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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, 1999
[ ] 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, 1999 -- 102,493,655
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BEVERLY ENTERPRISES, INC.
FORM 10-Q
MARCH 31, 1999
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........................................................ 9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 15
Item 6. Exhibits and Reports on Form 8-K............................................................. 16
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PART I
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 19,114 $ 17,278
Accounts receivable - patient, less allowance for doubtful accounts:
1999--$24,266; 1998--$21,764 .............................................. 474,967 463,822
Accounts receivable - nonpatient, less allowance for doubtful accounts:
1999--$474; 1998--$441 .................................................... 22,386 85,585
Notes receivable ............................................................ 20,983 21,075
Operating supplies .......................................................... 32,167 32,133
Deferred income taxes ....................................................... 54,191 56,512
Prepaid expenses and other .................................................. 20,190 19,565
------------ -----------
Total current assets ..................................................... 643,998 695,970
Property and equipment, net of accumulated depreciation and amortization:
1999--$696,783; 1998--$694,322 ............................................. 1,123,626 1,120,315
Other assets:
Notes receivable, less allowance for doubtful notes:
1999--$2,902; 1998--$2,921 ............................................... 11,768 21,263
Designated funds ............................................................ 3,761 4,029
Goodwill, net ............................................................... 225,985 217,066
Other, net .................................................................. 101,304 101,868
------------ -----------
Total other assets ....................................................... 342,818 344,226
------------ -----------
$ 2,110,442 $ 2,160,511
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ $ 95,445 $ 85,533
Accrued wages and related liabilities ....................................... 95,596 96,092
Accrued interest ............................................................ 9,776 12,783
Other accrued liabilities ................................................... 116,334 134,975
Current portion of long-term obligations .................................... 52,411 27,773
------------ -----------
Total current liabilities ................................................ 369,562 357,156
Long-term obligations .......................................................... 810,461 878,270
Deferred income taxes payable .................................................. 115,893 114,962
Other liabilities and deferred items ........................................... 32,940 33,917
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000 .............................. -- --
Common stock, shares issued: 1999--110,380,455; 1998--110,275,714 .......... 11,038 11,028
Additional paid-in capital .................................................. 876,293 876,383
Retained earnings (deficit) ................................................. 1,125 (4,782)
Accumulated other comprehensive income ...................................... 313 760
Treasury stock, at cost: 7,886,800 shares .................................. (107,183) (107,183)
------------ -----------
Total stockholders' equity ............................................... 781,586 776,206
------------ -----------
$ 2,110,442 $ 2,160,511
============ ===========
NOTE: The balance sheet at December 31, 1998 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.
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BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998
--------- ---------
Net operating revenues .................................................... $ 633,601 $ 694,400
Interest income ........................................................... 1,428 3,027
--------- ---------
Total revenues ..................................................... 635,029 697,427
Costs and expenses:
Operating and administrative:
Wages and related .................................................... 395,669 419,087
Other ................................................................ 183,867 210,180
Interest ................................................................ 16,983 15,488
Depreciation and amortization ........................................... 24,242 23,118
Year 2000 remediation ................................................... 2,986 455
Investigation costs ..................................................... 1,905 --
--------- ---------
Total costs and expenses ............................................ 625,652 668,328
--------- ---------
Income before provision for income taxes and cumulative effect of change
in accounting for start-up costs ........................................ 9,377 29,099
Provision for income taxes ................................................ 3,470 11,058
--------- ---------
Income before cumulative effect of change in accounting for start-up
costs.................................................................... 5,907 18,041
Cumulative effect of change in accounting for start-up costs, net of income
tax benefit of $2,811 ................................................... -- (4,415)
--------- ---------
Net income ................................................................ $ 5,907 $ 13,626
========= =========
Income (loss) per share of common stock:
Basic:
Before cumulative effect of change in accounting for start-up
costs............................................................. $ 0.06 $ 0.17
Cumulative effect of change in accounting for start-up costs ....... -- (0.04)
--------- ---------
Net income ......................................................... $ 0.06 $ 0.13
========= =========
Shares used to compute per share amounts ........................... 102,480 106,006
========= =========
Diluted:
Before cumulative effect of change in accounting for start-up
costs............................................................. $ 0.06 $ 0.17
Cumulative effect of change in accounting for start-up costs ....... -- (0.04)
--------- ---------
Net income ......................................................... $ 0.06 $ 0.13
========= =========
Shares used to compute per share amounts ........................... 102,693 107,479
========= =========
See accompanying notes.
