Edgar Filing: BEVERLY ENTERPRISES INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
------------
TO
------------

COMMISSION FILE NUMBER 1-9550

BEVERLY ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 62-1691861
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

ONE THOUSAND BEVERLY WAY
FORT SMITH, ARKANSAS 72919
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (501) 201-2000

INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT REGISTRANT WAS REQUIRED
TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.

YES X NO
--- -----

SHARES OF REGISTRANT'S COMMON STOCK, $.10 PAR VALUE, OUTSTANDING,
EXCLUSIVE OF TREASURY SHARES, AT APRIL 30, 2001 - 103,641,593
2
BEVERLY ENTERPRISES, INC.

FORM 10-Q

MARCH 31, 2001

TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION PAGE
----

Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets ................... 2
Condensed Consolidated Statements of Operations ......... 3
Condensed Consolidated Statements of Cash Flows ......... 4
Notes to Condensed Consolidated Financial Statements .... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 11

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings ................................................ 17
Item 6. Exhibits and Reports on Form 8-K ................................. 19

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PART I

BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2001 AND DECEMBER 31, 2000

(DOLLARS IN THOUSANDS)

MARCH 31, DECEMBER 31,
2001 2000
---- ----
(UNAUDITED) (NOTE)

ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 25,861 $ 25,908
Accounts receivable - patient, less allowance for doubtful accounts:
2001 - $86,717; 2000 - $91,636 ........................................... 328,213 323,143
Accounts receivable - nonpatient, less allowance for doubtful accounts:
2001 - $776; 2000 - $1,106 ............................................... 9,356 19,831
Notes receivable, less allowance for doubtful notes: 2001 - $72; 2000 - $72 . 17,781 2,197
Operating supplies .......................................................... 26,681 29,134
Deferred income taxes ....................................................... 69,124 24,379
Assets held for sale ........................................................ 122,079 --
Prepaid expenses and other .................................................. 19,600 18,787
----------- -----------
Total current assets ................................................. 618,695 443,379
Property and equipment, net of accumulated depreciation and amortization:
2001 - $734,097; 2000 - $805,557 ............................................ 863,939 1,063,247
Other assets:
Goodwill, net ............................................................... 201,295 203,742
Deferred income taxes ....................................................... 26,891 27,721
Other, less allowance for doubtful accounts and notes:
2001 - $3,727; 2000 - $3,767 ............................................. 132,779 137,904
----------- -----------
Total other assets ................................................... 360,965 369,367
----------- -----------

$ 1,843,599 $ 1,875,993
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ............................................................ $ 89,122 $ 84,420
Accrued wages and related liabilities ....................................... 102,965 106,300
Accrued interest ............................................................ 7,519 15,744
Other accrued liabilities ................................................... 102,008 99,136
Current portion of long-term debt ........................................... 62,568 227,111
----------- -----------
Total current liabilities ............................................ 364,182 532,711
Long-term debt .................................................................. 703,928 564,247
Other liabilities and deferred items ............................................ 237,942 195,042
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000 .............................. -- --
Common stock, shares issued: 2001 - 112,157,746; 2000 - 112,818,798 ........ 11,216 11,282
Additional paid-in capital .................................................. 880,918 876,981
Accumulated deficit ......................................................... (246,205) (193,931)
Accumulated other comprehensive income ...................................... 896 718
Treasury stock, at cost: 2001 - 8,515,758 shares; 2000 - 9,061,300 shares .. (109,278) (111,057)
----------- -----------
Total stockholders' equity ........................................... 537,547 583,993
----------- -----------
$ 1,843,599 $ 1,875,993
=========== ===========

NOTE: The balance sheet at December 31, 2000 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2001 AND 2000

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2001 2000
--------- ---------

Net operating revenues ............................................. $ 659,468 $ 646,102
Interest income .................................................... 387 825
--------- ---------
Total revenues ............................................... 659,855 646,927

Costs and expenses:
Operating and administrative:
Wages and related .............................................. 397,962 389,716
Provision for insurance and related items ...................... 27,163 20,513
Other .......................................................... 178,512 181,646
Interest .......................................................... 19,110 19,618
Depreciation and amortization ..................................... 24,464 25,336
Asset impairments, workforce reductions and other unusual items ... 107,689 --
--------- ---------
Total costs and expenses ..................................... 754,900 636,829
--------- ---------

Income (loss) before provision for (benefit from) income taxes ..... (95,045) 10,098
Provision for (benefit from) income taxes .......................... (42,771) 3,837
--------- ---------

Net income (loss) .................................................. $ (52,274) $ 6,261
========= =========

Net income (loss) per share of common stock:

Basic and diluted net income (loss) per share of common stock .. $ (0.50) $ 0.06
========= =========

Shares used to compute basic net income (loss) per share ....... 103,705 102,281
========= =========

Shares used to compute diluted net income (loss) per share ..... 103,705 102,402
========= =========

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2001 AND 2000

(UNAUDITED)

(IN THOUSANDS)

