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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 JUNE 30, 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 JULY 31, 2001 - 104,239,745
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BEVERLY ENTERPRISES, INC.
FORM 10-Q
JUNE 30, 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............................................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 21
Item 6. Exhibits and Reports on Form 8-K............................................................. 22
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PART I
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 80,007 $ 25,908
Accounts receivable - patient, less allowance for doubtful accounts:
2001 - $86,236; 2000 - $91,636 ..................................................... 298,292 323,143
Accounts receivable - nonpatient, less allowance for doubtful accounts:
2001 - $635; 2000 - $1,106 ......................................................... 6,177 19,831
Notes receivable, less allowance for doubtful notes: 2001 - $225; 2000 - $72 ......... 18,089 2,197
Operating supplies .................................................................... 26,562 29,134
Deferred income taxes ................................................................. 82,849 24,379
Assets held for sale .................................................................. 117,079 --
Prepaid expenses and other ............................................................ 19,567 18,787
------------ ------------
Total current assets ............................................................ 648,622 443,379
Property and equipment, net of accumulated depreciation and amortization:
2001 - $751,740; 2000 - $805,557 ...................................................... 860,230 1,063,247
Other assets:
Goodwill, net ......................................................................... 200,473 203,742
Deferred income taxes ................................................................. 11,958 27,721
Other, less allowance for doubtful accounts and notes: 2001 - $3,747; 2000 - $3,767 .. 135,554 137,904
------------ ------------
Total other assets .............................................................. 347,985 369,367
------------ ------------
$ 1,856,837 $ 1,875,993
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................................... $ 84,211 $ 84,420
Accrued wages and related liabilities ................................................. 103,461 106,300
Accrued interest ...................................................................... 14,810 15,744
Other accrued liabilities ............................................................. 93,916 99,136
Current portion of long-term debt ..................................................... 84,898 227,111
------------ ------------
Total current liabilities ....................................................... 381,296 532,711
Long-term debt ........................................................................... 692,149 564,247
Other liabilities and deferred items ..................................................... 237,773 195,042
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000 ....................................... -- --
Common stock, shares issued: 2001 - 112,648,983; 2000 - 112,818,798 .................. 11,265 11,282
Additional paid-in capital ............................................................ 883,280 876,981
Accumulated deficit ................................................................... (240,637) (193,931)
Accumulated other comprehensive income ................................................ 989 718
Treasury stock, at cost: 2001 - 8,515,758 shares; 2000 - 9,061,300 shares ............ (109,278) (111,057)
------------ ------------
Total stockholders' equity ...................................................... 545,619 583,993
------------ ------------
$ 1,856,837 $ 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-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net operating revenues ....................................... $ 679,978 $ 655,239 $ 1,339,446 $ 1,301,341
Interest income .............................................. 811 649 1,198 1,474
------------ ------------ ------------ ------------
Total revenues ..................................... 680,789 655,888 1,340,644 1,302,815
Costs and expenses:
Operating and administrative:
Wages and related ..................................... 409,608 393,841 807,570 783,557
Provision for insurance and related items ............. 29,206 14,648 56,369 35,161
Other ................................................. 181,572 188,707 360,084 370,353
Interest ................................................. 20,273 20,313 39,383 39,931
Depreciation and amortization ............................ 22,150 25,378 46,614 50,714
Asset impairments, workforce reductions and other
unusual items .......................................... 7,854 -- 115,543 --
------------ ------------ ------------ ------------
Total costs and expenses ........................... 670,663 642,887 1,425,563 1,279,716
------------ ------------ ------------ ------------
Income (loss) before provision for (benefit from) income
taxes .................................................... 10,126 13,001 (84,919) 23,099
Provision for (benefit from) income taxes .................... 4,558 4,479 (38,213) 8,316
------------ ------------ ------------ ------------
Net income (loss) ............................................ $ 5,568 $ 8,522 $ (46,706) $ 14,783
============ ============ ============ ============
Net income (loss) per share of common stock:
Basic and diluted net income (loss) per share of
common stock .......................................... $ 0.05 $ 0.08 $ (0.45) $ 0.15
============ ============ ============ ============
Shares used to compute basic net income (loss)
per share ............................................. 103,884 101,321 103,795 101,801
============ ============ ============ ============
Shares used to compute diluted net income (loss)
per share ............................................. 105,691 101,323 103,795 101,863
============ ============ ============ ============
See accompanying notes.
