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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, 2002
[ ] 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 72919
FORT SMITH, ARKANSAS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(479) 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, 2002 -- 104,869,539
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BEVERLY ENTERPRISES, INC.
FORM 10-Q
JUNE 30, 2002
TABLE OF CONTENTS
PAGE
----
PART I -- FINANCIAL INFORMATION
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 12
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosures About Market 20
Risk........................................................
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 6. Exhibits and Reports on Form 8-K............................ 23
1
PART I
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 107,466 $ 89,343
Accounts receivable -- patient, less allowance for
doubtful accounts: 2002 -- $45,905; 2001 -- $51,400.... 208,866 242,865
Accounts receivable -- nonpatient, less allowance for
doubtful accounts: 2002 -- $1,068; 2001 -- $908........ 7,351 12,914
Notes receivable, less allowance for doubtful notes:
2002 -- $1,770; 2001 -- $714........................... 1,617 18,662
Operating supplies........................................ 21,730 25,701
Assets held for sale...................................... 6,696 120,843
Prepaid expenses and other................................ 18,495 13,720
---------- ----------
Total current assets.............................. 372,221 524,048
Property and equipment, net of accumulated depreciation and
amortization: 2002 -- $775,371; 2001 -- $744,163.......... 883,627 873,585
Goodwill, net............................................... 141,790 144,884
Other, less allowance for doubtful accounts and notes:
2002 -- $4,513; 2001 -- $4,393............................ 148,219 138,553
---------- ----------
$1,545,857 $1,681,070
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 69,484 $ 93,728
Accrued wages and related liabilities..................... 98,354 109,295
Accrued interest.......................................... 12,970 14,708
General and professional liabilities...................... 85,628 51,784
Federal government settlement liabilities................. 46,391 45,891
Other accrued liabilities................................. 84,746 112,609
Current portion of long-term debt......................... 20,684 64,231
---------- ----------
Total current liabilities......................... 418,257 492,246
Long-term debt.............................................. 616,107 677,442
Other liabilities and deferred items........................ 205,344 214,885
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............ -- --
Common stock, shares issued: 2002 -- 113,265,731;
2001 -- 112,813,303.................................... 11,327 11,281
Additional paid-in capital................................ 890,719 887,668
Accumulated deficit....................................... (488,713) (495,203)
Accumulated other comprehensive income.................... 1,753 2,029
Treasury stock, at cost: 2002 -- 8,414,542 shares;
2001 -- 8,515,758 shares............................... (108,937) (109,278)
---------- ----------
Total stockholders' equity........................ 306,149 296,497
---------- ----------
$1,545,857 $1,681,070
========== ==========
NOTE: The balance sheet at December 31, 2001 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
in the United States for complete financial statements.
See accompanying notes.
2
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
Net operating revenues.......................... $633,689 $679,978 $1,255,464 $1,339,446
Interest income................................. 1,044 811 2,143 1,198
-------- -------- ---------- ----------
Total revenues........................... 634,733 680,789 1,257,607 1,340,644
Costs and expenses:
Operating and administrative:
Wages and related........................ 369,782 409,608 736,985 807,570
Provision for insurance and related
items................................. 46,006 29,206 67,923 56,369
Other.................................... 171,218 181,572 344,447 360,084
Interest...................................... 16,606 20,273 33,827 39,383
Depreciation and amortization................. 22,265 22,150 43,986 46,614
Florida insurance reserve adjustment.......... 22,179 -- 22,179 --
California investigation settlement and
related costs.............................. 6,300 -- 6,300 --
Adjustment to estimated reserves related to
settlements of federal government
investigations............................. (6,940) -- (6,940) --
Asset impairments, workforce reductions and
other unusual items........................ -- 7,854 -- 115,543
-------- -------- ---------- ----------
Total costs and expenses................. 647,416 670,663 1,248,707 1,425,563
-------- -------- ---------- ----------
Income (loss) before provision for (benefit
from) income taxes............................ (12,683) 10,126 8,900 (84,919)
Provision for (benefit from) income taxes....... 1,331 4,558 2,410 (38,213)
-------- -------- ---------- ----------
Net income (loss)............................... $(14,014) $ 5,568 $ 6,490 $ (46,706)
======== ======== ========== ==========
Net income (loss) per share of common stock:
Basic and diluted net income (loss) per share
of common stock............................ $ (0.13) $ 0.05 $ 0.06 $ (0.45)
======== ======== ========== ==========
Shares used to compute basic net income (loss)
per share.................................. 104,731 103,884 104,587 103,795
======== ======== ========== ==========
Shares used to compute diluted net income
(loss) per share........................... 104,731 105,691 105,996 103,795
======== ======== ========== ==========
See accompanying notes.
3
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001
----------- ----------
Cash flows from operating activities:
Net income (loss)......................................... $ 6,490 $(46,706)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization.......................... 43,986 46,614
Provision for reserves on patient, notes and other
receivables, net...................................... 24,978 16,996
Amortization of deferred financing costs............... 1,562 1,839
Florida insurance reserve adjustment................... 22,179 --
California investigation settlement and related
costs................................................. 6,300 --
Adjustment to estimated reserves related to settlements
of federal government investigations.................. (6,940) --
Asset impairments, workforce reductions and other
unusual items......................................... -- 115,543
Losses (gains) on dispositions of facilities and other
assets, net........................................... 2,354 (1,160)
Deferred income taxes.................................. -- (40,896)
Insurance related accounts............................. 17,424 29,024
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable -- patient....................... 9,810 7,254
Operating supplies................................... 2,262 (82)
Prepaid expenses and other receivables............... (5,015) (1,552)
Accounts payable and other accrued expenses.......... (53,632) (26,551)
Income taxes payable................................. 5,719 (2,622)
Other, net........................................... (6,173) (2,086)
--------- --------
Total adjustments................................. 64,814 142,321
--------- --------
Net cash provided by operating activities......... 71,304 95,615
Cash flows from investing activities:
Capital expenditures................................... (61,143) (33,554)
Proceeds from dispositions of facilities and other
assets................................................ 156,876 9,840
Collections on notes receivable........................ 956 31
Proceeds from designated funds, net.................... (124) 343
Other, net............................................. (3,492) (1,507)
--------- --------
Net cash provided by (used in) investing
activities...................................... 93,073 (24,847)
Cash flows from financing activities:
Revolver borrowings.................................... -- 442,000
Repayments of Revolver borrowings...................... -- (606,000)
Proceeds from issuance of long-term debt............... -- 200,000
Repayments of long-term debt........................... (104,882) (46,711)
Repayments of off-balance sheet financing.............. (42,901) --
Proceeds from exercise of stock options................ 1,605 2,841
Deferred financing costs paid.......................... (76) (8,799)
--------- --------
Net cash used in financing activities............. (146,254) (16,669)
--------- --------
Net increase (decrease) in cash and cash equivalents........ 18,123 54,099
Cash and cash equivalents at beginning of period............ 89,343 25,908
--------- --------
Cash and cash equivalents at end of period.................. $ 107,466 $ 80,007
========= ========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized................... $ 34,003 $ 38,478
Income tax payments (refunds), net..................... (3,309) 5,305
See accompanying notes.
