-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MljNYVZx44YmYlbkTQ0lu0n+vZbGeQSLnEsojH3xIzfKNjkBIz20/bnbJngVjo4Q oiPnCO3AlNuBg9CE1sQspw== 0000950134-97-004162.txt : 19970521 0000950134-97-004162.hdr.sgml : 19970521 ACCESSION NUMBER: 0000950134-97-004162 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970415 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970520 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEVERLY ENTERPRISES INC /DE/ CENTRAL INDEX KEY: 0000812305 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 954100309 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09550 FILM NUMBER: 97612170 BUSINESS ADDRESS: STREET 1: 1200 S WALDRON RD STREET 2: STE 155 CITY: FORT SMITH STATE: AR ZIP: 72903 BUSINESS PHONE: 5014526712 8-K 1 FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 April 15, 1997 --------------------------------- Date of Report (Date of earliest event reported) Beverly Enterprises, Inc. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware ---------------------------------------------- (State or other jurisdiction of incorporation) 1-9550 95-4100309 - ------------------------ --------------------------------- (Commission file number) (IRS employer identification no.) 5111 Rogers Avenue Suite 40-A Fort Smith, Arkansas 72919 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) (501) 452-6712 ---------------------------------------------------- (Registrant's telephone number, including area code) 2 Item 5. Other Events On April 16, 1997, Beverly Enterprises, Inc. ("Beverly") and Capstone Pharmacy Services, Inc. ("Capstone") announced that they have signed a definitive agreement dated April 15, 1997(the "Merger Agreement") to combine Beverly's institutional pharmacy subsidiary, Pharmacy Corporation of America ("PCA") with Capstone to create the nation's largest independent institutional pharmacy company (the "Merger"). Capstone is expected to issue approximately 50 million shares of its common stock ("Capstone Common Stock") to Beverly stockholders and assume $275 million of PCA debt incurred to repay Beverly for certain intercompany indebtedness, with any remaining intercompany balance contributed to PCA's capital. Beverly stockholders will receive, for each share of Beverly Common Stock exchanged in the Merger, a fraction of a Capstone share equal to the quotient of 50,000,000 divided by the number of Beverly shares outstanding at the effective date of the Merger, or approximately .44 of a Capstone share, based on the fully diluted number of shares of Beverly Common Stock outstanding at March 31, 1997. The exact ratio will be determined on the effective date of the Merger, and Beverly stockholders are expected to own approximately 57% of the combined pharmacy company. Concurrently with execution of the Merger Agreement, Beverly, Capstone and New Beverly Holdings, Inc. ("NBHI"), a wholly owned subsidiary of Beverly, also entered into an Agreement and Plan of Distribution (the "Distribution Agreement"). Under the Distribution Agreement, Beverly will transfer all of its non-PCA business, including all related assets and liabilities (the "Remaining Health Care Business") to NBHI in exchange for the issuance of NBHI Common Stock. Then, on the Distribution Date (as defined in the Distribution Agreement) and prior to the Merger, Beverly will distribute to holders of Beverly Common Stock as of the Distribution Record Date (as defined in the Distribution Agreement) the NBHI Common Stock then owned by Beverly, on the basis of one whole share of NBHI Common Stock for each outstanding whole share of Beverly Common Stock (the "Distribution"). The Distribution Agreement also sets forth various agreements between Beverly and NBHI to facilitate and accomplish the separation of PCA and its institutional pharmacy business from Beverly's Remaining Health Care Business. Thus, upon completion of the Distribution and the Merger, Beverly stockholders will have received one share of NBHI Common Stock (reflecting an interest in the Remaining Health Care Business) for each share of Beverly Common Stock held as of the Distribution Record Date, and will have exchanged their shares of Beverly Common Stock for shares of Capstone Common Stock (reflecting an interest in the combined institutional pharmacy businesses of PCA and Capstone) on the basis described above. The completion of the Merger is subject to certain conditions, including but not limited to the approval of both Beverly and Capstone stockholders, the completion of the Distribution, customary regulatory approvals and the receipt, at the option of Beverly, of either a favorable tax ruling from the IRS or an opinion reasonably acceptable to Beverly and Capstone concerning the tax-free nature of the transactions. This Current Report contains forward-looking information regarding proposed transactions, the consummation of which are subject to various 2 3 conditions and uncertainties, and which information is being provided in connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those forecasted or contemplated. These risks and uncertainties include national and local economic conditions, market conditions, the effect of government regulation and the competitive environment in which the companies operate, and regulatory review of the pending transactions described in this Report. These and other risks and uncertainties which could affect future results may also be addressed in filings with the Securities and Exchange Commission, including Reports on Forms 10-K and 10-Q. The above summary of the Merger Agreement and the Distribution Agreement is not intended to be complete and is qualified in its entirety by reference to the detailed provisions of the Merger Agreement and the Distribution Agreement, which are attached hereto as Exhibits 2.1 and 2.2, respectively. In addition, a copy of the press release issued by Beverly in connection with its announcement of the above-described transaction is attached hereto as Exhibit 99.1. Item 7. Financial Statements and Exhibits. a) Financial statements of businesses acquired. Not applicable. b) Pro forma financial information. Not applicable. c) Exhibits. 2.1 Agreement and Plan of Merger dated April 15, 1997 by and between Beverly Enterprises, Inc. and Capstone Pharmacy Services, Inc. 2.2 Agreement and Plan of Distribution by and among Beverly Enterprises, Inc., New Beverly Holdings, Inc. and Capstone Pharmacy Services, Inc., dated as of April 15, 1997. 99.1 Press release, dated April 16, 1997, issued by Beverly Enterprises, Inc. 3 4 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BEVERLY ENTERPRISES, INC. /s/ SCOTT M. TABAKIN ----------------------------------- Scott M. Tabakin, Executive Vice President and Chief Financial Officer Date: May 20, 1997 4 5 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Agreement and Plan of Merger dated April 15, 1997 by and between Beverly Enterprises, Inc. And Capstone Pharmacy Services, Inc. 2.2 Agreement and Plan of Distribution by and among Beverly Enterprises, Inc., New Beverly Holdings, Inc. and Capstone Pharmacy Services, Inc. dated as of April 15, 1997. 99.1 Press release, dated April 16, 1997, issued by Beverly Enterprises, Inc. EX-2.1 2 AGREEMENT & PLAN OF MERGER 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER BETWEEN BEVERLY ENTERPRISES, INC. AND CAPSTONE PHARMACY SERVICES, INC. DATED APRIL 15, 1997 2 TABLE OF CONTENTS ARTICLE I. THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.01 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.02 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.03 Certificate of Incorporation and By-laws of Surviving Corporation . . . . . . . . . . . . . . 3 Section 1.04 Directors and Officers of Surviving Corporation . . . . . . . . . . . . . . . . . . . . . . . 3 Section 1.05 Stockholders' Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 1.06 Filing of Certificate of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 1.07 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE II. CONVERSION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 2.01 Conversion of Beverly Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 2.02 Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 2.03 Effect on Beverly Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 2.04 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.05 Assumption of Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF CAPSTONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.01 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.02 Authority Relative to This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 3.03 Consents, No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 3.04 Board Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3.05 State Anti-takeover Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3.06 No Existing Violation, Default, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3.07 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.08 Registration Statement; Prospectus/Joint Proxy Statement . . . . . . . . . . . . . . . . . 11 Section 3.09 Finders or Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 3.10 SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 3.11 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 3.12 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 3.13 Absence of Changes or Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 3.14 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 3.15 Capital Stock of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.16 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.18 Title to and Condition of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.19 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 3.20 Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 3.21 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 3.22 No Change of Control Puts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 3.23 Employment and Labor Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
-ii- 3 Section 3.24 Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 3.25 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 3.26 Employee Benefit Plans; ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 3.27 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 3.28 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 3.29 Institutional Pharmacy Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 3.30 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 3.31 Sufficiency of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF BEVERLY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.01 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.02 Authority Relative to This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 4.03 Consents, No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 4.04 Board Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 4.05 State Anti-takeover Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 4.06 No Existing Violation, Default, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 4.07 Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 4.08 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 4.09 Registration Statement; Prospectus/Joint Proxy Statement; NBHI Registration Document . . . 33 Section 4.10 Finders or Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 4.11 SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 4.12 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 4.13 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 4.14 Absence of Changes or Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 4.15 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 4.16 Capital Stock of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 4.17 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 4.18 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 4.19 Title to and Condition of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 4.20 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 4.21 Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 4.22 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 4.23 No Change of Control Puts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 4.24 Employment and Labor Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 4.25 Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 4.26 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 4.27 Employee Benefit Plans; ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 4.28 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 4.29 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.30 Institutional Pharmacy Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.31 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 4.32 Sufficiency of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
-iii- 4 ARTICLE V. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 5.01 Conduct of Business of Beverly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 5.02 Conduct of Business of Capstone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 5.03 No Solicitation by Beverly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 5.04 No Solicitation by Capstone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 5.05 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 5.06 Registration Statement and Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 5.07 Commercially Reasonable Efforts; Other Actions . . . . . . . . . . . . . . . . . . . . . . 58 Section 5.08 Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 5.09 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 5.10 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 5.11 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 5.12 Stock Exchange Listings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 5.13 Beverly and Subsidiary Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 5.14 Capstone and Subsidiary Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 5.15 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 5.16 Actions Regarding Outstanding Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 5.17 Retroactive Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 5.18 Preferred Provider Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 5.19 Failure to Take Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 5.20 Exhibits, Closing Statements and Schedules . . . . . . . . . . . . . . . . . . . . . . . . 62 ARTICLE VI. CONDITIONS TO THE OBLIGATIONS OF CAPSTONE AND BEVERLY . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 6.01 Registration Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 6.02 Beverly Stockholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 6.03 Capstone Stockholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 6.04 Listings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 6.05 Certain Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 6.06 Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 6.07 Debt Restructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 6.08 Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 ARTICLE VII. CONDITIONS TO THE OBLIGATIONS OF CAPSTONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 7.01 Representations and Warranties True . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.02 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.03 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.04 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.05 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.06 Pharmacy Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.07 Auditors' Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.09 Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
-iv- 5 ARTICLE VIII. CONDITIONS TO THE OBLIGATIONS OF BEVERLY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 8.01 Representations and Warranties True . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 8.02 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 8.03 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 8.04 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 8.05 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 8.06 Interim Quarterly Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 8.07 Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 8.08 Repayment of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 8.09 Auditors' Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 ARTICLE IX. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 9.01 Time And Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 9.02 Filings at the Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 ARTICLE X. TERMINATION AND ABANDONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 10.01 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 10.02 Termination by Capstone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 10.03 Termination by Beverly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 10.04 Procedure for Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 10.05 Effect of Termination and Abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . 70 ARTICLE XI. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 11.01 Terms Defined in This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 ARTICLE XII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 12.01 Amendment and Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 12.02 Waiver of Compliance; Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 12.03 Survivability; Investigations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 12.04 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 12.05 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Section 12.06 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Section 12.07 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Section 12.08 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Section 12.09 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Section 12.10 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Section 12.11 Choice of Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