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BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
1999 1998
--------- ---------
Cash flows from operating activities:
Net income .......................................................................... $ 5,907 $ 13,626
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................................... 24,242 23,118
Provision for reserves on patient, notes and other receivables, net .............. 5,155 5,240
Amortization of deferred financing costs ......................................... 549 613
Cumulative effect of change in accounting for start-up costs ..................... -- 7,226
Losses (gains) on dispositions of facilities and other assets, net ............... 1,957 (2,158)
Deferred taxes ................................................................... 2,241 5,919
Net increase (decrease) in insurance related accounts ............................ (831) 6,067
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient ................................................ (15,516) (46,970)
Operating supplies ........................................................... 32 (362)
Prepaid expenses and other receivables ....................................... (1,442) 1,974
Accounts payable and other accrued expenses .................................. (1,647) 16,953
Income taxes payable ......................................................... 24,786 (104)
Other, net ................................................................... (1,078) (1,877)
--------- ---------
Total adjustments ......................................................... 38,448 15,639
--------- ---------
Net cash provided by operating activities ................................. 44,355 29,265
Cash flows from investing activities:
Proceeds from dispositions of facilities and other assets ........................... 38,835 2,279
Payments for acquisitions, net of cash acquired ..................................... (3,521) (53,715)
Capital expenditures ................................................................ (25,173) (31,132)
Collections on notes receivable ..................................................... 8,905 448
Other, net .......................................................................... (10,036) (6,963)
--------- ---------
Net cash provided by (used for) investing activities ...................... 9,010 (89,083)
Cash flows from financing activities:
Revolver borrowings ................................................................. 403,000 164,000
Repayments of Revolver borrowings ................................................... (498,000) (139,000)
Proceeds from issuance of long-term obligations ..................................... 65,000 --
Repayments of long-term obligations ................................................. (21,449) (6,268)
Proceeds from exercise of stock options ............................................. 129 2,189
Deferred financing costs ............................................................ (270) (19)
Proceeds from designated funds, net ................................................. 61 801
--------- ---------
Net cash provided by (used for) financing activities ...................... (51,529) 21,703
--------- ---------
Net increase (decrease) in cash and cash equivalents ....................................... 1,836 (38,115)
Cash and cash equivalents at beginning of period ........................................... 17,278 105,230
--------- ---------
Cash and cash equivalents at end of period ................................................. $ 19,114 $ 67,115
========= =========
Supplemental schedule of cash flow information:
Cash paid (received) during the period for:
Interest, net of amounts capitalized ................................................ $ 19,441 $ 17,866
Income tax payments (refunds), net .................................................. (23,557) 2,432
See accompanying notes.
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BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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,
1999 and 1998 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 1998 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The results of
operations for the three months ended March 31, 1999 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.
The following table sets forth the computation of basic and diluted earnings
per share for the three months ended March 31 (in thousands):
1999 1998
-------- --------
NUMERATOR:
Numerator for basic and diluted income per share from
continuing operations .................................... $ 5,907 $ 18,041
======== ========
DENOMINATOR:
Denominator for basic income per share - weighted average
shares ................................................... 102,480 106,006
Effect of dilutive securities:
Employee stock options ................................... 213 1,473
-------- --------
Denominator for diluted income per share - adjusted weighted
average shares and assumed conversions ................... 102,693 107,479
======== ========
Basic income per share ....................................... $ 0.06 $ 0.17
======== ========
Diluted income per share ..................................... $ 0.06 $ 0.17
======== ========
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BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
Comprehensive income (loss) includes net income (loss), as well as charges
and credits directly to stockholders' equity which are excluded from net income
(loss). The components of comprehensive income, net of income taxes, consist of
the following for the three months ended March 31 (in thousands):
1999 1998
------- -------
Net income .................................................... $ 5,907 $13,626
Unrealized gains (losses) on securities, net of income taxes... (447) 446
------- -------
Comprehensive income .......................................... $ 5,460 $14,072
======= =======
Accumulated other comprehensive income, net of income taxes, consists of
unrealized gains on securities of $313,000 and $760,000 at March 31, 1999 and
December 31, 1998, respectively.
