1
================================================================================
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, 1998
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.)
5111 ROGERS AVENUE, SUITE 40-A
FORT SMITH, ARKANSAS 72919-0155
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (501) 452-6712
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, 1998 -- 103,217,409
================================================================================
2
BEVERLY ENTERPRISES, INC.
FORM 10-Q
MARCH 31, 1998
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets................................................. 2
Condensed Consolidated Statements of Income........................................... 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......................................................... 7
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 12
Item 6. Exhibits and Reports on Form 8-K............................................................. 12
1
3
PART I
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents..................................................................... $ 67,115 $ 105,230
Accounts receivable - patient, less allowance for doubtful accounts:
1998--$21,178; 1997--$17,879................................................................ 429,073 384,833
Accounts receivable - nonpatient, less allowance for doubtful accounts:
1998--$964; 1997--$626...................................................................... 20,779 14,400
Notes receivable.............................................................................. 4,653 4,409
Operating supplies............................................................................ 30,924 30,439
Deferred income taxes......................................................................... 26,000 27,304
Prepaid expenses and other.................................................................... 52,535 59,703
----------- ------------
Total current assets....................................................................... 631,079 626,318
Property and equipment, net of accumulated depreciation and amortization:
1998--$652,637; 1997--$638,834............................................................... 1,162,717 1,158,329
Other assets:
Notes receivable, less allowance for doubtful notes:
1998--$2,921; 1997--$2,917................................................................. 20,139 20,564
Designated and restricted funds............................................................... 59,229 64,233
Goodwill, net................................................................................. 148,264 99,280
Other, net.................................................................................... 110,389 104,745
----------- ------------
Total other assets......................................................................... 338,021 288,822
----------- ------------
$ 2,131,817 $ 2,073,469
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................................. $ 100,003 $ 75,791
Accrued wages and related liabilities......................................................... 121,651 123,146
Accrued interest.............................................................................. 12,117 15,108
Other accrued liabilities..................................................................... 106,421 98,421
Current portion of long-term obligations...................................................... 33,248 31,551
----------- ------------
Total current liabilities.................................................................. 373,440 344,017
Long-term obligations............................................................................ 701,101 686,941
Deferred income taxes payable.................................................................... 117,032 111,388
Other liabilities and deferred items............................................................. 63,845 68,618
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............................................... -- --
Common stock, shares issued: 1998--110,168,989; 1997--109,890,205............................ 11,017 10,989
Additional paid-in capital.................................................................... 875,387 874,335
Retained earnings............................................................................. 44,280 26,239
Accumulated other comprehensive income........................................................ 1,778 1,332
Treasury stock, at cost: 1998--4,000,000 shares; 1997--4,000,000 shares....................... (56,063) (50,390)
----------- ------------
Total stockholders' equity................................................................. 876,399 862,505
----------- ------------
$ 2,131,817 $ 2,073,469
=========== ============
NOTE: The balance sheet at December 31, 1997 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
for complete financial statements.
See accompanying notes.
2
4
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997
----------- -----------
Net operating revenues................................................................ $ 694,400 $ 816,716
Interest income....................................................................... 3,027 3,565
----------- -----------
Total revenues................................................................. 697,427 820,281
Costs and expenses:
Operating and administrative:
Wages and related................................................................ 419,219 449,782
Other............................................................................ 210,503 289,930
Interest............................................................................ 15,488 22,716
Depreciation and amortization....................................................... 23,118 27,081
----------- -----------
Total costs and expenses....................................................... 668,328 789,509
----------- -----------
Income before provision for income taxes.............................................. 29,099 30,772
Provision for income taxes............................................................ 11,058 12,309
----------- -----------
Net income............................................................................ $ 18,041 $ 18,463
=========== ===========
Net income per share of common stock:
Basic:
Net income per share of common stock........................................... $ 0.17 $ 0.19
=========== ===========
Shares used to compute net income per share.................................... 106,006 98,144
=========== ===========
Diluted:
Net income per share of common stock........................................... $ 0.17 $ 0.18
=========== ===========
Shares used to compute net income per share.................................... 107,479 110,386
=========== ===========
Operating results for the first quarter of 1997 included the operations of
Pharmacy Corporation of America, a former subsidiary that was separated from
the Company and merged with another Company on December 3, 1997.
See accompanying notes.