-v- 6 EXHIBITS TO MERGER AGREEMENT 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 ATTACHMENTS TO MERGER AGREEMENT Beverly Disclosure Statement Capstone Disclosure Statement -vi- 7 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 1 8 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. 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"). 2 9 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 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 3 10 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 4 11 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 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. 5 12 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 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"), 6 13 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 7 14 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 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 8 15 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, 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 9 16 (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 10 17 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 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 11 18 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 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 12 19 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 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 13 20 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 14 21 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. 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 15 22 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 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 16 23 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) 17 24 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; (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. 18 25 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 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 19 26 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 20 27 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 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. 21 28 (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 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. 22 29 (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. 23 30 (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. (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 24 31 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 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 25 32 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. 26 33 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. 27 34 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 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, 28 35 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 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. 29 36 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. 30 37 (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 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 31 38 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 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 32 39 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. 33 40 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. 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 34 41 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. 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 35 42 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 36 43 Incorporation or By-laws of Beverly or any agreement to which Beverly is a party or by which it may be bound. (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 37 44 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, 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 38 45 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 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 39 46 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; 40 47 (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 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. 41 48 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 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 42 49 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 43 50 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. (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 44 51 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. (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 45 52 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 46 53 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 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 47 54 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 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 48 55 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. 49 56 (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 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. 50 57 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 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 51 58 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; 52 59 (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 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, 53 60 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; (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; 54 61 (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; 55 62 (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; (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. 56 63 (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 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 57 64 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, 58 65 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 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. 59 66 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 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 60 67 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 61 68 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. 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: 62 69 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. 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: 63 70 (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: 64 71 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 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). 65 72 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 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. 66 73 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. 67 74 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 68 75 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 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; 69 76 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 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 70 77 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 71 78 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 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. 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)
72 79 Beverly Licenses 4.08 Beverly Material Adverse Effect 4.01 Beverly Option Plans 4.15(a) Beverly Options 4.15(a) Beverly Payments 10.05(b) 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) 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 Payments 10.05(c) 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) Certificate of Merger 1.02 Certificates 2.02(a) circumstance (Capstone) 3.01 circumstance (Beverly) 4.01 Closing 9.01
73 80 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 Effective Time 1.02 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) Merger 1.01(a) Nasdaq 2.04 NBHI Recitals NBHI Registration Document 4.09(b) NBHI Stock Recitals PBGC 3.26(i) PCA 7.09 person 12.09 Pharmacy Acquisition Transaction 5.03(a) Pharmacy Subsidiaries Distribution Agreement Prospectus/Joint Proxy Statement 1.05(a) Registration Statement 3.08 Remaining Health Care Assets Distribution Agreement Remaining Health Care Business Distribution Agreement Remaining Health Care Liabilities Distribution Agreement Restructuring Recitals Rights 4.15(a)
74 81 Rights Agreement 4.15(a) SEC 3.08 Securities Act 3.08 spin-off 10.05(b) Subsidiary 12.09 Surviving Corporation 1.01(a) Tax or Taxes 3.25 Tax Returns 3.25 Time of Distribution Distribution Agreement Transferred Employees 2.03(a) Voting Agreement Recitals
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 75 82 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 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 76 83 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. 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 77 84 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. 78 85 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: 86 EXHIBIT B Prepared pursuant to the Recitals in the Merger Agreement VOTING AGREEMENT This Voting Agreement dated April 15, 1997 (the "Agreement") by and between Beverly Enterprises, Inc., a Delaware corporation ("Beverly"), and Counsel Corporation, a Toronto, Ontario corporation ("Counsel"). Capitalized terms used herein and not otherwise defined shall have the meaning set forth in the Merger Agreement. WHEREAS, simultaneously with the execution of this Agreement, Beverly is entering into an Agreement and Plan of Merger dated the date hereof (the "Merger Agreement") with Capstone Pharmacy Services, Inc., a Delaware corporation ("Capstone") pursuant to which Beverly will merge with and into Capstone, with Capstone as the surviving corporation on the terms specified or referred to therein (the "Merger"); and WHEREAS, the Merger is structured to be a tax-free "reorganization" under Section 368 of the Internal Revenue Code; and WHEREAS, Counsel currently beneficially owns, as determined in accordance with Rule 13d-3 as promulgated under the Exchange Act, 8,356,815 shares of Capstone Common Stock, par value $.01 per share (collectively with any Capstone Common Stock acquired hereafter, the "Shares"); and WHEREAS, in order to induce Beverly to enter into the Merger Agreement, Counsel and Capstone wish to set forth certain understandings regarding their relationship prior to the Merger. NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and intending to be legally bound, the parties hereto agree as follows. 1. Agreements of Counsel. 1.1. The Merger. Counsel agrees to vote the Shares in favor of the Merger and the transactions contemplated thereby, and further agrees not to withdraw, change or otherwise rescind such vote prior to the earlier of the Effective Time or the termination of the Merger Agreement in accordance with its terms. 1.2. No Solicitation. (a) Until the earlier of the Effective Time or the termination of the Merger Agreement in accordance with its terms, Counsel shall not, directly or indirectly, solicit 1 87 or respond to any inquiries or the making of any proposal by any person or entity (other than Beverly) with respect to any sale, transfer or other disposition of Counsel's Shares, and Counsel shall not sell, transfer or dispose of the Shares except (i) in the amounts described in Rule 144 (e)(i) pursuant to the Securities Act, and (ii) nothing herein shall prevent a pledge of such shares as collateral in a bona fide borrowing transaction; provided, however, that such pledge shall preserve and be subject to the rights of Beverly under this Agreement. (b) Until the earlier of the Effective Time or nine months after the termination of the Merger Agreement in accordance with its terms, Counsel shall not, directly or indirectly, solicit or respond to any inquiries or the making of any proposal by any person or entity (other than Beverly) with respect to any acquisition or purchase of a substantial amount of assets of Capstone or any merger, consolidation, business combination or similar transaction involving Capstone. (c) Until the earlier of the Effective Time or nine months after the termination of the Merger Agreement in accordance with its terms, Counsel shall not vote in favor of, propose, endorse or solicit proxies with respect to any matter to be proposed to the stockholders of Capstone, the approval of which would restrict, hinder, prevent or otherwise be inconsistent with the consummation of the Merger. 1.3. Reasonable Efforts. Counsel agrees, from and after the date hereof, to use all commercially reasonable efforts to assist in the Merger becoming effective as contemplated by the Merger Agreement. 2. Waiver of Section 203 of the Delaware General Corporation Law. The obligations of Counsel and Beverly under this Agreement shall be subject to the condition that the Merger, the Merger Agreement and this Agreement shall have been approved by the Board of Directors of Capstone with the effect that neither Counsel nor Beverly will be subject to the restrictions of Section 203 of the Delaware General Corporation Law. 3. Representations and Warranties. 3.1. Representations and Warranties of Beverly. Counsel is duly organized, validly existing in good standing under the laws of and has the requisite corporate power and authority to enter into this Agreement and consummate the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by Counsel and constitutes a valid and binding obligation of Counsel enforceable against it in accordance with its terms. 3.2. Representations and Warranties of Counsel. Beverly is duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to enter into this Agreement and consummate the transactions contemplated hereby. This Agreement has been duly authorized, executed and 2 88 delivered by Beverly and constitutes a valid and binding obligation of Beverly, enforceable against it in accordance with its terms. 4. Termination. This Agreement shall terminate upon the later of (a) the consummation of the Merger in accordance with the terms of the Merger Agreement and (b) the termination of the Merger Agreement in accordance with its terms. 5. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal, substantive laws of the State of Delaware without regard for the principles of conflict of laws. 6. Entire Agreement. This Agreement contains the entire agreement among the parties and supersedes all prior or contemporaneous discussions, negotiations, representations, or agreements relating to the subject matter of this Agreement. No changes to this Agreement shall be made or be binding on any party unless made in writing and signed by each party. 7. Successors. No party may assign this agreement or any of its rights or obligations hereunder without the prior written consent of the other parties, except that Beverly's rights hereunder may be assigned to any wholly owned subsidiary of Beverly. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against the respective successors and assigns of each party. 8. Injunctive Relief. Each of the parties hereto recognizes and acknowledges that a breach by it of any covenants or agreements contained in this Agreement will cause the other party to sustain damages for which it would not have an adequate remedy at law for money damages, and therefore each of the parties hereto agrees that in the event of any such breach the aggrieved party shall be entitled to the remedy of specific performance of such covenants and agreements and injunctive and other equitable relief in addition to any other remedy to which it may be entitled, at law or in equity. 9. 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. 3 89 IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the date above written. BEVERLY ENTERPRISES, INC. By: -------------------------------- Name: --------------------------- Title: -------------------------- COUNSEL CORPORATION By: -------------------------------- Name: --------------------------- Title: -------------------------- 4 90 EXHIBIT F Prepared pursuant to Section 4.07 of the Merger Agreement AFFILIATE AGREEMENT This Affiliate Agreement ("Agreement") is executed by Capstone Pharmacy Services, Inc. ("Capstone"), a Delaware corporation, and the undersigned director, shareholder, or executive officer ("Executive") of Beverly Enterprises, Inc., a Delaware corporation ("Beverly"), in connection with the Agreement and Plan of Merger dated April 15, 1997 (the "Merger Agreement"), among Beverly and Capstone. All defined terms used herein and not otherwise defined shall have the meaning set forth in the Merger Agreement. WHEREAS, pursuant to the terms of the Merger Agreement Beverly will be merged with and into Capstone (the "Merger"), with stockholders of Beverly receiving in exchange for their shares of Beverly Common Stock issued and outstanding immediately prior to the Effective Time newly issued shares of Capstone Common Stock; and WHEREAS, Executive beneficially owns an amount of shares of Beverly Common Stock, as determined in accordance with Rule 13d-3 as promulgated under the Exchange Act, as set forth below; and WHEREAS, as of the date of this Agreement, Executive may be deemed to be an "affiliate" of Beverly, as the term "affiliate" is defined for purposes of paragraphs (c) and (d) of Rule 145 under the Securities Act. NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants, agreements and conditions contained herein, the parties hereto agree as follows. 1. Background. The Merger Agreement provides for the Merger of Beverly with and into Capstone in a transaction in which the issued and outstanding shares of Beverly Common Stock will be converted into shares of Capstone Common Stock, on the terms and conditions set forth in the Merger Agreement. The parties to the Merger Agreement intend for the Merger to qualify as a tax-free "reorganization" for federal income tax purposes. 2. Purpose and Scope. This Agreement is executed by the Executive and Capstone to qualify the Merger for the tax treatment described above and to ensure compliance with the Securities Act in connection with resales of any securities acquired by Executive as a result of the Merger. This Agreement applies to the following securities that are beneficially owned by Executive after the Effective Time (collectively, the "Restricted Securities"): (a) all shares of Capstone Common Stock that Executive acquires in the Merger in exchange and substitution for 1 91 shares of Beverly Common Stock; (b) any shares of Capstone Common Stock issued pursuant to the exercise of any option, warrant, or other right to acquire shares of Beverly Common Stock that is held by Executive as of the effective date of the Merger specified in the Merger Agreement (the "Effective Time"); (c) any securities (whether or not Capstone Common Stock) issued or distributed to Executive in respect of, or in exchange and substitution for, any of the shares of Capstone Common Stock described in the preceding clauses, whether pursuant to a split-up, spin-off, stock split, stock dividend, capital adjustment, recapitalization, reorganization, reclassification, or other similar transaction; and (d) any right, option, or other interest with respect to any of the foregoing securities. 