2001 2000
--------- ---------

Cash flows from operating activities:
Net income (loss) ..................................................................... $ (52,274) $ 6,261
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization ...................................................... 24,464 25,336
Provision for reserves on patient, notes and other receivables, net ................ 7,112 5,564
Amortization of deferred financing costs ........................................... 666 624
Asset impairments, workforce reductions and other unusual items .................... 107,689 --
Gains on dispositions of facilities and other assets, net .......................... (1,099) (2,162)
Deferred income taxes .............................................................. (44,035) 3,567
Insurance related accounts ......................................................... 28,494 5,660
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient .................................................... (12,584) (36,590)
Operating supplies ............................................................... (171) 503
Prepaid expenses and other receivables ........................................... (1,571) (1,973)
Accounts payable and other accrued expenses ...................................... (25,267) (42,142)
Income taxes payable ............................................................. (621) (23)
Other, net ....................................................................... (1,204) (858)
--------- ---------
Total adjustments ............................................................. 81,873 (42,494)
--------- ---------
Net cash provided by (used for) operating activities .......................... 29,599 (36,233)
Cash flows from investing activities:
Capital expenditures ............................................................... (13,941) (19,982)
Proceeds from dispositions of facilities and other assets .......................... 4,415 9,926
Payments for acquisitions, net of cash acquired .................................... (74) (1,263)
Collections on notes receivable .................................................... 19 294
Other, net ......................................................................... 347 (2,352)
--------- ---------
Net cash used for investing activities ........................................ (9,234) (13,377)
Cash flows from financing activities:
Revolver borrowings ................................................................ 369,000 539,000
Repayments of Revolver borrowings .................................................. (351,000) (485,000)
Repayments of long-term debt ....................................................... (39,166) (5,649)
Purchase of common stock for treasury .............................................. -- (3,289)
Proceeds from exercise of stock options ............................................ 698 --
Deferred financing costs paid ...................................................... (356) (38)
Proceeds from designated funds, net ................................................ 412 119
--------- ---------
Net cash provided by (used for) financing activities .......................... (20,412) 45,143
--------- ---------
Net decrease in cash and cash equivalents ................................................ (47) (4,467)
Cash and cash equivalents at beginning of period ......................................... 25,908 24,652
--------- ---------
Cash and cash equivalents at end of period ............................................... $ 25,861 $ 20,185
========= =========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 26,669 $ 23,667
Income tax payments, net 1,885 293

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2001

(UNAUDITED)

(1) References throughout this document to the Company include Beverly
Enterprises, Inc. and its wholly owned subsidiaries. In accordance with the
Securities and Exchange Commission's "Plain English" guidelines, this Quarterly
Report on Form 10-Q has been written in the first person. In this document, the
words "we", "our", "ours" and "us" refer only to Beverly Enterprises, Inc. and
its wholly owned subsidiaries and not to any other person.

We have prepared the condensed consolidated financial statements, without
audit. In management's opinion, they include all normal recurring adjustments
necessary for a fair presentation of the results of operations for the three
months ended March 31, 2001 and 2000 in accordance with the rules and
regulations of the Securities and Exchange Commission. Although certain
information and footnote disclosures required by generally accepted accounting
principles have been condensed or omitted, we believe that the disclosures in
these condensed consolidated financial statements are adequate to make the
information presented not misleading. These condensed consolidated financial
statements should be read along with our 2000 Annual Report on Form 10-K filed
with the Securities and Exchange Commission. Our results of operations for the
three months ended March 31, 2001 are not necessarily indicative of the results
for a full year.

Generally accepted accounting principles require management to make
estimates and assumptions when preparing financial statements that affect:

- the reported amounts of assets and liabilities at the date of the
financial statements; and

- the reported amounts of revenues and expenses during the reporting
period.

They also require management to make estimates and assumptions regarding
any contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.

Approximately 77% and 74% of our net operating revenues for the three
months ended March 31, 2001 and 2000, respectively, were derived from funds
under federal and state medical assistance programs. We accrue for revenues when
services are provided at standard charges. These charges are adjusted to amounts
that we estimate to receive under governmental programs and other third-party
contractual arrangements based on contractual terms and historical experience.
These revenues are reported at their estimated net realizable amounts and are
subject to audit and retroactive adjustment.

Retroactive adjustments are considered in the recognition of revenues on an
estimated basis in the period the related services are rendered. Such amounts
are adjusted in future periods as adjustments become known or as cost reporting
years are no longer subject to audits, reviews or investigations. Due to the
complexity of the laws and regulations governing the Medicare and Medicaid
programs, there is at least a reasonable possibility that recorded estimates
will change by a material amount in the near term.

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

The following table sets forth the calculation of basic and diluted
earnings per share for the three months ended March 31 (in thousands):

2001 2000
---- ----

NUMERATOR:
Numerator for basic and diluted net income (loss) per share ..... $ (52,274) $ 6,261
========= =========

DENOMINATOR:
Denominator for basic net income (loss) per share - weighted
average shares ................................................ 103,705 102,281
Effect of dilutive securities:
Employee stock options ......................................... -- 121
--------- ---------

Denominator for diluted net income (loss) per share - adjusted
weighted average shares and assumed conversions ............... 103,705 102,402
========= =========

Basic and diluted net income (loss) per share ................... $ (0.50) $ 0.06
========= =========

Comprehensive income (loss) includes net income (loss), as well as charges
and credits to stockholders' equity not included in net income (loss). The
components of comprehensive income (loss), net of income taxes, consist of the
following for the three months ended March 31 (in thousands):

2001 2000
---- ----

Net income (loss) .................................................. $(52,274) $ 6,261
Foreign currency translation adjustments, net of income taxes ...... (44) 469
Net unrealized gains (losses) on available-for-sale securities, net
of income taxes .................................................. 222 (768)
-------- --------
Comprehensive income (loss) ........................................ $(52,096) $ 5,962
======== ========

The components of accumulated other comprehensive income, net of income
taxes, consist of the following (in thousands):

MARCH 31, DECEMBER 31,
2001 2000
---- ----

Foreign currency translation adjustments .......... $339 $383
Unrealized gains on available-for-sale securities . 557 335
---- ----
$896 $718
==== ====

Certain prior year amounts have been reclassified to conform with the 2001
financial statements presentation.

