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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 MARCH 31, 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
Fort Smith, Arkansas 72919
(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 April 30, 2002 - 104,652,907
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BEVERLY ENTERPRISES, INC.
FORM 10-Q
MARCH 31, 2002
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.......................................... 9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 13
Item 6. Exhibits and Reports on Form 8-K................................................ 15
1
PART I
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 82,803 $ 89,343
Accounts receivable - patient, less allowance for doubtful accounts:
2002 - $47,855; 2001 - $51,400 ................................................. 235,630 242,865
Accounts receivable - nonpatient, less allowance for doubtful accounts:
2002 - $512; 2001 - $908 ....................................................... 10,326 12,914
Notes receivable, less allowance for doubtful notes: 2002 - $1,800; 2001 - $714 ... 1,714 18,662
Operating supplies ................................................................ 22,695 25,701
Assets held for sale .............................................................. 1,690 120,843
Prepaid expenses and other ........................................................ 15,224 13,720
----------- -----------
Total current assets ........................................................ 370,082 524,048
Property and equipment, net of accumulated depreciation and amortization:
2002 - $760,485; 2001 - $744,163 .................................................. 878,958 873,585
Other assets:
Goodwill, net ..................................................................... 142,749 144,884
Other, less allowance for doubtful accounts and notes:
2002 - $4,382; 2001 - $4,393 ................................................... 147,863 138,553
----------- -----------
Total other assets .......................................................... 290,612 283,437
----------- -----------
$ 1,539,652 $ 1,681,070
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 68,876 $ 93,728
Accrued wages and related liabilities ............................................. 106,419 109,295
Accrued interest .................................................................. 14,117 14,708
General and professional liabilities .............................................. 51,739 51,784
Federal government settlement liabilities ......................................... 46,119 45,891
Other accrued liabilities ......................................................... 83,191 112,609
Current portion of long-term debt ................................................. 22,351 64,231
----------- -----------
Total current liabilities ................................................... 392,812 492,246
Long-term debt ....................................................................... 621,206 677,442
Other liabilities and deferred items ................................................. 207,989 214,885
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000 ................................... -- --
Common stock, shares issued: 2002 - 112,918,476; 2001 - 112,813,303 .............. 11,292 11,281
Additional paid-in capital ........................................................ 888,545 887,668
Accumulated deficit ............................................................... (474,699) (495,203)
Accumulated other comprehensive income ............................................ 1,452 2,029
Treasury stock, at cost: 2002 - 8,416,824 shares; 2001 - 8,515,758 shares ........ (108,945) (109,278)
----------- -----------
Total stockholders' equity .................................................. 317,645 296,497
----------- -----------
$ 1,539,652 $ 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 accounting principles generally accepted
in the United States for complete financial statements.
See accompanying notes.
2
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001
--------- ---------
Net operating revenues .............................................. $ 621,775 $ 659,468
Interest income ..................................................... 1,099 387
--------- ---------
Total revenues ................................................ 622,874 659,855
Costs and expenses:
Operating and administrative:
Wages and related ............................................... 367,203 397,962
Provision for insurance and related items ....................... 21,917 27,163
Other ........................................................... 173,229 178,512
Interest .......................................................... 17,221 19,110
Depreciation and amortization ..................................... 21,721 24,464
Asset impairments, workforce reductions and other unusual items ... -- 107,689
--------- ---------
Total costs and expenses ...................................... 601,291 754,900
--------- ---------
Income (loss) before provision for (benefit from) income taxes ...... 21,583 (95,045)
Provision for (benefit from) income taxes ........................... 1,079 (42,771)
--------- ---------
Net income (loss) ................................................... $ 20,504 $ (52,274)
========= =========
Net income (loss) per share of common stock:
Basic:
Net income (loss) per share of common stock ................... $ 0.20 $ (0.50)
========= =========
Shares used to compute basic net income (loss) per share ...... 104,441 103,705
========= =========
Diluted:
Net income (loss) per share of common stock ................... $ 0.19 $ (0.50)
========= =========
Shares used to compute diluted net income (loss) per share .... 105,466 103,705
========= =========
See accompanying notes.