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BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)
2001 2000
---------- ----------
Cash flows from operating activities:
Net income (loss) ..................................................................... $ (46,706) $ 14,783
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization ....................................................... 46,614 50,714
Provision for reserves on patient, notes and other receivables, net ................. 16,996 20,360
Amortization of deferred financing costs ............................................ 1,839 1,281
Asset impairments, workforce reductions and other unusual items ..................... 115,543 --
Gains on dispositions of facilities and other assets, net ........................... (1,160) (2,354)
Deferred income taxes ............................................................... (40,896) 7,623
Insurance related accounts .......................................................... 29,024 1,962
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient ..................................................... 7,254 (45,504)
Operating supplies ................................................................ (82) 938
Prepaid expenses and other receivables ............................................ (1,552) (1,979)
Accounts payable and other accrued expenses ....................................... (26,551) (54,627)
Income taxes payable .............................................................. (2,622) (708)
Other, net ........................................................................ (2,086) (3,594)
---------- ----------
Total adjustments ............................................................... 142,321 (25,888)
---------- ----------
Net cash provided by (used for) operating activities ............................ 95,615 (11,105)
Cash flows from investing activities:
Capital expenditures ................................................................ (33,554) (40,763)
Proceeds from dispositions of facilities and other assets ........................... 9,840 10,206
Payments for acquisitions, net of cash acquired ..................................... (82) (1,619)
Collections on notes receivable ..................................................... 31 5,589
Other, net .......................................................................... (1,425) (2,341)
---------- ----------
Net cash used for investing activities ......................................... (25,190) (28,928)
Cash flows from financing activities:
Revolver borrowings ................................................................. 442,000 873,000
Repayments of Revolver borrowings ................................................... (606,000) (814,000)
Proceeds from issuance of long-term debt ............................................ 200,000 --
Repayments of long-term debt ........................................................ (46,711) (23,140)
Purchase of common stock for treasury ............................................... -- (3,874)
Proceeds from exercise of stock options ............................................. 2,841 --
Deferred financing costs paid ....................................................... (8,799) (132)
Proceeds from designated funds, net ................................................. 343 172
---------- ----------
Net cash provided by (used for) financing activities ............................ (16,326) 32,026
---------- ----------
Net increase (decrease) in cash and cash equivalents ..................................... 54,099 (8,007)
Cash and cash equivalents at beginning of period ......................................... 25,908 24,652
---------- ----------
Cash and cash equivalents at end of period ............................................... $ 80,007 $ 16,645
========== ==========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized ................................................ $ 38,478 $ 37,466
Income tax payments, net ............................................................ 5,305 1,401
See accompanying notes.
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BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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-month and six-month periods ended June 30, 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- month and six-month periods ended June 30,
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:
o the reported amounts of assets and liabilities at the date of the
financial statements; and
o 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 six months
ended June 30, 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.
We are currently negotiating with officials from the Centers for Medicare and
Medicaid Services ("CMS") to resolve reimbursement issues relating to costs of
services provided to Medicare patients during 1996 through 1998 under the
government's former cost-reimbursement system. As a result of routine audits
conducted by the government's fiscal intermediary, CMS claims that we were
overpaid for services provided to these Medicare patients. As previously
disclosed, in June 1999, we recorded a pre-tax charge of $39 million related to
open issues surrounding the allocation of nursing labor costs on certain
Medicare filings. We have not accrued for any other open cost report issues for
these years since we believe, and outside legal counsel has advised, that we
have followed appropriate reimbursement procedures for these costs and should be
fully reimbursed. In addition, CMS contends that another issue, reimbursement
for co-payments due from Medicare beneficiaries who were also eligible for
Medicaid, extends into 1999 and 2000. We believe that we have appropriately
followed all Medicare reimbursement regulations; however, under present law, if
the federal government made a formal demand for payment of the contested
amounts, we would have to accrue those amounts and begin payment before being
given an opportunity to appeal. Therefore, we cannot estimate nor can we give
any assurances of the ultimate impact the resolution of these matters will have
on our consolidated financial position, results of operations or cash flows, but
the $39 million charge we recorded in 1999 may prove inadequate.
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BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
The following table sets forth the calculation of basic and diluted earnings
per share for the three-month and six-month periods ended June 30 (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
NUMERATOR:
Numerator for basic and diluted net income (loss) per share ........ $ 5,568 $ 8,522 $ (46,706) $ 14,783
========== ========== ========== ==========
DENOMINATOR:
Denominator for basic net income (loss) per share -
weighted average shares .......................................... 103,884 101,321 103,795 101,801
Effect of dilutive securities:
Employee stock options ........................................... 1,807 2 -- 62
---------- ---------- ---------- ----------
Denominator for diluted net income (loss) per share -
weighted average shares and assumed conversions .................. 105,691 101,323 103,795 101,863
========== ========== ========== ==========
Basic and diluted net income (loss) per share ...................... $ 0.05 $ 0.08 $ (0.45) $ 0.15
========== ========== ========== ==========
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-month and six-month periods ended June 30 (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income (loss) .................................................... $ 5,568 $ 8,522 $ (46,706) $ 14,783
Foreign currency translation adjustments, net of
income taxes ....................................................... (232) 58 (276) 527
Net unrealized gains (losses) on available-for-sale
securities, net of income taxes .................................... 325 444 547 (324)
---------- ---------- ---------- ----------
Comprehensive income (loss) .......................................... $ 5,661 $ 9,024 $ (46,435) $ 14,986
========== ========== ========== ==========
The components of accumulated other comprehensive income, net of income
taxes, consist of the following (in thousands):
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
Foreign currency translation adjustments ............................. $ 107 $ 383
Unrealized gains on available-for-sale securities .................... 882 335
---------- ----------
$ 989 $ 718
========== ==========
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141"), which is effective for all business combinations completed after June 30,
2001. SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations except for qualifying business combinations initiated
prior to July 1, 2001. In addition, SFAS No. 141 further clarifies the criteria
to recognize intangible assets separately from goodwill. We do not expect there
to be a material impact on our consolidated financial position, results of
operations or cash flows as a result of adopting SFAS No. 141.