3
5
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
1998 1997
----------- -----------
Cash flows from operating activities:
Net income................................................................................ $ 18,041 $ 18,463
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................................................... 23,118 27,081
Provision for reserves on patient, notes and other receivables, net.................... 5,240 6,378
Amortization of deferred financing costs............................................... 613 662
(Gains) losses on dispositions of facilities and other assets, net..................... (2,158) 1,469
Deferred taxes......................................................................... 5,919 5,740
Net increase (decrease) in insurance related accounts.................................. 6,067 (1,364)
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient...................................................... (46,970) (36,631)
Operating supplies................................................................. (362) (276)
Prepaid expenses and other receivables............................................. 1,974 (950)
Accounts payable and other accrued expenses........................................ 16,953 25,960
Income taxes payable............................................................... 2,707 (4,751)
Other, net......................................................................... (1,877) 320
----------- -----------
Total adjustments............................................................... 11,224 23,638
----------- -----------
Net cash provided by operating activities....................................... 29,265 42,101
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........................................... (53,715) (30,829)
Capital expenditures...................................................................... (31,132) (37,638)
Proceeds from dispositions of facilities and other assets................................. 2,279 263
Collections on notes receivable and REMIC investment...................................... 448 8,981
Other, net................................................................................ (6,963) 742
----------- -----------
Net cash used for investing activities.......................................... (89,083) (58,481)
Cash flows from financing activities:
Revolver borrowings....................................................................... 164,000 387,000
Repayments of Revolver borrowings......................................................... (139,000) (363,000)
Proceeds from issuance of long-term obligations........................................... -- 3,534
Repayments of long-term obligations....................................................... (6,268) (16,356)
Purchase of common stock for treasury..................................................... -- (2,397)
Proceeds from exercise of stock options................................................... 2,189 1,855
Deferred financing costs.................................................................. (19) (320)
Proceeds from designated funds, net....................................................... 801 439
----------- -----------
Net cash provided by financing activities....................................... 21,703 10,755
----------- -----------
Net decrease in cash and cash equivalents........................................................ (38,115) (5,625)
Cash and cash equivalents at beginning of period................................................. 105,230 69,761
----------- -----------
Cash and cash equivalents at end of period....................................................... $ 67,115 $ 64,136
=========== ===========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized)....................................................... $ 17,866 $ 25,309
Income tax payments (net of refunds)........................................................ 2,432 11,320
See accompanying notes.
4
6
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(i) The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, and include all adjustments of a normal
recurring nature which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the three months ended March 31,
1998 and 1997 pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes 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 in conjunction with the Company's consolidated financial
statements and the notes thereto included in the Company's 1997 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of the results for a full year. Unless the context indicates
otherwise, the Company means Beverly Enterprises, Inc. and its consolidated
subsidiaries.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No.
128"). SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. Earnings
per share amounts for all periods have been presented, and where appropriate,
restated to conform with the requirements of SFAS No. 128.
The following table sets forth the computation of basic and diluted earnings
per share for the three months ended March 31 (in thousands):
1998 1997
-------- --------
NUMERATOR:
Numerator for basic earnings per share - income available
to common stockholders .......................................... $ 18,041 $ 18,463
Effect of dilutive securities:
5 1/2% convertible subordinated debentures, net of income taxes.. -- 1,238
-------- --------
Numerator for diluted earnings per share - income available
to common stockholders after assumed conversions ................ $ 18,041 $ 19,701
======== ========
DENOMINATOR:
Denominator for basic earnings per share - weighted average
shares .......................................................... 106,006 98,144
Effect of dilutive securities:
Employee stock options .......................................... 1,473 989
5 1/2% convertible subordinated debentures ...................... -- 11,253
-------- --------
Dilutive potential common shares .................................. 1,473 12,242
-------- --------
Denominator for diluted earnings per share - adjusted weighted
average shares and assumed conversions .......................... 107,479 110,386
======== ========
Basic earnings per share ............................................ $ 0.17 $ 0.19
======== ========
Diluted earnings per share .......................................... $ 0.17 $ 0.18
======== ========
5
7
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130") which requires the presentation of comprehensive income in a company's
financial statement disclosures. Comprehensive income represents all changes in
the equity of a company during the reporting period, including net income, as
well as charges and credits directly to retained earnings which are excluded
from net income. The components of comprehensive income, net of income taxes,
consist of the following for the three months ended March 31 (in thousands):
1998 1997
---- ----
Net income .......................................... $ 18,041 $ 18,463
Unrealized gains on securities ...................... 446 --
-------- --------
Comprehensive income ................................ $ 18,487 $ 18,463
======== ========
Accumulated other comprehensive income, net of income taxes, is made up of
unrealized gains on securities of $1,778,000 and $1,332,000 at March 31, 1998
and December 31, 1997, respectively.