4
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
(1) References throughout this document to the Company include Beverly
Enterprises, Inc. and its wholly owned consolidated 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 consolidated subsidiaries and not to any
other person.
We have prepared the condensed consolidated financial statements, without
audit. In management's opinion, these financial statements 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, 2002 and
2001 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 2001
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, 2002 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% of our net operating revenues for the six months ended
June 30, 2002 and 2001, 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 we will
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 and evolving nature 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.
5
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002
(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, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
NUMERATOR:
Numerator for basic and diluted net income
(loss) per share........................... $(14,014) $ 5,568 $ 6,490 $(46,706)
======== ======== ======== ========
DENOMINATOR:
Denominator for basic net income (loss) per
share -- weighted average shares........... 104,731 103,884 104,587 103,795
Effect of dilutive securities: Employee stock
options.................................... -- 1,807 1,409 --
-------- -------- -------- --------
Denominator for diluted net income (loss) per
share -- weighted average shares and
assumed conversions........................ 104,731 105,691 105,996 103,795
======== ======== ======== ========
Basic and diluted net income (loss) per
share...................................... $ (0.13) $ 0.05 $ 0.06 $ (0.45)
======== ======== ======== ========
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,
------------------ ------------------
2002 2001 2002 2001
-------- ------ ------ --------
Net income (loss)................................. $(14,014) $5,568 $6,490 $(46,706)
Foreign currency translation adjustments, net of
income taxes.................................... -- (232) -- (276)
Net unrealized gains (losses) on
available-for-sale securities, net of income
taxes........................................... 301 325 (276) 547
-------- ------ ------ --------
Comprehensive income (loss)....................... $(13,713) $5,661 $6,214 $(46,435)
======== ====== ====== ========
The components of accumulated other comprehensive income, net of income
taxes, consist of the following (in thousands):
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Unrealized gains on available-for-sale securities........... $1,700 $1,976
Foreign currency translation adjustments.................... 53 53
------ ------
$1,753 $2,029
====== ======
6
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002
(UNAUDITED)
(2) During the second quarter of 2002, we recorded pre-tax charges relating
to the following:
-- Florida Insurance Reserve Adjustment
Based on the results of a semi-annual actuarial study performed by
an independent risk consultant, completed in mid-July, we recorded a
total increase of $43,268,000 in our estimated reserves for prior
policy-year patient care liability costs. Included in this amount was
$22,179,000 to increase reserves related to our previously operated
Florida facilities, which have been sold. The balance of the increase in
reserves, $21,089,000, is included in the provision for insurance and
related items in the accompanying financial statements.
In connection with the results of this actuarial study, commencing
May 1, 2002 we also increased our monthly operating expense accruals by
$2,500,000 per month to reflect an anticipated increase in patient care
liability costs for the current policy year.
-- California Investigation Settlement and Related Costs
On August 1, 2002, the Company and the State of California reached
an agreement on the settlement of an investigation by the Attorney
General's office and the District Attorney of Santa Barbara County of
patient care issues in a number of California nursing facilities. In
accordance with the terms of the settlement agreement, Beverly
Enterprises -- California, Inc. has entered a plea of nolo contendere to
two felony charges under California's Elder Abuse statute and will pay a
fine of $54,000 related to the plea. In addition, Beverly
Enterprises -- California, Inc. will reimburse the Attorney General and
the Santa Barbara County District Attorney $533,000 for the costs of
their investigations and will pay a $2,000,000 civil penalty in four
equal, quarterly installments of $500,000 beginning in the third quarter
of 2002. In addition a permanent injunction was entered requiring that
the Company and its operating subsidiaries operate their California
nursing facilities in compliance with all applicable laws and
regulations and continue their existing training and education programs.
The Company recorded a charge against earnings of $6,300,000 to reflect
the terms of the settlement and related costs.
-- Adjustment to Estimated Reserves Related to Settlements of Federal
Government Investigations
In February 2002, we made a settlement offer to the Centers for
Medicare and Medicaid Services ("CMS") to resolve reimbursement issues
relating to: (1) costs of services provided to Medicare patients during
1996 through 1998 under the federal government's former
cost-reimbursement system; and (2) co-payments due from Medicare
beneficiaries, who were also eligible for Medicaid, for the years 1999
and 2000. This settlement offer resolves all outstanding issues from the
Allocation Investigations (as defined in "Part II, Item 1. Legal
Proceedings").
In connection with the proposed settlement offer, and based on
further discussions with CMS, we have revised the amount of legal fees
and other costs we expect to incur. Accordingly, previously accrued
legal and related fees for these matters have been reduced by
$6,900,000.
(3) The provision for (benefit from) income taxes for the three-month and
six-month periods ended June 30, 2002 and 2001 were based on estimated annual
effective tax rates of 10% and 45%, respectively. Total annual tax expense for
2002, which primarily relates to state income taxes, is estimated to be
approximately $5,000,000. The tax provision for the six-month period ended June
30, 2002 represents approximately half of that amount. Our estimated annual
effective tax rate for 2002 differs from the federal statutory rate primarily
due to a reduction in the valuation allowance for deferred tax assets
established at December 31, 2001. This
7
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002
(UNAUDITED)
reduction in the valuation allowance is principally due to our expected
realization of the net operating loss carryforwards.