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BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"), which establishes new rules on the accounting for goodwill and
other intangible assets. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives will no longer be amortized; however, they will be subject to
annual impairment tests as prescribed by the Statement. Intangible assets with
definite lives will continue to be amortized over their estimated useful lives.
The amortization provisions of SFAS No. 142 apply immediately to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, companies are required to
adopt SFAS No. 142 in their fiscal year beginning after December 15, 2001. SFAS
No. 142 will be effective for us beginning in the first quarter of 2002. At that
time, we will perform the required impairment tests on our goodwill and those
intangibles we deem to have indefinite lives. We cannot currently estimate the
impact these impairment tests will have on our consolidated financial position
or result of operations. The amortization provisions of SFAS No. 142 are
expected to benefit our results of operations by approximately $3,800,000, or
$.04 per share diluted, on an annual basis.
Certain prior year amounts have been reclassified to conform with the 2001
financial statements presentation.
(2) The provision for (benefit from) income taxes for the three-month and
six-month periods ended June 30, 2001 and 2000 were based on estimated annual
effective tax rates of 45% and 36%, 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 charges for asset
impairments, workforce reductions and other unusual items totaling approximately
$115,500,000, 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 June 30, 2001 will be
realized through the generation of future taxable income. Realization is
dependent on generating sufficient taxable income prior to the expiration of
loss carryforwards. Although realization is not assured, management believes it
is more likely than not that all of the deferred tax assets will be realized.
However, the amount of the deferred tax assets considered realizable could be
reduced in the near term if estimates of future taxable income during the
carryforward periods are reduced.
The provision for (benefit from) income taxes consists of the following for
the three-month and six-month periods ended June 30 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Federal:
Current .......................................................... $ 347 $ 128 $ 658 $ 216
Deferred ......................................................... 6,028 3,337 (36,575) 6,286
State:
Current .......................................................... 1,072 295 2,025 477
Deferred ......................................................... (2,889) 719 (4,321) 1,337
---------- ---------- ---------- ----------
$ 4,558 $ 4,479 $ (38,213) $ 8,316
========== ========== ========== ==========
(3) During the six months ended June 30, 2001, we sold, closed or terminated
the leases on 11 nursing facilities (1,056 beds), two outpatient therapy
clinics, one home care center and certain other assets for cash proceeds of
approximately $8,100,000 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 six months ended June 30, 2001, of
approximately $1,200,000 as a result of these dispositions. The operations of
these facilities and other assets were immaterial to our consolidated financial
position and results of operations.
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.
This pre-tax charge has been included in the condensed consolidated statement of
operations caption "Asset impairments, workforce reductions and other unusual
items."
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BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
(4) On July 16, 2001, we announced that we had entered into a definitive
agreement to sell 49 nursing facilities (6,129 beds) and four assisted living
centers (315 units) located in the state of Florida (the "Florida facilities")
to NMC of Florida, LLC. The transaction is scheduled to close during the fourth
quarter of 2001 and is subject to lenders due diligence and normal regulatory
review. We anticipate using the net cash proceeds generated from the sale to
repay indebtedness and for general corporate purposes.
The sale of the Florida facilities is a result of a formal plan initiated by
management during the first quarter of 2001 to pursue the sale of our nursing
home operations in Florida, which include the Florida facilities, 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). This 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 recorded during the first quarter of
2001 related to this write-down was approximately $68,900,000. As a result of
the agreement we entered into with NMC of Florida, LLC, we recorded an
additional impairment write-down of approximately $6,200,000 during the second
quarter of 2001. In addition, we recorded a pre-tax charge during the first
quarter of 2001 of approximately $17,200,000 for certain costs to exit the
Florida facilities. These costs relate to severance agreements, termination
payments on certain contracts and various other items. These pre-tax charges
have been included in the condensed consolidated statement of operations caption
"Asset impairments, workforce reductions and other unusual items." At June 30,
2001, the Florida assets held for sale totaled approximately $117,100,000 and
are classified as current assets in the condensed consolidated balance sheet, as
we expect to close the sale of these facilities in 2001.