3
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS)
2002 2001
--------- ---------
Cash flows from operating activities:
Net income (loss) .................................................................... $ 20,504 $ (52,274)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization ...................................................... 21,721 24,464
Provision for reserves on patient, notes and other receivables, net ................ 12,903 7,112
Amortization of deferred financing costs ........................................... 783 666
Asset impairments, workforce reductions and other unusual items .................... -- 107,689
Losses (gains) on dispositions of facilities and other assets, net ................. 2,167 (1,099)
Deferred income taxes .............................................................. -- (44,035)
Insurance related accounts ......................................................... 7,822 28,494
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient .................................................... (5,045) (12,584)
Operating supplies ............................................................... 2,159 (171)
Prepaid expenses and other receivables ........................................... (2,471) (1,571)
Accounts payable and other accrued expenses ...................................... (49,489) (25,267)
Income taxes payable ............................................................. 6,502 (621)
Other, net ....................................................................... (2,540) (1,204)
--------- ---------
Total adjustments .............................................................. (5,488) 81,873
--------- ---------
Net cash provided by operating activities ...................................... 15,016 29,599
Cash flows from investing activities:
Capital expenditures ............................................................... (28,907) (13,941)
Proceeds from dispositions of facilities and other assets .......................... 153,790 4,415
Payments for acquisitions, net of cash acquired .................................... -- (74)
Collections on notes receivable .................................................... 452 19
Proceeds from designated funds, net ................................................ 124 412
Other, net ......................................................................... (6,253) 347
--------- ---------
Net cash provided by (used in) investing activities ........................... 119,206 (8,822)
Cash flows from financing activities:
Revolver borrowings ................................................................ -- 369,000
Repayments of Revolver borrowings .................................................. -- (351,000)
Repayments of long-term debt ....................................................... (98,116) (39,166)
Repayments of off-balance sheet financing .......................................... (42,901) --
Proceeds from exercise of stock options ............................................ 298 698
Deferred financing costs paid ...................................................... (43) (356)
--------- ---------
Net cash used in financing activities .......................................... (140,762) (20,824)
--------- ---------
Net decrease in cash and cash equivalents ............................................... (6,540) (47)
Cash and cash equivalents at beginning of period ........................................ 89,343 25,908
--------- ---------
Cash and cash equivalents at end of period .............................................. $ 82,803 $ 25,861
========= =========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized ............................................... $ 17,029 $ 26,669
Income tax payments (refunds), net ................................................. (5,423) 1,885
See accompanying notes.
4
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
(1) References throughout this document to the Company include Beverly
Enterprises, Inc. and its wholly owned subsidiaries. In accordance with the
Securities and Exchange Commission's "Plain English" guidelines, this Quarterly
Report on Form 10-Q has been written in the first person. In this document, the
words "we", "our", "ours" and "us" refer only to Beverly Enterprises, Inc. and
its wholly owned subsidiaries and not to any other person.
We have prepared the condensed consolidated financial statements, without
audit. In management's opinion, they include all normal recurring adjustments
necessary for a fair presentation of the results of operations for the three
months ended March 31, 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 months ended March 31, 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:
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% of our net operating revenues for the three months ended
March 31, 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 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.
5
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
The following table sets forth the calculation of basic and diluted
earnings per share for the three months ended March 31 (in thousands, except per
share amounts):
2002 2001
--------- ---------
NUMERATOR:
Numerator for basic and diluted net income (loss) per share ..... $ 20,504 $ (52,274)
========= =========
DENOMINATOR:
Denominator for basic net income (loss) per share - weighted
average shares ................................................ 104,441 103,705
Effect of dilutive securities - employee stock options .......... 1,025 --