Our estimated annual effective tax rate for 2001 differs from the federal
statutory rate primarily due to the pre-tax charges for asset impairments,
workforce reductions and other unusual items of approximately $115,500,000.
These charges reduced our pre-tax income for 2001 to a level where the impact of
permanent tax differences and state income taxes had a significant impact on the
effective tax rate.
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,
------------------- ------------------
2002 2001 2002 2001
------- -------- ------ --------
Federal:
Current............................................ $ -- $ 347 $ -- $ 658
Deferred........................................... 2 6,028 2 (36,575)
State:
Current............................................ 1,379 1,072 2,458 2,025
Deferred........................................... (50) (2,889) (50) (4,321)
------ ------- ------ --------
$1,331 $ 4,558 $2,410 $(38,213)
====== ======= ====== ========
(4) During the six months ended June 30, 2002, we sold, closed or
terminated the leases on 57 nursing facilities (6,883 beds), four assisted
living centers (315 units), three home care centers, one outpatient clinic and
certain other assets for cash proceeds of approximately $158,100,000 and notes
receivable of approximately $15,700,000. We did not operate 49 of the nursing
facilities (6,129 beds) or the four assisted living centers, which were located
in Florida and had been leased in December 2001 to another operator. Excluding
the Florida properties, which had been written down to net realizable value in
2001, we recognized net pre-tax losses of approximately $1,500,000 as a result
of these dispositions. These losses were included in net operating revenues
during the six months ended June 30, 2002. The operations of these facilities
and certain other assets were immaterial to our consolidated financial position
and results of operations.
(5) 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 established new rules on the accounting for goodwill and
other intangible assets. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized; however, they are 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 to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, SFAS No. 142 was effective for us beginning in
the first quarter of 2002.
8
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002
(UNAUDITED)
Following is a summary of adjusted operating results reflecting the effects
of adopting SFAS No. 142, net of income taxes, for the three-month and six-month
periods ended June 30 (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
-------- ------ ------ --------
Reported net income (loss).......................... $(14,014) $5,568 $6,490 $(46,706)
Add back:
Goodwill amortization............................. -- 966 -- 1,944
Operating rights amortization..................... -- 82 -- 166
-------- ------ ------ --------
Adjusted net income (loss).......................... $(14,014) $6,616 $6,490 $(44,596)
======== ====== ====== ========
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
-------- ------ ------ --------
Reported basic and diluted net income (loss) per
share............................................. $ (0.13) $ 0.05 $ 0.06 $ (0.45)
Add back:
Goodwill amortization............................. -- 0.01 -- 0.02
Operating rights amortization..................... -- -- -- --
-------- ------ ------ --------
Adjusted basic and diluted net income (loss) per
share............................................. $ (0.13) $ 0.06 $ 0.06 $ (0.43)
======== ====== ====== ========
We completed the impairment assessment of our indefinite lived intangible
assets, other than goodwill, during the first quarter of 2002, with no
impairment identified. SFAS No. 142 describes a two-step process for testing
goodwill for impairment. The first step is a screen for potential impairment,
while the second step measures the amount of the impairment, if any. We have
completed the first step of the goodwill impairment test for all reporting units
of the Company. The results of that test have indicated that goodwill does not
appear to be impaired except for our Matrix and Home Care Services reporting
units where goodwill may be impaired and an impairment loss may have to be
recognized. The amount of that loss has not been fully estimated, and the
measurement of that loss, if any, is expected to be completed prior to the end
of the third quarter of 2002. Any required impairment as a result of initial
adoption of SFAS No. 142 will be recorded as the cumulative effect of a change
in accounting principle as of January 1, 2002.
(6) We have notified federal and California healthcare regulatory
authorities (CMS, the Office of Inspector General ("OIG"), the California
Attorney General's office and the California Department of Health) that we are
conducting an internal investigation of past billing practices at MK Medical,
our medical equipment business unit based in Fresno, California. An independent
third party has been engaged to audit MK Medical's billing of government payors.
Until the results of this audit are known, the extent of potential overpayments,
penalties or fines cannot be quantified, but they could have a material adverse
effect on our consolidated financial position, results of operations and cash
flows. Annualized cash receipts since the October 1998 acquisition of MK Medical
have averaged approximately $20,000,000, of which approximately $15,000,000 is
related to government payors.
(7) See "Part II, Item 1. Legal Proceedings" for a description of certain
legal proceedings and investigations pending against the Company. 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 believe the ultimate resolution
of such other matters will not have a material adverse effect on our
consolidated financial position, results of operations or cash flows.
9
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002
(UNAUDITED)
(8) 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. During the first quarter of 2002, we reorganized certain of
our operations in order to continue the momentum towards achieving our
three-year strategic plan objectives. This reorganization required an adjustment
to our reportable segments, which are now as follows:
-- Nursing facilities, which provide long-term healthcare through the
operation of nursing homes and assisted living centers;
-- AEGIS, which provides rehabilitation therapy services under contract to
Beverly and non-Beverly facilities;
-- Home Care, which provides home health, hospice and home medical
equipment services; and
-- Matrix, which operates outpatient therapy and other clinics and a
managed care network.