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
(ii) The provisions for income taxes for the three months ended March 31,
1998 and 1997 were based on estimated annual effective tax rates of 38% and
40%, respectively. The Company's estimated annual effective tax rates for 1998
and 1997 are different than the federal statutory rate primarily due to the
impact of state income taxes and amortization of nondeductible goodwill. The
provisions for income taxes consist of the following for the three months ended
March 31 (in thousands):
1998 1997
--------- ---------
Federal:
Current.................................................... $ 4,061 $ 5,298
Deferred................................................... 4,948 4,840
State:
Current.................................................... 1,078 1,271
Deferred................................................... 971 900
--------- ---------
$ 11,058 $ 12,309
========= =========
(iii) During the three months ended March 31, 1998, the Company purchased 47
home health centers, 40 outpatient clinics, one previously leased nursing
facility (120 beds) and certain other assets for approximately $52,800,000 cash,
approximately $2,400,000 acquired debt and approximately $5,400,000 closing and
other costs. Also during such period, the Company sold one nursing facility (120
beds) and certain other assets for cash proceeds of approximately $2,300,000.
The Company recognized net pre-tax gains during the first quarter of 1998 of
approximately $2,200,000 as a result of these dispositions. The operations of
these facilities were immaterial to the Company's consolidated financial
position and results of operations.
(iv) In June 1996, the Company announced that its Board of Directors had
authorized a stock repurchase program whereby the Company may repurchase, from
time to time on the open market, up to a total of 10,000,000 shares of its
outstanding Common Stock. In December 1997, the Company repurchased 4,000,000
shares of its Common Stock through an accelerated stock repurchase transaction
at a cost of approximately $56,100,000 (approximately $5,700,000 of which was
included in other accrued liabilities at March 31, 1998). In April 1998, through
a similar transaction, the Company repurchased 3,000,000 shares at a cost of
approximately $43,600,000. The repurchases were financed primarily through
borrowings under the Company's Revolver/Letter of Credit Facility. Since June
1996, the Company has repurchased approximately 9,300,000 shares of its
outstanding Common Stock under the stock repurchase program.
On March 4, 1998, a jury in California returned a verdict of $95,100,000
against a nursing facility operated by a subsidiary of the Company. The verdict,
which was based on findings of fraud as well as negligence and abuse, consisted
of $365,580 in compensatory damages and $94,700,000 in punitive damages. Since
punitive damages are generally not covered by insurance, a final judgement of
this size could have a material adverse effect on the Company's consolidated
results of operations and financial position. However, it is the Company's
belief, based on discussions with its trial and appellate counsel, that many of
the jury's findings are not supportable from the evidence presented in the case,
and that the judgement entered will be significantly reduced by the trial court
or on appeal. The trial judge has set a post-trial hearing for June 3, 1998.
The Company intends to aggressively pursue all post-trial and appellate remedies
available to it.
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. The Company does not
believe that the ultimate resolution of these matters will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
6
8
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1998
(UNAUDITED)
GENERAL
Forward Looking Statements
This Quarterly Report on Form 10-Q, and other information provided by the
Company 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 the Company's expected future financial position, results
of operations, cash flows, continued performance improvements, ability to
service its debt obligations, finance growth opportunities, respond to changes
in government regulations, 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 the Company's actual results in future periods to
differ materially from those projected or contemplated in the forward-looking
statements as a result of, but not limited to, the following factors: national
and local economic conditions; the effect of government regulation and changes
in regulations governing the healthcare industry, including the Company's
compliance with such regulations; changes in Medicare and Medicaid payment
levels; liabilities and other claims asserted against the Company; the ability
to attract and retain qualified personnel; the availability and terms of capital
to fund acquisitions; the competitive environment in which the Company operates;
demographic changes; the ability to timely locate and correct all relevant
computer codes prior to the year 2000; and the availability and cost of labor
and materials. Given these risks and uncertainties, the Company can give no
assurances that these forward-looking statements will, in fact, transpire and,
therefore, cautions investors not to place undue reliance on them.