3. Representations, Warranties and Covenants of Executive. Executive hereby represents, warrants and covenants to Capstone that in the event Executive receives any Capstone Common Stock as a result of the Merger: (a) Executive shall not make any sale, transfer or other disposition of the Capstone Common Stock in violation of the Securities Act or the rules and regulations as promulgated thereunder. (b) Executive has carefully read this Agreement and the Merger Agreement and discussed the requirements of such documents and other applicable limitations upon Executive's ability to sell, transfer or otherwise dispose of Capstone Common Stock to the extent Executive felt necessary, with Executive's counsel or counsel for Beverly. (c) Executive has full power and authority to execute this Agreement, to make the representations and warranties set forth in it, and to perform the obligations to be performed by Executive under it. (d) Executive currently does not own any Capstone Common Stock, except as indicated at the end of this Agreement. (e) Executive is the beneficial owner, as determined pursuant to Rule 13d-3 under the Exchange Act, of the number of shares of Beverly Common Stock set forth on the signature page of this Agreement, which includes all shares of Beverly Common Stock as to which Executive has sole or shared voting or investment power and all shares of Beverly Common Stock issuable upon the exercise of any outstanding rights, options, and warrants to acquire Beverly Common Stock. (f) Executive has been advised that the issuance of Capstone Common Stock to Executive pursuant to the Merger has been registered with the Securities and Exchange Commission ("SEC") under the Securities Act on a Registration Statement Form S-4. Executive has also been advised that, because Executive may be deemed to be an affiliate of Beverly and because as of the date of this Agreement any proposed distribution by 2 92 Executive of the Capstone Common Stock has not been registered under the Securities Act, Executive may not sell, transfer or otherwise dispose of Capstone Common Stock issued to Executive in the Merger unless (i) such sale, transfer or other disposition is made in conformity with the volume and other limitations of Rule 145 under the Securities Act, (ii) such sale, transfer or other disposition has been registered under the Securities Act, (iii) in the opinion of counsel such sale, transfer or other disposition is otherwise exempt from registration under the Securities Act, provided that such opinion is reasonably acceptable in form and substance to Capstone, or (iv) Executive has delivered to Capstone a "no-action" or interpretative letter from an authorized representative of the SEC to the effect that the SEC would not take enforcement action, or the SEC staff would not recommend that the SEC take enforcement action, if the transaction is effected without registration under the Securities Act. (g) Executive understands that Capstone is under no obligation to register the sale, transfer or other disposition of the Capstone Common Stock by Executive or on behalf of Executive under the Securities Act or to take any other action necessary in order to make compliance with an exemption from such registration available solely as a result of the Merger or the transactions contemplated thereby, or this Agreement. (h) Executive understands that there will be placed on the certificates for the Capstone Common Stock issued to Executive, or any substitutions therefor, a legend stating in substance: THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION SUBJECT TO RULE 145 PROMULGATED BY THE SECURITIES EXCHANGE COMMISSION (THE "SEC") UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, CONSEQUENTLY, CANNOT BE SOLD OR OTHERWISE TRANSFERRED AT ANY TIME ABSENT (A) COMPLIANCE WITH THE CONDITIONS OF RULE 145(D), (B) REGISTRATION OF THE TRANSACTION WITH THE SEC UNDER THE SECURITIES ACT, OR (C) RECEIPT BY THE ISSUER OF THESE SHARES OF A WRITTEN OPINION OF LEGAL COUNSEL OR OTHER EVIDENCE THAT REGISTRATION OF THE TRANSACTION IS NOT REQUIRED UNDER THE SECURITIES ACT. Executive also understands that Capstone will cause a legend substantially identical to the one described above to be placed on every new stock certificate that is issued upon a transfer or exchange of any Restricted Securities, unless the transferee acquires the securities in a transaction that is registered with the SEC under the Securities Act or that 3 93 is executed in compliance with all the applicable conditions of Rule 145(d) of the Securities Act. 4. Covenants, Warranties, and Representations of Capstone. Capstone covenants, warrants, and represents to Executive the following: (a) On and after the Effective Time and for as long as is necessary to permit Executive to sell all the Restricted Securities pursuant to Rule 145 of the Securities Act and, to the extent applicable, Rule 144 of the Securities Act, Capstone shall use its best efforts to file on a timely basis all reports required to be filed by it pursuant to Section 13 or 15(d) of the Exchange Act. (b) Capstone shall remove the restrictive legend described above and cancel all stop transfer instructions applicable to any certificates representing Restricted Securities that are sold or otherwise transferred by Executive to a third party in compliance with the provisions of this Agreement. (c) Capstone acknowledges that it will promptly authorize a transfer of any Restricted Securities that are sold by Executive pursuant to Rule 145(d) of the Securities Act if it receives separate representation letters in customary form from Executive and the broker making the sale that confirm that all applicable conditions of Rule 145(d) of the Securities Act have been satisfied in connection with the transaction, and that it does not have any reasonable basis to believe that the sale was not made in compliance with the conditions of Rule 145(d) of the Securities Act. (d) Upon request of Executive, Capstone shall remove the restrictive legend on, and cancel any stop transfer instructions applicable to, every certificate representing Restricted Securities, if the provisions of Rule 145(d)(2) of the Securities Act have been satisfied. 5. Legal Matters. (a) The validity, construction, enforcement, and interpretation of this Agreement are governed by the laws of the State of Delaware and the federal laws of the United States of America, excluding the laws of those jurisdictions pertaining to the resolution of conflicts with laws of other jurisdictions. (b) Execution of this Agreement by Executive should not be considered an admission on the part of Executive that Executive is an "affiliate" of Beverly or as a waiver of any rights Executive may have to object to any claim that Executive is an affiliate on or after the date of this Agreement. 4 94 6. Termination. Before the Merger occurs, the obligations, responsibilities and agreements contained in this Agreement will terminate concurrently with any termination of the Merger Agreement. After the Merger occurs, this Agreement will terminate, all restrictive legends will be promptly removed from all certificates representing the Restricted Securities that are then beneficially owned by Executive, and all stop transfer instructions regarding those Restricted Securities will be promptly canceled, if: (i) all those Restricted Securities are registered with the SEC for sale and sold by Executive pursuant to an effective registration statement under the Securities Act; (ii) Executive notifies Capstone that Executive has held all the Restricted Securities for at least two years since the Effective Time (or such shorter period as prescribed in or pursuant to the Securities Act) and is not, and has not been for at least three months, an affiliate of Capstone; or (iii) Executive delivers to Capstone a written opinion of legal counsel or a "no-action" or interpretative letter from an authorized representative of the SEC, to the effect that Executive may publicly sell or otherwise transfer all the Restricted Securities without registration under the Securities Act and, therefore, the restrictive legend and stock transfer instructions are no longer required. 7. Binding Effect. This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective legal representatives, successor and assigns. 8. 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. 9. Notices, Communications. All notices and other communications hereunder shall be in writing and shall be delivered in the manner and at the address (unless subsequently notified to the contrary in the manner provided therein) as provided in the Merger Agreement. 10. 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. 11. Amendment. This Agreement may be amended, modified or supplemented only with the written agreement of Capstone and Executive. 12. Entire Agreement. This Agreement embodies the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and supersedes all prior agreements and 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. 5 95 IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the date above written. CAPSTONE PHARMACY SERVICES, INC. By: ------------------------------ Name: Title: EXECUTIVE --------------------------------- Name: Title: Number of Shares of Beverly Common Stock Beneficially Owned: --------------------------------- Number of Shares of Beverly Common Stock Issuable under Outstanding Options Owned: --------------------------------- Number of Shares of Capstone Common Stock Beneficially Owned: --------------------------------- 6 96 EXHIBIT 7.08 Provided Pursuant to Section 7.08 of the Merger Agreement NON-COMPETITION AGREEMENT This Non-competition Agreement (the "Agreement") by and between New Beverly Holdings, Inc., a Delaware corporation ("NBHI") and Capstone Pharmacy Services, Inc. ("Capstone"), dated as of __________, 1997. Unless the context otherwise requires, capitalized terms not otherwise defined herein shall have the respective meanings ascribed to such terms pursuant to the Merger Agreement (as defined below) or the Distribution Agreement (as described below). WHEREAS, pursuant to an Agreement and Plan of Merger dated April 15, 1997 (the "Merger Agreement") between Beverly Enterprises, Inc. ("Beverly") and Capstone, Beverly will merge with and into Capstone with Capstone as the Surviving Corporation (the "Merger"); and WHEREAS, prior to the Merger Beverly will distribute the Remaining Health Care Business to NBHI pursuant to an Agreement and Plan of Distribution dated as of April 15, 1997 (the "Distribution Agreement"); and WHEREAS, in connection with the Merger, the Merger Agreement and the Distribution Agreement NBHI has agreed to enter into a non-competition agreement with Capstone; 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: 1. NON-COMPETITION AGREEMENT. NBHI, on behalf of itself and all NBHI Subsidiaries, agrees that none of NBHI or the NBHI Subsidiaries (collectively, the "Bound Parties"), will, directly or indirectly, for a period of five (5) years after the Closing, whether as an owner, partner, shareholder, member, manager, consultant, agent or otherwise, wholly or partially own or engage in the operation, management or conduct of any business or enterprise that provides pharmaceutical products and services as currently provided in the Institutional Pharmacy Business, as further described in Exhibit A hereto, within a one hundred twenty (120) mile radius of any pharmacy included in the Institutional Pharmacy Assets or operated by Capstone; provided, however, that nothing in this Agreement shall be construed to restrict or impair any activities of NBHI or any NBHI Subsidiaries as currently provided in connection with the provision of health care services or products in acute, acute exempt or rehabilitation hospitals, hospice or home health care settings or other settings where long-term health care is not the primary service furnished; and further provided that no Bound Party would be prohibited from acquiring and owning any otherwise prohibited pharmacy dispensing services business as part of the acquisition of a larger business if such pharmacy dispensing services business does not constitute the principal component of the larger business and the purchaser thereof agrees to offer to sell such pharmacy dispensing services business to Capstone within a reasonable period of time after purchasing such business, not to exceed six (6) months, pursuant to paragraph 2 hereof. For purposes of this Agreement, "NBHI Subsidiary" shall 97 mean any person or entity which on the date in question, directly or indirectly is controlled by NBHI; and, for such purposes, NBHI shall be deemed to "control" another entity if NBHI is the "beneficial owner" (as that term is defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of greater than twenty-five percent (25%) of any class of voting securities (or other voting interests) of a controlled entity which is a publicly-traded entity, or fifty-one percent (51%) of any privately-held entity, or NBHI possesses, directly or indirectly, the power to direct or cause the direction of the management of policies of the controlled entity with respect to the matters covered by the Non-Competition Agreement, whether through ownership of stock, election of directors, by contract or otherwise. 2. APPRAISAL RIGHTS AND PURCHASE OPTION. (a) Capstone shall have the right to require that the fair market value of any (or all) businesses described in subsection 1 above which are acquired by NBHI or any NBHI Subsidiary (each a "Permitted Acquisition Business") be appraised by an appraisal firm of national standing, as selected by NBHI, and which does not have any material business relationship with NBHI or any NBHI Subsidiary, with the costs and expenses of such appraisal to be paid by Capstone in the event that Capstone elects not to exercise its purchase option hereunder, and the costs and expenses of such appraisal to be shared equally by Capstone and NBHI in the event that Capstone exercises its purchase option hereunder. (b) For a period of thirty (30) days after the fair market value of any such Permitted Acquisition Business has been so determined, Capstone may elect by written notice to purchase such Permitted Acquisition Business for cash at such fair market price by delivery of written notice exercising such option. In the event Capstone exercises such election, Capstone shall close such acquisition within sixty (60) days after its exercise of its election, subject to reasonable extensions required for regulatory approvals not to exceed a total of more than one hundred and eighty (180) days after the determination of fair market value, as appraised. NBHI and the NBHI Subsidiaries will make available to such appraiser and to Capstone, its potential lender(s) and their respective professional advisors all information reasonably requested by them with respect to any such Permitted Acquisition Business, and will assign any representations, warranties or indemnities it may have received in connection with such acquisition to the extent that such representations, warranties or indemnities are assignable. 3. MODIFICATION. In the event that any court of competent jurisdiction finds the restrictions set forth in the Non-Competition Agreement unenforceable as applied to any act or condition in any specific instance, but such act or condition would nonetheless be prohibited if the Non-Competition Agreement were to impose a lesser time, geographic or scope-of-business restriction, then, as applied to such act or condition of such Bound Party, then the temporal, geographic and/or scope of business limitations contained in the Non-Competition Agreement shall automatically be modified to restrict only such acts and conditions as such court may determine to be the maximum, enforceable under law; and the parties hereto agree that such restrictions shall be 2 98 enforced as amended, except as limited by the application of legal principles affecting the availability of specific performance, injunction and other equitable remedies. 4. CHANGES. This Agreement cannot be changed or modified except by another agreement that both parties sign. 5. HEADINGS. The article and paragraph headings contained herein are for convenience of reference only and are not intended to define, limit, or describe the scope of intent of any provision of this Agreement. 6. GOVERNING LAW. This Agreement shall be deemed to have been made and shall be construed and interpreted in accordance with the laws of the State of Delaware. 7. 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 agreement. 3 99 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Non-Competition Agreement effective as of the day and year first above written. Capstone: CAPSTONE PHARMACY SERVICE, INC. By: ----------------------------- Title: -------------------------- Beverly: BEVERLY ENTERPRISES, INC. By: ----------------------------- Title: -------------------------- NBHI: NEW BEVERLY HOLDINGS, INC. By: ----------------------------- Title: -------------------------- 4 100 EXHIBIT A The Institutional Pharmacy Business provides institutional pharmacy 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. It also includes consultant pharmacist services and mail order pharmacy products and medical equipment. 5 EX-2.2 3 AGREEMENT & PLAN OF DISTRIBUTION 1 EXHIBIT 2.2 AGREEMENT AND PLAN OF DISTRIBUTION BY AND AMONG BEVERLY ENTERPRISES, INC. NEW BEVERLY HOLDINGS, INC. AND CAPSTONE PHARMACY SERVICES, INC. DATED AS OF APRIL 15, 1997 2 TABLE OF CONTENTS ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2 Incorporation of Merger Agreement Definitions . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 1.3 References; Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE II. DISTRIBUTION AND OTHER TRANSACTIONS; CERTAIN COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.1 Transfer of Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (a) Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (b) Exchange of Stock with Beverly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (c) Charters; By-laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (d) Directors; Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (e) Certain Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (f) Transfer of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (g) Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (h) Delivery of Shares to Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (i) Assumed Pharmacy Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (j) Other Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 2.2 Certain Financial and Other Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . 11 (a) Intercompany Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (b) Operations in Ordinary Course . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.3 Assumption of Indebtedness; Payment or Provision for Certain Debts; Settlement of Expenses and Other Items. . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.4 Assumption and Satisfaction of Liabilities; Management Responsibility for Shared Liabilities; Obligations, Rights and Assets Relating to Shared Liabilities . . . 13 Section 2.5 Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 2.6 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 2.7 No Representations or Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.8 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.9 Witness Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 2.10 Certain Post-Distribution Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 2.11 Directors and Officers Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 2.12 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 2.13 Ancillary Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 2.14 Listing of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE III. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 3.1 Indemnification by Beverly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 3.2 Indemnification by NBHI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 3.3 Limitations on Indemnification Obligations . . . . . . . . . . . . . . . . . . . . . . . . 18