During the three-month and six-month periods ended June 30, 2001, our Florida
nursing home operations recorded pre-tax income of approximately $200,000 and a
pre-tax loss of approximately $900,000, respectively. Such amounts do not
include certain costs which are currently recorded at the parent company level
and are not fully allocated to the individual subsidiaries or facilities. In
accordance with SFAS No. 121, we do not have to record depreciation and
amortization expense on the Florida assets during the period these assets are
being held for sale, since these assets are now recorded at their estimated net
realizable value. The amount of depreciation and amortization expense that we
did not have to record during the three-month and six-month periods ended June
30, 2001 on the Florida assets was approximately $2,600,000.
(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. During the second quarter of 2001, we filed a registration
statement under Form S-4 with the Securities and Exchange Commission registering
the Senior Notes. We are offering to exchange (the "Exchange Offer") all of the
Senior
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BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
Notes issued through the private placement for registered Senior Notes. We will
not receive any proceeds as a result of the Exchange Offer. 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 bear interest at 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.
In January 2001, we implemented a new three-year strategic plan aimed at
accomplishing four fundamental strategies:
o streamline our nursing home portfolio to strengthen our long-term
financial position;
o accelerate the growth of our service and knowledge business;
o establish a leadership position in eldercare; and
o 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:
o nursing facilities, which provide long-term healthcare through the
operation of nursing homes and assisted living centers;
o innovation and services group, which include rehabilitation therapy,
hospice, home care and a business strategy and development division;
and
o TMX, formerly known as Matrix/Theraphysics, which operates 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 and an additional
$1,000,000 during the second quarter of 2001. The pre-tax charges are included
in the condensed consolidated statement of operations caption "Asset
impairments, workforce reductions and other unusual items". Approximately
$18,400,000 related to severance and other employment agreements for 141
associates. Approximately $13,200,000 was paid during the six months ended June
30, 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.
9
11
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
The following table summarizes certain information for each of our operating
segments (in thousands):
INNOVATION
NURSING AND SERVICES
FACILITIES GROUP TMX ALL OTHER(1) TOTALS
------------ ------------ ------------ ------------ ------------
Three months ended June 30, 2001
Revenues from external customers .... $ 627,471 $ 28,916 $ 23,742 $ (151) $ 679,978
Intercompany revenues ............... -- 45,745 -- 2,791 48,536
Interest income ..................... 77 -- 28 706 811
Interest expense .................... 6,898 22 12 13,341 20,273
Depreciation and amortization ....... 17,015 1,117 2,454 1,564 22,150
Pre-tax income (loss) ............... 27,449 3,892 (2,791) (18,424) 10,126
Total assets ........................ 1,377,663 103,487 162,308 213,379 1,856,837
Capital expenditures ................ 17,544 771 458 840 19,613
Three months ended June 30, 2000
Revenues from external customers .... $ 601,750 $ 27,266 $ 24,349 $ 1,874 $ 655,239
Intercompany revenues ............... -- 33,641 -- 3,015 36,656
Interest income ..................... 51 -- 31 567 649
Interest expense .................... 6,765 44 28 13,476 20,313
Depreciation and amortization ....... 19,874 1,090 2,881 1,533 25,378
Pre-tax income (loss) ............... 20,191 4,453 (2,438) (9,205) 13,001
Total assets ........................ 1,514,683 108,394 217,560 126,143 1,966,780
Capital expenditures ................ 16,581 1,144 1,237 1,819 20,781
Six months ended June 30, 2001
Revenues from external customers .... $ 1,235,528 $ 56,057 $ 47,202 $ 659 $ 1,339,446
Intercompany revenues ............... -- 87,749 -- 5,620 93,369
Interest income ..................... 134 -- 60 1,004 1,198
Interest expense .................... 13,239 52 24 26,068 39,383
Depreciation and amortization ....... 36,500 2,188 4,898 3,028 46,614
Pre-tax income (loss) ............... 48,028 13,952 (6,039) (140,860) (84,919)
Total assets ........................ 1,377,663 103,487 162,308 213,379 1,856,837
Capital expenditures ................ 29,646 1,761 1,012 1,135 33,554
Six months ended June 30, 2000
Revenues from external customers .... $ 1,195,113 $ 54,741 $ 47,811 $ 3,676 $ 1,301,341
Intercompany revenues ............... -- 69,146 -- 5,895 75,041
Interest income ..................... 98 -- 61 1,315 1,474
Interest expense .................... 13,648 97 60 26,126 39,931
Depreciation and amortization ....... 39,771 2,093 5,574 3,276 50,714
Pre-tax income (loss) ............... 42,595 10,724 (4,558) (25,662) 23,099
Total assets ........................ 1,514,683 108,394 217,560 126,143 1,966,780
Capital expenditures ................ 31,777 2,477 2,087 4,422 40,763
----------
(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
$7,800,000 and $115,500,000 for the three-month and six-month periods
ended June 30, 2001, respectively.