Governmental Regulation and Reimbursement
Healthcare system reform and concerns over rising Medicare and Medicaid costs
continue to be high priorities for both the federal and state governments. In
August 1997, the President signed into law the Balanced Budget Act of 1997 (the
"1997 Act") in which Congress included numerous program changes directed at
balancing the federal budget. The legislation changes Medicare and Medicaid
policy in a number of ways, including: (i) development of new Medicare and
Medicaid health plan options; (ii) creation of additional safeguards against
healthcare fraud and abuse; (iii) repeal of the Medicaid "Boren Amendment"
payment standard; (iv) a 10% reduction in Part B therapy costs for the period
from January 1, 1998 through July 1, 1998, at which time reimbursement for
these services will be based on Health Care Financing Administration of the
Department of Health and Human Services ("HCFA") established fee schedules; (v)
the phase in of a Medicare prospective payment system ("PPS") for skilled
nursing facilities effective July 1, 1998 (which will be in effect for the
Company in January 1999); and (vi) establishment of limitations on Part B
therapy charges per beneficiary per year. The legislation includes new
opportunities for providers to focus further on patient outcomes by creating
alternative patient delivery structures. At this time, the Company has not been
able to fully assess the impact of these changes, due in part to uncertainty as
to the details of implementation and interpretation of the legislation by HCFA
and, therefore, no assurances can be made as to the ultimate impact of this
legislation or future healthcare reform legislation on the Company's
consolidated financial position, results of operations, or cash flows. However,
future federal budget legislation and federal and state regulatory changes may
negatively impact the Company.
During the second quarter of 1998, final rules were issued by HCFA which
established guidelines for maximum reimbursement to skilled nursing facilities
for contracted speech and occupational therapy services based on equivalent
salary amounts for on-staff therapists. In addition, these rules revised the
salary equivalency rules previously in effect for physical and respiratory
therapy services. The Company has not experienced, and does not expect the new
rules to have, a material adverse effect on its consolidated results of
operations or cash flows because of the following: (i) the Company currently
provides the majority of its therapy services through on-staff therapists; and
(ii) the salary equivalency guidelines cease to apply to skilled nursing
facilities once the 1997 Act provisions for PPS become effective.
7
9
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
The Company believes that its facilities are in substantial compliance with
currently applicable Medicaid and Medicare conditions of participation. In the
ordinary course of its business, however, the Company receives notices of
deficiencies for failure to comply with various regulatory requirements. The
Company reviews such notices and takes appropriate corrective action. In most
cases, the Company and the reviewing agency 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 reviewing agency may take a number of
adverse actions against a facility. These adverse actions can include the
imposition of fines, temporary suspension of admission of new patients to the
facility, decertification from participation in the Medicaid or Medicare
programs and, in extreme circumstances, revocation of a facility's license.
The Social Security Act and regulations of the Department of Health and
Human Services ("HHS") provide for exclusion of providers and related persons
from participation in the Medicare and Medicaid programs if they have been
convicted of a criminal offense related to the delivery of an item or service
under either of these programs or if they have been convicted, under state or
federal law, of a criminal offense relating to neglect or abuse of residents in
connection with the delivery of a healthcare item or service. Furthermore,
individuals or entities and their affiliates may be excluded from the Medicare
and Medicaid programs under certain circumstances including conviction relating
to fraud, license revocation or suspension, or failure to furnish services of
adequate quality.
The "fraud and abuse" anti-kickback provisions of the Social Security Act
(presently codified in section 1128B(b) of the Social Security Act,
hereinafter the "Antifraud Amendments") make it a criminal felony offense to
knowingly and willfully offer, pay, solicit or receive remuneration in order to
induce business for which reimbursement is provided under government health
programs, including Medicare and Medicaid. The Antifraud Amendments have been
broadly interpreted to make remuneration of any kind, including many types of
business and financial arrangements among providers, potentially illegal if any
purpose of the remuneration or financial arrangement is to induce a referral.
Accordingly, joint ventures, space and equipment rentals, management and
personal services contracts, and certain investment arrangements among providers
may be suspect.
In 1991, HHS promulgated regulations which describe certain arrangements
that would not be subject to enforcement action under the Social Security Act
(the "Safe Harbors"). The Safe Harbors described in the regulations are narrow,
leaving unprotected a wide range of economic relationships that many hospitals,
physicians and other healthcare providers consider to be legitimate business
arrangements not prohibited by the Antifraud Amendments. The regulations do not
purport to describe comprehensively all lawful relationships between healthcare
providers and referral sources and clearly provide that arrangements that do not
qualify for Safe Harbor protection are not automatically deemed to violate the
Antifraud Amendments. Thus, skilled nursing facilities and other healthcare
providers having arrangements or relationships that do not fall within a Safe
Harbor may not be required to alter them in order to ensure compliance with the
Social Security Act provisions. Although failure to qualify for a Safe Harbor
may subject a particular arrangement or relationship to increased regulatory
scrutiny, the fact that a particular relationship or arrangement does not fall
within one of the Safe Harbors does not in and of itself mean the relationship
or arrangement is unlawful. In 1993, HHS published proposed regulations for
comment in the Federal Register establishing additional Safe Harbors.
Additionally, in 1995, HHS published a proposed rule aimed at clarifying the
existing Safe Harbors. As of April 1, 1998, these regulations had not been
adopted in final form. The Company cannot predict the final form that these
regulations and rules will take or their effect, if any, on the Company's
business.