--------- ---------
Denominator for diluted net income (loss) per share -
weighted average shares and assumed conversions ............... 105,466 103,705
========= =========
Basic net income (loss) per share ............................... $ 0.20 $ (0.50)
========= =========
Diluted net income (loss) per share ............................. $ 0.19 $ (0.50)
========= =========
Comprehensive income (loss) includes net income (loss), as well as charges
and credits to stockholders' equity not included in net income (loss). The
components of comprehensive income (loss), net of income taxes, consist of the
following for the three months ended March 31 (in thousands):
2002 2001
-------- --------
Net income (loss) ..................................................... $ 20,504 $(52,274)
Foreign currency translation adjustments, net of income taxes ......... -- (44)
Net unrealized gains (losses) on available-for-sale securities, net
of income taxes ..................................................... (577) 222
-------- --------
Comprehensive income (loss) ........................................... $ 19,927 $(52,096)
======== ========
The components of accumulated other comprehensive income, net of income
taxes, consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
Foreign currency translation adjustments ............. $ 53 $ 53
Unrealized gains on available-for-sale securities .... 1,399 1,976
------ ------
$1,452 $2,029
====== ======
(2) The provision for (benefit from) income taxes for the three months
ended March 31, 2002 and 2001 were based on estimated annual effective tax rates
of 5% and 45%, respectively. Our estimated annual effective tax rate for 2002
differs from the federal statutory rate primarily due to a reduction in the
valuation allowance, due principally to the expected realization of net
operating loss carryforwards, for deferred tax assets established at December
31, 2001. Our estimated annual effective tax rate for 2001 differs from the
federal statutory rate primarily due to the
6
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
pre-tax charges for asset impairments, workforce reductions and other unusual
items of approximately $107,700,000. These charges 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. The provision for (benefit from)
income taxes consists of the following for the three months ended March 31 (in
thousands):
2002 2001
-------- --------
Federal:
Current ..... $ -- $ 311
Deferred .... -- (42,603)
State:
Current ..... 1,079 953
Deferred .... -- (1,432)
-------- --------
$ 1,079 $(42,771)
======== ========
(3) During the three months ended March 31, 2002, we sold, closed or
terminated the leases on 54 nursing facilities (6,693 beds), four assisted
living centers (315 units), three home care centers and certain other assets for
cash proceeds of approximately $154,900,000 and notes receivable of
approximately $15,500,000. We did not operate 49 of the nursing facilities
(6,129 beds) and the four assisted living centers which had been leased in
December 2001 to another operator. We recognized net pre-tax losses, which were
included in net operating revenues during the first quarter of 2002, of
approximately $1,000,000 as a result of these dispositions. The operations of
these facilities and certain other assets were immaterial to our consolidated
financial position and results of operations.
(4) 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, SFAS No. 142 was effective for
us beginning in the first quarter of 2002.
Following is a summary of adjusted operating results for the effects of
adopting SFAS No. 142, for the three months ended March 31 (in thousands, except
per share amounts):
2002 2001
---------- --------
Reported net income (loss) .......... $ 20,504 $(52,274)
Add back:
Goodwill amortization ............ -- 978
Operating rights amortization .... -- 84
---------- --------
Adjusted net income (loss) .......... $ 20,504 $(51,212)
========== ========
BASIC DILUTED
----------------- -----------------
2002 2001 2002 2001
----- ----- ----- -----
Reported net income (loss) per share ..... $0.20 $(0.50) $0.19 $(0.50)
Add back:
Goodwill amortization ................. -- 0.01 -- 0.01
Operating rights amortization ......... -- -- -- --
----- ------ ----- ------
Adjusted net income (loss) per share ..... $0.20 $(0.49) $0.19 $(0.49)
===== ====== ===== ======
7
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
We completed the impairment assessment of our indefinite lived intangible
assets, other than goodwill, during the first quarter of 2002, with no
impairment identified. We will test goodwill for impairment using the two-step
process prescribed in SFAS No. 142. The first step is a screen for potential
impairment, while the second step measures the amount of the impairment, if any.
We expect to finalize the first step during the second quarter of 2002, and
complete the measurement of any impairment loss by the fourth 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.
(5) 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").
(6) 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 as follows:
o Nursing facilities, which provide long-term healthcare through
the operation of nursing homes and assisted living centers;
o AEGIS, which provides rehabilitation therapy services under
contract to Beverly and non-Beverly facilities;
o Home Care, which provides home health, hospice and home medical
equipment services; and
o Matrix, which operates outpatient therapy clinics and a managed
care network.