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

(2) The provision for (benefit from) income taxes for the three months
ended March 31, 2001 and 2000 were based on estimated annual effective tax rates
of 45% and 38%, respectively. Our estimated annual effective tax rates for 2001
and 2000 were different than the federal statutory rate primarily due to the
impact of state income taxes, amortization of nondeductible goodwill and the
benefit of certain tax credits. Our estimated annual effective tax rate
increased to 45% in 2001 primarily due to the pre-tax charge for asset
impairments, workforce reductions and other unusual items of approximately
$107,700,000, which reduced our pre-tax income to a level where the impact of
permanent tax differences and state income taxes had a significant impact on the
effective tax rate. Our net deferred tax assets at March 31, 2001 are expected
to be realized through the reversal of temporary taxable differences, future
taxable income and the implementation of tax planning strategies, as needed.
Therefore, we do not believe that a deferred tax valuation allowance is
necessary at March 31, 2001. The provision for (benefit from) income taxes
consists of the following for the three months ended March 31 (in thousands):

2001 2000
-------- --------

Federal:
Current $ 311 $ 88
Deferred (42,603) 2,949

State:
Current 953 182
Deferred (1,432) 618
-------- --------
$(42,771) $ 3,837
======== ========

(3) During the three months ended March 31, 2001, we acquired a parcel of
land and certain other assets for cash of approximately $62,000 and closing and
other costs of approximately $65,000. The acquisitions of such assets were
accounted for as purchases. Also during such period, we sold, closed or
terminated the leases on nine nursing facilities (815 beds) and one outpatient
therapy clinic for cash proceeds of approximately $7,000,000 and a note
receivable of approximately $300,000. We did not operate two of the nursing
facilities (234 beds) which had been leased to another nursing home operator. We
recognized net pre-tax gains, which were included in net operating revenues
during the first quarter of 2001, of approximately $1,100,000 as a result of
these dispositions. The operations of these facilities and certain other assets
were immaterial to our consolidated financial position and results of
operations.

During the three months ended March 31, 2001, we restructured the lease
agreement related to 10 nursing facilities in the state of Indiana. In addition,
we terminated the lease on one nursing facility (223 beds) leased from the same
landlord. We recorded a pre-tax charge of approximately $3,300,000 related to
the termination of this lease, including the write-off of the net book value of
this property.

(4) During the first quarter of 2001, a formal plan was initiated by
management to pursue the sale of our nursing home operations in Florida. Such
decision was made due to the excessive patient care liability costs that we have
been incurring in recent periods in the state of Florida. Accordingly, the
property and equipment, identifiable intangibles and operating supplies of our
Florida nursing home operations at March 31, 2001 were considered assets to be
disposed of, as that term is defined in Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). Management estimated the
fair value less selling costs of such assets based upon verbal and non-binding
purchase prices from potential buyers and determined that an impairment
write-down was necessary as of March 31, 2001. The pre-tax charge related to
this write-down was approximately $68,900,000. In addition, we recorded a
pre-tax charge of approximately $17,200,000 for certain costs to exit the
Florida facilities (as defined below). These costs relate to severance
agreements, termination payments on certain contracts and various other items.
Such pre-tax charges have been included in the condensed consolidated statement
of operations caption "Asset impairments, workforce reductions and other unusual
items." At March 31, 2001, the assets held for sale totaled approximately
$122,100,000 and are classified as current assets in the condensed consolidated
balance sheet, as we expect to close a transaction on the Florida facilities in
2001.

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

Our Florida nursing home operations include 49 nursing facilities (6,129
beds) and four assisted living centers (315 units) (the "Florida facilities")
currently being marketed as a group, as well as one additional nursing facility
(56 beds) and certain other assets which we plan to sell in separate
transactions. All of these assets are included in the total assets of our
nursing facilities segment (see Note 7). We are currently negotiating with a
potential purchaser of all of the Florida facilities. Other potential purchasers
have expressed an interest in purchasing all or portions of the Florida
facilities.

During the three months ended March 31, 2001, our Florida nursing home
operations recorded a pre-tax loss of approximately $1,100,000. Included in this
pre-tax loss was depreciation and amortization expense of approximately
$2,600,000. In accordance with SFAS No. 121, depreciation and amortization
expense will be excluded from our consolidated statement of operations during
the period these assets are held for sale, as these assets are now recorded at
their estimated net realizable value.

(5) In January 2001, we filed a registration statement under Form S-8 with
the Securities and Exchange Commission registering 1,174,500 shares of our
Common Stock. These shares were previously repurchased by the Company and held
in treasury. Such shares are expected to be issued under the Beverly
Enterprises, Inc. Stock Grant Plan (the "Stock Grant Plan"). Shares of Common
Stock will be issued under the Stock Grant Plan to holders of restricted shares
who, by virtue of the terms of their employment contracts, severance agreements
or other similar arrangements, have a claim to the immediate vesting of their
restricted stock. In conjunction with the reorganization in the first quarter of
2001 (as discussed in Note 7), 545,542 shares of Common Stock under the Stock
Grant Plan were issued to various officers who made such claims, and the shares
of restricted stock held by such officers were cancelled. During the first
quarter of 2001, we incurred a pre-tax charge of approximately $3,700,000
related to the issuance of shares under the Stock Grant Plan, which was included
in the workforce reductions and other reorganization costs (as discussed in Note
7).