In addition to the Antifraud Amendments, Section 1877 of the Social Security
Act (known as the "Stark Law") imposes restrictions on financial relationships
between physicians and certain entities. The Stark Law provides that if a
physician (or an immediate family member of a physician) has a financial
relationship with an entity that furnishes certain designated health services,
the physician may not refer a Medicare or Medicaid patient to the entity and the
entity may not bill for services provided unless an exception to the financial
relationship exists. Designated health services include certain services
furnished by the Company, such as physical therapy, occupational therapy,
prescription drugs and home health. The types of financial relationships that
can trigger the referral and billing prohibitions are broad and include
ownership or investment interests, as well as compensation arrangements.
Penalties for violating the law are severe, including denial of payment for
services furnished pursuant to prohibited referrals, civil monetary penalties of
$15,000 for each item claimed, assessments equal to 200% of the dollar value of
each such service provided, and exclusion from the Medicare and Medicaid
programs.
On August 14, 1995, the final regulations were published interpreting the
original provisions of the Stark Law that became effective January 1, 1992.
These provisions relate to entities that furnish clinical laboratory services,
commonly referred to as "Stark I." Expanded restrictions as applied to the
additional designated health services (referred to as "Stark II") became
effective as of January 1, 1995. Proposed regulations implementing Stark II were
published on January 9, 1998. The Company cannot predict the final form that
such regulations will take or the effect that Stark II or the regulations
promulgated thereunder will have on the Company.
Many states in which the Company operates also have laws that prohibit
payments to physicians for patient referrals with statutory language similar to
the Antifraud Amendments, but with broader effect since they apply regardless of
the source of payment for care. These statutes typically provide criminal and
civil penalties as well as loss of licensure. Many states also have passed
legislation similar to Stark, but with broader effect, since the legislation
applies regardless of the source of payment for care. The scope of these state
laws is broad, and little precedent exists for their interpretation or
enforcement.
On August 21, 1996, President Clinton signed significant new federal health
reform legislation known as the Health Insurance Portability and Accountability
Act of 1996 ("HIPAA"). The new law includes comprehensive and far-reaching
revisions or supplements to the Antifraud Amendments. Under HIPAA, healthcare
fraud, now defined as knowingly and willfully executing or attempting to execute
a "scheme or device" to defraud any healthcare benefit program, is made a
federal criminal offense. In addition, for the first time, federal enforcement
officials will have the ability to exclude from Medicare and Medicaid any
investors, officers and managing employees associated with business entities
that have committed healthcare fraud, even if the investor, officer, or employee
had no actual knowledge of the fraud. HIPAA also establishes a new violation for
the payment of inducements to Medicare or Medicaid beneficiaries in order to
influence those beneficiaries to order or receive services from a particular
provider or practitioner. Most of the provisions of HIPAA became effective on
January 1, 1997. HIPAA was followed by the 1997 Act. The 1997 Act also contained
a significant number of new fraud and abuse provisions. For example, civil
monetary penalties ("CMP") may now be imposed for violations of the
anti-kickback provisions of the Medicare and Medicaid statute (previously,
exclusion or criminal prosecution were the only actions under the anti-kickback
statute) as well as contracting with an individual or entity that the provider
knows or should know is excluded from a federal healthcare program. The 1997 Act
provides for a CMP of $50,000 and damages of not more than three times the
amount of remuneration in the prohibited activity.
In 1976, Congress established the Office of Inspector General ("OIG") at HHS
to identify and eliminate fraud, abuse and waste in HHS programs and to promote
efficiency and economy in HHS departmental operations. The OIG carries out this
mission through a nationwide program of audits, investigations, and inspections.
In order to provide guidance to healthcare providers on ways to engage in
legitimate business practices and avoid scrutiny under the fraud and abuse
statutes, the OIG has from time to time issued "fraud alerts" identifying
segments of the healthcare industry and particular practices that are
particularly vulnerable to abuse. The OIG has issued three fraud alerts
targeting the skilled nursing industry: an August 1995 alert relating to the
provision of medical supplies to nursing facilities, the fraudulent billing for
medical supplies equipment and fraudulent supplier transactions; a May 1996
alert focusing on the provision of fraudulent professional services to nursing
facility residents; and a March 1998 alert addressing the interrelationship
between hospice services and the nursing home industry, and potentially illegal
practices and arrangements. The fraud alerts encourage persons having
information about potentially abusive practices or transactions to report such
information to the OIG.