10
12
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 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:
o national and local economic conditions, including their effect on the
availability and cost of labor, utilities and materials;
o the effect of government regulations and changes in regulations
governing the healthcare industry, including our compliance with such
regulations;
o changes in Medicare and Medicaid payment levels and methodologies and
the application of such methodologies by the government and its fiscal
intermediaries, including our negotiations with CMS (as discussed
below);
o 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");
o our ability to attract and retain qualified personnel;
o the availability and terms of capital to fund acquisitions and capital
improvements;
o the competitive environment in which we operate;
o our ability to maintain and increase census levels; and
o 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 various risk factors
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.
GOVERNMENTAL REGULATION AND REIMBURSEMENT
We are currently negotiating with officials from the Centers for Medicare and
Medicaid Services ("CMS") to resolve reimbursement issues relating to costs of
services provided to Medicare patients during 1996 through 1998 under the
government's former cost-reimbursement system. As a result of routine audits
conducted by the government's fiscal intermediary, CMS claims that we were
overpaid for services provided to these Medicare patients. As previously
disclosed, in June 1999, we recorded a pre-tax charge of $39 million related to
open issues surrounding the allocation of nursing labor costs on certain
Medicare filings. We have not accrued for any other open cost report issues for
these years since we believe, and outside legal counsel has advised, that we
have followed appropriate reimbursement procedures for these costs and should be
fully reimbursed. In addition, CMS contends that another issue, reimbursement
for co-payments due from Medicare beneficiaries who were also eligible for
11
13
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
Medicaid, extends into 1999 and 2000. We believe that we have appropriately
followed all Medicare reimbursement regulations; however, under present law, if
the federal government made a formal demand for payment of the contested
amounts, we would have to accrue those amounts and begin payment before being
given an opportunity to appeal. Therefore, we cannot estimate nor can we give
any assurances of the ultimate impact the resolution of these matters will have
on our consolidated financial position, results of operations or cash flows, but
the $39 million charge we recorded in 1999 may prove inadequate.
OPERATING RESULTS
SECOND QUARTER 2001 COMPARED TO SECOND QUARTER 2000
RESULTS OF OPERATIONS
We reported net income for the second quarter of 2001 of $5,568,000, compared
to net income of $8,522,000 for the same period in 2000. Net income for 2001
included pre-tax charges totaling approximately $7,800,000, including $6,800,000
for asset impairments ($6,200,000 related to the Florida facilities) and
$1,000,000 for workforce reductions and other reorganization costs.
On July 16, 2001, we announced that we had entered into a definitive
agreement to sell 49 nursing facilities (6,129 beds) and four assisted living
centers (315 units) located in the state of Florida (the "Florida facilities")
to NMC of Florida, LLC. The transaction is scheduled to close during the fourth
quarter of 2001 and is subject to lenders due diligence and normal regulatory
review. We anticipate using the net cash proceeds generated from the sale to
repay indebtedness and for general corporate purposes. As a result of this
agreement, we recorded an impairment write-down of approximately $6,200,000
during the second quarter of 2001. See "Six Months 2001 Compared to Six Months
2000 - Results of Operations" for discussion of pre-tax charges recorded during
the first quarter of 2001 related to this transaction.
In addition, we recorded a pre-tax charge of approximately $1,000,000 related
to the reorganization of our business operations. See "Six Months 2001 Compared
to Six Months 2000 - Results of Operations" for discussion of this
reorganization.
INCOME TAXES
We had estimated annual effective tax rates of 45% and 36% for 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 charges for asset impairments, workforce reductions
and other unusual items totaling approximately $115,500,000, 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 June 30, 2001 are expected to be realized through the
generation of future taxable income. Realization is dependent on generating
sufficient taxable income prior to the expiration of loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax assets will be realized. However, the amount of
the deferred tax assets considered realizable could be reduced in the near term
if estimates of future taxable income during the carryforward periods are
reduced.
NET OPERATING REVENUES
We reported net operating revenues of $679,978,000 during the second quarter
of 2001 compared to $655,239,000 for the same period in 2000. Approximately 92%
of our total net operating revenues for the quarters ended June 30,
12
14
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
2001 and 2000 were derived from services provided by our nursing facilities
segment. The increase in net operating revenues of approximately $24,700,000 for
the second quarter of 2001, as compared to the same period in 2000, consists of
the following:
o an increase of $51,000,000 due to facilities which we operated during
each of the quarters ended June 30, 2001 and 2000 ("same facility
operations");
o an increase of $8,500,000 due to acquisitions and openings of
newly-constructed facilities; and
o a decrease of $34,800,000 due to dispositions.
