow, operating margin or net
worth of the Company, any of its Subsidiaries, divisions or other areas of the
Company; and (ii) any other further restrictions that may be advisable under the
law, including requirements set forth by the Exchange Act, the Securities Act,
any securities trading system or stock exchange upon which such Shares are
listed.
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8.3 Nontransferability. Except as provided in this Section 8 and subject to
applicable law, the Shares of Restricted Stock or Restricted Stock Units granted
under the Plan may not be sold, transferred, pledged, assigned, exchanged,
encumbered or otherwise alienated or hypothecated until the termination of the
applicable Period of Restriction or upon earlier satisfaction of other
conditions as specified by the Committee in its sole discretion and set forth in
the Agreement. All rights with respect to the Restricted Stock and Restricted
Stock Units granted to a Participant under the Plan shall be exercisable only by
such Participant or his or her guardian or legal representative.
8.4 Removal of Restrictions. Except as otherwise noted in this Section 8,
Restricted Stock and Restricted Stock Units covered by each Award shall be
provided to and become freely transferable by the Participant after the last day
of the Period of Restriction and/or upon the satisfaction of other conditions as
determined by the Committee. Except as specifically provided in this Section 8,
the Committee shall have no authority to reduce or remove the restrictions or to
reduce or remove the Period of Restriction without the express consent of the
stockholders of the Company. Except where performance-based conditions or
restrictions are placed on the grant, or except in the event of the death or
disability of the Participant, or a Change in Control of the Company, the
minimum Period of Restriction shall be three (3) years, which Period of
Restriction would permit the removal of restrictions on no more than one-third
( 1/3) of the Restricted Stock or Restricted Stock Units at the end of the first
year following the Grant Date, and the removal of the restrictions on an
additional one-third ( 1/3) at the end of each subsequent year. Except in the
event of the death or disability of the Participant, or a Change in Control of
the Company, no restrictions may be removed from Restricted Stock or Restricted
Stock Units during the first year following the Grant Date. If there are
performance-based conditions placed on the grant of Restricted Stock or
Restricted Stock Units, the total Period of Restriction shall be no less than
one (1) year from the Grant Date. The following limitations notwithstanding, the
Committee in its sole discretion may reduce or remove the restrictions or reduce
or remove the Period of Restriction with respect to Restricted Stock or
Restricted Stock Units upon assumption of, or in substitution for, restricted
stock or restricted stock units of a company with which the Company participates
in an acquisition, separation, or similar corporate transaction.
8.5 Voting Rights. During the Period of Restriction, Participants in whose
name Restricted Stock is granted under the Plan may exercise full voting rights
with respect to those Shares.
8.6 Dividends and Other Distributions. During the Period of Restriction,
Participants in whose name Restricted Stock is granted shall be entitled to
receive all dividends and other distributions paid with respect to those Shares.
If any such dividends or distributions are paid in Shares, the Shares shall be
subject to the same restrictions on transferability as the Restricted Stock with
respect to which they were distributed.
SECTION 9. PERFORMANCE AWARDS
9.1 Grant of Performance Awards. Subject to the terms and provisions of the
Plan and applicable law, the Committee, at any time and from time to time, may
grant Performance Awards in the form of either Performance Units or Performance
Shares to Participants subject to such Performance Goals and Performance Period
as it shall determine. The Committee shall have complete discretion in
determining the number and value of Performance Units or Performance Shares
granted to each Participant. Participants receiving Performance Awards are not
required to pay the Company therefor (except for applicable tax withholding)
other than the rendering of services.
9.2 Value of Performance Awards. The Committee shall determine the number
and value of Performance Units or Performance Shares granted to each Participant
as a Performance Award. The Committee shall set Performance Goals in its
discretion for each Participant who is granted a Performance Award. The extent
to which such Performance Goals are met will determine the value of the
Performance Unit or Performance Share to the Participant. Such Performance Goals
may be particular to a Participant, may relate to the performance of the
Subsidiary which employs him or her, may be based on the division which employs
him or her, may be based on the performance of the Company generally, or a
combination of the foregoing. The Performance Goals may be based on achievement
of balance sheet or income statement objectives, or any other objectives
established by the Committee. The Performance Goals may be absolute in their
terms or
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measured against or in relationship to other companies comparably, similarly or
otherwise situated. The terms and conditions of each Performance Award will be
set forth in an Agreement.
9.3 Settlement of Performance Awards. After a Performance Period has ended,
the holder of a Performance Unit or Performance Share shall be entitled to
receive the value thereof based on the degree to which the Performance Goals
established by the Committee and set forth in the Agreement have been satisfied.
9.4 Form of Payment. Payment of the amount to which a Participant shall be
entitled upon the settlement of a Performance Award shall be made in cash,
Stock, or a combination thereof as determined by the Committee. Payment may be
made as prescribed by the Committee.
SECTION 10. BONUS STOCK
Subject to the terms and provisions of the Plan and applicable law, the
Committee, at any time and from time to time, may award Shares of Bonus Stock to
Participants without cash consideration. The Committee shall determine and
indicate in the relevant Agreement whether such Shares of Bonus Stock shall be
unencumbered of any restrictions (other than those advisable to comply with law)
or shall be subject to restrictions and limitations similar to those referred to
in Section 9. In the event the Committee imposes any restrictions on the Shares
of Bonus Stock, then such Shares shall be subject to at least the following
restrictions:
(a) No Shares of Bonus Stock may be sold, transferred, pledged,
assigned, exchanged, encumbered or otherwise alienated or hypothecated if
such Shares are subject to restrictions which have not lapsed or have not
been vested.
(b) If any condition of vesting of the Shares of Bonus Stock are not
met, all such Shares subject to such vesting shall be delivered to the
Company and cancelled (in a manner determined by the Committee) within 60
days of the failure to meet such condition without any payment from the
Company.
SECTION 11. OTHER STOCK UNIT AWARDS
11.1 Grant of Other Stock Unit Awards. Subject to the terms and provisions
of the Plan and applicable law, the Committee, at any time and from time to
time, may issue to Participants, either alone or in addition to other Awards
made under the Plan, Other Stock Unit Awards which may be in the form of Common
Stock or other securities. The value of each such Award shall be based, in whole
or in part, on the value of the underlying Common Stock or other securities. The
Committee, in its sole and complete discretion, may determine that an Award,
either in the form of an Other Stock Unit Award under this Section 11 or as an
Award granted pursuant to Sections 6 through 10, may provide to the Participant
(i) dividends or dividend equivalents (payable on a current or deferred basis)
and (ii) cash payments in lieu of or in addition to an Award. Subject to the
provisions of the Plan, the Committee in its sole and complete discretion, shall
determine the terms, restrictions, conditions, vesting requirements, and payment
rules (all of which are sometimes hereinafter collectively referred to as
"Rules") of the Award. The Agreement shall specify the Rules of each Award as
determined by the Committee. However, each Other Stock Unit Award need not be
subject to identical Rules.