In addition to laws addressing referral relationships, several federal laws
impose criminal and civil sanctions for fraudulent and abusive billing
practices. The federal False Claims Act imposes sanctions, consisting of
monetary penalties of up to $10,000 for each claim and treble damages, on
entities and persons who knowingly present or cause to be presented a false or
fraudulent claim for payment to the United States. Section 1128B(a) of the
Social Security Act prohibits the knowingly and willful making of a false
statement or representation of a material fact in relation to the submission of
a claim for payment under government health programs (including the Medicare and
Medicaid programs). Violations of this provision constitute felony offenses
punishable by fines and imprisonment. The new HIPAA provisions establish
criminal penalties for fraud, theft, embezzlement, and the making of false
statements in relation to healthcare benefits programs (which includes private,
as well as government programs).
A joint federal/state initiative, Operation Restore Trust, was created in
1995 to apply to nursing homes, home health agencies, and suppliers of medical
equipment to these providers in the five states of New York, Florida,
California, Illinois and Texas. The program was subsequently expanded to
hospices in these states as well. The program is designed to focus audit and law
enforcement efforts on geographic areas and provider types receiving large
concentrations of Medicare and Medicaid funds. According to HHS statistics, the
targeted states account for nearly 40% of all Medicare and Medicaid
beneficiaries. Under Operation Restore Trust, the OIG and HCFA have undertaken a
variety of activities to address fraud and abuse by nursing homes, home health
providers, and medical equipment suppliers. These activities will include
financial audits, creation of a Fraud and Waste Report Hotline, and increased
investigations and enforcement activity.
On May 20, 1997, HHS announced that Operation Restore Trust will be expanded
during the next two years to include twelve additional states (Arizona,
Colorado, Georgia, Louisiana, Massachusetts, Missouri, New Jersey, Ohio,
Pennsylvania, Tennessee, Virginia and Washington), as well as several other
types of healthcare services. Over the longer term, it is anticipated that
Operation Restore Trust investigative techniques will be used in all 50 states,
and will be applied throughout the Medicare and Medicaid programs.
In addition to increasing the resources devoted to investigating allegations
of fraud and abuse in the Medicare and Medicaid programs, federal and state
regulatory and law enforcement authorities are taking an increasingly strict
view of the requirements imposed on healthcare providers by the Social Security
Act and Medicare and Medicaid regulations. Although the Company believes that
it is in material compliance with such laws, a determination that the Company
has violated such laws, or even the public announcement that the Company was
being investigated concerning possible violations, could have a material
adverse effect on the Company.
The Company's future operating performance will continue to be affected by
the issues facing the long-term healthcare industry as a whole, including the
maintenance of occupancy, its ability to continue to expand higher margin
businesses, the availability of nursing, therapy and other personnel, the
adequacy of funding of governmental reimbursement programs, the demand for
nursing home care and the nature of any healthcare reform measures that may be
taken by the federal government, as discussed above, as well as by any state
governments. The Company's ability to control costs, including its wages and
related expenses which continue to rise and represent the largest component of
the Company's operating and administrative expenses, will also significantly
impact its future operating results.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
8
10
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
Based on an ongoing assessment, the Company has determined that it will be
required to modify or replace significant portions of its hardware and software
so that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The Company presently believes that with modifications
to existing hardware and software and conversions to new hardware and software,
the Year 2000 Issue will not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not made,
or are not completed timely, the Year 2000 Issue could have a material impact on
the operations of the Company.
The Company is in the process of initiating formal communications with all of
its significant suppliers, payors and large customers to determine the extent to
which the Company's systems and operations are vulnerable to those third
parties' failure to remediate their own Year 2000 Issues. There can be no
assurance that the systems of other companies, as well as those of the federal
and state governments, on which the Company's systems and operations rely will
be timely converted and will not have an adverse effect on the Company's systems
or ongoing operations.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the hardware and software for Year 2000 modifications. The
Company anticipates completing its reprogramming phase of the Year 2000 project
by December 31, 1998 and will continue with the testing phase during 1999. Since
assessments of the Year 2000 Issue currently remain ongoing, the Company has not
yet been able to fully determine the total costs of the Year 2000 project.
The Company will continue to assess each of its operations and their Year
2000 readiness. At this time, the Company believes that appropriate actions are
being taken, and expects to complete its overall Year 2000 remediation prior to
any anticipated impact on its operations. However, there can be no assurance
that these assumptions will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, third party modification plans and similar
uncertainties.