10
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002
(UNAUDITED)
The following table summarizes certain information for each of our
reportable segments (in thousands):
NURSING ALL
FACILITIES AEGIS HOME CARE MATRIX OTHER(1) TOTALS
---------- ------- --------- ------- --------- ----------
Three months ended June 30, 2002
Revenues from external customers.............. $ 579,845 $13,026 $17,878 $22,335 $ 605 $ 633,689
Intercompany revenues......................... -- 41,150 -- -- -- 41,150
Interest income............................... 416 8 10 -- 610 1,044
Interest expense.............................. 4,187 -- -- -- 12,419 16,606
Depreciation and amortization................. 18,509 148 500 1,443 1,665 22,265
Pre-tax income (loss)......................... 41,382 10,595 (6,188) 28 (58,500) (12,683)
Total assets.................................. 1,244,316 15,802 45,726 103,416 136,597 1,545,857
Capital expenditures.......................... 28,056 677 466 804 2,233 32,236
Three months ended June 30, 2001
Revenues from external customers.............. $ 627,471 $ 3,900 $25,016 $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 63 1,054 2,454 1,564 22,150
Pre-tax income (loss)......................... 27,449 13,452 (8,996) (2,791) (18,988) 10,126
Total assets.................................. 1,377,663 4,898 98,583 162,308 213,385 1,856,837
Capital expenditures.......................... 17,544 109 662 458 840 19,613
Six months ended June 30, 2002
Revenues from external customers.............. $1,147,725 $24,088 $38,766 $44,673 $ 212 $1,255,464
Intercompany revenues......................... -- 81,758 -- -- 626 82,384
Interest income............................... 782 18 15 3 1,325 2,143
Interest expense.............................. 8,923 -- -- 2 24,902 33,827
Depreciation and amortization................. 35,604 255 1,886 2,928 3,313 43,986
Pre-tax income (loss)......................... 79,962 21,114 (12,775) (871) (78,530) 8,900
Total assets.................................. 1,244,316 15,802 45,726 103,416 136,597 1,545,857
Capital expenditures.......................... 53,957 916 1,087 1,289 3,894 61,143
Six months ended June 30, 2001
Revenues from external customers.............. $1,235,528 $ 6,485 $49,572 $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................. 36,500 122 2,066 4,898 3,028 46,614
Pre-tax income (loss)......................... 48,028 25,311 (10,021) (6,039) (142,198) (84,919)
Total assets.................................. 1,377,663 4,898 98,583 162,308 213,385 1,856,837
Capital expenditures.......................... 29,646 332 1,429 1,012 1,135 33,554
---------------
(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: (a) pre-tax charges related to the Florida insurance
reserve adjustment, the California investigation settlement and related
costs and the adjustment to estimated reserves related to settlements of
federal government investigations, netting to approximately $21,500,000 for
the three-month and six-month periods ended June 30, 2002; and (b) 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.
11
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 2002
(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, continued performance improvements, ability to service and refinance our
debt obligations, ability to finance growth opportunities, ability to control
our patient care liability costs, ability to respond to changes in government
regulations, ability to execute our three-year strategic plan, 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. Numerous factors will affect our actual results, some of which are
beyond our control. These include, but are not limited to:
-- 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, pending government investigations and the
resolutions of the proposed settlement with the federal government on
prior year Medicare issues, the Class Action and the Derivative Lawsuits
(see "Part II, Item 1. Legal Proceedings");
-- the ability to predict future reserve levels for patient care
liabilities (see Critical Accounting Policies Update below);
-- 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 2001 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, which speak only as of the date of this report will,
in fact, transpire and, therefore, caution investors not to place undue reliance
on them.
12
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following discussion relates to the condensed consolidated financial
statements of the Company and should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
GOVERNMENTAL REGULATION AND REIMBURSEMENT
The Company and its facilities are subject to extensive regulation by
federal, state and local agencies. Each facility must comply with regulations
regarding staffing levels, patient care standards, occupational health and
safety, patient confidentiality, billing and reimbursement and environmental and
biological hazards, among others. Additionally, government agencies have
steadily increased their enforcement activity in this industry over the past
several years, particularly with respect to large for-profit, multi-facility
providers like us. This regulatory environment may force us to expend
considerable resources to ensure compliance and respond to inspections,
investigations or other enforcement actions. We believe the government will
continue aggressive enforcement in the future.
In the ordinary course of business, we periodically receive notices of
deficiencies for allegations of failure to comply with various regulatory
requirements. We review all such notices and take timely and appropriate
corrective action. In most cases, the facility and the government will agree
upon steps to be taken to bring the facility into compliance with regulatory
requirements. In some cases or upon repeat violations, the government may take a
number of adverse actions against the facility or the Company, including
imposition of fines, temporary suspension of admission of new patients,
decertification from participation in Medicaid or Medicare programs and
licensure revocation.
We have notified federal and California healthcare regulatory authorities
(CMS, OIG, the California Attorney General's office and the California
Department of Health) that we are conducting an internal investigation of past
billing practices at MK Medical, our medical equipment business unit based in
Fresno, California. An independent third party has been engaged to audit MK
Medical's billing of government payors. Until the results of this audit are
known, the extent of potential overpayments, penalties or fines cannot be
quantified, but they could have a material adverse effect on our consolidated
financial position, results of operations and cash flows. Annualized cash
receipts since the October 1998 acquisition of MK Medical have averaged
approximately $20,000,000, of which approximately $15,000,000 is related to
government payors.
Additionally, changes in the reimbursement received by our facilities may
significantly affect our expected future financial position, results of
operations and cash flows. On September 30, 2002, certain provisions of current
Medicare payment regulations are scheduled to expire, subject to federal
government intervention. These provisions include a 16.66% add-on to the nursing
component of all 44 Resource Utilization Group ("RUG") categories and a 4%
overall increase in the adjusted rates for all 44 RUG categories. Assuming a
similar volume and mix of Medicare patients as those we are currently
experiencing, if these add-ons were completely eliminated, our annual net
operating revenues would be reduced by an estimated $58,400,000 (or
approximately $14,600,000 for 2002, assuming an October 1, 2002 implementation
date). In addition, a 6.7% add-on for the rehabilitation RUG categories and a
20% add-on for high-acuity non-therapy RUG categories were due to expire on
September 30, 2002, when CMS was expected to release their refinements to the
RUG system. On July 29, 2002, CMS announced that it had determined that the
research is not sufficiently advanced to permit it to make and implement
refinements to the RUG system for the fiscal year ended 2003. Therefore, these
two add-ons will continue at least through September 30, 2003. Currently, we
generate annual net operating revenues related to these add-ons of approximately
$39,400,000.