11.2 Rules. The Committee, in its sole and complete discretion, may grant
an Other Stock Unit Award subject to the following Rules:
(a) Common Stock or other securities issued pursuant to Other Stock
Unit Awards may not be sold, transferred, pledged, assigned, exchanged,
encumbered or otherwise alienated or hypothecated by a Participant until
the expiration of at least six months from the Award Date, except that such
limitation shall not apply in the case of death or disability of the
Participant or a Change in Control of the Company. All rights with respect
to such Other Stock Unit Awards granted to a Participant shall be
exercisable during his or her lifetime only by such Participant or his or
her guardian or legal representative.
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(b) Other Stock Unit Awards may require the payment of cash
consideration by the Participant upon receipt of the Award or provide that
the Award, and any Common Stock or other securities issued in conjunction
with the Award be delivered without the payment of cash consideration.
(c) The Committee, in its sole and complete discretion, may establish
certain Performance Criteria that may relate in whole or in part to receipt
of the Other Stock Unit Awards.
(d) Other Stock Unit Awards may be subject to a deferred payment
schedule and/or vesting over a specified employment period.
(e) The Committee, in its sole and complete discretion, as a result of
certain circumstances, including, without limitation, the assumption of, or
substitution of stock unit awards of a company with which the Company
participates in an acquisition, separation, or similar corporate
transaction, may waive or otherwise remove, in whole or in part, any
restriction or condition imposed on an Other Stock Unit Award at the time
of grant.
SECTION 12. SPECIAL PROVISIONS APPLICABLE TO COVERED PARTICIPANTS
Awards subject to Performance Criteria paid to Covered Participants under
this Plan shall be governed by the conditions of this Section 12 in addition to
the requirements of Sections 8, 9, 10 and 11 above. Should conditions set forth
under this Section 12 conflict with the requirements of Sections 8, 9, 10 and I
1, the conditions of this Section 12 shall prevail.
(a) All Performance Measures relating to Covered Participants for a
relevant Performance Period shall be established by the Committee in
writing prior to the beginning of the Performance Period, or by such other
later date for the Performance Period as may be permitted under Section
162(m). Performance Measures may include alternative and multiple
Performance Measures and may be based on one or more business criteria. In
establishing Performance Measures, the Committee shall consider one or more
of the following business or financial goals of the Company: absolute or
relative increases in total stockholder return, economic value added,
return on capital employed, revenues, sales, net income, return on equity,
cash flow, operating margin or net worth of the Company, any of its
Subsidiaries, divisions or other areas of the Company.
(b) The Performance Measures must be substantially uncertain of
attainment at the time established, must be objective and must satisfy
third party "objectivity" standards under Section 162(m).
(c) The Performance Measures shall not allow for any discretion by the
Committee as to an increase in any Award, but discretion to lower an Award
is permissible.
(d) The Award and payment of any Award under this Plan to a Covered
Participant with respect to a relevant Performance Period shall be
contingent upon the attainment of the Performance Measures that are
applicable to such Covered Participant. The Committee shall certify in
writing prior to payment of any such Award that such applicable Performance
Measures relating to the Award are satisfied. Approved minutes of the
Committee may be used for this purpose.
(e) The maximum Award that may be paid to any Covered Participant
under the Plan pursuant to Sections 9, 10 and 11 for any Performance Period
is the lesser of $1 Million or 100 percent of the Covered Participant's
annual base salary as of the first day of that Performance Period. The
maximum number of Shares subject to Options, Stock Appreciation Rights or
Restricted Stock granted to any Covered Participant for any fiscal year
shall be the number of shares determined pursuant to Section 5.2(b).
(f) All Awards to Covered Participants under this Plan shall be
further subject to such other conditions, restrictions, and requirements as
the Committee may determine to be necessary to carry out the purpose of
this Section 12.
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SECTION 13. DEFERRED ELECTIONS/TAX REIMBURSEMENTS.
The Committee may permit a Participant to elect to defer receipt of any
payment of cash or any delivery of shares of Common Stock that would otherwise
be due to such Participant by virtue of the exercise, earn-out, or settlement of
any Award made under the Plan. If such election is permitted, the Committee
shall establish rules and procedures for such deferrals, including, without
limitation, the payment or crediting of dividend equivalents in respect of
deferrals credited in units of Common Stock. The Committee may also provide in
the relevant Agreement for a tax reimbursement cash payment to be made by the
Company in favor of any Participant in connection with the tax consequences
resulting from the grant, exercise, settlement or earn-out of any Award made
under the Plan.
SECTION 14. GENERAL PROVISIONS
14.1 Plan Term. The Plan was adopted by the Board of Directors of the
Company on May 29, 1997. The Plan was adopted and approved by the BEI Board of
Directors on , 1997 and recommended for consideration by the BEI
stockholders. Subject to approval by the stockholders of BEI, the Plan shall be
effective as of the effective time of the Distribution of the Stock of the
Company to the stockholders of BEI, pursuant to the Agreement and Plan of
Distribution by and between BEI and the Company dated as of April 15, 1997;
provided, however, no Stock, rights or Options may be sold, awarded or granted
under the Plan until the Company is in receipt of a Registration Statement under
the Securities Act covering the Shares to be issued under the Plan. Any Stock,
rights, or Options granted under this Plan prior to approval of the Plan by the
stockholders of BEI shall be granted subject to such approval.
The Plan terminates December 31, 2006; however, all Awards made prior to,
and outstanding on such date, shall remain valid in accordance with their terms
and conditions.
14.2 Withholding. The Company shall have the right to deduct or withhold,
or require a Participant or Permitted Transferee to remit to the Company, any
taxes required by law to be withheld from Awards. In the event an Award is paid
in the form of Common Stock, the Committee may require the Participant or
Permitted Transferee to remit to the Company the amount of any taxes required to
be withheld from such payment in Common Stock, or, in lieu thereof, the Company
may withhold from the number of Shares otherwise to be issued (or the
Participant or Permitted Transferee, with respect to Stock already owned by such
Participant or Permitted Transferee (which the Committee may require to have
been held for at least six (6) months), may be provided the opportunity to elect
to tender) the number of shares of Common Stock equal in Fair Market Value to
the amount required to be withheld.