Results of operations for the first quarter of 1998 have been restated for a
cumulative effect adjustment of $4,415,000, net of income taxes, or $0.04 per
share, resulting from the adoption of Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities," which requires costs of start-up activities
and organization costs to be expensed as incurred.
Certain prior year amounts have been reclassified to conform with the 1999
presentation.
(ii) The provisions for taxes on income before the cumulative effect of a
change in accounting for start-up costs for the three months ended March 31,
1999 and 1998 were based on estimated annual effective tax rates of 37% and 38%,
respectively. The Company's estimated annual effective tax rates for 1999 and
1998 were different than the federal statutory rate primarily due to the impact
of state income taxes, amortization of nondeductible goodwill and the benefit of
certain tax credits. The provisions for taxes on income before the cumulative
effect of a change in accounting for start-up costs consist of the following for
the three months ended March 31 (in thousands):
1999 1998
------- -------
Federal:
Current..................................................... $ 792 $ 4,061
Deferred ................................................... 2,025 4,948
State:
Current .................................................... 437 1,078
Deferred ................................................... 216 971
------- -------
$ 3,470 $11,058
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BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
(iii) During the three months ended March 31, 1999, the Company purchased
three outpatient clinics, two home care centers, two nursing facilities (284
beds) and certain other assets for cash of approximately $3,500,000, acquired
debt of approximately $8,700,000 and closing and other costs of approximately
$1,600,000. The acquisitions of such facilities and other assets were accounted
for as purchases. Also during such period, the Company sold or terminated the
leases on seven nursing facilities (719 beds), one assisted living center (10
units) and certain other assets for cash proceeds of approximately $3,100,000.
The Company did not operate one of these nursing facilities (86 beds) which was
leased to another nursing home operator in a prior year transaction. The Company
recognized net pre-tax losses, which were included in net operating revenues
during the first quarter of 1999, of approximately $2,000,000 as a result of
these dispositions. The operations of these facilities and certain other assets
were immaterial to the Company's consolidated financial position and results of
operations.
(iv) In January 1999, the Company entered into a $65,000,000 promissory note
at an annual interest rate of 6.50%, payable in three annual installments
beginning in January 2000 and maturing in January 2002. The proceeds from this
promissory note were used to pay down Revolver borrowings and is secured by a
surety bond.
(v) 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. At a
post-trial hearing on June 3, 1998, the trial judge reduced the compensatory
damages to $125,000 and reduced the punitive damages to $3,000,000. The Company
believes that these reduced damages are excessive and has appealed on this
basis. The plaintiff has cross-appealed. The Company intends to aggressively
pursue all appellate remedies available.
The Company is the subject of a federal government investigation relating to
the allocation to the Medicare program of certain nursing labor costs in its
skilled nursing facilities from 1990 to 1997. The federal government has not
disclosed the origin of this investigation. The investigation is being conducted
by the Office of Inspector General of the Department of Health and Human
Services and by the Department of Justice. The Company has received subpoenas
and has provided substantial information voluntarily. The Company's independent
auditors, Ernst & Young LLP, also received a subpoena relating to its evaluation
of the Company's internal controls. In addition, the Company has been notified
that a federal grand jury in San Francisco is currently investigating practices
which are the subject of the above civil investigation. To date, five current
employees of the Company have appeared as witnesses before the grand jury. The
Company has cooperated with the United States Attorney's office in its
investigation. In addition, the Company's current Medicare fiscal intermediary,
Blue Cross of California, is examining cost reports of the Company's facilities
with respect to the areas that are the focus of the government investigation.