-i- 3 Section 3.4 Procedures for Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.5 Indemnification Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 3.6 Other Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 3.7 Survival of Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE IV. ACCESS TO INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 4.1 Provision of Corporate Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 4.2 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 4.3 Reimbursement; Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 4.4 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE V. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 5.1 Policies and Rights Included Within Assets; Maintenance of Coverage . . . . . . . . . . . . 22 Section 5.2 Post-Distribution Date Claims Against NBHI . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 5.3 Administration; Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (b) Allocation of Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 5.4 Agreement for Waiver of Conflict and Shared Defense . . . . . . . . . . . . . . . . . . . . 23 Section 5.5 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE VI. DISPUTE RESOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 6.1 Distribution Agreement Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 6.2 Arbitration in Accordance with American Arbitration Association Rules . . . . . . . . . . . 24 Section 6.3 Final and Binding Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 6.4 Costs of Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 6.5 Settlement by Mutual Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE VII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 7.1 Complete Agreement; Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 7.2 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 7.3 Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 7.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 7.5 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 7.6 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 7.7 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 7.8 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 7.9 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 7.10 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 7.11 Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 7.12 Attorney Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 7.13 Title and Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
-ii- 4 Section 7.14 Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 7.15 Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 7.16 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 7.17 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Exhibit A - Plan of Restructuring
-iii- 5 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. 1 6 "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 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, 2 7 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 3 8 reasonably incurred in investigating, 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 4 9 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. "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. 5 10 "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 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 6 11 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. 7 12 "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 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 8 13 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. (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 9 14 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 10 15 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 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, 11 16 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 the date of this Agreement and ending at the Distribution Date, which amount shall be in addition to the Assumed Pharmacy Indebtedness 12 17 (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. 13 18 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 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 14 19 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 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 15 20 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. 16 21 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. 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. 17 22 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 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 18 23 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, 19 24 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. 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 20 25 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 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 21 26 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 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- 22 27 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. 23 28 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) 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. 24 29 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 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 25 30 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. 26 31 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. 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. 27 32 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. 28 33 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: 34 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.] A-1 35 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. A-2 36 EXHIBIT B Prepared Pursuant to Section 2.1(g) of the Distribution Agreement INTERIM SERVICES AGREEMENT THIS INTERIM SERVICES AGREEMENT (the "Agreement"), dated as of April 15, 1997, by and between Beverly Enterprises, Inc., a Delaware corporation ("Beverly") and New Beverly Holdings, Inc. a Delaware corporation ("NBHI"). W I T N E S S E T H: WHEREAS, Beverly and Capstone Pharmacy Services, Inc., a Delaware corporation ("Capstone"), have entered into an Agreement and Plan of Merger, dated as of April 15, 1997 (the "Merger Agreement"), providing for the merger (the "Merger") of Beverly's Institutional Pharmacy Business with Capstone; and WHEREAS, prior to the Effective Time (as defined in the Merger Agreement) of the merger Beverly intends to transfer its Remaining Health Care Businesses (as defined in the Merger Agreement) to NBHI in exchange for the issuance of shares of NBHI Common Stock; and WHEREAS, immediate prior to the Effective Time, Beverly's Board of Directors, subject to the approval of Beverly's shareholders, expects to complete the Distribution (as defined in the Merger Agreement) pursuant to the Agreement and Plan of Distribution dated as of April 15, 1997 by and between Beverly and NBHI (the "Distribution Agreement"); and WHEREAS, the purpose of the Distribution is to make possible the Merger by divesting Beverly of the Remaining Health Care Businesses which Capstone is unwilling to acquire; and WHEREAS, in the interest of an orderly transition, NBHI desires to provide, and Beverly (for the benefit of Capstone after the Effective Time) desires to receive, certain support services from NBHI, as hereinafter specifically provided (collectively, the "Services" and, individually, a "Service"), for a limited period after the date hereof, and the parties desire to set forth herein the basis on which the Services shall be provided to NBHI (and Capstone following the Effective Time). NOW, THEREFORE, in consideration of the mutual covenants and premises contained herein, NBHI and Beverly agree as follows: 1. Definitions. Unless the context otherwise requires, capitalized terms not otherwise defined herein shall have the respective meanings ascribed to such terms pursuant to the Merger Agreement or the Distribution Agreement. 37 2. Services. The specific Services to be provided by NBHI to Beverly are comprised of the administrative services more particularly set forth on Attachment 1 hereto. Subject to the terms of this Agreement, upon the written request of the Chief Financial Officer of Beverly or a person designated to act on his behalf in an instrument executed by the Beverly Chief Financial Officer (a "Beverly Authorized Officer") and delivered to NBHI, NBHI will provide each of the Services with respect to the Institutional Pharmacy Business retained by Beverly in the manner and to the same general extent as such Services have been provided by Beverly in connection with its Institutional Pharmacy Business prior to the Distribution Date. 3. Term. Except with respect to Section 13, the term of this Agreement shall commence on the date hereof and terminate on (a) April 30, 1998 or (b) such other date on which the parties hereto shall mutually agree in writing to terminate this Agreement (the "Term"). Services shall be provided only as specified in Attachment 1 hereto, unless otherwise agreed to by the parties. In addition, Beverly shall have the right to terminate a Service or Services upon sixty (60) days prior written notice to NBHI. Termination of one or more Services by Beverly shall not affect the obligation of NBHI to furnish all other Services for the remainder of the Term. 4. Cost. Unless otherwise expressly agreed in writing executed by a duly authorized officer of Beverly and NBHI, the Services shall be provided to Beverly at the costs specified for such services on Attachment 1 or Attachment 2 hereto. To the extent the Attachments hereto do not specify the cost of a specific Service, Beverly will pay NBHI (i) the allocated portion of the base salaries of NBHI's employees providing such Service and (ii) the amount of NBHI's direct and indirect costs (excluding any amounts attributable to lost productivity), expenses and disbursements incurred in connection with providing such Service to Beverly; provided, however, that in no event shall such costs be less than the fair market value of such services based on terms and conditions arrived at by the parties bargaining at arm's length. 5. Delegation. NBHI may retain the Services of such third parties, either by oral or written contract, as NBHI may, from time to time, deem necessary or appropriate to facilitate the expeditious discharge of NBHI's responsibilities hereunder, and NBHI shall be entitled to full reimbursement from Beverly for all fees and expenses paid by NBHI to such third parties (whose services were obtained for Beverly) as provided in Section 4 hereof; provided, however, that the amount to be reimbursed to NBHI shall be no greater than the cost for such services had they been provided by NBHI directly. 6. Transition Services Team. To facilitate administration, communication, and problem resolution related to the Services, Beverly and NBHI shall appoint a transition services team ("Transition Services Team") consisting of two (2) persons, one (1) of whom shall be appointed by Beverly (the "Beverly Appointee") and one (1) of whom shall be appointed by NBHI (the "NBHI Appointee"). The NBHI Appointee shall be authorized to make all decisions concerning the pricing, provision, continuation after the Term, and cessation of Services on 2 38 behalf of NBHI. The Beverly Appointee shall be authorized to make all decisions concerning the pricing, provision, continuation after the Term, and cessation of Services on behalf of Beverly. 7. Independence. All employees and representatives of NBHI providing Services to Beverly will be deemed for purposes of all compensation and employee benefits to be employees or representatives of NBHI and not employees or representatives of Beverly. In performing such Services, such employees or representatives will be under the direction, control and supervision of NBHI (and not Beverly) and NBHI will have the sole right to exercise all authority with respect to the employment (including termination of employment), assignment and compensation of such employees and representatives. NBHI shall be solely responsible for the payment of all payroll and withholding taxes relating to its employees for services provided to Beverly during the Term. 8. Impracticability. NBHI shall not be required to provide any Service to the extent the performance of provision of such Service becomes impracticable as a result of a cause or causes outside the reasonable control of NBHI including unfeasible technological requirements, or to the extent the performance of such Service would require NBHI to violate any applicable laws, rules or regulations or result in the breach of any license, permit or applicable contract. 9. Additional Resources. In providing the Services, NBHI shall not be obligated to: (i) hire any additional employees, (ii) maintain the employment of any specific employee or (iii) purchase, lease or license any additional equipment or software. 10. Force Majeure. The obligations of NBHI under this Agreement, except as to payment for Services actually provided, are subject to conditions of Force Majeure, as below defined. "Force Majeure" means an act of God, strike or walkout or other labor dispute, act of a public enemy, war declared or undeclared, blockade, revolution, riot, insurrection, civil commotion, lightning, fire, storm, flood, earthquake, explosion, governmental action or restraint, embargo, and any other cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party affected thereby. 11. Nondisclosure. In the event that, during the term hereof and in connection with a party's performance of its obligations hereunder, either party shall receive information concerning the other party hereto which the receiving party knows, or has reason to believe, is confidential or proprietary to the party to whom such information relates,the party receiving such information shall take all reasonable steps to: (a) protect and hold such information in confidence and prevent its disclosure to third parties unless such third parties are under a duty of confidentiality to the party to which such information relates; and (b) restrict its use to those purposes consented to in writing by the party to whom such information relates; provided, however, that the party receiving such information shall not be required to protect or hold in confidence any information or data which (a) is or becomes available to the public without the fault of the receiving party, (b) is independently developed by the receiving party, (c) is disclosed to the receiving party by a third party known to the receiving party not to be under any duty of 3 39 confidentiality to the party to whom such information relates with respect to such information, or (d) except as may otherwise be required by law. This Section 11 shall not limit the obligation of the parties under the Distribution Agreement to provide access to records after the date hereof. 12. Limitation Of Liability. NBHI's liability to Beverly in connection with this Agreement and the Services to be provided by NBHI hereunder shall be limited to (i) actual damages arising from NBHI's gross negligence or willful misconduct in the performance of its duties and responsibilities hereunder, and (ii) in all other cases of breach of this Agreement, repetition of a Service for the purpose of correcting an error or omission where reasonable or appropriate under the circumstances; provided that in no event shall NBHI be liable for any incidental or consequential damages. 13. Indemnity. (a) NBHI agrees to defend, indemnify and hold Beverly and its officers, directors, employees and agents harmless from and against and all liabilities, losses, claims, damages, and expenses of any nature, including reasonable attorneys' fees, that are actually suffered by Beverly arising out of the performance of the Services hereunder, except where such liability, loss, claim, damage or expense shall have been caused by Beverly's gross negligence or willful misconduct in the performance of its duties and responsibilities hereunder. Nothing in this paragraph shall be construed to relieve Beverly of its responsibilities pursuant to this Agreement. (b) Beverly agrees to defend, indemnify and hold NBHI and its officers, directors, employees and agents harmless from and against any and all liabilities, losses, claims, damages, and expenses of any nature, including reasonable attorneys' fees, that are actually suffered by NBHI arising out of the performance of the Services hereunder, except where such liability, loss, claim, damage or expense shall have been caused by NBHI's gross negligence or willful misconduct in the performance of its duties and responsibilities hereunder. Nothing in this paragraph shall be construed to relieve NBHI of its responsibilities pursuant to this Agreement. 