In August 2000, final regulations surrounding standards for electronic
transactions, code sets and protecting the confidentiality and integrity of
individually identifiable health information, as required under the Health
Insurance Portability and Accountability Act, were released. These new
transactions and code sets
13
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
must be implemented by October 2002, unless a covered entity applies for, and is
granted, an extension of up to one year. In December 2000, the final privacy
standards were released and must be implemented by April 2003. The privacy
standards are designed to protect the privacy of patients' medical information.
The Bush Administration and Congress have reexamined these privacy standards and
proposed revisions in March 2002. The final rule on these proposed revisions is
expected to be released in August 2002. While most standards will likely require
implementation by April 2003, certain covered entities may be granted additional
time to comply with some standards, with civil and criminal penalties
established for noncompliance.
CRITICAL ACCOUNTING POLICIES UPDATE
PATIENT CARE LIABILITY AND INSURANCE RISKS
General liability and professional liability costs for the long-term care
industry have become increasingly expensive and difficult to estimate. In
addition, insurance coverage for patient care liability and certain other risks,
for nursing facilities specifically and companies in general, has become
increasingly difficult to obtain. When obtained, insurance carriers are often
requiring companies to significantly increase their liability retention levels
and pay substantially higher premiums for reduced coverage.
We believe adequate provision has been made in the financial statements for
liabilities that may arise out of patient care and related services. Such
provisions are made based primarily upon the results of independent actuarial
valuations, prepared by actuaries with long-term care industry experience. Such
independent valuations are formally prepared twice a year using the most recent
trends of claims, settlements and other relevant data. In addition to the
actuarial estimate of claim payments, our provision for insurance includes
accruals for insurance premiums for the coverage period and our estimate of any
experience adjustments to premiums. Based on the results of the most recent
semi-annual actuarial study completed in mid-July, performed by an independent
risk consultant, we recorded a pre-tax charge of $43,268,000 to increase our
reserves for prior policy-year patient care liability costs, including
$22,179,000 relating to our previously operated Florida facilities, which have
been sold. Our risk management and independent actuaries estimate our range of
discounted exposure for patient care liabilities to be $164,000,000 to
$195,000,000 (or a range of $176,000,000 to $208,000,000 for total insurance
liabilities, including workers' compensation). Our recorded reserves for patient
care liabilities were $179,752,000 (and $191,773,000 for total insurance
liabilities) at June 30, 2002. Based on the results of this semi-annual
actuarial study, we have also increased our monthly accruals for the current
policy year by $2,500,000.
For our general and professional liabilities, we are typically responsible
for the first dollar of each claim, up to a self-insurance limit determined by
the individual policies, subject to aggregate limits for certain policy years.
The majority of our workers' compensation risks are insured through insurance
policies with third parties. These liabilities are estimated by the independent
actuaries and are discounted at 10% on our financial statements to their present
value using expected loss payment timing patterns. The discount rate is based
upon our best estimate of the incremental borrowing rate that would be required
to fund these liabilities with uncollateralized debt. A reduction in the
discount rate by one-half of a percentage point would have resulted in an
additional pre-tax charge at June 30, 2002 of $1,200,000. On an undiscounted
basis, these liabilities totaled $220,700,000 at June 30, 2002.
14
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OFF-BALANCE SHEET OBLIGATIONS
We have two off-balance sheet financing arrangements which totaled
approximately $139,500,000 at June 30, 2002, including:
-- $70,000,000 of Medium Term Notes due March 2005; and
-- $69,500,000 of Synthetic Leases expiring in August 2004.
The Medium Term Notes are obligations of a bankruptcy-remote subsidiary of
the Company, Beverly Funding Corporation ("BFC"). These notes are collateralized
by Medicaid and Veterans Administration accounts receivable that are sold by
Beverly Health and Rehabilitation Services, Inc., a wholly owned subsidiary, to
BFC at a discount. These daily transactions constitute true sales of receivables
for which BFC bears the risk of collection. BFC is a legally-isolated entity
whose assets cannot be used to satisfy claims of the Company or any of its other
subsidiaries. Therefore, in accordance with current generally accepted
accounting principles, the assets and liabilities of BFC are not consolidated
with Beverly Enterprises, Inc.
Because BFC is a wholly owned subsidiary of the Company, its total equity
of approximately $31,000,000 at June 30, 2002 is recorded as an asset on the
condensed consolidated balance sheet of the Company and its operating loss of
approximately $2,100,000 for the six months ended June 30, 2002, is fully
reflected in the operating results of the Company. If BFC was required to be
reconsolidated with the Company, we would record additional assets of
approximately $60,800,000 and debt obligations of $70,000,000 on the condensed
consolidated statements.
At June 30, 2002, the Company leased five nursing facilities, one assisted
living center and its corporate headquarters under an off-balance sheet
financing arrangement, typically referred to as a synthetic lease. The lessor
financed the construction of these properties and we lease the properties under
a master operating lease agreement due to expire in August 2004. At that time,
we can renew the lease for up to two years (at the lessor's option), purchase
the properties at original cost, or coordinate the sale of the properties to a
third-party.
We monitor these off-balance sheet obligations throughout the year and
believe the obligations and any related assets should not be included in our
condensed consolidated financial statements under generally accepted accounting
principles. However, if changes in accounting standards or facts surrounding
these obligations would require these obligations to be consolidated, the impact
on our financial position, results of operations and cash flows would not be
significant and consolidation would not impact compliance with any of our debt
covenants.
In addition, at June 30, 2002, we have off-balance sheet debt guarantees of
approximately $37,700,000 and we guarantee certain third-party operating leases
and officer loans.
STOCK BASED AWARDS
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, ("SFAS No. 123") encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair market value on the date of grant. We have elected to continue
accounting for our stock-based awards in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, we
do not recognize compensation expense for our stock option grants, which are
issued at fair market value on the date of grant.
15
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair market value of
the stock options is amortized to expense over their respective vesting periods.