During April 2001, we completed the restructuring of our $375,000,000
credit facility, which was scheduled to mature on December 31, 2001. We entered
into a new $150,000,000 revolving credit facility (the "Credit Facility") and
issued $200,000,000 of 9 5/8% senior notes due 2009 (the "Senior Notes") through
a private placement. The Senior Notes are unsecured obligations, guaranteed by
substantially all of our present and future subsidiaries (the "Subsidiary
Guarantors") and impose on us certain restrictive covenants. The net proceeds
from issuance of the Senior Notes were used to repay borrowings under the
$375,000,000 credit facility and for general corporate purposes.

The Credit Facility provides for a Revolver/Letter of Credit Facility.
Borrowings under the Credit Facility will bear interest according to a pricing
schedule based on our financial leverage and will bear an initial interest rate
of adjusted LIBOR plus 2.875%, the Base Rate, as defined, plus 1.875% or the
adjusted CD rate, as defined, plus 3%, at our option. Such interest rates may be
adjusted quarterly based on certain financial ratio calculations. The Credit
Facility is secured by mortgages on certain nursing facilities, is guaranteed by
the Subsidiary Guarantors and imposes on us certain financial tests and
restrictive covenants.

(6) There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages that are generally not covered by insurance. We do not believe that the
ultimate resolution of such matters will have a material adverse effect on our
consolidated financial position or results of operations. (See "Part II, Item 1.
Legal Proceedings").

(7) Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" provides disclosure
guidelines for segments of a company based on a management approach to defining
operating segments.

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

In January 2001, we implemented a new three-year strategic plan aimed at
accomplishing four fundamental strategies:

- streamline our nursing home portfolio to strengthen our long-term
financial position;

- accelerate the growth of our service and knowledge business;

- establish a leadership position in eldercare; and

- reengineer our organization in order to focus our resources on
profitable growth and new opportunities.

In order to support the implementation of these strategies, in the first
quarter of 2001, we reorganized our business into three primary operating
segments:

- nursing facilities, which provide long-term healthcare through the
operation of nursing homes and assisted living centers;

- innovation and services group, which include rehabilitation therapy,
hospice, home care and a business strategy and development division;
and

- Matrix/Theraphysics, which operate outpatient therapy clinics and a
managed care network.

As a result of this reorganization, we recorded a pre-tax charge of
approximately $18,300,000 during the first quarter of 2001. Approximately
$17,400,000 related to severance and other employment agreements for 108
associates. Approximately $14,300,000 was paid during the first quarter of 2001,
with the remainder expected to be paid throughout 2001. Included in the pre-tax
charge were non-cash expenses of approximately $3,700,000 related to the
issuance of shares under the Stock Grant Plan and $600,000 related to other
long-term incentive agreements. During the fourth quarter of 2000, we incurred a
pre-tax charge of approximately $3,500,000 primarily due to severance agreements
associated with four executives who were notified prior to December 31, 2000 of
the Company's intent to terminate their employment in conjunction with this
reorganization. Substantially all of this amount was paid during the first
quarter of 2001.

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

The following table summarizes certain information for each of our
operating segments (in thousands):

INNOVATION
NURSING AND SERVICES MATRIX/
FACILITIES GROUP THERAPHYSICS ALL OTHER (1) TOTALS
---------- ----- ------------ ------------- ------

Three months ended March 31, 2001

Revenues from external customers ...... $ 608,057 $ 27,141 $ 23,460 $ 810 $ 659,468
Intercompany revenues ................. -- 42,004 -- 2,829 44,833
Interest income ....................... 57 -- 32 298 387
Interest expense ...................... 6,341 30 12 12,727 19,110
Depreciation and amortization ......... 19,485 1,071 2,444 1,464 24,464
Pre-tax income (loss) ................. 20,579 10,060 (3,248) (122,436) (95,045)
Total assets .......................... 1,420,591 109,285 163,659 150,064 1,843,599
Capital expenditures .................. 12,102 990 554 295 13,941

Three months ended March 31, 2000

Revenues from external customers ...... $ 593,363 $ 27,475 $ 23,462 $ 1,802 $ 646,102
Intercompany revenues ................. -- 35,505 -- 2,880 38,385
Interest income ....................... 47 -- 30 748 825
Interest expense ...................... 6,883 53 32 12,650 19,618
Depreciation and amortization ......... 19,897 1,003 2,693 1,743 25,336
Pre-tax income (loss) ................. 22,404 6,271 (2,120) (16,457) 10,098
Total assets .......................... 1,524,956 107,937 217,047 142,855 1,992,795
Capital expenditures .................. 15,196 1,333 850 2,603 19,982

----------
(1) Consists of the operations of our corporate headquarters and related
overhead, as well as certain non-operating revenues and expenses. Such
amounts also include pre-tax charges related to asset impairments,
workforce reductions and other unusual items totaling approximately
$107,700,000 for 2001.