The increase in net operating revenues of $51,000,000 from same facility
operations for the second quarter of 2001, as compared to the same period in
2000, was primarily due to the following:
o $53,600,000 due to an increase in Medicaid, Medicare and private rates;
and
o $2,900,000 due to a positive shift in our patient mix.
Such increases were partially offset by a decrease of $6,100,000 due to a
decline in same facility occupancy to 86.8% for the second quarter of 2001, as
compared to 87.0% for the same period in 2000.
Our Medicare, private and Medicaid census for same facility operations was
10%, 18% and 71%, respectively, for the second quarter of 2001, as compared to
9%, 19% and 71%, respectively, for the same period in 2000.
Acquisitions and openings of newly-constructed facilities which occurred
during the year ended December 31, 2000 caused our net operating revenues to
increase $8,500,000 for the second quarter of 2001, as compared to the same
period in 2000. 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). 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 six months ended June 30, 2001 and the
year ended December 31, 2000 caused our net operating revenues to decrease
$34,800,000 for the second quarter of 2001, as compared to the same period in
2000. During the six months ended June 30, 2001, we sold, closed or terminated
the leases on 12 nursing facilities (1,279 beds), two outpatient therapy
clinics, one home care center and certain other assets. We recognized net
pre-tax gains, which were included in net operating revenues during the six
months ended June 30, 2001, of approximately $1,200,000 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 $620,386,000 during the
second quarter of 2001 compared to $597,196,000 for the same period in 2000. The
increase of approximately $23,200,000 consists of the following:
o an increase of $47,300,000 due to same facility operations;
o an increase of $9,400,000 due to acquisitions and openings of
newly-constructed facilities; and
o a decrease of $33,500,000 due to dispositions.
13
15
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
The increase in operating and administrative expenses of $47,300,000 from
same facility operations for the second quarter of 2001, as compared to the same
period in 2000, was due primarily to the following:
o $31,700,000 of additional wages and related expenses primarily due to
an increase in our weighted average wage rate; and
o $14,600,000 due to an increase in our provision for insurance and
related items.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased to $22,150,000 for the second
quarter of 2001, as compared to $25,378,000 for the same period in 2000
primarily due to the discontinuation of depreciation and amortization of our
Florida nursing home assets during the second quarter of 2001.
SIX MONTHS 2001 COMPARED TO SIX MONTHS 2000
RESULTS OF OPERATIONS
We reported a net loss for the six months ended June 30, 2001 of $46,706,000,
compared to net income of $14,783,000 for the same period in 2000. Net loss for
2001 included pre-tax charges totaling approximately $115,500,000, including
$75,700,000 for asset impairments ($75,100,000 related to the Florida
facilities), $19,300,000 for workforce reductions and other reorganization costs
and $20,500,000 for Florida exit costs and other unusual items.
During the first quarter of 2001, a formal plan was initiated by management
to pursue the sale of our nursing home operations in Florida, which include the
Florida facilities, as well as one additional nursing facility (56 beds) and
certain other assets which we plan to sell in separate transactions. 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 recorded
during the first quarter of 2001 related to this write-down was approximately
$68,900,000. As a result of the agreement we entered into with NMC of Florida,
LLC, we recorded an additional impairment write-down of approximately $6,200,000
during the second quarter of 2001. In addition, we recorded a pre-tax charge
during the first quarter of 2001 of approximately $17,200,000 for certain costs
to exit the Florida facilities. These costs relate to severance agreements,
termination payments on certain contracts and various other items. These pre-tax
charges have been included in the condensed consolidated statement of operations
caption "Asset impairments, workforce reductions and other unusual items." At
June 30, 2001, the Florida assets held for sale totaled approximately
$117,100,000 and are classified as current assets in the condensed consolidated
balance sheet, as we expect to close the sale of these facilities in 2001.
During the three-month and six-month periods ended June 30, 2001, our Florida
nursing home operations recorded pre-tax income of approximately $200,000 and a
pre-tax loss of approximately $900,000, respectively. Such amounts do not
include certain costs which are currently recorded at the parent company level
and are not fully allocated to the individual subsidiaries or facilities. In
accordance with SFAS No. 121, we do not have to record depreciation and
amortization expense on the Florida assets during the period these assets are
being held for sale, since these assets are now recorded at their estimated net
realizable value. The amount of depreciation and amortization expense that we
did not have to record during the three-month and six-month periods ended June
30, 2001 on the Florida assets was approximately $2,600,000.