The fair market value has been estimated at the date of grant using a
Black-Scholes option pricing model. The following table summarizes our pro forma
net income (loss) and diluted net income (loss) per share assuming we accounted
for our stock option grants in accordance with SFAS No. 123, for the three-month
and six-month periods ended June 30 (in thousands except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
-------- ------ ------ --------
Pro forma net income (loss)......................... $(16,078) $4,509 $2,726 $(46,177)
Pro forma diluted net income (loss) per share....... $ (0.15) $ 0.04 $ 0.03 $ (0.44)
OPERATING RESULTS
SECOND QUARTER 2002 COMPARED TO SECOND QUARTER 2001
Results of Operations
We reported a net loss for the second quarter of 2002 of $14,014,000,
compared to net income of $5,568,000 for the same period in 2001. Net loss for
the second quarter of 2002 included net pre-tax charges totaling approximately
$21,500,000 and consisted of the following:
-- approximately $22,200,000 for prior policy-year patient care liability
costs related to our Florida facilities which have been sold;
-- $6,300,000 related to the settlement and related costs of investigation
for patient care issues at certain California nursing homes; and
-- partially offset by a decrease of approximately $6,900,000 in reserves
established in conjunction with previous settlements of federal
government investigations.
Net income for the 2001 period 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.
Income Taxes
We have estimated annual effective tax rates of 10% and 45% for 2002 and
2001, respectively. Total annual tax expense for 2002, which primarily relates
to state income taxes, is estimated to be approximately $5,000,000. The tax
provision for the six-month period ended June 30, 2002 represents approximately
half of that amount. Our estimated annual effective tax rate for 2002 differs
from the federal statutory rate primarily due to a reduction in the valuation
allowance for deferred tax assets established at December 31, 2001. This
reduction in the valuation allowance is principally due to our expected
realization of the net operating loss carryforwards.
Our estimated annual effective tax rate for 2001 differs from the federal
statutory rate primarily due to the pre-tax charges for asset impairment,
workforce reductions and other unusual items of approximately $115,500,000,
which reduced our pre-tax income to a level where the effect of permanent tax
differences and state income taxes had a significant impact on the effective tax
rate. See Note 3 to Condensed Consolidated Financial Statements.
16
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Operating Revenues
On a same facility basis for the quarter, Company-wide revenues grew 6.6%.
Total Company net operating revenues were $633,689,000 during the second quarter
of 2002 compared to $679,978,000 for the same period in 2001. The decrease in
net operating revenues of approximately $46,300,000 for the second quarter of
2002, as compared to the same period in 2001, consists of the following:
-- a decrease of $85,900,000 due to dispositions, primarily related to our
Florida facilities;
-- an increase of $39,200,000 due to facilities which we operated during
each of the quarters ended June 30, 2002 and 2001 ("same facility
operations"); and
-- an increase of $400,000 due to the openings of a newly constructed
facility and two outpatient therapy clinics.
The increase in net operating revenues of $39,200,000 from same facility
operations for the three months ended June 30, 2002, as compared to the same
period in 2001 consists of the following:
-- $22,600,000 due to an increase in Medicaid, Medicare and private payment
rates;
-- $9,300,000 due to an increase in AEGIS' external therapy business;
-- $6,600,000 due to a positive shift in our patient mix;
-- $7,400,000 due to various other items; and
-- partially offset by a decrease of $6,700,000 due to a decline in same
facility census.
Our Medicare, private and Medicaid census for same facility operations was
11%, 18% and 70%, respectively, for the second quarter of 2002, as compared to
10%, 18% and 71%, respectively, for the same period in 2001. Approximately 92%
of our total net operating revenues for the quarters ended June 30, 2002 and
2001, were derived from services provided by our nursing facilities segment.
Operating and Administrative Expenses
We reported operating and administrative expenses of $587,006,000 during
the second quarter of 2002 compared to $620,386,000 for the same period in 2001.
The decrease of approximately $33,400,000 consists of the following:
-- a decrease of $73,300,000 due to dispositions, primarily related to our
Florida facilities;
-- an increase of $38,300,000 due to same facility operations; and
-- an increase of $1,600,000 due to the openings of a newly constructed
facility and two outpatient therapy clinics.
The increase in operating and administrative expenses of $38,300,000 from
same facility operations for the three months ended June 30, 2002, as compared
to the same period in 2001, was due primarily to the following:
-- $16,800,000 increase in our provision for insurance, primarily related
to actuarial increases in required reserves for prior policy years;
-- $9,800,000 increase in contracted services, primarily due to outsourcing
certain housekeeping and laundry services;
-- $8,900,000 additional provision for reserves on patient accounts
receivables; and
17
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-- $7,600,000 increase in wages and related expenses primarily due to an
increase in our weighted average wage.
Such increases were partially offset by decreases of:
-- $2,000,000 in rent expense primarily due to the restructuring of certain
lease agreements; and
-- $2,800,000 in various other items.
Interest Expense, Net
Interest income increased to $1,044,000 for the second quarter of 2002, as
compared to $811,000 for the same period in 2001 primarily due to new notes
receivable and an increase in invested funds. Interest expense decreased to
$16,606,000 for the second quarter of 2002, as compared to $20,273,000 for the
same period in 2001 primarily due to the reduction of debt using the net
proceeds from the sale of the Florida facilities.
SIX MONTHS 2002 COMPARED TO SIX MONTHS 2001
Results of Operations
We reported net income for the six months ended June 30, 2002 of
$6,490,000, compared to a net loss of $46,706,000 for the same period in 2001.
Net income for the six months ended June 30, 2002 included net pre-tax charges
totaling approximately $21,500,000 as discussed above. 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.
Net Operating Revenues
On a same facility basis for the six months ended June 30, 2002,
Company-wide revenues grew 7.6%. Total Company net operating revenues were
$1,255,464,000 during the six months ended June 30, 2002 compared to
$1,339,446,000 for the same period in 2001. The decrease in net operating
revenues of approximately $84,000,000 for the six months ended June 30, 2002, as
compared to the same period in 2001, consists of the following:
-- a decrease of $174,400,000 due to dispositions, primarily related to our
Florida facilities;
-- an increase of $88,200,000 due to facilities which we operated during
each of the six months ended June 30, 2002 and 2001 ("same facility
operations"); and
-- an increase of $2,200,000 due to a facility acquisition and the openings
of a newly constructed facility, one hospice and six outpatient therapy
clinics.