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BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MARCH 31, 2001

(UNAUDITED)

GENERAL

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and other information we provide from
time to time, contains certain "forward-looking" statements as that term is
defined by the Private Securities Litigation Reform Act of 1995. All statements
regarding our expected future financial position, results of operations or cash
flows, our continued performance improvements, our ability to service and
refinance our debt obligations, our ability to finance growth opportunities, our
ability to control our patient care liability costs, our ability to respond to
changes in government regulations, our ability to execute our three-year
strategic plan, our ability to execute a transaction with respect to our Florida
nursing operations and similar statements including, without limitation, those
containing words such as "believes," "anticipates," "expects," "intends,"
"estimates," "plans," and other similar expressions are forward-looking
statements.

Forward-looking statements involve known and unknown risks and
uncertainties that may cause our actual results in future periods to differ
materially from those projected or contemplated in the forward-looking
statements as a result of, but not limited to, the following factors:

- national and local economic conditions, including their effect on the
availability and cost of labor, utilities and materials;

- the effect of government regulations and changes in regulations
governing the healthcare industry, including our compliance with such
regulations;

- changes in Medicare and Medicaid payment levels and methodologies and
the application of such methodologies by the government and its fiscal
intermediaries;

- liabilities and other claims asserted against the Company, including
patient care liabilities, as well as the resolution of the Class Action
and Derivative Lawsuits (see "Part II, Item 1. Legal Proceedings");

- our ability to attract and retain qualified personnel;

- the availability and terms of capital to fund acquisitions and capital
improvements;

- the competitive environment in which we operate;

- our ability to maintain and increase census levels; and

- demographic changes.

Investors should also refer to Item 1. Business in our 2000 Annual Report
on Form 10-K for a discussion of various governmental regulations and other
operating factors relating to the healthcare industry and the risks inherent in
them. Given these risks and uncertainties, we can give no assurances that any
forward-looking statements will, in fact, transpire and, therefore, caution
investors not to place undue reliance on them.

OPERATING RESULTS

FIRST QUARTER 2001 COMPARED TO FIRST QUARTER 2000

RESULTS OF OPERATIONS

We reported a net loss for the first quarter of 2001 of $52,274,000,
compared to net income of $6,261,000 for the same period in 2000. Net loss for
2001 included pre-tax charges totaling approximately $107,700,000, including
$68,900,000 for asset impairments, $18,300,000 for workforce reductions and
other reorganization costs and $20,500,000 for Florida exit costs and other
unusual items.

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BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

During the first quarter of 2001, a formal plan was initiated by management
to pursue the sale of our nursing home operations in Florida. Such decision was
made due to the excessive patient care liability costs that we have been
incurring in recent periods in the state of Florida. Accordingly, the property
and equipment, identifiable intangibles and operating supplies of our Florida
nursing home operations at March 31, 2001 were considered assets to be disposed
of, as that term is defined in Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS No. 121"). Management estimated the fair value
less selling costs of such assets based upon verbal and non-binding purchase
prices from potential buyers and determined that an impairment write-down was
necessary as of March 31, 2001. The pre-tax charge related to this write-down
was approximately $68,900,000. In addition, we recorded a pre-tax charge of
approximately $17,200,000 for certain costs to exit the Florida facilities (as
defined below). These costs relate to severance agreements, termination payments
on certain contracts and various other items. Such pre-tax charges have been
included in the condensed consolidated statement of operations caption "Asset
impairments, workforce reductions and other unusual items." At March 31, 2001,
the assets held for sale totaled approximately $122,100,000 and are classified
as current assets in the condensed consolidated balance sheet, as we expect to
close a transaction on the Florida facilities in 2001.

Our Florida nursing home operations include 49 nursing facilities (6,129
beds) and four assisted living centers (315 units) (the "Florida facilities")
currently being marketed as a group, as well as one additional nursing facility
(56 beds) and certain other assets which we plan to sell in separate
transactions. All of these assets are included in the total assets of our
nursing facilities segment. We are currently negotiating with a potential
purchaser of all of the Florida facilities. Other potential purchasers have
expressed an interest in purchasing all or portions of the Florida facilities.

In January 2001, we implemented a new three-year strategic plan aimed at
accomplishing four fundamental strategies:

- streamline our nursing home portfolio to strengthen our long-term
financial position;

- accelerate the growth of our service and knowledge business;

- establish a leadership position in eldercare; and

- reengineer our organization in order to focus our resources on
profitable growth and new opportunities.

In order to support the implementation of these strategies, in the first
quarter of 2001, we reorganized our business into three primary operating
segments:

- nursing facilities, which provide long-term healthcare through the
operation of nursing homes and assisted living centers;

- service companies, which include rehabilitation therapy, hospice, home
care and a research and development division; and

- Matrix/Theraphysics, which operate outpatient therapy clinics and a
managed care network.

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14
BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

Also during the first quarter of 2001, we restructured the lease agreement
related to 10 nursing facilities in the state of Indiana. In addition, we
terminated the lease on one nursing facility (223 beds) leased from the same
landlord. We recorded a pre-tax charge of approximately $3,300,000 related to
the termination of this lease, including the write-off of the net book value of
this property.