14
16
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
In January 2001, we implemented a new three-year strategic plan aimed at
accomplishing four fundamental strategies:
o streamline our nursing home portfolio to strengthen our long-term
financial position;
o accelerate the growth of our service and knowledge business;
o establish a leadership position in eldercare; and
o 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:
o nursing facilities, which provide long-term healthcare through the
operation of nursing homes and assisted living centers;
o innovation and services group, which include rehabilitation therapy,
hospice, home care and a research and development division; and
o TMX, formerly know as Matrix/Theraphysics, which operates 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 and an additional
$1,000,000 during the second quarter of 2001. Approximately $18,400,000 related
to severance and other employment agreements for 141 associates. Approximately
$13,200,000 was paid during the six months ended June 30, 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.
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).
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.
NET OPERATING REVENUES
We reported net operating revenues of $1,339,446,000 during the six months
ended June 30, 2001 compared to $1,301,341,000 for the same period in 2000.
Approximately 92% of our total net operating revenues for the six
15
17
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
months ended June 30, 2001 and 2000 were derived from services provided by our
nursing facilities segment. The increase in net operating revenues of
approximately $38,100,000 for the six months ended June 30, 2001, as compared to
the same period in 2000, consists of the following:
o an increase of $85,600,000 due to facilities which we operated during
each of the six months ended June 30, 2001 and 2000 ("same facility
operations");
o an increase of $20,100,000 due to acquisitions and openings of
newly-constructed facilities; and
o a decrease of $67,600,000 due to dispositions.
The increase in net operating revenues of $85,600,000 from same facility
operations for the six months ended June 30, 2001, as compared to the same
period in 2000, was primarily due to the following:
o $98,100,000 due to an increase in Medicaid, Medicare and private rates;
and
o $5,600,000 due to an increase in our rehabilitation therapy business'
external contracts.
Such increases were partially offset by decreases of:
o $12,500,000 due to a decline in same facility occupancy to 87.0% for
the six months ended June 30, 2001, as compared to 87.3% for the same
period in 2000; and
o $5,900,000 due to one less calendar day during the six months ended
June 30, 2001, as compared to the same period in 2000.
OPERATING AND ADMINISTRATIVE EXPENSES
We reported operating and administrative expenses of $1,224,023,000 during
the six months ended June 30, 2001 compared to $1,189,071,000 for the same
period in 2000. The increase of approximately $35,000,000 consists of the
following:
o an increase of $75,500,000 due to same facility operations;
o an increase of $21,800,000 due to acquisitions and openings of
newly-constructed facilities; and
o a decrease of $62,300,000 due to dispositions.
The increase in operating and administrative expenses of $75,500,000 from
same facility operations for the six months ended June 30, 2001, as compared to
the same period in 2000, was due primarily to the following:
o $51,200,000 of additional wages and related expenses primarily due to
an increase in our weighted average wage rate;
o $21,200,000 due to an increase in our provision for insurance and
related items; and
o $5,300,000 due to an increase in other contracted services.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased to $46,614,000 for the six
months ended June 30, 2001, as compared to $50,714,000 for the same period in
2000 primarily due to dispositions of, or lease terminations on, certain
facilities and the discontinuation of depreciation and amortization of our
Florida nursing home assets.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141"), which is effective for all business combinations completed after June 30,
2001. SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations
16
18
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
except for qualifying business combinations initiated prior to July 1, 2001. In
addition, SFAS No. 141 further clarifies the criteria to recognize intangible
assets separately from goodwill. We do not expect there to be a material impact
on our consolidated financial position, results of operations or cash flows as a
result of adopting SFAS No. 141.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"), which establishes new rules on the accounting for goodwill and
other intangible assets. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives will no longer be amortized; however, they will be subject to
annual impairment tests as prescribed by the Statement. Intangible assets with
definite lives will continue to be amortized over their estimated useful lives.
The amortization provisions of SFAS No. 142 apply immediately to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, companies are required to
adopt SFAS No. 142 in their fiscal year beginning after December 15, 2001. SFAS
No. 142 will be effective for us beginning in the first quarter of 2002. At that
time, we will perform the required impairment tests on our goodwill and those
intangibles we deem to have indefinite lives. We cannot currently estimate the
impact these impairment tests will have on our consolidated financial position
or result of operations. The amortization provisions of SFAS No. 142 are
expected to benefit our results of operations by approximately $3,800,000, or
$.04 per share diluted, on an annual basis.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, we had approximately $80,000,000 in cash and cash
equivalents, approximately $267,300,000 of net working capital and approximately
$117,000,000 of unused commitments under our $150,000,000 revolving credit
facility.