Skilled nursing facilities are required to allocate nursing labor costs to
Medicare-certified units on an equitable basis. The Company has relied on a
variety of internal and external processes and practices that are designed to
ensure compliance with this requirement. The Company believes that its cost
reporting policies and procedures are consistent with government regulations and
reflect industry norms for determination of these cost allocations. While it is
not possible to predict the outcome of this investigation, a determination that
the Company has violated these regulations could have a material adverse effect
on the Company's consolidated financial position and results of operations,
which could include the payment of fines and penalties and exclusion from
participation in the Medicare and Medicaid programs.
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BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
On October 2, 1998, a purported class action lawsuit was filed in the United
States District Court for the Eastern District of Arkansas by Jack Kushner
against the Company and certain of its officers. The class action lawsuit
alleges, among other things, that the Company and certain of its officers
committed violations of the federal securities laws by materially inflating the
Company's revenues and earnings through practices that are the subject of the
federal government investigation (see above) and disseminating false and
misleading statements concerning compliance with Medicare regulations. The class
action lawsuit seeks damages, costs and expenses. The Company intends to
aggressively pursue all defenses 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 such other matters will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
(vi) In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131") which provides revised
disclosure guidelines for segments of a company based on a management approach
to defining operating segments.
The following table summarizes certain information for each of the
Company's operating segments (in thousands):
BEVERLY BEVERLY
BEVERLY CARE SPECIALTY
HEALTHCARE ALLIANCE HOSPITALS ALL OTHER (1) TOTALS
---------- ---------- ----------- ------------- ----------
Three months ended March 31, 1999
Revenues from external customers ..... $ 568,193 $ 64,571 $ -- $ 837 $ 633,601
Intercompany revenues ................ -- 35,977 -- 2,677 38,654
Interest income ...................... 71 15 -- 1,342 1,428
Interest expense ..................... 6,612 107 -- 10,264 16,983
Depreciation and amortization ........ 19,741 3,051 -- 1,450 24,242
Pre-tax income (loss) ................ 30,193 2,268 -- (23,084) 9,377
Total assets ......................... 1,572,924 323,946 -- 213,572 2,110,442
Capital expenditures ................. 18,646 3,565 -- 2,962 25,173
Three months ended March 31, 1998
Revenues from external customers ..... $ 630,153 $ 33,649 $ 29,231 $ 1,367 $ 694,400
Intercompany revenues ................ -- 3,579 125 2,526 6,230
Interest income ...................... 82 -- -- 2,945 3,027
Interest expense ..................... 7,560 3 48 7,877 15,488
Depreciation and amortization ........ 19,255 1,650 769 1,444 23,118
Pre-tax income (loss) ................ 39,078 2,541 113 (12,633) 29,099
Total assets ......................... 1,525,705 190,178 55,702 360,232 2,131,817
Capital expenditures ................. 20,573 2,115 1,777 6,667 31,132
- ---------------------
(1) All Other consists of the operations of the Company's corporate
headquarters and related overhead.
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BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(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, ability to finance growth opportunities, response
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
regulations 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, including the outcome of the federal government investigation (see
"Part II, Item 1. Legal Proceedings"); the ability to attract and retain
qualified personnel; the availability and terms of capital to fund acquisitions
and capital improvements; the competitive environment in which the Company
operates; demographic changes; the ability of the Company and its significant
vendors, suppliers and payors to timely locate and correct all relevant computer
codes and identify and remediate date-sensitive embedded chips 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.
YEAR 2000 REMEDIATION
GENERAL
Computer programs and embedded chips that utilize a two digit year in their
processing logic may interpret the year "00" as the year 1900 rather than the
year 2000. This could result in 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. Through the year 2000 project (the "Y2K Project"), the Company is
addressing its own processing logic issues, as well as those of third parties,
which may impact the Company.