INCOME TAXES

We had estimated annual effective tax rates of 45% and 38% for the quarters
ended March 31, 2001 and 2000, respectively. Our estimated annual effective tax
rates for 2001 and 2000 were different than the federal statutory rate primarily
due to the impact of state income taxes, amortization of nondeductible goodwill
and the benefit of certain tax credits. Our estimated annual effective tax rate
increased to 45% in 2001 primarily due to the pre-tax charge for asset
impairments, workforce reductions and other unusual items of approximately
$107,700,000, which reduced our pre-tax income to a level where the impact of
permanent tax differences and state income taxes had a significant impact on the
effective tax rate. Our net deferred tax assets at March 31, 2001 are expected
to be realized through the reversal of temporary taxable differences, future
taxable income and the implementation of tax planning strategies, as needed.
Therefore, we do not believe that a deferred tax valuation allowance is
necessary at March 31, 2001.

NET OPERATING REVENUES

We reported net operating revenues of $659,468,000 during the first quarter
of 2001 compared to $646,102,000 for the same period in 2000. Approximately 92%
of our total net operating revenues for the quarters ended March 31, 2001 and
2000 were derived from services provided by our nursing facilities segment. The
increase in net operating revenues of approximately $13,400,000 for the first
quarter of 2001, as compared to the same period in 2000, consists of the
following:

- an increase of $36,200,000 due to facilities which we operated during
each of the quarters ended March 31, 2001 and 2000 ("same facility
operations");

- an increase of $10,200,000 due to acquisitions and openings of
newly-constructed facilities; and

- a decrease of $33,000,000 due to dispositions.

The increase in net operating revenues of $36,200,000 from same facility
operations for the first quarter of 2001, as compared to the same period in
2000, was primarily due to an increase in Medicaid, Medicare and private rates
totaling $44,900,000.

Such increase was partially offset by decreases of:

- $5,900,000 due to one less calendar day during the first quarter of
2001, as compared to the same period in 2000;

- $5,400,000 due to a decline in same facility occupancy to 87.2% for the
first quarter of 2001, as compared to 87.4% for the same period in
2000; and

- $1,800,000 due to a shift in our patient mix.

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15
BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

Our Medicare, private and Medicaid census for same facility operations was
10%, 18% and 71%, respectively, for the first quarter of 2001, as compared to
10%, 19% and 70%, respectively, for the same period in 2000.

Acquisitions and openings of newly-constructed facilities which occurred
during the three months ended March 31, 2001 and the year ended December 31,
2000 caused our net operating revenues to increase $10,200,000 for the first
quarter of 2001, as compared to the same period in 2000. During the three months
ended March 31, 2001, we acquired a parcel of land and certain other assets.
During 2000, we acquired seven nursing facilities (1,210 beds), one previously
leased nursing facility (105 beds) and certain other assets. In addition, we
opened four newly-constructed nursing facilities (418 beds) during 2000. The
acquisitions of the facilities and other assets were accounted for as purchases.
The operations of the acquired facilities and other assets, as well as the
newly-constructed facilities, were immaterial to our consolidated financial
position and results of operations.

Dispositions that occurred during the three months ended March 31, 2001 and
the year ended December 31, 2000 caused our net operating revenues to decrease
$33,000,000 for the first quarter of 2001, as compared to the same period in
2000. During the three months ended March 31, 2001, we sold, closed or
terminated the leases on 10 nursing facilities (1,038 beds) and one outpatient
therapy clinic. We recognized net pre-tax gains, which were included in net
operating revenues during the three months ended March 31, 2001, of
approximately $1,100,000 as a result of these dispositions.

During 2000, we sold, closed or terminated the leases on 39 nursing
facilities (4,263 beds) and certain other assets. We recognized net pre-tax
gains, which were included in net operating revenues during the year ended
December 31, 2000, of approximately $2,000,000 as a result of these
dispositions. The operations of the disposed facilities and other assets were
immaterial to our consolidated financial position and results of operations.

OPERATING AND ADMINISTRATIVE EXPENSES

We reported operating and administrative expenses of $603,637,000 during
the first quarter of 2001 compared to $591,875,000 for the same period in 2000.
The increase of approximately $11,800,000 consists of the following:

- an increase of $29,400,000 due to same facility operations;

- an increase of $11,500,000 due to acquisitions and openings of
newly-constructed facilities; and

- a decrease of $29,100,000 due to dispositions.

The increase in operating and administrative expenses of $29,400,000 from
same facility operations for the first quarter of 2001, as compared to the same
period in 2000, was due primarily to the following:

- $20,400,000 of additional wages and related expenses primarily due to
an increase in our weighted average wage rate;

- $6,600,000 due to an increase in our provision for insurance and
related items; and

- $1,900,000 due to an increase in other contracted services.

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16
BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

INTEREST EXPENSE, NET

Interest income decreased to $387,000 for the first quarter of 2001, as
compared to $825,000 for the same period in 2000 primarily due to the payoff of
various notes receivable. Interest expense decreased to $19,110,000 for the
first quarter of 2001, as compared to $19,618,000 for the same period in 2000
primarily due to the paydown of the A.I. Credit Corp. note in January 2001, as
well as various other debt paydowns.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense decreased to $24,464,000 for the
first quarter of 2001, as compared to $25,336,000 for the same period in 2000,
primarily due to dispositions of, or lease terminations on, certain facilities.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2001, we had approximately $25,900,000 in cash and cash
equivalents, approximately $254,500,000 of net working capital and approximately
$160,200,000 of unused commitments under our $375,000,000 credit facility.