14. Mutual Cooperation. Beverly and NBHI will provide each other with information and assistance reasonably necessary to investigate, defend or prosecute any claims, suits, charges, including, but not limited to, equal employment opportunity, workers compensation, personal injury, insurance and similar claims brought by or against Beverly or NBHI relating to either of their businesses. This provision shall survive the termination of this Agreement. 15. Third Party Rights. Nothing in this Agreement, express or implied, is intended to confer upon any person (including, without limitation, employees), other than the parties hereto and their respective successors and assigns (including, without limitation, Capstone as provided in Section 17 hereof), any rights or remedies of any nature whatsoever under or by reason of this Agreement. 4 40 16. Relationship Of Parties. Nothing in this Agreement shall be deemed or construed by the parties or any third party as creating the relationship of principal and agent, partnership or joint venture between the parties, it being understood and agreed that no provision contained herein, and no act of the parties, shall be deemed to create any relationship between the parties other than the relationship of independent contractor nor be deemed to vest any rights, interest or claims in any third parties. 17. Successor and Assigns. This Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto, provided that this Agreement may not be assigned by either of the parties hereto without the prior written consent of the other. Capstone has entered into the Merger Agreement pursuant to which Beverly shall be merged with and into Capstone. At the Effective Time, Capstone shall succeed to all of the rights and obligations of Beverly hereunder. 18. Notices. All notices and other communications pursuant to this Agreement shall be in writing and shall be deemed to be sufficient if contained in a written instrument and shall be deemed given if delivered personally, telecopied, sent by nationally-recognized, overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the respective addresses set forth in the Distribution Agreement (or at such other address for a party as shall be specified by like notice). All such notices and other communications shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of a telecopy, when the party receiving such telecopy shall have confirmed receipt of the communication, (c) in the case of delivery by nationally-recognized, overnight courier, on the second Business Day following dispatch and (d) in the case of mailing, on the fifth Business Day following such mailing. 19. Entire Agreement; Amendment Or Waiver. (a) This Agreement (together with all of the exhibits hereto, which are incorporated by reference herein and constitute an integral part hereof) constitutes the entire agreement and understanding among NBHI and Beverly with respect to the subject matter hereof, and supersedes any and all prior oral and written agreements, commitments and understandings among the parties hereto with respect to such subject matter. (b) This Agreement may be amended, supplemented or modified, and the observance of any provision hereof may be waived, only by a written instrument making specific reference to this Agreement, signed by the party (or parties) against whom the enforcement of any amendment, supplement or modification or waiver is sought. No waiver by any party of any condition, and no breach of any provision, term, covenant, representation or warranty contained in this Agreement (whether by conduct or otherwise) in any one or more instances, shall be deemed to be a waiver of such condition for any other purpose, or, as the case may be, a breach of any other provision, term, covenant, representation or warranty set forth in this Agreement. 5 41 20. Severability. If at any time subsequent to the date hereof, any provision of this Agreement shall be held by any court of competent jurisdiction to be invalid, void or otherwise unenforceable (whether as a matter of law or equity) the invalidity or unenforceability of such provision shall have no effect upon and shall not impair the validity or enforceability of any other provision of this Agreement. 21. Governing Law. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of Delaware without regard to the conflict of laws principles of such state. 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, and all of which together shall constitute but one and the same original instrument. 23. Headings. The headings of the paragraphs and sections of this Agreement have been inserted for convenience of reference only and are not intended to, and shall not, restrict, modify or otherwise affect any of the terms or provisions hereof. 6 42 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. BEVERLY ENTERPRISES, INC. By: ----------------------------- Name: ------------------------ Title: ----------------------- NEW BEVERLY HOLDINGS, INC. By: ----------------------------- Name: ------------------------ Title: ----------------------- 7 43 ATTACHMENT 1 SERVICES 1. Cash Management. Services include setting up or closing-out unit bank accounts, drafting funds out of unit bank accounts, distribution of accounts payable checks, reconciliation of accounts payable and payroll checking accounts, investment of excess funds, handling credit card issues and other banking services as required 2. Compensation & Benefits. Administrative services, if any, relating to the transfer of compensation and benefit plans to Beverly and providing information in connection therewith as agreed to by the parties. 3. Management Information Systems. Includes all services related to the processing of computer systems such as general ledger, payroll, fixed assets, accounts receivable, accounts payable, etc ("MIS"). Also includes the printing of all computer generated reports. 4. License & Taxes. Services include handling anything to do with personal property tax to include filing and payment of taxes due on a timely basis. 5. MIS Support. Services associated with the implementation and support of MIS data processing hardware, software and systems. 6. HR Support. Services associated with maintaining the human resources system. 7. Risk Management. Services include procuring and maintaining insurance coverage against risks as are ordinarily insured against by owners of an Institutional Pharmacy Business and administering claims thereunder. 8. Legal. Services include providing legal advice and service to Beverly in connection with the Institutional Pharmacy Business. In connection therewith, NBHI may retain the services of outside counsel, who may be counsel to NBHI, and bill Beverly for the fees and expenses of such counsel. 8 44 ATTACHMENT 2 Schedule of Costs for Administrative Services Costs for all Services provided hereby shall be as agreed to by the parties to this Agreement and by Capstone; provided, however, that in no event shall such costs be less than the fair market value of such costs based upon the terms and conditions arrived at by Beverly, NBHI and Capstone bargaining at arm's length. 9 45 EXHIBIT C Provided Pursuant to Section 2.13 of the Distribution Agreement TAX ALLOCATION AND INDEMNIFICATION AGREEMENT TAX ALLOCATION AND INDEMNIFICATION AGREEMENT (this "Agreement") dated as of , 1997, among Beverly Enterprises Inc. ("BEI"), a Delaware Corporation, New Beverly Holdings, Inc. ("NBHI"), a Delaware Corporation, and their respective subsidiaries (hereinafter "BEI and Subsidiaries" and "NBHI and Subsidiaries"). WHEREAS, the parties to this Agreement are currently members ("Members") of an affiliated group (the "Group") within the meaning of Section 1504(a) of the Internal Revenue Code of 1986 (the "Code"), of which BEI is the common parent; WHEREAS, BEI, as the common parent of the Group, has filed and will file consolidated federal income tax returns ("Group Tax Returns") and other tax returns on behalf of the Group for certain periods relevant hereto; WHEREAS, as a result of the proposed distribution by BEI of its entire stockholdings in NBHI to BEI's shareholders (the "Distribution"), pursuant to an Agreement and Plan of Distribution By and Among Beverly Enterprises, Inc., New Beverly Holdings, Inc., and Capstone Pharmacy Services, Inc. ("Capstone"), dated as of April 15, 1997 (the "Distribution Agreement"), NBHI and Subsidiaries will cease to be Members of the Group as of the date of the distribution (the "Distribution Date"); WHEREAS, Members of the Group may be subject to state income and franchise tax liabilities on a combined or consolidated basis for periods both before and after the aforementioned transactions; and WHEREAS, BEI and Subsidiaries (the "BEI Subgroup" as constituted following the Distribution) and NBHI and Subsidiaries (the "NBHI Subgroup" as constituted following the Distribution) desire to set forth their rights and obligations with respect to certain tax liabilities. NOW THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties agree as follows: 46 - 2 - 1. Applicable Period; Tax Period. For purposes of this Agreement, the term "Applicable Period" shall refer to the period January 1, 1996 through the date on which NBHI and Subsidiaries cease to be Members of the Group. The term "Tax Period" shall refer to all taxable periods beginning or ending in the Applicable Period. 2. Return Filing Responsibilities. a. If the Group Tax Return for taxable year 1996 is filed before the Distribution Date, BEI shall be responsible for preparing and filing such Group Tax Return in a manner which fairly reflects the interests of BEI and Subsidiaries and NBHI and Subsidiaries. If the Group Tax Return for taxable year 1996 is filed after the Distribution Date, NBHI shall be responsible for preparing such Group Tax Return in a manner which fairly reflects the interests of BEI and Subsidiaries and for furnishing the completed Group Tax Return to BEI in time to permit the timely signing and filing of such Return by BEI. BEI shall be responsible for preparing and filing the Group Tax Return for taxable year 1997 in a manner which fairly reflects the interests of NBHI and Subsidiaries. NBHI will be responsible for providing to BEI for taxable year 1997 the information relating to NBHI and Subsidiaries which is needed for the preparation of the taxable year 1997 Group Tax Return, and the information so provided will be included in such Group Tax Return without modification, provided that positions taken by NBHI have a realistic possibility of being sustained on their merits. NBHI will determine the items of income, gain, loss, deduction and credit of the NBHI Subgroup to be included on the Group Tax Return for taxable year 1997 by using the "closing of the books" method described in Treas. Reg. Section 1.502-76(b)(2)(i) as modified by Treas. Reg. Section 1.502-76(b)(2)(iii) to permit a ratable allocation of the closing month's items if the Date of Distribution occurs at a time other than the last day of a month. NBHI shall provide such assistance and documents, without charge, as may reasonably be requested by BEI in the preparation of the 1997 Group Tax Return. BEI shall provide to NBHI a copy of each Group Tax Return as filed for each Tax Period. b. All Group Tax Returns filed after the date of this Agreement, in the absence of a controlling change in law or 47 - 3 - circumstances, 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, and in a manner that does not unreasonably accelerate deductions or defer income to the advantage of one Subgroup and corresponding disadvantage of the other Subgroup. 3. Group Tax Liability. For purposes of this Agreement, the term "Group Tax Liability" shall mean the consolidated federal income tax liability, if any, reported on the Group Tax Return (as adjusted under Section 6 of this Agreement). 4. Allocation of Group Tax Liability. If the Group Tax Liability for any 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 the NBHI Subgroup. The remaining portion of the Group Tax Liability (after reduction for alternative minimum tax) shall be apportioned as follows: The amount allocable to the BEI Subgroup shall be equal to the federal income tax liability of the Pharmacy Subsidiaries (as defined in the Distribution Agreement) (the "Pharmacy Subsidiaries") for the Tax Period determined as though the Pharmacy Subsidiaries had filed a separate consolidated federal income tax return for that period; and the amount allocable to the NBHI Subgroup shall be equal to (a) for taxable year 1996 the remaining portion of the Group Tax Liability, and (b) for taxable year 1997 the remaining portion of the Group Tax Liability determined as if the Group Tax Return had included only amounts relating to the BEI Subgroup and the NBHI Subgroup and no amounts relating to Capstone. 5. Payments Relating to Allocable Tax Liability. For any Tax Period for which a Group Tax Return is filed after April 15, 1997, the NBHI Subgroup shall be liable for the amount allocated to the NBHI Subgroup under Section 4 reduced by the excess of (a) the total amount of estimated federal income taxes paid by BEI with respect to any portion of such Tax Period which occurs on or before the Distribution Date, over (b) the amount included as a payable to BEI for federal income taxes with respect to such Tax Period by Pharmacy Subsidiaries on the 48 - 4 - audited financial statements of Pharmacy Corporation of America. In applying clause (b) of the preceding sentence, for the Tax Period commencing January 1, 1997, the amount to be used is the payable described in clause (b) but determined as of April 15, 1997. If the amount allocated to the NBHI Subgroup under Section 4 for any Tax Period reduced as provided above is a positive number, such net amount shall be a joint and several liability of NBHI and Subsidiaries enforceable by BEI and Subsidiaries under the terms of this Agreement, and requiring NBHI and Subsidiaries promptly to transmit payment of such net amount to BEI so that such payment may be included with the filing of the Group Tax Return for such Tax Period. NBHI and Subsidiaries shall be jointly and severally liable for any interest or penalties resulting from their failure to tender such payment timely. If the amount allocated to the NBHI Subgroup under Section 4 for any Tax Period reduced as provided above is a negative number, BEI and Subsidiaries shall be jointly and severally liable for the payment of an amount equal to such negative number to NBHI. In addition, if an estimated payment for federal income taxes is required after the Date of Distribution for a period that includes the Date of Distribution, NBHI shall pay to BEI the share of such estimated tax payment attributable to NBHI and Subsidiaries so that BEI may timely pay required estimated federal income taxes for that period. BEI shall promptly provide NBHI with evidence of the timely payment of the Group Tax Liability for each Tax Period and each installment of estimated taxes. 6. Audits and Other Adjustments. a. If as a result of any (i) filing of an amended return or claim for refund (other than an amended return or claim to which section 6b applies), (ii) final determination or settlement with the Internal Revenue Service (the "IRS"), or (iii) court decision, relating to a Group Tax Return for any Tax Period or any taxable period prior to the Applicable Period: (1) there is an increase in the Group Tax Liability, then each Subgroup shall be allocated the portion of the increase in the Group Tax Liability that is attributable to it under the apportionment method described in Section 4, plus any allocable interest and penalties ; or 49 - 5 - (2) there is a reduction in the Group Tax Liability, then each Subgroup shall 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 in Section 4, plus any allocable interest. b. If an amended return or claim for refund is filed by the BEI Subgroup as a result of a net operating loss carryback, or is filed by the BEI Subgroup or the NBHI Subgroup as a result of a capital loss carryback, from a taxable period commencing after the Distribution Date to any Tax Period or any taxable period prior to the Applicable Period, and such amended return or claim for refund results in a reduction in the Group Tax Liability, then the Subgroup which filed the amended return or claim for refund shall be entitled to the entire refund (including any interest thereon) resulting from such reduction. If, however, as a result of any subsequent determination, settlement or court decision, there is an increase in such Group Tax Liability, then the increase shall be allocated first to the party which obtained the refund up to the amount of the refund of tax, and then to both Subgroups in accordance with Section 6a. NBHI agrees to elect under Code section 172(b)(3) to waive its net operating loss carryback period with respect to each of the first three taxable years of the NBHI Subgroup commencing after the Distribution Date. c. If, for a taxable period commencing after the Distribution Date, any member of the NBHI Subgroup incurs a capital loss which it would be entitled to carry back to reduce income of the NBHI Subgroup included on a Group Tax Return for a prior period, but such carryback or any portion thereof is not allowable because the prior period's income has already been reduced by a capital loss incurred by the BEI Group (including Capstone and subsidiaries) for any period ending after the Distribution Date, BEI shall reimburse NBHI for the amount of income taxes plus interest that would have been refunded by the IRS had such NBHI capital loss carryback been allowable. To the extent any portion of a carryback which was not allowable to NBHI, and in respect of which NBHI received reimbursement from BEI, is allowed as a carryover within the first five taxable years of NBHI commencing after the Distribution Date, NBHI shall pay BEI the amount of the reduction in income taxes resulting 50 - 6 - from the use of such carryover, but not in excess of the reimbursement of income taxes received from BEI under the preceding sentence. d. To the extent that the computation under Section 6(a) or (b) results in NBHI having a net payment liability, such amount shall be paid by NBHI to BEI; and, to the extent that it results in NBHI having a net amount receivable, such amount shall be paid by BEI to NBHI. The appropriate liability or receivable, as the case may be, together with any interest or penalties thereon, shall be paid in a timely fashion and shall be a joint and several liability of BEI and Subsidiaries or NBHI and Subsidiaries, as the case may be. 7. Conduct of Disputes. If BEI as common parent of the Group receives notice of any audit or other examination by the IRS of any Group Tax Return, BEI shall promptly notify NBHI of such audit or examination. BEI may, at its option upon timely notice to NBHI, control the conduct of any audit and the defense of any suit, action or proceeding resulting therefrom relating to the tax liability of the BEI Subgroup as determined under Section 4. NBHI may, at its option upon timely notice to BEI, control the conduct of any audit and the defense of any suit, action or proceeding resulting therefrom relating to the tax liability of the NBHI Subgroup as determined under Section 4. Each party will cooperate with the other in these proceedings and provide such assistance and documents, without charge, as may reasonably be requested by the other party for such purpose. 