The increase in net operating revenues of $88,200,000 from same facility
operations for the six months ended June 30, 2002, as compared to the same
period in 2001, was primarily due to the following:
-- $64,400,000 due to an increase in Medicaid, Medicare and private rates;
-- $18,000,000 due to an increase in AEGIS' external therapy business;
-- $11,500,000 due to a positive shift in our patient mix;
-- $5,200,000 due to various other items; and
-- partially offset by a decrease of $10,900,000 due to a decline in same
facility census.
18
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Approximately 91% and 92% of our total net operating revenues for the six
months ended June 30, 2002 and 2001, respectively, were derived from services
provided by our nursing facilities segment.
Operating and Administrative Expenses
We reported operating and administrative expenses of $1,149,355,000 during
the six months ended June 30, 2002 compared to $1,224,023,000 for the same
period in 2001. The decrease of approximately $74,700,000 consists of the
following:
-- a decrease of $144,800,000 due to dispositions, primarily related to our
Florida facilities;
-- an increase of $66,600,000 due to same facility operations; and
-- an increase of $3,500,000 due to a facility acquisition and the openings
of a newly constructed facility, one hospice and six outpatient therapy
clinics.
The increase in operating and administrative expenses of $66,600,000 from
same facility operations for the six months ended June 30, 2002, as compared to
the same period in 2001, was due primarily to the following:
-- $24,400,000 of additional wages and related expenses primarily due to an
increase in our weighted average wage rate;
-- $23,300,000 increase in contracted services, primarily due to
outsourcing certain housekeeping, laundry and maintenance services;
-- $14,400,000 additional provision for reserves on patient accounts
receivables; and
-- $11,600,000 due to an increase in our provision for insurance, primarily
related to actuarial increases in required reserves for prior policy
years.
Such increases were partially offset by decreases of:
-- $3,900,000 in rent expense primarily due to the restructuring of certain
lease agreements; and
-- $3,200,000 in various other items.
Interest Expense, Net
Interest income increased to $2,143,000 for the six months ended June 30,
2002, as compared to $1,198,000 for the same period in 2001 primarily due to new
notes receivable and an increase in invested funds. Interest expense decreased
to $33,827,000 for the six months ended June 30, 2002, as compared to
$39,383,000 for the same period in 2001 primarily due to the reduction of debt
using the net proceeds from the sale of the Florida facilities.
Depreciation and Amortization
Depreciation and amortization expense decreased to $43,986,000 for the six
months ended June 30, 2002, as compared to $46,614,000 for the same period in
2001 primarily due to the elimination of amortization on goodwill and other
indefinite lived intangibles with the implementation of SFAS No. 142, the
dispositions of, or lease terminations on, certain facilities and the
discontinuation of depreciation and amortization of our Florida nursing home
assets beginning in the second quarter of 2001.
19
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had approximately $107,500,000 in cash and cash
equivalents. We anticipate $11,000,000 of this cash balance at June 30, 2002,
while not legally restricted, will be utilized primarily to fund certain
worker's compensation and general liability claims and expenses. At June 30,
2002, we had approximately $130,000,000 of unused commitments under our
$150,000,000 credit facility, with utilization being for standby letters of
credit primarily in support of certain insurance programs, security deposits,
and debt or guaranteed debt obligations. We had a negative net working capital
of approximately $46,000,000.
Net cash provided by operating activities for the six months ended June 30,
2002 was approximately $71,300,000 compared to approximately $95,600,000 for the
same period in 2001. This decline was primarily due to the timing of certain
payments. Net cash provided by investing and net cash used in financing
activities were approximately $93,100,000 and $146,300,000, respectively, for
the six months ended June 30, 2002. We received net cash proceeds of
approximately $156,900,000 from the dispositions of facilities and other assets.
These net proceeds, along with cash generated from operations, were used to
repay approximately $104,900,000 of long-term debt and $42,900,000 of
off-balance sheet financing and to fund capital expenditures totaling
approximately $61,100,000.
We currently anticipate that cash flows from operations and availability
under our banking arrangements will be adequate to repay our debts due within
one year of approximately $20,700,000, to make normal recurring annual net
capital additions and improvements of approximately $80,000,000, to make
operating lease and other contractual obligation payments, to make selective
acquisitions, including the purchase of previously leased facilities, and to
meet working capital requirements for the twelve months ending June 30, 2003. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the information provided in our 2001
Annual Report on Form 10-K under Item 7A.
20
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
JUNE 30, 2002
(UNAUDITED)
ITEM 1. LEGAL PROCEEDINGS
(a) As previously reported, on October 2, 1998, a purported class action
lawsuit was filed in the United States District Court for the Eastern District
for Arkansas by Jack Kushner against the Company and certain of its officers
(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 related 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 defendants filed a motion to dismiss that
complaint on October 8, 1999. Oral argument on this motion was held on April 6,
2000. By order and judgement dated October 17, 2001, defendants' motion to
dismiss was granted, and the complaint was dismissed with prejudice. Plaintiffs
appealed this decision to the Eighth Circuit Court of Appeals (Case No.
01-3677). The briefing schedule has been completed and oral argument was held on
April 18, 2002. 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.
(b) As previously reported, 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, assertedly on behalf of the Company,
(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 was appealed to the Eighth
Circuit Court of Appeals on November 5, 2001; 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
21
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
JUNE 30, 2002
(UNAUDITED)
Friedman actions. In February 2002, the Delaware Chancery Court entered a
stipulation of dismissal without prejudice. 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 Class Action.
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 current and former 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 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 plaintiffs' allegations that the defendants
acted unlawfully are without merit and the defendants 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.
(c) In February 2002, we made a settlement offer to the Centers for
Medicare and Medicaid Services ("CMS") to resolve reimbursement issues relating
to: (1) costs of services provided to Medicare patients during 1996 through 1998
under the federal government's former cost-reimbursement system; and (2) co-
payments due from Medicare beneficiaries, who were also eligible for Medicaid,
for the years 1999 and 2000. This settlement offer resolves all outstanding
issues from the Allocation Investigations.