The following table summarizes certain information for each of our
reportable segments (in thousands):
NURSING
FACILITIES AEGIS HOME CARE MATRIX ALL OTHER (1) TOTALS
----------- ----------- ----------- ----------- ------------- -----------
Three months ended March 31, 2002
Revenues from external customers ... $ 567,880 $ 11,062 $ 20,888 $ 22,338 $ (393) $ 621,775
Intercompany revenues .............. -- 40,608 -- -- 626 41,234
Interest income .................... 366 10 5 3 715 1,099
Interest expense ................... 4,736 -- -- 2 12,483 17,221
Depreciation and amortization ...... 17,095 107 1,386 1,485 1,648 21,721
Pre-tax income (loss) .............. 38,580 10,519 (6,587) (899) (20,030) 21,583
Total assets ....................... 1,265,072 13,581 52,877 105,823 102,299 1,539,652
Capital expenditures ............... 25,901 239 621 485 1,661 28,907
Three months ended March 31, 2001
Revenues from external customers ... $ 608,057 $ 2,585 $ 24,556 $ 23,460 $ 810 $ 659,468
Intercompany revenues .............. -- 42,004 -- -- 2,829 44,833
Interest income .................... 57 -- -- 32 298 387
Interest expense ................... 6,341 -- 30 12 12,727 19,110
Depreciation and amortization ...... 19,485 59 1,012 2,444 1,464 24,464
Pre-tax income (loss) .............. 20,579 11,859 (1,025) (3,248) (123,210) (95,045)
Total assets ....................... 1,420,591 3,545 105,740 163,659 150,064 1,843,599
Capital expenditures ............... 12,102 223 767 554 295 13,941
----------
(1) Consists of the operations of our corporate headquarters and related
overhead, as well as certain non-operating revenues and expenses. Such
amounts also include pre-tax charges related to asset impairments,
workforce reductions and other unusual items totaling approximately
$107,700,000 for 2001.
8
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 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 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;
o 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 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 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 will, in fact, transpire and, therefore, caution
investors not to place undue reliance on them.
OPERATING RESULTS
FIRST QUARTER 2002 COMPARED TO FIRST QUARTER 2001
RESULTS OF OPERATIONS
We reported net income for the first quarter of 2002 of $20,504,000,
compared to a net loss of $52,274,000 for the same period in 2001. Net loss for
2001 included pre-tax charges totaling approximately $107,700,000, including
$68,900,000 for asset impairments related to our Florida facilities, $18,300,000
for workforce reductions and other reorganization costs and $20,500,000 for
Florida exit costs and other unusual items.
9
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
INCOME TAXES
The provision for (benefit from) income taxes for the three months ended
March 31, 2002 and 2001 were based on estimated annual effective tax rates of 5%
and 45%, respectively. Our estimated annual effective tax rate for 2002 differs
from the federal statutory rate primarily due to a reduction in the valuation
allowance, due principally to the expected realization of net operating loss
carryforwards, for deferred tax assets established at December 31, 2001. Our
estimated annual effective tax rate for 2001 differs from the federal statutory
rate primarily due to the pre-tax charges of approximately $107,700,000, which
reduced our pre-tax income to a level where the impact of permanent tax
differences and state income taxes had a significant impact on the effective tax
rate.
NET OPERATING REVENUES
We reported net operating revenues of $621,775,000 during the first quarter
of 2002 compared to $659,468,000 for the same period in 2001. On a same facility
basis, company-wide revenues grew 8.7%. Approximately 91% and 92% of our total
net operating revenues for the quarters ended March 31, 2002 and 2001,
respectively, were derived from services provided by our nursing facilities
segment. The decrease in net operating revenues of approximately $37,700,000 for
the first quarter of 2002, as compared to the same period in 2001, consists of
the following:
o a decrease of $88,200,000 due to dispositions, primarily related
to our Florida facilities;
o an increase of $49,400,000 due to facilities which we operated
during each of the quarters ended March 31, 2002 and 2001 ("same
facility operations"); and
o an increase of $1,100,000 due to a facility acquisition and the
openings of one hospice and four outpatient therapy clinics.
The increase in net operating revenues of $49,400,000 from same facility
operations for the first quarter of 2002, as compared to the same period in 2001
consists of the following:
o $42,300,000 due to an increase in Medicaid, Medicare and private
payment rates;
o $8,500,000 due to an increase in AEGIS' external therapy
business; and
o $5,000,000 due to a positive shift in our patient mix.
Such increases were partially offset by decreases of:
o $4,500,000 due to a decline in same facility census; and
o $1,900,000 due to various other items.
Our Medicare, private and Medicaid census for same facility operations was
11%, 19% and 70%, respectively, for the first quarter of 2002, as compared to
10%, 20% and 70%, respectively, for the same period in 2001.
OPERATING AND ADMINISTRATIVE EXPENSES
We reported operating and administrative expenses of $562,349,000 during
the first quarter of 2002 compared to $603,637,000 for the same period in 2001.
The decrease of approximately $41,300,000 consists of the following:
o a decrease of $76,600,000 due to dispositions, primarily due to
our Florida facilities;
o an increase of $34,000,000 due to same facility operations; and
o an increase of $1,300,000 due to acquisitions and openings of one
hospice and four outpatient therapy clinics.