14.3 Awards. Each Award shall be evidenced in a corresponding Agreement
provided in writing to the Participant, which shall specify the terms,
conditions and any Rules applicable to the Award, including but not limited to
the effect of a Change in Control, or death, Disability, Divestiture, Early
Retirement, Normal Retirement or other termination of employment of the
Participant on the Award. Each Permitted Transferee, along with the transferor,
of a Non-Qualified Stock Option transferred in accordance with the provisions of
Section 14.4 shall enter into a Stock Option Transfer Agreement with the Company
in a form specified by the Committee.
14.4 Nontransferability. No Award and no rights or interests therein may be
sold, transferred, pledged, assigned, exchanged, encumbered or otherwise
alienated or hypothecated, except (i) by testamentary disposition by the
Participant or the laws of descent and distribution or, except in the case of an
ISO, by a qualified domestic relations order; and (ii) in the case of
Nonqualified Stock Options, transfers made with the prior approval of the
Committee and on such terms and conditions as the Committee in its sole
discretion shall approve, to (a) the spouse, child, step-child, grandchild or
step-grandchild of the Participant (an "Immediate Family Member"), (b) a trust
the beneficiaries of which do not include persons other than the Participant and
Immediate Family Members; (c) a partnership (either general or limited) the
partners of which do not include persons other than the Participant and
Immediate Family Members (or a corporation the shareholders of which do not
include persons other than the Participant and Immediate Family Members); (d) a
corporation the shareholders of which do not include persons other than the
Participant and Immediate Family Members; or (e) any other transferee that is
approved by the Committee in its sole discretion (each a
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Permitted Transferee); provided, however, that, without the prior approval of
the Committee, no Permitted Transferee shall further transfer a Nonqualified
Stock Option, other than by testamentary disposition or the laws of descent and
distribution, either directly or indirectly, including, without limitation, by
reason of the dissolution of, or a change in the beneficiaries of, a Permitted
Transferee that is a trust, the sale, merger, consolidation, dissolution, or
liquidation of a Permitted Transferee that is a partnership (or the sale of all
or any portion of the partnership interests therein), or the sale, merger,
consolidation, dissolution or liquidation of a Permitted Transferee that is a
corporation (or the sale of all or any portion of the stock thereof). Further,
no right or interest of any Participant in an Award may be assigned in
satisfaction of any lien, obligation, or liability of the Participant.
14.5 No Right to Employment. No granting of an Award shall be constituted
as a right to employment with the Company.
14.6 Rights as Stockholder. Subject to the Award provisions, no Participant
or Designated Beneficiary shall be deemed a stockholder of the Company nor have
any rights as such with respect to any Shares to be provided under the Plan
until he or she has become the holder of such Shares. Notwithstanding the
aforementioned, with respect to Stock granted as Restricted Stock, Performance
Shares, Bonus Stock or Other Stock Unit Awards under this Plan, the Participant
or Designated Beneficiary of such Award shall be deemed the owner of such Shares
provided herein. As such, unless contrary to the provisions herein or in any
such related Agreement, such stockholder shall be entitled to full voting,
dividend and distribution rights as provided any other Company stockholder for
as long as the Participant continues to be deemed the owner of such stock.
14.7 Construction of the Plan. The Plan, and its rules, rights, agreements
and regulations, shall be governed, construed, interpreted and administered
solely in accordance with the laws of the state of Delaware. In the event any
provision of the Plan shall be held invalid, illegal or unenforceable, in whole
or in part, for any reason, such determination shall not affect the validity,
legality or enforceability of any remaining provision, portion of provision or
the Plan overall, which shall remain in full force and effect as if the Plan had
been absent the invalid, illegal or unenforceable provision or portion thereof
14.8 Amendment of the Plan. The Committee or Board of Directors may amend,
suspend, or terminate the Plan or any portion thereof at any time, provided such
amendment is made with stockholder approval if such approval is necessary to
comply with any tax or regulatory requirement, including for these purposes any
approval which is a requirement for exemptive relief under Section 16(b) of the
Exchange Act or which is a requirement for the performance-based compensation
exception under Section 162(m). The Committee in its sole discretion may amend
the Plan so as to conform with local rules and regulations subject to any
provisions to the contrary specified herein.
14.9 Amendment of Award. In its sole and complete discretion, the Committee
may at any time amend any Award for the following reasons: (i) additions and/or
changes to the Code, any federal or state securities law, or other law or
regulations applicable to the Award, are made, and such additions and/or changes
have some effect on the Award; or (ii) any other event not described in clause
(i) occurs and the Participant gives his or her consent to such amendment,
provided however, except for capital adjustments described in Section 5.8, the
Committee may not reduce the Exercise Price of an Award.
14.10 Exemption from Computation of Compensation for Other Purposes. By
acceptance of an applicable Award, subject to the conditions of such Award, each
Participant shall be considered in agreement that all Shares sold or awarded and
all Options granted under this Plan shall be considered special incentive
compensation and will be exempt from inclusion as "wages" or "salary" in
pension, retirement, life insurance, and other employee benefits arrangements of
the Company, except as determined otherwise by the Company. In addition, each
Designated Beneficiary of a deceased Participant shall be in agreement that all
such Awards will be exempt from inclusion in "wages" or "salary" for purposes of
calculating benefits of any life insurance coverage sponsored by the Company.
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14.11 Legend. In its sole and complete discretion, the Committee may elect
to legend certificates representing Shares sold or awarded under the Plan, to
make appropriate references to the restrictions imposed on such shares.
14.12 Certain Participants. All Agreements for Participants subject to
Section 16(b) of the Exchange Act shall be deemed to include any such additional
terms, conditions, limitations and provisions as Rule 16b-3 requires, unless the
Committee in its discretion determines that any such Award should not be
governed by Rule 16b-3. All performance-based Awards shall be deemed to include
any such additional terms, conditions, limitations and provisions as are
necessary to comply with the performance-based compensation exemption of Section
162(m) unless the Committee in its discretion determines that any such Award to
a Covered Participant is not intended to qualify for the exemption for
performance-based compensation under Section 162(m).
14.13 Change in Control. In the event of a Change in Control, the Committee
is permitted to accelerate the payment or vesting and release any restrictions
on any Awards.