8. Certain Post-Applicable Period Returns. For any taxable year in which the federal income tax liability of NBHI and Subsidiaries is not reported on the same tax return as that of BEI and Subsidiaries, the person or persons preparing the returns and representing the taxpayers in any examination or appeal shall do so in a manner which fairly reflects the interests of all taxpaying entities. 9. State and Local Income and Franchise Taxes. a. In the case of any taxable year for which a consolidated income or franchise tax return is filed with any 51 - 7 - state or local jurisdiction, which return includes any member of NBHI and Subsidiaries, NBHI shall pay to BEI the proportionate share of any taxes reported on such return attributable to NBHI and Subsidiaries computed in a manner consistent with the principles set forth in Section 4 of this Agreement. The principles set forth in Sections 2, 5, 6, 7 and 8 shall also be applicable to state and local income and franchise tax returns. b. If the state income or franchise tax liability of BEI or any one or more of its direct or indirect subsidiaries (other than NBHI and Subsidiaries) is determined by reference to the income, loss, assets, expenses, or activities of any member of NBHI and Subsidiaries: (i) NBHI shall cause a payment to be made to BEI equal to the amount, if any, by which the State tax liability of BEI and Subsidiaries (determined on a with and without basis) is increased because of the income, loss, assets, expenses, or activities of that member or members of NBHI and Subsidiaries; (ii) BEI shall cause a payment to be made to NBHI equal to the amount, if any, by which the State tax liability of BEI and Subsidiaries (determined on a with and without basis) is reduced because of the income, loss, assets, expenses, or activities of that member or members of NBHI and Subsidiaries; and (iii) Such payments shall be adjusted to reflect any examination adjustments or amended returns consistent with the principles set forth in Section 6. c. Principles similar to those set forth in Section 9(b) shall apply if the state income or franchise tax liability of any member of NBHI and Subsidiaries is determined by reference to the income, loss, assets, expenses, or activities of BEI or one or more of its direct or indirect subsidiaries (other than NBHI and Subsidiaries). d. No state income or franchise tax return or report shall be made on a basis that combines or consolidates the income of any member of NBHI and Subsidiaries with any member of BEI and Subsidiaries, unless such combined reporting has been 52 - 8 - approved by the boards of directors of both BEI and NBHI or has been determined to be required by the taxing authority of the state in which such return or report is filed. e. NBHI agrees to pay all state taxes that arise from the transfer of assets of the Pharmacy Subsidiaries to NBHI and Subsidiaries in connection with the restructuring related to the Distribution. 10. Indemnification. Each party shall pay and be responsible for, and shall indemnify, defend and hold harmless all other parties to this Agreement from and against all liabilities allocated to it under this 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 to this Agreement is or becomes liable pursuant to the terms of this Agreement, appropriate reimbursement shall be made no later than 10 days after demand therefore The portion of any refund, rebate or reimbursement received by any party to which another party is entitled pursuant to this Agreement shall be paid over within 10 days of receipt to the party which is entitled thereto. Any payments required to be made between the parties pursuant to this Agreement which are not made in a timely fashion shall bear interest calculated at the rate specified under Section 6621(a)(2) of the Code (the "Underpayment Rate") from the date such payment is due pursuant to this Agreement to the date the payment is made. In all other respects Section 3.4 and Section 3.5 of the Distribution Agreement shall govern the indemnification procedures and payments under this Agreement. 11. Record Retention. BEI 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 relating thereto ("Tax Records") existing on the date hereof or relating to Tax Periods ending with the Distribution Date, for 7 years following the Distribution Date, or such longer period as a tax deficiency may be assessed or a refund claim filed under applicable periods of limitation, and (ii) allow NBHI and its representatives (and representatives of any of its affiliates), at times and dates reasonably acceptable to BEI, to inspect, review and make copies of such records, and have access to such 53 - 9 - employees, as NBHI may reasonably deem necessary or appropriate from time to time, such activities to be conducted during normal business hours and without disruption to BEI's business. 12. Complete Agreement. This Agreement shall constitute the entire agreement among the parties with respect to the subject matter hereof and shall supersede any previous negotiations, commitments and writings with respect to such subject matter. 13. Successors and Assigns. This Agreement and all of its provisions hereof shall be binding upon and shall inure to the benefit of the parties and their respective successors and permitted assigns. 14. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to its principles of conflicts of law. 15. Amendments. This Agreement may not be modified or amended except by an agreement in writing signed by the parties hereto. 16. 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. 17. Notices, Communications. All notices and other communications hereunder shall be in writing and shall be delivered in the manner and at the address (unless subsequently notified to the contrary in the manner provided therein) as provided in the Distribution Agreement. 54 - 10 - IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the ____ day of , 1997. Attest BEVERLY ENTERPRISES, INC., On Behalf Of Itself And Its SUBSIDIARIES By: By: --------------------------- ----------------------------- Attest NEW BEVERLY HOLDINGS, INC., On Behalf Of Itself And Its SUBSIDIARIES By: By: --------------------------- ----------------------------- 55 EXHIBIT D Provided pursuant to Section 2.13 of the Distribution Agreement EMPLOYEE BENEFIT MATTERS AGREEMENT This Employee Benefit Matters Agreement ("Agreement"), effective as of April 15, 1997 between BEVERLY ENTERPRISES, INC., a Delaware corporation ("Beverly"), NEW BEVERLY HOLDINGS, INC., a Delaware corporation ("NBHI"), and Capstone Pharmacy Services, Inc., a Delaware corporation ("Capstone"), shall govern the rights and obligations of Beverly, NBHI, and Capstone and their respective subsidiaries (present and future), as contemplated by the Distribution Agreement (as hereinafter defined) and the Restructuring (as hereinafter defined) with respect to compensation and benefits of the employees and former employees of each of Beverly and NBHI and their respective subsidiaries, in connection with the transactions effected by the Distribution, as described below. The term Beverly, when used in this Agreement, shall be construed to mean Beverly, Pharmacy Corporation of America, a Delaware corporation ("PCA") and each subsidiary of PCA or Beverly which is engaged primarily in the institutional pharmacy business (collectively, the "Pharmacy Subsidiaries"), and shall not be construed to include NBHI where such construction would have the effect of negating any obligation of Beverly or Capstone hereunder. The term NBHI, when used in this Agreement, shall be construed to mean NBHI and each other subsidiary of Beverly which is not a Pharmacy Subsidiary, and shall not be construed to include Beverly where such construction would have the effect of negating any obligation of NBHI hereunder. Capitalized terms used herein and not otherwise defined shall have the meaning set forth in the Merger Agreement or in the Distribution Agreement (both as defined below). RECITALS WHEREAS, Beverly is entering into an Agreement and Plan of Merger dated as of April 15, 1997 (the "Merger Agreement") with Capstone Pharmacy Services, Inc., a Delaware corporation ("Capstone") pursuant to which Beverly will merge with and into Capstone, with Capstone as the Surviving Corporation on the terms specified or referred to therein (the "Merger"); and WHEREAS, prior to the Merger, Beverly and its subsidiaries will transfer to NBHI, upon the terms and subject to the conditions set forth in the Agreement and Plan of Distribution by and between Beverly and NBHI dated as of April 15, 1997 (the "Distribution Agreement"), all of the Remaining Health Care Assets and Remaining Health Care Liabilities of Beverly and its subsidiaries (the "Restructuring"), following which all of the NBHI Stock will be distributed (the "Distribution") to the stockholders of Beverly immediately prior to the Merger; and 56 WHEREAS, the purpose of the Restructuring is to make possible the Merger by divesting Beverly of the businesses and operations conducted or to be conducted by NBHI, which Capstone is unwilling to acquire; and WHEREAS, the Distribution Agreement sets forth or provides for certain agreements between Beverly and NBHI in consideration of the separation of their ownership, including this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual promises contained in this Agreement, the Distribution Agreement and in the other agreements and instruments provided for in such agreements, the parties hereto agree as follows. ARTICLE I Definitions "Beverly Stock Plans" means the 1981 Beverly Incentive Stock Option Plan, 1985 Beverly Nonqualified Stock Option Plan, Amended and Restated Beverly Enterprises, Inc. 1993 Long-Term Incentive Stock Plan, Beverly Enterprises, Inc. Annual Incentive Plan, Beverly Enterprises, Inc. Non-Employee Directors' Stock Option Plan, the 1996 Beverly Enterprises, Inc. Long-Term Incentive Plan, Beverly Enterprises, Inc. Equity Incentive Plan, American Transitional Hospitals, Inc. 1993 Nonqualified Stock Option Plan assumed by Beverly, PMSI 1990 Incentive and Nonstatutory Stock Option Plan assumed by Beverly, and Insta-Care Holdings, Inc. First Employees Stock Option Plan assumed by Beverly. "Capstone Conversion Number" means the number of shares of Capstone stock into which a single share of Beverly stock outstanding immediately prior to the Effective Time of the Merger would have been converted pursuant to the Merger Agreement. "Consent and Release" means an agreement executed by a Transferred Employee or Retained Employee consenting to the substitution of stock options, performance shares and phantom shares issued by NBHI or Capstone, as the case may be, for Beverly stock options, performance shares and phantom shares, releasing Beverly, NBHI and Capstone from any and all liability under any Beverly stock option, performance share or phantom share, and agreeing to the amendment of all option, incentive, employment, change in control or similar agreements and plans to which he or she is a party or beneficiary, to exclude the Distribution and Merger and the accompanying restructuring transactions from the definition of a "change in control". "Distributed Stock Fraction" means a fraction representing (i) the Fair Market Value of a share of NBHI stock immediately after the Time of Distribution which, for purposes of this determination, shall mean such value of a share of NBHI stock, trading on a "when issued" basis, on the Ex-Dividend Date, divided by (ii) the Fair Market Value of a share of Beverly stock immediately before the Time of Distribution which, for purposes of this determination, shall mean such value on the Last Trading Date. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Ex-Dividend Date" means the date on which shares of Beverly 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 NBHI stock in the Distribution). "Fair Market Value" means, on any given date, (i) if the stock to be valued is listed on the New York Stock Exchange, the last reported sales price per share of such stock as reported on the New York Stock Exchange composite tape on such date, as reported by The Wall Street Journal, and (ii) if the stock to be valued is not listed on the New York Stock Exchange, the last reported sales price per share of such stock on the NASDAQ National Market System on such date, as reported by The Wall Street Journal. 2 57 "Last Trading Date" means the last trading day before the Ex-Dividend Date. "Retained Employee" means each person employed by Beverly or any of the Pharmacy Subsidiaries primarily in connection with the Institutional Pharmacy Business. Where appropriate, such term shall also include former employees and current and former independent contractors of Beverly or any of the Pharmacy Subsidiaries who provide or previously provided services primarily in connection with the Institutional Pharmacy Business. "Retained Stock Fraction" means a fraction representing (i) the Fair Market Value of a share of Beverly stock immediately after the Time of Distribution which, for purposes of this determination, shall mean such value on the Ex-Dividend Date, divided by (ii) the Fair Market Value of a share of Beverly stock immediately before the Time of Distribution which, for purposes of this determination, shall mean such value on the Last Trading Date. "Transferred Employee" means each person employed by Beverly or any subsidiary (excluding the Pharmacy Subsidiaries) of Beverly, other than the Retained Employees. Where appropriate, such term shall also include former employees and current and former independent contractors who provide or previously provided services to Beverly or a Beverly Subsidiary other than a Pharmacy Subsidiary or the Institutional Pharmacy Business. Non-Tax Qualified Benefit Plans" means the Beverly Enterprises Deferred Compensation Plan, Beverly Enterprises Executive Deferred Compensation Plan, Beverly Enterprises Executive Retirement Plan, Beverly Enterprises Executive Life Insurance Plan, Beverly Enterprises Retirement Plan for Board of Directors, Beverly Enterprises Non-Employee Director Deferred Compensation Plan, Beverly Enterprises Executive Survivorship Income Plan, Beverly Enterprises Executive Split Dollar Life Insurance Plan, Beverly Enterprises and/or Pharmacy Corporation of America Change of Control Agreements, Beverly Enterprises and/or Pharmacy Corporation of America Employment Agreements, and Beverly Enterprises and/or Pharmacy Corporation of America Severance Agreements for Robert Van Tuyle, Robert Wotil, Michael Hayden, and Ronald C. Kayne. "Welfare Plans" means the Beverly Enterprises, Inc. Associates Group Health Plan, Beverly Enterprises, Inc. Dental Plan--Management and Non-Management, Beverly Enterprises, Inc. Life Insurance Plan, Beverly Enterprises, Inc. Executive Long-Term Disability Plan, Beverly Enterprises, Inc. Executive Physical Program, Beverly Enterprises, Inc. Executive Medical Reimbursement Plan, Beverly Enterprises, Inc. Group Long-Term Disability Plan, Beverly Enterprises, Inc. Group Business Travel Accident Plan, Beverly Enterprises, Inc. Severance Plan, Pharmacy Corporation of America Severance Plan, Beverly Enterprises, Inc. Health Care Spending Account, Beverly Enterprises, Inc. Dependent Care Assistance Plan, Beverly Enterprises, Inc. Vacation Policy, Pharmacy Corporation of America Vacation Policy, Beverly Enterprises, Inc. Sick Pay Policy for Exempt Associates, Beverly Enterprises, Inc. Sick Pay Policy for Non-Exempt Associates, Pharmacy Corporation of America Sick Pay Policy for Exempt Co-Workers, Pharmacy Corporation of America Sick Pay Policy for Non-Exempt Co-Workers, Beverly Enterprises, Inc. Pre-Tax Premium Plan, Beverly Enterprises, Inc. Group Universal Life 3 58 Insurance Program, Beverly Enterprises, Inc. Insurance At Work Program, Beverly Enterprises, Inc. Vision One Discount Program, and Beverly Enterprises, Inc. Voluntary Coverage Program. ARTICLE II Salary, Wages, Payroll and Related Benefits 2.1 Prior to the Time of Distribution, Beverly and NBHI shall cooperate to transfer each Transferred Employee to the employ of NBHI or the appropriate subsidiary of NBHI, if required, effective as of the Time of Distribution. 2.2 With respect to the Transferred Employees but not the Retained Employees, except as specifically provided in this Agreement, NBHI shall assume the liabilities and obligations regarding, and continue to be responsible for, all claims made by or on behalf of such Transferred Employees in respect of salary, wages, benefits, stock based compensation, non-qualified plans, qualified plans, welfare plans, severance pay, salary continuation, COBRA continuation and similar obligations relating to the continued employment, or the termination or alleged termination of such persons' employment with NBHI or Beverly, including, without limitation, by reason of consummation of the transactions contemplated in the Distribution Agreement or the Merger Agreement or otherwise. All such liabilities and obligations shall be deemed Remaining Health Care Liabilities, and Beverly shall not assume nor be liable in any way whatsoever for any such liabilities after the Time of Distribution, and NBHI shall indemnify and hold Beverly and Capstone harmless with respect thereto. 