10
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
The increase in operating and administrative expenses of $34,000,000 from
same facility operations for the first quarter of 2002, as compared to the same
period in 2001, was due primarily to the following:
o $14,200,000 increase in wages and related expenses primarily due
to an increase in our weighted average wage rate;
o $7,700,000 increase in contracted services, primarily due to
outsourcing certain housekeeping, laundry and maintenance
services;
o $5,500,000 additional bad debt reserves on accounts receivables,
primarily in our Home Care products business;
o $5,200,000 increase in our provision for insurance and related
items, primarily for workers' compensation and professional
liability; and
o $6,700,000 increase in other controllable costs.
Such increases were partially offset by the following:
o $1,900,000 of rent decrease primarily due to the restructuring of
certain lease agreements; and
o $3,400,000 due to various other items.
INTEREST EXPENSE, NET
Interest income increased to $1,099,000 for the first quarter of 2002, as
compared to $387,000 for the same period in 2001 primarily due to new notes
receivable and an increase in invested funds. Interest expense decreased to
$17,221,000 for the first quarter of 2002, as compared to $19,110,000 for the
same period in 2001 primarily due to the reduction of debt, primarily with
proceeds from the sale of the Florida facilities.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased to $21,721,000 for the
first quarter of 2002, as compared to $24,464,000 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 and the
dispositions of, or lease terminations on, certain facilities, including those
in Florida.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had approximately $82,803,000 in cash and cash
equivalents and approximately $135,700,000 of unused commitments under our
$150,000,000 credit facility. We had a negative net working capital of
approximately $22,700,000.
Net cash provided by operating activities for the first quarter of 2002 was
approximately $15,000,000 compared to $29,600,000 for the first quarter of 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 $119,200,000 and $140,800,000, respectively, for the first quarter
of 2002. We received net cash proceeds of approximately $153,800,000 from the
dispositions of facilities and other assets. These net proceeds, along with cash
generated from operations and cash on hand, were used to repay approximately
$98,100,000 of long-term debt and $42,900,000 of off-balance sheet financing and
to fund capital expenditures totaling approximately $28,900,000.
11
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
At March 31, 2002, we leased five nursing facilities, one assisted living
center and our corporate headquarters under an off-balance sheet financing
arrangement subject to operating leases with the lessor. We have the option to
purchase the facilities at the end of the initial lease terms at original cost.
This financing arrangement was entered into for the construction of these
facilities and as of March 31, 2002, we had $69,500,000 of outstanding
commitments.
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 $22,400,000, to make normal recurring capital
additions and improvements of approximately $80,000,000, to make operating lease
and other contractual payments, to make selective acquisitions, including the
purchase of previously leased facilities, and to meet working capital
requirements for the twelve months ending March 31, 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.
12
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
MARCH 31, 2002
(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 generally in
compliance with the requirements of the Corporate Integrity Agreement and file
annual reports with the OIG documenting our compliance.
In accordance with our agreement to dispose of 10 nursing facilities, we
have completed the dispositions.
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. 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.
13
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION (CONTINUED)
MARCH 31, 2002
(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, assertedly on behalf of the Company,
(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
was appealed to the Eighth Circuit Court of Appeals on November
5, 2001; 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. 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 motion to dismiss in 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.
14
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
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 the 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.
On April 29, 2002 the State of California notified us that it is
investigating possible criminal charges against the Company with respect to
certain of its California facilities based in substantial part on a number of
civil citations related to patient care issued by the California Department of
Health Services involving incidents during the years 1998 to 2001. Most of the
citations were resolved by payment of civil penalties, and a minority are being
contested. The Company is engaged in discussions with the State aimed at
resolving these issues. The Company is unable to predict whether these
discussions will lead to an agreement or the nature of any possible agreement.
The Company is not in a position at this time to assess the nature or
significance of any charges that might be filed in the event these issues
cannot be resolved.
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 6(a). EXHIBITS
EXHIBIT
NUMBER
None
ITEM 6(b). REPORTS ON FORM 8-K
None
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEVERLY ENTERPRISES, INC.
Registrant
Dated: May 15, 2002 By: /s/ PAMELA H. DANIELS
-----------------------------------
Pamela H. Daniels
Senior Vice President, Controller
and Chief Accounting Officer
16