14.14 Listing, Registration and Other Legal Compliance. No Awards or shares
of the Common Stock shall be required to be issued or granted under the Plan
unless legal counsel to the Company shall be satisfied that such issuance or
grant will be in compliance with all applicable federal and state securities
laws and regulations and any other applicable laws or regulations. The Committee
may require, as a condition of any payment or share issuance, that certain
agreements, undertakings, representations, certificates, and/or information, as
the Committee may deem necessary or advisable, be executed or provided to the
Company to assure compliance with all such applicable laws or regulations. Any
certificates for shares of the Restricted Stock and/or Common Stock delivered
under the Plan may be subject to such stock-transfer orders and such other
restrictions as the Committee may deem advisable under the rules, regulations,
or other requirements of the Securities and Exchange Commission, any stock
exchange upon which the Common Stock is then listed, and any applicable federal
or state securities law. In addition, if, at any time specified herein (or in
any Agreement or otherwise) for (a) the making of any Award, or the making of
any determination, (b) the issuance or other distribution of Restricted Stock
and/or other Common Stock, or (c) the payment of amounts to or through a
Participant with respect to any Award, any law, rule, regulation, or other
requirement of any governmental authority or agency shall require the Company,
any Affiliate, or any Participant (or any estate, designated beneficiary, or
other legal representative thereof) to take any action in connection with any
such determination, any such shares to be issued or distributed, any such
payment, or the making of any such determination, as the case may be, shall be
deferred until such required action is taken. With respect to persons subject to
Section 16 of the Exchange Act, transactions under the Plan are intended to
comply with all applicable conditions of Rule 16b-3. To the extent any provision
of the Plan or any action by the administrators of the Plan fails to so comply
with such rule, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the Committee.
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ANNEX J
NEW BEVERLY HOLDINGS, INC.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
ARTICLE I.
ESTABLISHMENT AND PURPOSE
1.1. Establishment of the Plan. New Beverly Holdings, Inc., a Delaware
corporation ("Company") hereby establishes a stock option plan as set forth in
this document, which plan as amended from time to time shall be known as the
"New Beverly Non-Employee Directors' Stock Option Plan" ("Plan").
1.2 Purpose. The purpose of the Plan is to build a proprietary interest
among the Company's Non-Employee Directors and thereby secure for the Company's
stockholders the benefits associated with common stock ownership by those who
will oversee the Company's future growth and success.
1.3 Applicability of the Plan. The provisions of this Plan are applicable
only to individuals who are Non-employee Directors as of the Effective Time of
the Distribution of the Common Stock of the Company to the stockholders of
Beverly Enterprises, Inc. ("BEI"), pursuant to the Agreement and Plan of
Distribution by and between BEI, Capstone Pharmacy Services, Inc. ("Capstone")
and the Company dated as of April 15, 1997 (the "Distribution Date"), or becomes
a Non-Employee Directors thereafter.
1.4 Effective Date. This Plan shall be effective as of the Distribution
Date, subject to the approval of this Plan by the Board of Directors and the
Company's stockholders, as provided in this Section 1.4. To become effective,
this Plan must be approved by the Board of Directors and by the affirmative vote
of the holders of a majority of shares of Common Stock present, or represented,
and entitled to vote thereon at a meeting of the Company's stockholders called
for such purpose. Absent such approvals prior to June 1, 1998, this Plan shall
terminate and cease to be of any further force or effect and all grants of
Options hereunder shall be null and void.
ARTICLE II.
DEFINITIONS AND CONSTRUCTION
2.1 Definitions. Whenever used as a capitalized term in the Plan, the
following terms shall have the respective meanings set forth below, unless
otherwise expressly provided:
(a) "Affiliate" means "affiliate" as defined in Rule 12b-2 under the
Exchange Act.
(b) "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 under the Exchange Act.
(c) "Board" or "Board of Directors" means the Board of Directors of
the Company.
(d) "Change in Control" shall be deemed to have occurred if the
conditions set forth in any one of the following paragraphs shall have been
satisfied:
(1) Any Person, corporation or other entity or group becomes the
Beneficial Owner of shares of the Company having 30 percent or more of
the total number of votes that may be cast for the election of members
of the Board; or
(2) As the result of, or in connection with, any tender or exchange
offer, merger or other business combination, sale of assets or contested
election, or any combination of the foregoing (a "Transaction"), the
persons who were members of the Board before the Transaction shall cease
to constitute a majority of the Board of Directors of the Company or any
successor to the Company or its assets; or
(3) If at any time (A) the Company shall consolidate with, or merge
with, any other Person and the Company shall not be the continuing or
surviving corporation, (B) any Person shall
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consolidate with, or merge with, the Company, and the Company shall be
the continuing or surviving corporation and in connection therewith, all
or part of the outstanding Common Stock shall be changed into or
exchanged for stock or other securities of any other Person or cash or
any other property, (C) the Company shall be a party to a statutory
share exchange with any other Person after which the Company is a
Subsidiary of any other Person, or (D) the Company shall sell or
otherwise transfer 50 percent or more of the assets or earning power of
the Company and its Subsidiaries (taken as a whole) to any Person or
Persons.
(e) "Code" means the Internal Revenue Code of 1986, as amended, and
the regulations issued thereunder, as the same may be amended from time to
time.
(f) "Common Stock" means the common stock of the Company.
(g) "Company" means New Beverly Holdings, Inc., or any successor
thereto.
(h) "Effective Date" means the Distribution Date, subject to the
approvals as described in Section 1.4.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(j) "Fair Market Value" means, on any given date, the closing price of
Common Stock as reported on the New York Stock Exchange composite tape on
such day or, if no shares of Common Stock were traded on the New York Stock
Exchange on such day, then on the next preceding day that Common Stock was
traded on such Exchange, all as reported by such source as the Board may
select. As to Options granted to Participants in connection with the
assumption of Options previously granted by Beverly Enterprises, Inc. (BEI)
pursuant to the Employee Benefit Matters Agreement dated April 15, 1997
among BEI, the Company and Capstone, Fair Market Value shall have the
definition contained therein.
(k) "Grant Date" means June 1 of each calendar year during the period
this Plan remains in effect. The first "Grant Date" under the Plan is June
1, 1998.
(l) "Non-Employee Director" means an individual who is a member of the
Board and who is not an employee of the Company or any Subsidiary or
Affiliate thereof.
(m) "Option" means an option granted under this Plan to purchase a
share or shares of Common Stock.