Net cash provided by operating activities for the first quarter of 2001 was
approximately $29,600,000. This amount was up approximately $65,800,000 from the
first quarter of 2000 primarily due to the following:

- the $25,000,000 civil and $5,000,000 criminal settlement payments made
during the first quarter of 2000, which negatively impacted the first
quarter of 2000 operating cash flows;

- proceeds received during the first quarter of 2001 of $28,900,000
related to a refund of certain workers compensation premiums and a
settlement on certain insurance policies; and

- a reduction in patient accounts receivable during the first quarter of
2001 compared to the first quarter of 2000.

Net cash used for investing and financing activities were approximately
$9,200,000 and $20,400,000, respectively, for the first quarter of 2001. We
received net cash proceeds of approximately $4,400,000 from the dispositions of
facilities and other assets. Such net cash proceeds, along with net borrowings
under our $375,000,000 credit facility of approximately $18,000,000, cash
generated from operations and cash on hand, were used to repay approximately
$39,200,000 of long-term debt and to fund capital expenditures totaling
approximately $13,900,000.

In January 2001, we filed a registration statement under Form S-8 with the
Securities and Exchange Commission registering 1,174,500 shares of our Common
Stock. These shares were previously repurchased by the Company and held in
treasury. Such shares are expected to be issued under the Beverly Enterprises,
Inc. Stock Grant Plan (the "Stock Grant Plan"). Shares of Common Stock will be
issued under the Stock Grant Plan to holders of restricted shares who, by virtue
of the terms of their employment contracts, severance agreements or other
similar arrangements, have a claim to the immediate vesting of their restricted
stock. In conjunction with the reorganization in the first quarter of 2001 (as
discussed above), 545,542 shares of Common Stock under the Stock Grant Plan were
issued to various officers who made such claims, and the shares of restricted
stock held by such officers were cancelled. We incurred a pre-tax charge of
approximately $3,700,000 related to the issuance of shares under the Stock Grant
Plan, which was included in the workforce reductions and other reorganization
costs (as discussed above).

15
17
BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

At March 31, 2001, we leased 11 nursing facilities (6 of which are in
Florida), one assisted living center and our corporate headquarters under an
off-balance sheet financing arrangement subject to operating leases with the
creditor. We have the option to purchase the facilities at the end of the
initial lease terms at fair market value. Such financing arrangement was entered
into for the construction of these facilities and had an original commitment of
$125,000,000. In April 2000, the agreement covering this financing arrangement
was amended whereby availability under the original commitment was reduced to
$113,500,000, which equaled the total construction advances made as of the date
of the amended agreement.

We currently anticipate that cash flows from operations and borrowings
under our banking arrangements will be adequate to repay our debts due within
one year of approximately $62,600,000, to make normal recurring capital
additions and improvements of approximately $77,000,000, to make selective
acquisitions, including the purchase of previously leased facilities, to
construct new facilities, and to meet working capital requirements for the
twelve months ending March 31, 2002. If cash flows from operations or
availability under our existing banking arrangements fall below expectations, we
may be required to delay capital expenditures, dispose of certain assets, issue
additional debt securities, or consider other alternatives to improve liquidity.

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18
PART II

BEVERLY ENTERPRISES, INC.

OTHER INFORMATION

MARCH 31, 2001

(UNAUDITED)

ITEM 1. LEGAL PROCEEDINGS

On February 3, 2000, we entered into a series of agreements with the U.S.
Department of Justice and the Office of Inspector General (the "OIG") of the
Department of Health and Human Services. These agreements settled the federal
government's investigations of the Company relating to our allocation to the
Medicare program of certain nursing labor costs in our skilled nursing
facilities from 1990 to 1998 (the "Allocation Investigations").

The agreements consist of:

- a Plea Agreement;

- a Civil Settlement Agreement;

- a Corporate Integrity Agreement; and

- an agreement concerning the disposition of 10 nursing facilities.

Under the Plea Agreement, one of our subsidiaries pled guilty to one count
of mail fraud and 10 counts of making false statements to Medicare and paid a
criminal fine of $5,000,000 during the first quarter of 2000.

Under the Civil Settlement Agreement, we paid the federal government
$25,000,000 during the first quarter of 2000 and are reimbursing the federal
government an additional $145,000,000 through withholdings from our biweekly
Medicare periodic interim payments in equal installments through the first
quarter of 2008. In addition, we agreed to resubmit certain Medicare filings to
reflect reduced labor costs allocated to the Medicare program.

Under the Corporate Integrity Agreement, we are required to monitor, on an
ongoing basis, our compliance with the requirements of the federal healthcare
programs. This agreement addresses our obligations to ensure that we comply with
the requirements for participation in the federal healthcare programs. It also
includes our functional and training obligations, audit and review requirements,
recordkeeping and reporting requirements, as well as penalties for
breach/noncompliance of the agreement. We believe that we are in substantial
compliance with the requirements of the Corporate Integrity Agreement.

In accordance with our agreement to dispose of 10 nursing facilities, we
disposed of seven of the facilities during 2000 and two of the facilities during
the first quarter of 2001. We expect to dispose of the remaining facility during
2001. The carrying value of this facility has been adjusted to our best estimate
of its net realizable value.