OPERATING RESULTS
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
Operating results for the first quarter of 1997 included the operations of
Pharmacy Corporation of America ("PCA"), a former subsidiary that was separated
from the Company and merged with another company on December 3, 1997. Net income
was $18,041,000 for the first quarter of 1998, as compared to net income of
$18,463,000 for the same period in 1997. Income before provision for income
taxes was $29,099,000 for the first quarter of 1998, as compared to $30,772,000
for the same period in 1997. The Company had an estimated annual effective tax
rate of 38% and 40% for the quarters ended March 31, 1998 and 1997,
respectively. The Company's estimated annual effective tax rates for 1998 and
1997 are different than the federal statutory rate primarily due to the impact
of state income taxes and amortization of nondeductible goodwill.
Net operating revenues and operating and administrative costs decreased
approximately $122,300,000 and $110,000,000, respectively, for the first quarter
of 1998, as compared to the same period in 1997. These decreases consist of the
following: decreases in net operating revenues and operating and administrative
costs of approximately $122,400,000 and $103,800,000, respectively, due to the
operations of PCA; and decreases in net operating revenues and operating and
administrative costs of approximately $54,600,000 and $53,100,000, respectively,
due to the disposition of, or lease terminations on, one nursing facility in
1998 and 68 nursing facilities in 1997; partially offset by increases in net
operating revenues and operating and administrative costs of approximately
$29,000,000 and $23,200,000, respectively, for facilities which the Company
operated during each of the quarters ended March 31, 1998 and 1997 ("same
facility operations"); and increases in net operating revenues and operating and
administrative costs of approximately $25,700,000 and $23,700,000, respectively,
due to the acquisitions of outpatient, home health and hospice businesses during
1998 and 1997.
The increase in net operating revenues for same facility operations for the
first quarter of 1998, as compared to the same period in 1997, was due to the
following: approximately $30,100,000 due to increases in room and board rates;
and approximately $2,000,000 due to various other items; partially offset by
approximately $3,100,000 due to a decrease in same facility occupancy to 89.4%
for the first quarter of 1998, as compared to 89.9% for the same period in 1997.
The increase in operating and administrative costs for same facility
operations for the first quarter of 1998, as compared to the same period in
1997, was due to the following: approximately $19,300,000 due to increased wages
and related expenses principally due to higher wages and greater benefits
required to attract and retain qualified
9
11
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
personnel, the hiring of therapists on staff as opposed to contracting for their
services and increased staffing levels in the Company's nursing facilities to
cover increased patient acuity; approximately $3,800,000 due primarily to
increases in purchased ancillary products; approximately $2,500,000 due to
increases in nursing supplies and other variable costs; and approximately
$2,000,000 due to various other items. These increases in operating and
administrative costs were partially offset by approximately $4,400,000 due to a
decrease in contracted therapy expenses as a result of hiring therapists on
staff as opposed to contracting for their services.
Interest expense decreased approximately $7,200,000 as compared to the same
period in 1997 primarily due to the conversion of the Company's 5 1/2%
convertible subordinated debentures in the third quarter of 1997, as well as the
repayments of the Company's 7 5/8% convertible subordinated debentures, the
8 3/4% Notes and certain other notes and mortgages during the fourth quarter of
1997 with the proceeds from the separation of PCA. The decrease in depreciation
and amortization expense of approximately $4,000,000 as compared to the same
period in 1997 was affected by the following: approximately $4,800,000 decrease
related to the operations of PCA and approximately $2,500,000 decrease due to
the dispositions of, or lease terminations on, certain nursing facilities;
partially offset by an increase of approximately $3,300,000 primarily due to
capital additions and improvements, as well as acquisitions.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," ("SOP 98-1") which is required to be adopted in
financial statements for periods beginning after December 15, 1998. SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use and provides guidance for determining whether computer
software is for internal use. The Company will adopt SOP 98-1 in its
consolidated financial statements by the first quarter of 1999. The Company has
not completed its review of SOP 98-1 but does not expect there to be a material
effect on its consolidated financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities," ("SOP 98-5")
which is required to be adopted in financial statements for periods beginning
after December 15, 1998. SOP 98-5 provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. The Company will
adopt SOP 98-5 in its consolidated financial statements by the first quarter of
1999. The Company has not completed its review of SOP 98-5 but does not expect
there to be a material effect on its consolidated financial position or results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had approximately $67,100,000 in cash and cash
equivalents and net working capital of approximately $257,600,000. The Company
anticipates that approximately $31,100,000 of its existing cash at March 31,
1998, while not legally restricted, will be utilized to fund certain workers'
compensation and general liability claims, and the Company does not expect to
use such cash for other purposes. The Company had approximately $303,600,000 of
unused commitments under its Revolver/Letter of Credit Facility as of March 31,
1998.