(n) "Participant" means a Non-Employee Director to whom an Option has
been granted under this Plan.
(o) "Person" means "person" as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d)(3) of the Exchange Act.
(p) "Plan" means the "New Beverly Holdings, Inc. Non-Employee
Directors Stock Option Plan" as set forth in this document, and as the same
may be amended from time to time.
(q) "Subsidiary" means a corporation at least 50 percent of the
combined voting power of all classes of stock of which is owned by the
Company, either directly or through one or more of its Subsidiaries.
(r) "Vesting Date" means, with respect to any Options granted as of a
particular Grant Date, the next June 1 following such Grant Date. The first
Vesting Date under the Plan is June 1, 1999.
2.2 Gender and Number; Headings. Except when otherwise indicated by the
context, any masculine terminology when used in this Plan shall also include the
feminine gender, and the definition of any term in the singular shall also
include the plural. Headings of Articles and Sections herein are included solely
for convenience, and if there is any conflict between such headings and the text
of the Plan, the text shall control.
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ARTICLE III.
ELIGIBILITY AND PARTICIPATION
3.1 Eligibility; Participation. Each Non-Employee Director shall be
eligible to participate under this Plan and to receive a grant of an Option in
accordance with the provisions of this Plan.
3.2 Grant of Stock Options. Each Non-Employee Director as of the first
Grant Date shall automatically be granted an Option to purchase 2,500 shares of
Common Stock ,and shall automatically be granted an Option to purchase an
additional 2,500 shares of Common Stock as of each Grant Date subsequent to the
initial Grant Date applicable to such Non-Employee Director and during the term
of this Plan, with each such subsequent grant being effective as of the
applicable Grant Date. To be eligible to receive such an Option grant with
respect to any such Grant Date, the Non-Employee Director must be a Nonemployee
Director on such Grant Date. All Options granted under this Section 3.2 shall be
subject to the Common Stock availability provisions of Section 4.1. Each
individual who first becomes a Nonemployee Director after the Effective Date
shall automatically be granted an Option to purchase 2,500 shares of Common
Stock, effective as of the Grant Date which is coincident with or next following
the date on which such individual becomes a Non-Employee Director.
ARTICLE IV.
COMMON STOCK AVAILABLE
4.1 In General. Subject to adjustment as provided in Section 4.2, an
aggregate of 300,000 shares of Common Stock shall be available for grant and
issuance pursuant to the provisions of this Plan. Such shares may be authorized
and unissued shares or may be shares issued and thereafter acquired by the
Company. If an Option shall expire or terminate for any reason without having
been exercised in whole or in part, the unpurchased shares of Common Stock
subject to such Option shall again be available for subsequent Option grants
under the Plan.
4.2 Adjustment in Event of Changes in Capitalization. In the event of a
stock dividend, stock split, or combination of shares, recapitalization or other
change in the Company's capitalization, or other distribution with respect to
holders of the Company's Common Stock other than normal cash dividends, an
automatic adjustment shall be made in the number and kind of shares as to which
outstanding Options or portions thereof then unexercised shall be exercisable
and in the available shares set forth in Section 4.1, to the end that the
proportionate interest of the Participant or eligible Non-Employee Director
shall be maintained as before the occurrence of such event. Such adjustment in
outstanding Options shall be made without change in the total price applicable
to the unexercised portion of such Options and with a corresponding adjustment
in the Option price per share. Automatic adjustment shall also be made in the
number and kind of shares subject to Options subsequently granted under Article
III of the Plan.
ARTICLE V.
TERMS AND CONDITIONS OF STOCK OPTIONS
5.1 Exercise of Stock Options.
(a) Option Exercisability. Each Option granted as of a particular
Grant Date shall be exercisable on or after the Vesting Date with respect
to such Grant Date, subject to the provisions of Section 5.1(b) and (c).
(b) Immediate Vesting For Death, Disability, and Change of
Control. Notwithstanding the provisions of Section 5.1(a), an Option
granted to any Participant shall become immediately exercisable in full
upon the first to occur of --
(1) The death of the Participant, in which case the Option may be
exercised by the Participant's executor or administrator, or if not so
exercised, by the legatees or distributees of his or
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her estate or by such other person or persons to whom the Participant's
rights under the Option shall pass by will or by the applicable laws of
descent and distribution;
(2) Such time as the Participant ceases to be a member of the Board
by reason of his or her disability and
(3) Change in Control.
(c) Termination Other Than Death or Disability. In the event the
Participant ceases to be a Nonemployee Director of the Company for any
reason other than death or disability when no Change of Control has
occurred, and such termination occurs prior to the time an Option granted
to such Participant has become exercisable, such Option shall terminate
with respect to the shares as to which the Option is not then exercisable
and all rights of the Participant to such shares shall terminate without
further obligation on the part of the Company. As regards any Option which
is exercisable by the Participant at such time, such Participant must
exercise such Option within 90 days following the date the Participant so
ceased to be a Non-Employee Director; and, any such Option remaining
unexercised as of the close of such period shall expire.
5.2 Exercise Price. The exercise price of an Option for a share of Common
Stock shall be 100 percent of the Fair Market Value of such Common Stock on the
Grant Date relating to such Option. However, Options granted on the assumption
of, or in substitution for, options of another company with which the Company
participates in an acquisition, separation or similar corporate transaction may
be issued at an exercise price less than 100% of Fair Market Value.
5.3 Expiration of Options.
(a) In General. An Option shall expire ten years from the Grant Date
relating to such Option, unless terminated earlier in accordance with the
Plan.
(b) Death or Disability of Participant. In the event a Participant
ceases to be a Non-Employee Director of the Company by reason of death or
disability, including without limitation in the event that a Participant
dies after ceasing to be a member of the Board by reason of disability, any
Option granted to such Participant hereunder that has not been fully
exercised at the time of the Participant's death may be exercised at any
time within the greater of
(1) one year after the date of death or disability, or --
(2) in the event any Option is exercised by the executors,
administrators, legatees, or distributees of the estate of a deceased
Participant, the Company shall be under no obligation to issue Common
Stock thereunder unless and until the Company is satisfied that the
person or persons exercising the Option are the duly appointed legal
representatives of the deceased optionee's estate or the proper legatees
or distributees thereof.