Net cash provided by operating activities for the six months ended June 30,
2001 was approximately $95,600,000. This amount was up approximately
$106,700,000 from the six months ended June 30, 2000 primarily due to the
following:
o a reduction in patient accounts receivable during the six months ended
June 30, 2001 compared to the six months ended June 30, 2000 primarily
due to improved collections, as well as an increase in Medicare
periodic interim payments;
o 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
o the $25,000,000 civil and $5,000,000 criminal settlement payments made
during the first quarter of 2000, which negatively impacted operating
cash flows for the six months ended June 30, 2000.
Net cash used for investing and financing activities were approximately
$25,200,000 and $16,300,000, respectively, for the six months ended June 30,
2001. We received net cash proceeds of approximately $194,800,000 from the
issuance of 9 5/8% Senior Notes (as discussed below) and approximately
$9,800,000 from the dispositions of facilities and other assets. Such net cash
proceeds, along with cash generated from operations and cash on hand, were used
to repay approximately $46,700,000 of long-term debt, to fund capital
expenditures totaling approximately $33,600,000 and to repay Revolver
borrowings.
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. During the second quarter of 2001, we filed a registration
statement under Form S-4 with the Securities and Exchange Commission registering
the Senior Notes. We are offering to exchange (the "Exchange Offer") all of the
Senior
17
19
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
Notes issued through the private placement for registered Senior Notes. We will
not receive any proceeds as a result of the Exchange Offer. 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 bear interest at 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.
At June 30, 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 currently has $113,500,000 of
outstanding commitments ($43,600,000 of which are related to the Florida
facilities).
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 $84,900,000, to make normal recurring capital additions and
improvements of approximately $110,000,000, 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 June 30, 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.
18
20
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
JUNE 30, 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:
o a Plea Agreement;
o a Civil Settlement Agreement;
o a Corporate Integrity Agreement; and
o 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 three of the facilities
during the six months ended June 30, 2001.
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.
19
21
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION (CONTINUED)
JUNE 30, 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:
o 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;
o 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;
o 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;
o Kenneth Abbey v. David R. Banks, et al., Case No. 17352NC, was filed in
the Delaware Chancery Court on or about August 4, 1999;
o Alan Friedman v. David R. Banks, et al., Case No. 17355NC, was filed in
the Delaware Chancery Court on or about August 9, 1999;
o 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;
o 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
o 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.
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.
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22
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 24, 2001, we held our Annual Meeting of Stockholders in Fort Smith,
Arkansas, for the purposes of electing eight members of the Board of Directors,
ratifying the appointment of Ernst & Young LLP as independent auditors for 2001,
amending our 1997 Long-Term Incentive Plan, amending our Non-Employee Directors
Stock Option Plan and transacting such other business as may have properly come
before the meeting or any adjournment thereof.
The following table sets forth the directors elected at such meeting and the
number of votes cast for and withheld for each director:
DIRECTOR FOR WITHHELD
---------------------- -------------- --------------
Beryl F. Anthony, Jr..................................... 89,992,238 7,621,733
David R. Banks........................................... 89,984,297 7,629,674
Harris Diamond .......................................... 89,997,060 7,616,911
William R. Floyd......................................... 89,995,168 7,618,803
James R. Greene.......................................... 89,987,029 7,626,942
Edith E. Holiday......................................... 90,101,813 7,512,158
James W. McLane.......................................... 89,983,930 7,630,041
Marilyn R. Seymann, Ph. D................................ 90,087,609 7,526,362
The appointment of Ernst & Young LLP as independent auditors for 2001 was
ratified at the meeting. The following table sets forth the number of votes for
and against, as well as abstentions as to this matter:
For......................................................... 96,970,412
Against..................................................... 560,561
Abstentions................................................. 82,998
The Amendment to the 1997 Long-Term Incentive Plan was approved at the
meeting. The following table sets forth the number of votes for and against, as
well as abstentions as to this matter:
For......................................................... 66,262,700
Against..................................................... 31,021,983
Abstentions................................................. 329,288
The Amendment to the Non-Employee Directors Stock Option Plan was approved at
the meeting. The following table sets forth the number of votes for and against,
as well as abstentions as to this matter:
For......................................................... 75,545,786
Against..................................................... 21,719,367
Abstentions................................................. 348,818
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23
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
ITEM 6(a). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
10.1 Employment Agreement, dated February 15, 2001, between the
Company and William A. Mathies
ITEM 6(b). REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K, dated June 14, 2001, which reported
under Item 5 that we provided updates on our plans and performance to investors
at the Goldman Sachs Health Care Conference in Dana Point, California.
We filed a Current Report on Form 8-K, dated June 18, 2001, which reported
under Item 5 a change in the description of our business.
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24
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: August 8, 2001 By: /s/ PAMELA H. DANIELS
---------------------------------------
Pamela H. Daniels
Senior Vice President, Controller
and Chief Accounting Officer
23
25
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1 Employment Agreement, dated February 15, 2001, between the
Company and William A. Mathies