2.3 With respect to Retained Employees, except as specifically provided in this Agreement, Beverly shall retain and Capstone shall assume the liabilities and obligations with respect to, and continue to be responsible for, all liabilities and obligations whatsoever in connection with claims made by or on behalf of such persons, including, without limitation, claims for salary, wages, benefits, stock based compensation, non-qualified plans, qualified plans, welfare plans, severance pay, salary continuation, COBRA continuation, all other obligations relating to the continued employment, unpaid and unused vacation benefits accrued and earned prior to the Time of Distribution, and the termination or alleged termination of such persons' employment with Beverly, Capstone, or any of the Pharmacy Subsidiaries, including by reason of the consummation of the transactions contemplated in the Distribution Agreement or the Merger Agreement or otherwise and NBHI shall not assume nor be liable in any way whatsoever for any such liabilities on or after the Time of Distribution, and Beverly and Capstone hereby indemnify and hold NBHI harmless with respect thereto. ARTICLE III Beverly Stock Plans 3.1 Prior to the Time of Distribution, Beverly, NBHI and Capstone shall (i) cooperate to (x) amend the Beverly Stock Plans in such manner, if any, as may be necessary to provide for the assumption of such plans and certain options to purchase shares of Beverly Common Stock ("Beverly Options"), and certain restricted shares, performance shares and phantom shares of 4 59 Beverly stock granted thereunder or elsewhere, by Capstone, as Beverly's successor under the Merger Agreement, to the extent set forth in Section 3.6 below, and (y) cause NBHI to adopt new stock plans as described in Section 3.2 hereof, and (ii) take such other steps (consistent with applicable law and the terms of such affected plans) as may be necessary to prevent consummation of the transactions contemplated by this Employee Benefits Matters Agreement, the Distribution Agreement and the Merger Agreement (including the transfer of employment of any Transferred Employee) from causing, resulting in or being treated as a termination of employment or a change in control with respect to the Beverly Stock Plans, except to the extent set forth herein. 3.2 Prior to the Time of Distribution, NBHI shall adopt one or more stock option plans, the participants in which, initially, shall be all Transferred Employees who (i) at the Time of Distribution, hold outstanding Beverly Options and/or restricted shares, performance shares or phantom shares of Beverly stock, and (ii) where applicable, agree to release Beverly, NBHI and Capstone from any and all liability under the Beverly Stock Plans, including any liability that would arise by virtue of a change in control arising under such Plans or under any option or share granted thereunder. 3.3 Effective immediately before the Time of Distribution, with respect to each Retained Employee and Transferred Employee who has executed and delivered to Beverly a Consent and Release, (i) each Beverly Option then outstanding, regardless of whether an incentive stock option or a nonqualified stock option, shall become fully vested and exercisable; (ii) the restrictions (e.g., risk of forfeiture) to which each restricted share of Beverly stock then outstanding is subject shall lapse and each such share shall become fully vested; (iii) each phantom share granted with respect to Beverly stock, to the extent any such grant is then outstanding, shall become fully vested; and (iv) each performance share of Beverly stock then outstanding shall become vested to the extent of fifty percent (50%) of such share. No such vesting shall occur at such time with respect to any Retained Employee or Transferred Employee who has declined to execute and deliver to Beverly a Consent and Release. 3.4 (a) Effective immediately after the Time of Distribution, NBHI shall substitute for each outstanding Beverly Option held by a Transferred Employee, subject to the optionee's consent to the extent required, a new NBHI option to acquire shares of NBHI Common Stock, which option shall be of the same character (i.e., incentive stock option or nonqualified stock option, as the case may be, though recognizing that any such substituted NBHI option will not qualify as an incentive stock option in the hands of an optionee who is not an employee of NBHI or one of its subsidiaries) 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 Transferred Employees who have executed and delivered to Beverly a Consent and Release, (i) the exercise price per share of NBHI 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 Time of Distribution, and (y) the Distributed Stock Fraction, and (ii) the number of 5 60 NBHI 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 Time of Distribution, divided by (y) the Distributed Stock Fraction. No such adjustment to the exercise price and number of NBHI 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. NBHI shall indemnify Capstone and hold Capstone harmless for any costs, expenses, or liabilities incurred by Capstone directly attributable to the refusal of any Transferred Employee to consent to the substitution of NBHI options and/or NBHI phantom shares for Beverly Options and/or phantom shares granted with respect to Beverly stock. Capstone shall promptly notify NBHI of any claim attributable to any such refusal to consent and shall cooperate with NBHI in responding thereto; provided, however, that NBHI shall have sole discretion in determining whether and how to respond to any such claim, at its sole expense, including, without limitation, contesting or settling any such claim. (b) Effective immediately after the Time of Distribution, NBHI shall also substitute, with the grantee's consent to the extent required, (i) for each then outstanding unvested phantom share granted with respect to Beverly stock and held by a Transferred Employee, new unvested phantom shares which shall be granted with respect to NBHI stock, and (ii) for each then outstanding unvested performance share or restricted share of Beverly 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 NBHI stock, as the case may be; provided, however, that, with respect to a Transferred Employee who has executed and delivered to Beverly a Consent and Release, the number of new phantom or performance shares, as the case may be, substituted for each phantom or performance share of Beverly 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 NBHI stock shall be made with respect to shares held by persons, whether Transferred Employees or Retained Employees, who have declined to execute and deliver to Beverly a Consent and Release; provided, further, that, 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 NBHI stock shall be issued in substitution for outstanding unvested phantom, performance or restricted shares of Beverly stock; and provided, further, that, 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 transactions referred to herein, including, without limitation, the requirement that employment services be performed for NBHI or one of its subsidiaries), as the phantom, performance or restricted share, as the case may be, for which they have been substituted. 3.5 (a) Effective immediately after the Time of Distribution, solely with respect to each Retained Employee who has executed and delivered to Beverly 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 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 Time of Distribution, and (y) the Retained Stock Fraction, and (ii) the number of Beverly shares for which the 6 61 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 Time of Distribution, divided by (y) the Retained Stock Fraction. No such adjustment to the exercise price and number of Beverly shares for which the option may be exercised shall apply to options held by Retained Employees who have declined to execute and deliver to Beverly a Consent and Release. (b) Effective immediately after the Time of Distribution, with respect to each Retained Employee who has executed and delivered to Beverly a Consent and Release, the number of Beverly shares represented by each outstanding unvested performance or phantom share of Beverly 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 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 stock shall be cancelled or forfeited, as the case may be. 3.6 (a) As of the Effective Time of the Merger, Capstone shall 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 stock subject to such option immediately prior to the Effective Time of the Merger, but after giving effect to the adjustments described in Section 3.5 hereof, 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 for which the option may be exercised, determined after giving effect to the adjustments described in Section 3.5 hereof, shall be an amount equal to the quotient of (x) such adjusted exercise price per share of Beverly 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 Capstone Conversion Number. (b) As of the Effective Time of the Merger, Capstone shall also assume each outstanding unvested phantom share granted with respect to Beverly stock and held by a Retained Employee, and each outstanding unvested performance share and/or restricted share of Beverly stock held by either a Transferred Employee or Retained Employee, in each instance after giving effect to the adjustments described in Section 3.5 hereof, and shall substitute (i) for each such phantom share new unvested phantom shares which shall be granted with respect to Capstone 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 stock; provided, however, that, the number of new phantom, performance or restricted shares of Capstone stock substituted for each phantom, performance or restricted share of Beverly stock, as the case may be, shall be equal to the Capstone Conversion Number; provided, further, that, 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 stock shall be cancelled or forfeited, as the case may be, and no new phantom, performance or restricted shares of Capstone stock shall be issued in substitution therefor; and provided, further, that, 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 transactions 7 62 referred to herein, including, without limitation, the requirement that employment services be performed for Capstone or one of its subsidiaries), as the phantom, performance or restricted share, as the case may be, for which it has been substituted. 3.7 Capstone's obligation hereunder to assume Beverly Options, and phantom shares of Beverly stock, and to substitute therefor options to acquire and phantom shares of Capstone stock, shall not be subject to any provision of the Merger Agreement limiting to 50 million the maximum number of Capstone shares which may be issued as part of the Closing Consideration. As of April 15, 1997, to NBHI's knowledge, before taking into account the adjustments described in this Article III, (i) the number of shares subject to Beverly Options held by Retained Employees was 719,168, and the number of shares to Beverly Options or unvested phantom shares held by Transferred Employees was 4,004,973; (ii) the number of unvested restricted shares of Beverly stock held by Retained Employees was 33,500, and the number of unvested restricted and performance shares held by Transferred Employees was 970,950; (iii) the number of unvested performance shares of Beverly stock held by Retained Employees was 93,000; and (iv) the number of unvested phantom shares granted with respect to Beverly stock held by Retained Employees was 888. Notwithstanding the above, NBHI represents and warrants that the aggregate number of outstanding Beverly Options, unvested phantom shares of Beverly stock, unvested restricted shares of Beverly stock, and unvested performance shares of Beverly stock issued to Retained Employees as of April 15, 1997, before taking into account the adjustments described in this Article III, does not exceed 900,000, and Capstone's obligation hereunder to assume Beverly Options and phantom shares of Beverly stock for Retained Employees shall not exceed 900,000 before taking into account the adjustments described in this Article III (reduced by the outstanding number of unvested restricted shares of Beverly stock and unvested performance shares of Beverly stock issued to Retained Employees, before taking into account the adjustments described in this Article III, and assumed hereunder); and provided further that NBHI shall indemnify and hold Capstone harmless with respect to any assumption of Beverly Options and phantom shares of Beverly stock issued to Retained Employees in excess of such limitation. The parties hereto also agree that no further additional Beverly Options or phantom shares of Beverly stock will be granted after April 15, 1997 to Retained Employees. 3.8 To the extent, if any, that, subsequent to the Distribution, any unvested performance share or restricted share of NBHI stock held by a Retained Employee shall be forfeited, any and all such forfeited shares shall revert to NBHI. Similarly, to the extent, if any, that, subsequent to the Distribution, any unvested performance share or restricted share of Beverly or Capstone stock held by a Transferred Employee shall be forfeited, any and all such forfeited shares shall revert to Beverly or Capstone, as the case may be. ARTICLE IV Non-Tax Qualified Benefit Plans 4.1 Prior to the Time of the Distribution, Capstone, Beverly and NBHI shall cooperate to amend the Non-Tax Qualified Benefit Plans as may be necessary to provide for (i) the assumption of such Non-Tax Qualified Benefit Plans by NBHI to the extent set forth in Section 4.2 below and to provide for the ongoing participation in such plans by all Transferred Employees who previously participated therein and who execute and deliver to Beverly and NBHI a Consent and Release, (ii) the cessation of participation, contributions, and accruals under such assumed Non-Tax Qualified Benefit Plans by all Retained Employees, (iii) the retention by Beverly and assumption by Capstone of all liabilities under the Non-Tax Qualified Benefit Plans with respect to Retained Employees, which, except in the case of individual insurance policies, annuity contracts, severance agreements, employment contracts, or change in control agreements relating to Retained Employees, which shall remain with Beverly and be assumed by Capstone (the 8 63 "Assumed Instruments"), shall take the form of NBHI maintaining such Plans (on a "frozen" basis with respect to Retained Employees) and Beverly and Capstone indemnifying and holding NBHI harmless from all costs, expenses, and liabilities relating thereto (net of any assets attributable thereto previously transferred to NBHI); and (iv) take such other steps (consistent with applicable law and the terms of the affected plans) as may be necessary to prevent the consummation of the transactions contemplated by this Agreement, the Distribution Agreement and the Merger Agreement (including the transfer of employment of any Transferred Employee) from causing, resulting in or being treated as a termination of employment, cessation of service as a director or a change of control with respect to such plans. 4.2 Effective as of the Time of Distribution, except for the Assumed Instruments, each of the Non-Tax Qualified Benefit Plans and any related rabbi trusts, related trust assets, insurance policies, and annuity contracts, shall be transferred from Beverly to NBHI and to the extent provided herein NBHI shall assume such plans, trusts, policies, and contracts and (i) succeed Beverly as the plan sponsor, plan administrator, employer or other party under such plan and any agreements related thereto and be vested with any and all of the powers, duties, rights and privileges of such plan sponsor, plan administrator, employer or other party thereunder; (ii) with respect to the Transferred Employees, assume and agree to perform and discharge all of the duties and obligations of the employer, sponsor and/or plan administrator thereunder and to pay, and be solely responsible for all of the liabilities and obligations of any kind (whether absolute, accrued, contingent or otherwise) of the employer, sponsor and/or plan administrator thereunder in respect of, arising under or required to be performed with respect to the Transferred Employees under any such plan, agreement or arrangement; and (iii) with respect to the Retained Employees, assume and agree to perform and discharge all of the liabilities accrued prior to the Time of Distribution under each Non-Tax Qualified Benefit Plan other than the Assumed Instruments, and, with respect to all such assumed Non-Tax Qualified Benefit Plan liabilities, Beverly and Capstone hereby agree to indemnify and hold NBHI harmless from all costs, expenses, and liabilities relating thereto, including, without limitation, any employer matching or other contributions due thereunder (net of any assets attributable thereto previously transferred to NBHI). Notwithstanding anything to the contrary herein, Beverly shall retain and Capstone shall assume and be solely responsible for all Assumed Instruments and any and all liabilities thereunder or relating thereto (including, without limitation, any employer matching or other contributions due thereunder). 