5.4 Exercise and Payment of Exercise Price.
(a) Number of Shares. Subject to the terms and conditions of the Plan,
an Option shall, to the extent then exercisable, be exercisable in whole or
in part by giving written notice to the Company stating the number of
shares with respect to which the Option is being exercised, accompanied by
payment in full for such shares; provided, however, that there shall be no
such exercise at any one time as to fewer than 100 shares or all of the
remaining shares then purchasable by the person or persons exercising the
Option, if fewer than 100 shares.
(b) Payment Methods. An Option may be paid for by --
(1) delivery of cash or a check payable to the order of the Company
in an amount equal to the exercise price of such Option, or
(2) by delivery to the Company of shares of Common Stock of the
Company already owned by the Participant for more than six months and
having a Fair Market Value equal in amount to the exercise price of the
Option being exercised, provided that such method is consistent with
applicable
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tax and securities laws, and is not contrary to any restriction on the
Company's purchase of its own shares; or
(3) by any combination of such methods of payment.
5.5 Rights as a Shareholder. Except as specifically provided by the Plan,
the grant of an Option shall not give a Participant rights as a stockholder; and
the Participant will obtain such rights only upon actual receipt of Common
Stock.
5.6 Documentation of Option Grants. Option grants shall be evidenced by
written instruments prescribed by the Board from time to time. The instruments
may be in the form of agreements to be executed by both the Participant and the
Company or certificates, letters or similar instruments, which need not be
executed by the Participant, but acceptance of which will evidence agreement to
the terms of the grant.
5.7 Nontransferability of Options. No Option granted under the Plan shall
be assignable or transferable by the Participant to whom it is granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution or pursuant to a "qualified domestic relations order" ("QDRO") as
defined under Section 414(p) of the Code. Any such attempted assignment or
transfer in violation of this Section 5.7 shall be null and void. During the
life of the Participant, the Option shall be exercisable only by such person or
an alternate payee under a QDRO, or, in the event of incapacity, by the person
or person properly appointed to act on his or her behalf.
ARTICLE VI.
REGULATORY COMPLIANCE
6.1 Issuance or Delivery of Shares. The issuance or delivery of any shares
of Common Stock subject to exercisable Options may be postponed by the Board for
such period as may be required to comply with any applicable requirements under
the Federal or applicable state securities laws, any applicable listing
requirements of any national securities exchange, or any requirements under any
law or regulation applicable to the issuance or delivery of such shares. The
Company shall not be obligated to issue or deliver any such shares if, in the
opinion of Company counsel, the issuance or delivery thereof would constitute a
violation of any provision of any law or of any regulation of any governmental
authority or any national securities exchange.
ARTICLE VII.
ADMINISTRATION
7.1 Plan Administration. The Plan shall be administered by the Board. The
Board shall have all the powers vested in it by the terms of the Plan, such
powers to include authority within the limitations described herein to prescribe
the form of the agreement embodying grants of Options. The Board shall have the
power to construe the Plan, to determine all questions arising thereunder, and
to adopt and amend such rules and regulations for the administration of the Plan
as it may deem desirable. Any decision of the Board in the administration of the
Plan, as described herein, shall be final and conclusive. The Board may from
time to time delegate certain of its administrative responsibilities under the
Plan to Company personnel or to a committee. The Board may act only by a
majority of its members in office, except that the members thereof may authorize
any one or more of their number or any officer of the Company to execute and
deliver documents on behalf of the Board. No member of the Board shall be liable
for anything done or omitted to be done other than by such member's own willful
misconduct or as expressly provided by statute.
7.2 Indemnification and Exculpation. The members of the Board, its agents,
and officers and employees of the Company shall be indemnified and held harmless
by the Company against and from any and all loss, cost, liability, or expense
that may be imposed upon or reasonably incurred by them in connection with or
resulting from any claim, action, suit, or proceeding to which they may be a
party or in which they may be involved by reason of any action taken or failure
to act under this Plan and against and from any and all amounts paid by them in
settlement (with the Company's written approval) or paid by them in satisfaction
of
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a judgment in any such action, suit, or proceeding. The foregoing provision
shall not be applicable to any person if the loss, cost, liability, or expense
is due to such person's gross negligence or willful misconduct.
ARTICLE VIII.
AMENDMENT AND TERMINATION
8.1 Amendment. Except as provided in Section 6.2, the Board shall have the
right to amend or modify the Plan in full or in part at any time and from time
to time; provided, however, that unless required by law, no such amendment or
modification shall --
(a) affect any right or obligation with respect to any Option grant
theretofore made,
(b) in any manner affect the restrictions set forth in Section 6.2, or
(c) unless previously approved by the stockholders of the Company,
where such approval is necessary to satisfy then applicable requirements of
Federal securities laws, the Code, or rules of any stock exchange on which
the Company's Common Stock is listed --
(1) in any manner materially affect the eligibility requirements
set forth in Sections 3.1, and 3.2,
(2) materially increase the number of shares of Common Stock
available for or subject to Options, or
(3) materially increase the benefits to Participants under the
Plan.
8.2 Termination.
(a) In General. The Board shall have the right to terminate the Plan
at any time; provided, however, that Options which are granted on or before
the termination date shall remain exercisable in accordance with their
respective terms after the termination of the Plan.
(b) Termination Date. Unless terminated earlier by the Board, the Plan
shall terminate on December 31, 2007; provided, however, that Options which
are granted on or before such date shall remain exercisable in accordance
with their respective terms after the termination of the Plan.
ARTICLE IX.
MISCELLANEOUS
9.1 Shareholder Approval. The effectiveness of the Plan and of the grant of
all Options under the Plan are subject to stockholder approval as provided in
Section 1.4. The Company's obligation to issue and deliver shares of Common
Stock under the Plan is subject to the approval of any governmental authority
required in connection with the authorization, issuance, or delivery of Common
Stock.
9.2 No Right to Reelection. Nothing in the Plan shall be deemed to create
any obligation on the part of the Board to nominate any Non-Employee Director
for reelection by the Company's stockholders, nor confer upon any Nonemployee
Director the right to remain a member of the Board for any period of time, or at
any particular rate of compensation.
9.3 Severability. In the event any provision of this Plan shall be held
invalid or illegal for any reason, any illegality or invalidity shall not affect
the remaining parts of this Plan, but this Plan shall be construed and enforced
as if the illegal or invalid provision had never been inserted, and the Company
shall have the privilege and opportunity to correct and remedy such questions of
illegality or invalidity by amendment as provided in this Plan.
9.4 Status Under ERISA. This Plan is not maintained as and is not intended
to be an "employee benefit plan" under the Employee Retirement Income Security
Act of 1974, as amended.