On July 6, 1999, an amended complaint was filed by the plaintiffs in a
previously disclosed purported class action lawsuit pending against the Company
and certain of our officers in the United States District Court for the Eastern
District of Arkansas (the "Class Action"). Plaintiffs filed a second amended
complaint on September 9, 1999 which asserted claims under Section 10(b)
(including Rule 10b-5 promulgated thereunder) and under Section 20 of the
Securities Exchange Act of 1934 arising from practices that were the subject of
the Allocation Investigations. The defendants filed a motion to dismiss that
complaint on October 8, 1999. Oral agreement on this motion was held on April 6,
2000. Due to the preliminary state of the Class Action and the fact the second
amended complaint does not allege damages with any specificity, we are unable at
this time to assess the probable outcome of the Class Action or the materiality
of the risk of loss. We believe that we acted lawfully with respect to
plaintiff investors and will vigorously defend the Class Action. However, we can
give no assurances of the ultimate impact on our consolidated financial
position, results of operations or cash flows as a result of these proceedings.

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19
BEVERLY ENTERPRISES, INC.

OTHER INFORMATION (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

In addition, since July 29, 1999, eight derivative lawsuits have been filed
in the federal and state courts of Arkansas, California and Delaware, as well as
the federal district court in Arkansas, (collectively, the "Derivative
Actions"), including:

- Norman M. Lyons v. David R. Banks, et al., Case No. OT99-4041, was
filed in the Chancery Court of Pulaski County, Arkansas (4th Division)
on or about July 29, 1999, and the parties filed an Agreed Motion to
Stay the proceedings on January 17, 2000;

- Alfred Badger, Jr. v. David R. Banks, et al., Case No. OT99-4353, was
filed in the Chancery Court of Pulaski County, Arkansas (1st Division)
on or about August 17, 1999 and voluntarily dismissed on November 30,
1999;

- James L. Laurita v. David R. Banks, et al., Case No. 17348NC, was filed
in the Delaware Chancery Court on or about August 2, 1999;

- Kenneth Abbey v. David R. Banks, et al., Case No. 17352NC, was filed in
the Delaware Chancery Court on or about August 4, 1999;

- Alan Friedman v. David R. Banks, et al., Case No. 17355NC, was filed in
the Delaware Chancery Court on or about August 9, 1999;

- Elles Trading Company v. David R. Banks, et al., was filed in the
Superior Court for San Francisco County, California on or about August
4, 1999 and removed to federal district court;

- Kushner v. David R. Banks, et al., Case No. LR-C-98-646, was filed in
the United States District Court for the Eastern District of Arkansas
(Western Division) on September 30, 1999; and

- Richardson v. David R. Banks, et al., Case No. LR-C-99-826, was filed
in the United States District Court for the Eastern District of
Arkansas (Western Division) on November 4, 1999.

The Laurita, Abbey and Friedman actions were subsequently consolidated by
order of the Delaware Chancery Court. On or about October 1, 1999, the
defendants moved to dismiss the Laurita, Abbey and Friedman actions. The parties
have agreed to stay the consolidated action pending the outcome of the motion to
dismiss in the Class Action. The plaintiffs in the Elles Trading Company action
filed a notice of voluntary dismissal on February 3, 2000. The Kushner and
Richardson actions were ordered to be consolidated as In Re Beverly Enterprises,
Inc. Derivative Litigation and by agreed motion, Plaintiffs filed an amended,
consolidated complaint on April 21, 2000. Defendants filed a motion to dismiss
the consolidated derivative complaint and a motion to strike portions thereof on
July 21, 2000. The parties have agreed to stay the consolidated action pending
the outcome of the motion to dismiss in the Class Action, but the stipulation
has not been entered by the Court.

The Derivative Actions each name the Company's directors as defendants, as
well as the Company as a nominal defendant. The Badger and Lyons actions also
name as defendants certain of the Company's officers. The Derivative Actions
each allege breach of fiduciary duties to the Company and its stockholders
arising primarily out of the Company's alleged exposure to loss due to the Class
Action and the Allocation Investigations. The Lyons, Badger and Richardson
actions also assert claims for abuse of control and constructive fraud arising
from the same allegations and the Richardson action also claims unjust
enrichment.

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20
BEVERLY ENTERPRISES, INC.

OTHER INFORMATION (CONTINUED)

MARCH 31, 2001

(UNAUDITED)

Due to the preliminary state of the Derivative Actions and the fact the
complaints do not allege damages with any specificity, we are unable at this
time to assess the probable outcome of the Derivative Actions or the materiality
of the risk of loss. We believe that we acted lawfully with respect to
the allegations of the Derivative Actions and will vigorously defend the
Derivative Actions. However, we can give no assurances of the ultimate impact on
our consolidated financial position, results of operations or cash flows as a
result of these proceedings.

There are various other lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages that are generally not covered by insurance. We do not believe that the
ultimate resolution of such other matters will have a material adverse effect on
our consolidated financial position or results of operations.

ITEM 6(a). EXHIBITS

EXHIBIT
NUMBER DESCRIPTION

10.1 Form of Employment and Severance Agreement, made as of March 31,
2001, between the Company and Scott M. Tabakin

ITEM 6(b). REPORTS ON FORM 8-K

We filed a Current Report on Form 8-K, dated March 30, 2001, which reported
under Item 5 that our preliminary operating results for the first quarter of
2001 should equal or slightly exceed the six cents per share earned during the
first quarter of 2000.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

BEVERLY ENTERPRISES, INC.
Registrant

Dated: May 15, 2001 By: /s/ PAMELA H. DANIELS
------------------------------
Pamela H. Daniels
Senior Vice President, Controller
and Chief Accounting Officer

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EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION

10.1 Form of Employment and Severance Agreement, made as of March 31,
2001, between the Company and Scott M. Tabakin