9 64 ARTICLE V Employee Welfare Benefit Plans 5.1 Prior to the Time of the Distribution, Beverly, Capstone, and NBHI shall cooperate to amend the Welfare Plans as may be necessary to provide for (i) the transfer by Beverly of such Welfare Plans and any related VEBA trusts, trust assets, insurance policies, HMO contracts, and plan assets to NBHI and the assumption by NBHI of the liabilities of such plans to the extent set forth below, (ii) the ongoing participation in such plans by all Transferred Employees (to the extent such Employees are otherwise eligible thereunder but for the Distribution and restructuring), (iii) the cessation of participation in such plans as of the Time of Distribution by all Retained Employees, and (iv) take such other steps (consistent with applicable law and the terms of the affected plan) as may be necessary to prevent the consummation of the transactions contemplated by this Agreement, the Distribution Agreement and the Merger Agreement (including the transfer of employment of any Transferred Employee) from causing, resulting in or being treated as a termination of employment with respect to such plans. 5.2 Effective as of the Time of Distribution, except to the extent provided below, NBHI shall assume the Welfare Plans and have transferred to it all related trust funds, insurance policies, HMO contracts, and plan assets, and, pursuant to the terms of such plans NBHI shall assume the liability with respect to and honor or cause its insurance carriers to honor all claims for benefits incurred by (i) Transferred Employees (or their dependents or beneficiaries) under such plans at any time without interruption as a result of the transactions contemplated by this Agreement, the Distribution Agreement or the Merger Agreement, and (ii) Retained Employees but only for claims actually incurred during periods ending immediately prior to the Time of Distribution, in accordance with the terms of such plans. Beverly shall be relieved of and shall not assume nor be liable in any way whatsoever for such above enumerated liabilities after the Time of Distribution. On or before the Time of Distribution, Beverly and its subsidiaries shall transfer all funds of such plans (including funds for any contributions or premiums due from Beverly or any subsidiaries of Beverly which have accrued as of the Time of Distribution) either to NBHI or to the respective plans entitled to receive such transfers. Notwithstanding the above, Beverly shall retain and Capstone shall assume all coverage obligations and benefit liabilities for Retained Employees under the Welfare Plans with respect to periods beginning on or after the Time of Distribution. This retention by Beverly and assumption by Capstone shall include, without limitation, all obligations for Retained Employees under (i) COBRA, (ii) severance pay plans, (iii) short-term disability, sick pay and leave of absence, (iv) waiver of premium, (v) vacation pay, and (vi) the Beverly Executive Life Insurance Plan, Executive Survivorship Income Plan, and Executive Split Dollar Life Insurance Plan, regardless of when such benefits accrued or vested, as long as such Retained Employees were alive as of the Time of Distribution. 5.3 Notwithstanding the above, Beverly's and Capstone's liability for Retained Employee COBRA obligations existing as of the Time of Distribution shall be discharged by NBHI administering and paying for such obligations and Beverly and Capstone indemnifying and holding NBHI harmless for all costs, expenses, and liabilities relating thereto. 10 65 ARTICLE VI Tax-Qualified Defined Contribution Plans 6.1 Prior to the Time of the Distribution, Beverly, Capstone and NBHI shall cooperate to amend each of the Beverly Enterprises 401(k) Savings Plus Plan and the Beverly Enterprises, Inc. 1988 Employee Stock Purchase Plan as may be necessary to provide for (i) the assumption of such plans by NBHI as set forth below, (ii) the ongoing participation therein by the Transferred Employees (to the extent otherwise eligible thereunder), (iii) the cessation of participations, contributions, and accruals with respect to Retained Employees, (iv) the amendment of the Pharmacy Corporation of America Retirement Savings Plan to provide for the assumption and sponsorship of such Plan by Capstone, whereby Beverly will retain such Plan and after the Merger Capstone will become the plan sponsor, named employer and fiduciary, and plan administrator thereunder, and (v) the taking of such other steps (consistent with applicable law and the terms of the affected plan) as may be necessary to prevent the consummation of the transactions contemplated by this Agreement, the Distribution Agreement and the Merger Agreement (including the transfer of employment of any Transferred Employee) from causing, resulting in or being treated as a termination of employment with respect to the Transferred Employees who are participants in such plans. 6.2 Effective as of the Time of Distribution, the Beverly Enterprises 401(k) Savings Plus Plan and the Beverly Enterprises, Inc. 1988 Employee Stock Purchase Plan shall be transferred from Beverly to NBHI and Beverly shall transfer the related trusts and trust assets (including funds for any contributions due from Beverly or subsidiaries of Beverly which have accrued or that have been deducted from payroll as of the Time of Distribution) and NBHI shall assume such plans and (i) succeed Beverly as the plan sponsor, plan administrator, employer or other party under such plans and any agreements related thereto and be vested with any and all of the powers, duties, rights and privileges of such plan sponsor, plan administrator, employer or other party thereunder; and (ii) except as provided below, assume and agree to perform and discharge all of the duties and obligations of the employer, sponsor and/or plan administrator thereunder and to pay and be solely responsible for all of the liabilities and obligations of any kind (whether absolute, accrued, contingent or otherwise) of the employer, sponsor and/or plan administrator thereunder in respect of, arising under or required to be performed under any such plan, agreement or arrangement. Notwithstanding anything to the contrary above, Beverly and Capstone shall remain solely liable and responsible for and shall pay to the respective NBHI plan or trust the matching and other employer contributions due for all Retained Employees under the Beverly Enterprises 401(k) Savings Plus Plan and the Beverly Enterprises 1988 Employee Stock Purchase Plan. 6.3 As soon as practicable following the Time of Distribution, and to the extent permitted by law, NBHI shall cause the accounts (and related assets and liabilities) of Retained Employees in the Beverly Enterprises 401(k) Savings Plus Plan to be transferred, in cash or property acceptable to Capstone, in a trust to trust transfer (without the election of any other participant), to either the Pharmacy Corporation of America Retirement Savings Plan or another tax-qualified 401(k) plan sponsored by Capstone, at Capstone's election, and Beverly and 11 66 Capstone hereby agree to indemnify and hold NBHI and all NHBI plans and plan fiduciaries harmless from any liability, obligation, claim, damage, cost or expense relating thereto. ARTICLE VII Retained Employees 7.1 Rights. The rights of Retained Employees with respect to the periods following the Time of Distribution will be governed by this Agreement and the Merger Agreement. ARTICLE VIII Miscellaneous 8.1 Governing Law. This Agreement and the transactions contemplated hereby shall be construed in accordance with and governed by the internal, substantive laws of the State of Delaware applicable to contracts executed in that state, without regard for the law of conflict of laws. 8.2 Entire Agreement. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof; superseding all negotiations, prior discussions and prior agreements. To the extent a subject is specifically covered in this Agreement and to the extent any other agreement is in conflict herewith, this Agreement, if more specific, shall control. 8.3 Parties In Interest. No party may assign its rights or delegate any of its duties under this Agreement without prior written consent of the others. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Nothing contained in this Agreement, express or implied, is intended to confer upon any third party any benefits, rights or remedies, except that as of the Effective Time of the Merger, Capstone shall be entitled to exercise any and all of the benefits, rights and remedies afforded Beverly and shall be responsible for all of the obligations and liabilities assumed, retained, or imposed upon Beverly under this Agreement. 8.4 Effectiveness. This Agreement shall become effective at the Time of Distribution and may be terminated by the parties at any time prior thereto by written agreement. 8.5 Reformation and Severability. If any provision of this Agreement shall be held to be invalid, unenforceable or illegal in any jurisdiction under any circumstances for any reason, (i) such provision shall be reformed to the minimum extent necessary to cause such provision to be valid, enforceable and legal and preserve the original intent of the parties, or (ii) if such provision cannot be so reformed, such provision shall be severed from this Agreement. Such holding shall not affect or impair the validity, enforceability or legality of such provision in any other jurisdiction or under any other circumstances. Neither such holding nor such reformation or severance shall affect or impair the legality, validity or enforceability of any other provision of this agreement to the extent that such other provision is not itself actually in conflict with any applicable law. 12 67 8.6 Titles and Heading. All titles and headings have been inserted solely for the convenience of the parties and are not intended to be a part of this Agreement or to affect its meaning or interpretation. 8.7 No Reliance. No third party is entitled to rely on any of the representations, warranties and agreements of the parties contained in this Agreement. The parties assume no liability to any third party because of any reliance on the representation, warranties and agreements of the parties contained in this Agreement. 8.8 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original. IN WITNESS WHEREOF the Parties have caused this Agreement to be executed by their duly authorized officers this ____ day of April, 1997, but to be effective as of April 15, 1997. BEVERLY ENTERPRISES, INC. By: ----------------------------------- Title: --------------------------------- NEW BEVERLY HOLDINGS, INC. By: ----------------------------------- Title: --------------------------------- CAPSTONE PHARMACY SERVICES, INC. By: ----------------------------------- Title: --------------------------------- 13 EX-99.1 4 PRESS RELEASE 1 EXHIBIT 99.1 NEWS RELEASE The following is a joint announcement by Beverly Enterprises (NYSE:BEV) and Capstone Pharmacy Services, Inc. (NASDAQ:DOSE): BEVERLY, CAPSTONE CREATE LARGEST INDEPENDENT INSTITUTIONAL PHARMACY (FORT SMITH, ARKANSAS, April 16, 1997) -- Beverly Enterprises, Inc. (NYSE:BEV) and Capstone Pharmacy Services, Inc. (NASDAQ:DOSE) announced today that they have signed a definitive agreement to combine Beverly's Pharmacy Corporation of America (PCA) unit with Capstone to create the nation's largest independent institutional pharmacy company. Capstone will issue approximately 50 million shares of its stock to Beverly shareholders (valued at approximately $587.5 million, based on the April 15, 1997 Capstone closing price) and assume $275 million of PCA debt. The transaction, which utilizes a "Morris Trust" structure, is intended to create incremental value for Beverly shareholders. It will be accretive to Capstone, increasing annual earnings per share by at least 10 percent. After the transaction, Capstone will have revenues totalling about $900 million, some 30 percent higher than its nearest competitor. The combined company will serve the pharmaceutical and medical needs of nearly 500,000 customers, and operate some 100 institutional pharmacies in 32 states. Beverly shareholders will receive approximately forty-four one-hundredths (0.44) of a share of Capstone stock for each share of Beverly stock (on a fully diluted basis), and cumulatively will own approximately 57 percent of the combined pharmacy company. Beverly Enterprises will not retain any ownership position in it. The exact ratio of Capstone-to-Beverly shares will be based on the total number of shares of Beverly stock outstanding on the record date of the transaction, which has not yet been set. "This agreement is designed to maximize PCA's growth potential by combining it with a leading publicly traded institutional pharmacy to create the largest provider in the industry." said David R. Banks, Beverly's Chairman and Chief Executive Officer. "There are significant synergies between PCA and Capstone that should enable the expanded company to improve customer service, reduce purchasing and operating costs, and broaden the scope of its operations to take full advantage of market opportunities. We estimate the annual value of these potential synergies at about $25 million, which represents a significant financial advantage for the combined company. 2 "This transaction provides a very satisfying return on the investments we've made to build PCA," Banks added. "Beverly shareholders can continue to benefit from opportunities within the institutional pharmacy industry. But now, they'll own a market leader that can more aggressively pursue growth through acquisitions and geographic expansion. At the same time, Beverly shareholders continue to own the market leader in long-term healthcare. We've been strengthening our position in this key industry, and we believe we're well-prepared to build on the operating and financial improvements we've already achieved. We'll now be able to focus even more sharply on maximizing profitable growth within our core businesses." Allan Silber, Capstone's Chairman, said: "The growth of managed care is pressuring the institutional pharmacy industry to become increasingly competitive on price and service. This transaction gives us the opportunity to become a highly focused industry leader with the scope of operations, the financial resources and the management talent to effectively address these competitive pressures. Capstone and its shareholders should benefit from the much stronger base we're building in an industry where consolidation and cost-effectiveness are becoming increasingly important. As market leader, we are excited about the prospects of shaping the future of this industry. We will continue to seek out those situations that will allow us to set the standards for quality, service, efficiency and innovation." Commenting on growth prospects, Silber added: "Capstone and PCA are an excellent strategic fit, with complementary strengths that should promote continued growth and increased profitability. For example, PCA has an excellent mail service capability and a stronger presence in ancillary services, including the infusion therapy business. Capstone has taken a more aggressive approach to acquisitions, has developed a much larger share of the correctional institution business and broadens PCA's geographic coverage in key markets. These complementary strengths, in combination with sophisticated information systems, should enable us to more fully develop our current business base, and expand our scope beyond long-term care to cover a broader spectrum of the healthcare market." C. Arnold Renschler, M.D., will serve as President and Chief Executive Officer of Capstone. He currently is President of PCA and Executive Vice President of Beverly. Continuing in their current positions with Capstone will be Allan Silber, Chairman; Bob Della Valle, Chief Operating Officer; and Jim Shelton, Chief Financial Officer. Dirk Allison, currently Capstone's President, will become Senior Vice President of Counsel Corporation, where he will take on significant responsibilities for executing Counsel's strategic initiatives. As part of the transaction, PCA will repay $275 million of debt to Beverly. Beverly then will use these proceeds to reduce its own debt. This will improve Beverly's debt structure and debt coverage ratios. To facilitate the transaction and prior to its close, Beverly intends to refinance a substantial portion of its overall debt portfolio. 3 The transaction, which is intended to be tax-free, will occur in two stages: - First, Beverly will transfer all its businesses except PCA to a new company, which will retain the Beverly name. Shares of the "new Beverly" company (comprised of skilled nursing centers, transitional care hospitals and rehabilitation therapy operations) will be distributed to Beverly shareholders on the effective date of the transaction on a one-for-one share basis. The new Beverly will be listed on the New York Stock Exchange. - Second, Beverly's remaining operations -- PCA -- then will be merged with Capstone, which will continue to be listed on the Nasdaq Stock Market. The appropriate number of shares of the combined pharmacy company will be distributed to Beverly stockholders. The transaction is subject to approval by the shareholders of both Beverly and Capstone, favorable tax ruling from the Internal Revenue Service and customary regulatory reviews. It is expected to close by year-end. Capstone is a leading provider of institutional pharmacy services to long-term care facilities and correctional institutions throughout the United States. Beverly Enterprises is the leading provider of post-acute healthcare in the United States. In addition to institutional and mail-service pharmacies, Beverly operates 630 skilled nursing and rehabilitation centers, as well as outpatient therapy clinics, assisted living facilities, and hospice and home health agencies. This news release contains forward-looking statements regarding continued performance improvements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risk and uncertainties that may cause either company's actual results in future periods to differ materially from forecasted results. These risks and uncertainties include national and local economic conditions, the effect of government regulation, the competitive environment in which the companies operate, and the availability and cost of labor and materials. These and other risks and uncertainties that could affect future results will be addressed in filings with the Securities and Exchange Commission, including Forms 10K and 10Q. ##### Contacts Beverly Enterprises, Inc. Capstone Pharmacy Services, Inc. Jim Griffith Morris Perlis Senior Vice President, Investor Relations Vice Chairman and Corporate Communications (416) 866-3193 (501) 484-6912 -----END PRIVACY-ENHANCED MESSAGE-----