9.5 Applicable Law. The Plan shall be governed by, construed, and
administered in accordance with the laws of the State of Delaware, except to the
extent such laws are preempted by the laws of the United States.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL applies to Capstone, and the relevant portion of
the DGCL provides as follows:
145. Indemnification of Officers, Directors, Employees and Agents;
Insurance. (a) A corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses (including attorneys' fees)
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<PAGE> 492
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).
The Capstone Certificate of Incorporation limits the liability of directors
(in their capacity as directors, but not in their capacity as officers) to
Capstone or its stockholders to the fullest extent permitted by the DGCL, as
amended. Specifically, no director of Capstone will be personally liable to
Capstone or its stockholders for monetary damages for breach of the director's
fiduciary duty as a director, except as provided in Section 102 of the DGCL for
liability: (i) for any breach of the director's duty of loyalty to Capstone or
its stockholders; (ii) for acts or omissions not in good faith and which involve
intentional misconduct or knowing violation of law; (iii) under Section 174 of
the DGCL, which relates to unlawful payments of dividends or unlawful stock
repurchases or redemptions; or (iv) for any transaction from which the director
derived an improper personal benefit. The inclusion of this provision in the
Capstone Certificate of Incorporation may have the effect of reducing the
likelihood of derivative litigation against directors, and may discourage or
deter
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<PAGE> 493
stockholders or management from bringing a lawsuit against directors for breach
of their duty of care, even though such action, if successful, might otherwise
have benefitted Capstone and its stockholders.
Under the Capstone Certificate of Incorporation and in accordance with
Section 145 of the DGCL, Capstone will indemnify any person who was or is a
party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than a "derivative" action by or in the right of Capstone)
by reason of the fact that such person was or is a director or officer of
Capstone, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of Capstone, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe such acts were unlawful. A similar standard
of care is applicable in the case of derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) actually
and reasonably incurred in connection with the defense or settlement of such an
action and then, where the person is adjudged to be liable to Capstone, only if
and to the extent that the Court of Chancery of the State of Delaware or the
court in which such action was brought determines that such person is fairly and
reasonably entitled to such indemnity and then only for such expenses as the
court deems proper. Capstone will indemnify, pursuant to the standard enumerated
in Section 145 of the DGCL, any past or present officer or director who was or
is a party, or is threatened to be made a party, to any threatened, pending or
completed derivative action by or in the right of Capstone.
The Capstone Certificate of Incorporation of Capstone provides that
Capstone may pay for the expenses incurred by an indemnified director or officer
in defending the proceedings specified above in advance of their final
disposition, provided that, if the DGCL so requires, such indemnified person
agrees to reimburse Capstone if it is ultimately determined that such person is
not entitled to indemnification. The Capstone Certificate of Incorporation also
allows Capstone, in its sole discretion, to indemnify any person who is or was
one of its employees and agents to the same degree as the foregoing
indemnification of directors and officers. To the extent that a director,
officer, employee or agent of Capstone has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145 of the DGCL, or in defense of any claim,
issue or matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection therewith. In addition, Capstone may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
Capstone or another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against and incurred by such person in
such capacity, or arising out of the person's status as such whether or not
Capstone would have the power or obligation to indemnify such person against
such liability under the provisions of the DGCL. Capstone maintains insurance
for the benefit of Capstone's officers and directors insuring such persons
against certain liabilities, including civil liabilities under the securities
laws. Additionally, Capstone has entered into indemnification agreements with
each of the Directors of Capstone, which, among other things, provides that
Capstone will indemnify such Directors to the fullest extent permitted by the
Capstone Certificate of Incorporation and the DGCL and will advance expenses of
defending claims against such Directors.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Reference is made to the exhibit index immediately following the
signature page to the Registration Statement.
(b) The Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(c) The following opinions are included in the Joint Proxy
Statement/Prospective as indicated:
<TABLE>
<S> <C>
Opinion of Merrill Lynch, Pierce, Fenner & Smith, Inc....... Annex D
Opinion of Stephens Inc..................................... Annex E
Opinion of Adirondack Capital Advisors, LLC................. Annex F
</TABLE>
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ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
2. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
3. That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
4. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
5. The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form S-4, within one business
day of receipt of such request, and to send the incorporated documents by
first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
6. The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became Effective.
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<PAGE> 495
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Dallas, State of Texas,
on the 30th day of May, 1997.
CAPSTONE PHARMACY SERVICES, INC.
By: /s/ R. DIRK ALLISON
------------------------------------
R. Dirk Allison
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature to the Registration Statement appears below
hereby appoints R. Dirk Allison and James D. Shelton, and each of them, as his
attorneys-in-fact to execute in the name and on behalf of any such person,
individually and in the capacity stated below, and to file all amendments and
post-effective amendments to this Registration Statement, which amendment or
amendments may make such changes and additions in this Registration Statement as
such attorneys-in-fact may deem necessary or appropriate.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on the dates indicated by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ R. DIRK ALLISON President, Chief Executive May 30, 1997
- ----------------------------------------------------- Officer and Director (Chief
R. Dirk Allison Executive Officer)
/s/ JAMES D. SHELTON Executive Vice President, Chief May 30, 1997
- ----------------------------------------------------- Financial Officer and
James D. Shelton Secretary (Chief Accounting
Officer)
/s/ ALLAN C. SILBER Chairman May 30, 1997
- -----------------------------------------------------
Allan C. Silber
/s/ MORRIS A. PERLIS Vice Chairman May 30, 1997
- -----------------------------------------------------
Morris A. Perlis
/s/ JOSEPH FURLONG, III Director May 30, 1997
- -----------------------------------------------------
Joseph Furlong, III
/s/ JOHN HARONIAN Director May 30, 1997
- -----------------------------------------------------
John Haronian
/s/ ALBERT REICHMANN Director May 30, 1997
- -----------------------------------------------------
Albert Reichmann
/s/ EDWARD SONSHINE Director May 30, 1997
- -----------------------------------------------------
Edward Sonshine
/s/ DR. GAIL WILENSKY Director May 30, 1997
- -----------------------------------------------------
Dr. Gail Wilensky
/s/ JOHN E. ZUCCOTTI Director May 30, 1997
- -----------------------------------------------------
John E. Zuccotti
</TABLE>
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<PAGE> 496
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger between Beverly and
Capstone, dated April 15, 1997 (incorporated by reference
to Annex B to the Joint Proxy Statement/Prospectus).