(d) On August 1, 2002, the Company and the State of California reached an
agreement on the settlement of an investigation by the Attorney General's office
and the District Attorney of Santa Barbara County of patient care issues in a
number of California nursing facilities. In accordance with the terms of the
settlement agreement, Beverly Enterprises -- California, Inc. has entered a plea
of nolo contendere to two felony charges under California's Elder Abuse statute
and will pay a fine of $54,000 related to the plea. In addition, Beverly
Enterprises -- California, Inc. will reimburse the Attorney General and the
Santa Barbara County District Attorney $533,000 for the costs of their
investigations and will pay a $2,000,000 civil penalty in four equal, quarterly
installments of $500,000 beginning in the third quarter of 2002. In addition a
permanent injunction was entered requiring that the Company and its operating
subsidiaries operate their California nursing facilities in compliance with all
applicable laws and regulations and continue their existing training and
education programs. The Company recorded a charge against earnings of $6,300,000
to reflect the estimated settlement and related costs.
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, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 23, 2002, we held our Annual Meeting of Stockholders in Fort Smith,
Arkansas, for the purposes of electing ten members of the Board of Directors,
ratifying the appointment of Ernst & Young LLP as
22
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
JUNE 30, 2002
(UNAUDITED)
independent auditors for 2002 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
-------- ---------- ---------
Johnston C. Adams, Jr....................................... 96,366,217 188,708
Beryl F. Anthony, Jr........................................ 95,418,832 1,136,093
William R. Floyd............................................ 96,347,327 207,598
John D. Fowler, Jr.......................................... 96,366,572 188,353
James R. Greene............................................. 96,143,563 411,362
Edith E. Holiday............................................ 96,151,152 403,773
John P. Howe, III, M.D...................................... 96,352,410 202,515
James W. McLane............................................. 96,271,766 283,159
Donald L. Seeley............................................ 96,363,480 191,445
Marilyn R. Seymann, Ph. D................................... 95,762,258 792,667
The appointment of Ernst & Young LLP as independent auditors for 2002 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......................................................... 93,856,282
Against..................................................... 2,633,395
Abstentions................................................. 65,248
ITEM 6(A). EXHIBITS
EXHIBIT
NUMBER
-------
10.1 Permanent Injunction and Final Judgment entered on August 1,
2002 in People of the State of California v. Beverly
Enterprises, Inc.; Beverly Health and Rehabilitation
Services, Inc.; Beverly Enterprises -- California, Inc.; and
Beverly Healthcare -- California, Inc., Superior Court of
the State of California For the County of Santa Barbara
10.2 Waiver of Constitutional Rights and Plea Form and Court
Finding and Order dated August 1, 2002 in The People of
California v. Beverly Enterprises -- California, Inc.,
Superior Court of the State of California For the County of
Santa Barbara (S.C. No. 1094923)
10.3 Investigation Conclusion letter dated August 1, 2002, from
the State of California Department of Justice
10.4* Description of Non-Employee Directors Group Term Life
Insurance Plan
10.5* Amendment Number One to the Beverly Enterprises, Inc.
Supplemental Executive Retirement Plan
10.6* Performance based Stock Option Award to Jeffrey P. Freimark
pursuant to Process Improvement Team Awards Program
10.7* Performance based Stock Option Award to L. Darlene Burch
pursuant to Process Improvement Team Awards Program
10.8* Description of Long Term Disability Policy for William R.
Floyd
10.9* Employment Agreement made as of December 31, 2001 between
Beverly Enterprises, Inc. and Jeffrey P. Freimark
10.10* Demand Promissory Note made as of April 1, 2002 by Richard
D. Skelly, Jr. for the benefit of Beverly Enterprises, Inc.
23
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
JUNE 30, 2002
(UNAUDITED)
---------------
* Exhibits 10.4 through 10.10 are management contracts, compensation plans,
contracts and arrangements in which a director or named executive officer
participates.
ITEM 6(B). REPORTS ON FORM 8-K
On July 30, 2002, the Company filed a report on Form 8-K, which included a
press release announcing its operating results for the 2002 second quarter.
On August 1, 2002, the Company filed a report on Form 8-K, which included a
press release announcing the settlement of an investigation with the State of
California.
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 13, 2002
By: /s/ PAMELA H. DANIELS
------------------------------------
Pamela H. Daniels
Senior Vice President, Controller
and Chief Accounting Officer
25
EXHIBIT INDEX
EXHIBIT
NUMBER
-------
10.1 Permanent Injunction and Final Judgment entered on August 1,
2002 in People of the State of California v. Beverly
Enterprises, Inc.; Beverly Health and Rehabilitation
Services, Inc.; Beverly Enterprises -- California, Inc.; and
Beverly Healthcare -- California, Inc., Superior Court of
the State of California For the County of Santa Barbara
10.2 Waiver of Constitutional Rights and Plea Form and Court
Finding and Order dated August 1, 2002 in The People of
California v. Beverly Enterprises -- California, Inc.,
Superior Court of the State of California For the County of
Santa Barbara (S.C. No. 1094923)
10.3 Investigation Conclusion letter dated August 1, 2002, from
the State of California Department of Justice
10.4* Description of Non-Employee Directors Group Term Life
Insurance Plan
10.5* Amendment Number One to the Beverly Enterprises, Inc.
Supplemental Executive Retirement Plan
10.6* Performance based Stock Option Award to Jeffrey P. Freimark
pursuant to Process Improvement Team Awards Program
10.7* Performance based Stock Option Award to L. Darlene Burch
pursuant to Process Improvement Team Awards Program
10.8* Description of Long Term Disability Policy for William R.
Floyd
10.9* Employment Agreement made as of December 31, 2001 between
Beverly Enterprises, Inc. and Jeffrey P. Freimark
10.10* Demand Promissory Note made as of April 1, 2002 by Richard
D. Skelly, Jr. for the benefit of Beverly Enterprises, Inc.
---------------
* Exhibits 10.4 through 10.10 are management contracts, compensation plans,
contracts and arrangements in which a director or named executive officer
participates.