Net cash provided by operating activities for the first quarter of 1998 was
approximately $29,300,000. Net cash used for investing activities and net cash
provided by financing activities were approximately $89,100,000 and $21,700,000,
respectively, for the first quarter of 1998. The Company primarily used cash
generated from operations, net borrowings
10
12
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
under its Revolver/Letter of Credit Facility, and cash on hand to fund capital
expenditures totaling approximately $31,100,000, to fund acquisitions of
approximately $53,700,000 and to repay approximately $6,300,000 of long-term
obligations.
In June 1996, the Company announced that its Board of Directors had
authorized a stock repurchase program whereby the Company may repurchase, from
time to time on the open market, up to a total of 10,000,000 shares of its
outstanding Common Stock. In December 1997, the Company repurchased 4,000,000
shares of its Common Stock through an accelerated stock repurchase transaction
at a cost of approximately $56,100,000 (approximately $5,700,000 of which was
included in other accrued liabilities at March 31, 1998). In April 1998, through
a similar transaction, the Company repurchased 3,000,000 shares at a cost of
approximately $43,600,000. The repurchases were financed primarily through
borrowings under the Company's Revolver/Letter of Credit Facility. Since June
1996, the Company has repurchased approximately 9,300,000 shares of its
outstanding Common Stock under the stock repurchase program.
The Company believes that its existing cash and cash equivalents, working
capital from operations, borrowings under its banking arrangements, issuance of
certain debt securities and refinancings of certain existing indebtedness will
be adequate to repay its debts due within one year of approximately $33,200,000,
to make normal recurring capital additions and improvements of approximately
$102,000,000, to make selective acquisitions, including the purchase of
previously leased facilities, to construct new facilities, and to meet working
capital requirements for the twelve months ending March 31, 1999.
As of March 31, 1998, the Company had total indebtedness of approximately
$734,300,000 and total stockholders' equity of approximately $876,400,000. The
ability of the Company to satisfy its long-term obligations will be dependent
upon its future performance, which will be subject to prevailing economic
conditions and to financial, business and other factors beyond the Company's
control, such as federal and state healthcare reform. In addition, healthcare
service providers, such as the Company, operate in an industry that is currently
subject to significant changes from business combinations, new strategic
alliances, legislative reform, increased regulatory oversight, aggressive
marketing practices by competitors and market pressures. In this environment,
the Company is frequently contacted by, and otherwise engages in discussions
with, other healthcare companies and financial advisors regarding possible
strategic alliances, joint ventures, business combinations and other financial
alternatives. The terms of substantially all of the Company's debt instruments
require the Company to repay or refinance indebtedness under such debt
instruments in the event of a change of control. There can be no assurance that
the Company will have the financial resources to repay such indebtedness upon a
change of control. See "-- General."
11
13
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
MARCH 31, 1998
(UNAUDITED)
ITEM 1. LEGAL PROCEEDINGS
On March 4, 1998, a jury in California returned a verdict of $95,100,000
against a nursing facility operated by a subsidiary of the Company. The verdict,
which was based on findings of fraud as well as negligence and abuse, consisted
of $365,580 in compensatory damages and $94,700,000 in punitive damages. Since
punitive damages are generally not covered by insurance, a final judgement of
this size could have a material adverse effect on the Company's consolidated
results of operations and financial position. However, it is the Company's
belief, based on discussions with its trial and appellate counsel, that many of
the jury's findings are not supportable from the evidence presented in the case,
and that the judgement entered will be significantly reduced by the trial court
or on appeal. The trial judge has set a post-trial hearing for June 3, 1998. The
Company intends to aggressively pursue all post-trial and appellate remedies
available to it.
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. The Company does not
believe that the ultimate resolution of these matters will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
ITEM 6(a). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1* Executive Stock Option Agreement, effective as of February 19, 1998, between
Beverly Enterprises, Inc. and David R. Banks
27.1 Financial Data Schedule for the three months ended March 31, 1998
27.2 Restated Financial Data Schedule for the three months ended March 31, 1997
* Exhibit 10.1 is a management contract, compensatory plan,
contract or arrangement in which a named executive officer
participates.
ITEM 6(b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 1998.
12
14
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, 1998 By: /s/ PAMELA H. DANIELS
---------------------------
Pamela H. Daniels
Vice President, Controller
and Chief Accounting Officer
13
15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1* Executive Stock Option Agreement, effective as of February 19, 1998, between
Beverly Enterprises, Inc. and David R. Banks
27.1 Financial Data Schedule for the three months ended March 31, 1998
27.2 Restated Financial Data Schedule for the three months ended March 31, 1997
* Exhibit 10.1 is a management contract, compensatory plan,
contract or arrangement in which a named executive officer
participates.