2.2 -- Asset Purchase Agreement among Integrated Health
Services, Inc. ("IHS"), Symphony Pharmacy Services, Inc.,
various of its subsidiaries ("Symphony") and Capstone,
dated June 20, 1996 (incorporated by reference to Exhibit
2 to Capstone's Current Report on Form 8-K dated July 18,
1996).
2.3 -- Amendments No. 1 to the Asset Purchase Agreement by and
between IHS, Symphony and Capstone, dated July 30, 1996.
(incorporated by reference to Exhibit 2.3 to Capstone's
Annual Report on Form 10-K for fiscal year ended December
31, 1996).
2.4 -- Agreement and Plan of Merger dated January 3, 1997, by
and among Clinical Care-SNF, Inc., Ron Belville, Capstone
and Institutional Pharmacy Services, Inc. ("IPS")
(incorporated by reference to Exhibit 2.1 to Capstone's
Current Report on Form 8-K dated January 31, 1997).
2.5 -- Agreement and Plan of Merger dated January 3, 1997, by
and among Portaro Pharmacies, Inc., Denis Portaro, Sandra
Portaro, Denis A. and Sandra Lou Portaro Revocable Trust
of 1992, Capstone and IPS (incorporated by reference to
Exhibit 2.2 to Form 8-K dated January 31, 1997).
2.6 -- Asset Purchase Agreement by and between Pharmacare, Inc.
and IPS, dated March 24, 1997 (incorporated by reference
to Exhibit 2.9 to Capstone's Annual Report on Form 10-K
for fiscal year ended December 31, 1996).
4.1 -- Form of Series B Warrant Certificate (incorporated by
reference to Exhibit 4.1 to Capstone's Registrant's
Registration Statement on Form S-3 (Reg. No. 333-03643)).
4.2 -- Form of Series B Warrant Agreement, dated as of August 7,
1996, between Capstone and First Union National Bank of
North Carolina (incorporated by reference to Exhibit 4.2
to Capstone's Registration Statement on Form S-3 (Reg.
No. 33-03643)).
4.4 -- Form of Warrant ($4.50) for Purchase of Common Stock
(incorporated by reference to Exhibit 4.5 to Capstone's
Annual Report on Form 10-K for fiscal year ended February
29, 1995).
4.5 -- Form of Warrant ($5.50) for Purchase of Common Stock
(incorporated by reference to Exhibit 4.6 to Capstone's
Annual Report on Form 10-K for fiscal year ended February
29, 1995).
4.6 -- Stock Purchase Agreement, dated December 16, 1994,
between Capstone and Counsel Corporation (incorporated by
reference to Exhibit 4.7 to Capstone's Annual Report on
Form 10-K for fiscal year ended February 29, 1995).
4.7 -- Warrant to Purchase Shares of Common Stock, dated
December 16, 1994, for the purchase of 800,000 shares
(incorporated by reference to Exhibit 4.8 to Capstone's
Annual Report on Form 10-K for fiscal year ended February
29, 1995).
4.8 -- Warrant to Purchase Shares of Common Stock, dated
December 16, 1994, for the purchase of 1,000,000 shares
(incorporated by reference to Exhibit 4.9 to Capstone's
Annual Report on Form 10-K for fiscal year ended February
29, 1995).
4.9 -- Warrant to purchase shares of Common Stock dated January
1, 1996, for the purchase of 75,000 shares. (incorporated
by reference to Exhibit 4.9 to Capstone's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996)
4.10 -- Warrant to purchase shares of Common Stock dated December
20, 1995 for the purchase of 15,000 shares. (incorporated
by reference to Exhibit 4.10 to Capstone's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.11 -- Form of ACA Investors Warrant ($12.00) for purchase of
Common Stock (incorporated by reference to Exhibit 4.11
to Capstone's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996).
4.13 -- Form of Certificate of Amendment to Certificate of
Incorporation of Capstone (incorporated by reference to
Annex G to the Joint Proxy Statement/Prospectus).
5.1 -- Opinion of Harwell Howard Hyne Gabbert & Manner P.C.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Ernst & Young LLP.
23.3 -- Consent of Harwell Howard Hyne Gabbert & Manner, P.C.
(contained in Exhibit 5.1).
24 -- Power of Attorney (included on signature page).
</TABLE>
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<PAGE> 1
EXHIBIT 5.1
June , 1997
Capstone Pharmacy Services, Inc.
9901 East Valley Ranch Parkway
Suite 3001
Irving, Texas 75063
Ladies and Gentlemen:
We have acted as legal counsel to Capstone Pharmacy Services, Inc. (the
"Company"), in connection with the preparation of a Registration Statement on
Form S-4 under the Securities Act of 1933, as amended ("Registration
Statement"), relating to the issuance of shares of Company stock (the "Shares")
to the holders of Beverly Enterprises, Inc. ("Beverly") in connection with the
merger of Beverly and the Company.
We have examined and are familiar with the Certificate of Incorporation and
the By-Laws of the Company, and the various corporate records and proceedings
relating to the organization of the Company and the filing of the Registration
Statement. We have also examined such other documents and proceedings as we have
considered necessary for the purpose of this opinion.
Based on the foregoing it is our opinion that the Shares will, when sold,
be legally issued, fully paid, and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and with such state securities administrators as may
require such opinion of counsel for the registration of the Shares, and the
reference to this firm under the heading "Legal Matters" in the Prospectus.
Very truly yours,
HARWELL HOWARD HYNE
GABBERT & MANNER, P.C.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland,
June 2, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4 No. 333-00000) and related Prospectus of
Capstone Pharmacy Services, Inc. and Joint Proxy Statement of Beverly
Enterprises Inc. and Capstone Pharmacy Services, Inc. for the registration of
50,000,000 shares of Capstone Pharmacy Services, Inc. common stock and to the
incorporation by reference therein of our report dated February 7, 1997 (except
for Note 2, paragraph 3, as to which the date is March 13, 1997) with respect to
the consolidated financial statements and schedule of Beverly Enterprises, Inc.
included in its Annual Report (Form 10-K) for the year ended December 31, 1996,
filed with the Securities and Exchange Commission.
We also consent to the reference to our firm under the caption "Experts"
and to the use of our report dated April 18, 1997, with respect to the
consolidated financial statements and schedule of Pharmacy Corporation of
America included in the above mentioned Registration Statement and Prospectus of
Capstone Pharmacy Services, Inc.
Ernst & Young LLP
June 2, 1997