In 1996, the Company began a major systems initiative to upgrade or replace
all of its integrated financial application software to facilitate the adoption
of a new standard chart of accounts. As part of that major initiative, the
Company took the necessary steps to upgrade or replace the applications with
year 2000 compliant releases of the software whenever possible. For those
purchased software applications where the year 2000 release was not available at
that time, the upgrades to the compliant releases are being addressed as part of
the Y2K Project. The Company has not postponed any of its other significant
information technology projects as a result of the Y2K Project.
Y2K PROJECT
The Company's Y2K Project is divided into four major components: technology
infrastructure; applications software; third party vendors, suppliers and major
customers; and business unit operating equipment. The phases of the Y2K Project
that are common to all components include: inventory of date-dependent hardware,
software, and operating equipment; assessment of identified items to determine
current year 2000 compliance status; repair or replacement of material
non-compliant items; testing of material items for compliance; and development
of contingency plans for each operating unit.
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BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
The technology infrastructure component and the applications software
component, together, comprise all of the Company's hardware and systems
software, as well as all electronic interfaces with external parties. The
testing phase for these components is divided into two distinct types of
testing, each with its own timetable. The initial phase of year 2000 testing
consists of remediating, upgrading, or replacing hardware and software. Upon
successful completion of this phase of testing, the application is moved back
into the production environment. At that time, the second phase of year 2000
testing is done in a parallel operating environment in which the applications
are tested using year 2000 dates. The remediation, upgrade, replacement, and
initial testing of all mission critical mainframe hardware and software was
substantially complete as of March 31, 1999. Trans-century compliance testing
began during the first quarter of 1999 and is expected to continue throughout
1999.
The third party vendors, suppliers and major customers component of the Y2K
Project includes the process of identifying and prioritizing critical vendors,
suppliers and customers, and communicating with them about their plans and
progress in addressing the year 2000 problem. The Company has completed the
inventory phase of this component of the Y2K Project and has initiated formal
communications with all of the vendors, suppliers, and customers identified as
critical to the Company's operations. During the fourth quarter of 1998,
follow-up inquiries were initiated with any critical third parties that did not
respond to the first communication, and detailed evaluations of the responses
for the most critical third parties were initiated. Based on the data obtained
and the detailed evaluations performed, contingency planning began in the
fourth quarter of 1998 and will continue throughout 1999. The Company has no
means of ensuring that third parties will be year 2000 ready. The inability of
third parties to complete their year 2000 resolution process in a timely manner
could materially impact the Company. The Company cannot determine the effect of
non-compliance by third parties. Due to these and other uncertainties, as part
of the Company's contingency planning process, the Company is taking
appropriate measures to ensure that an uninterrupted supply of critical
products is available into the new century, including additional monitoring of
the Company's critical third party vendors and suppliers, replacing vendors and
suppliers where necessary and increasing inventories when possible.
For the business unit operating equipment component of the Y2K Project, the
inventories of each individual operating unit were completed during the third
quarter of 1998, and the data has been compiled and summarized by major
operating category, including: medical devices and equipment; environmental
systems; security systems; telecommunication and office equipment. The Company
is utilizing external resources to test critical equipment impacted by the year
2000 problem, retrofit or replace equipment where necessary, and certify year
2000 compliance of all material date-sensitive equipment. The Company estimates
that all such remediation and testing will be completed by the third quarter of
1999.
COSTS
The Company has, and will continue to, utilize both internal and external
resources to reprogram or replace, test, and implement the software and
operating equipment for year 2000 modifications. The total cost of the Company's
Y2K Project is estimated at approximately $41,100,000 and is being funded
through operating cash flows. The total amount expended on the Y2K Project
through March 31, 1999 was approximately $13,900,000 ($12,700,000 expensed and
$1,200,000 capitalized for new systems and equipment), related to the activities
completed to date for all components and phases of the Y2K Project. Of the total
remaining Y2K Project costs, $13,200,000 is attributable to the purchase of new
hardware, software and operating equipment, which will be capitalized. The
remaining $14,000,000 relates to remediation of hardware, software, and
operating equipment, and will be expensed as incurred.
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BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
RISKS
The failure to correct a material year 2000 problem could result in
significant disruptions in, or failures of, normal business activities. Due to
the general uncertainty inherent in the year 2000 problem, due in part to the
uncertainty of the year 2000 readiness of third party vendors, suppliers and
customers, the Company is unable to determine at this time if it will be
impacted by year 2000 disruptions or failures, or whether the consequences of
such year 2000 disruptions or failures will have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
The Company believes that, with the completion of all phases of each component
of the Y2K Project as scheduled, the possibility of significant disruptions of
normal operations should be significantly reduced. However, in the event that
the Company fails to complete the remaining phases of any component of the Y2K
Project, a possible worst case scenario might be that the Company would be
unable to provide uninterrupted service to its patients, invoice customers, or
collect payments. In addition, due to the Company's dependence on Medicare and
Medicaid revenue sources, disruptions in the processing and payment of Medicare
or Medicaid claims could also materially adversely affect the Company. The
General Accounting Office has reported that the Health Care Financing
Administration, which runs Medicare, is behind schedule in taking steps to deal
with the year 2000 issue, and that it is highly unlikely that all of the
Medicare systems will be compliant in time to ensure the delivery of
uninterrupted benefits and services into the year 2000. The Company does not
know at this time whether there will in fact be a disruption of Medicare or
Medicaid reimbursements and is, therefore, unable to determine the impact on the
Company, its operations or cash flows. In addition, the Company could be subject
to litigation for equipment shutdown or failure to properly date business
records. The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
The Company is in the process of developing contingency plans for certain
critical applications and will continue development of such plans for all other
applications throughout 1999. These contingency plans involve, among other
actions, manual workarounds, increasing inventories, and staffing adjustments.
The dates on which the Company believes the Y2K Project will be completed are
based on management's best estimates, which were derived utilizing assumptions
of future events, including the continued availability of certain resources,
third party modification plans, and other factors. However, there can be no
assurance that these estimates will be achieved, or that there will not be a
delay in, or increased costs associated with, the implementation of the Y2K
Project. Specific factors that could cause differences between the estimates and
actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer codes, timely responses to and corrections by third parties, and
similar uncertainties.
OPERATING RESULTS
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
RESULTS OF OPERATIONS
Net income was $5,907,000 for the first quarter of 1999, as compared to net
income of $13,626,000 for the same period in 1998. Results of operations for the
first quarter of 1998 have been restated for a cumulative effect adjustment of
$4,415,000, net of income taxes, resulting from the adoption of Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," which requires
costs of start-up activities and organization costs to be expensed as incurred.
Income before provision for income taxes and cumulative effect of change in
accounting for start-up costs was $9,377,000 for the first quarter of 1999, as
compared to $29,099,000 for the same period in 1998. The Company had an
estimated annual effective tax rate of 37% and 38% for the quarters ended March
31, 1999 and 1998, respectively. The Company's estimated annual effective tax
rates for 1999 and 1998 were different than the federal statutory rate primarily
due to the impact of state income taxes, amortization of nondeductible goodwill
and the benefit of certain tax credits.
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13
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NET OPERATING REVENUES
The Company reported net operating revenues of $633,601,000 during the first
quarter of 1999 compared to $694,400,000 for the same period in 1998.
Approximately 90% and 91% of the Company's total net operating revenues for the
quarters ended March 31, 1999 and 1998, respectively, were derived from
services provided by the Company's Beverly Healthcare segment. The decrease in
net operating revenues of approximately $60,800,000 for the first quarter of
1999, as compared to the same period in 1998, consists of the following: a
decrease of approximately $60,000,000 due to the disposition of, or lease
terminations on, seven nursing facilities and one assisted living center in
1999 and 26 nursing facilities and American Transitional Hospitals, Inc.
("ATH"), which operated as Beverly Specialty Hospitals, in 1998; a decrease of
approximately $47,700,000 due to facilities which the Company operated during
each of the quarters ended March 31, 1999 and 1998 ("same facility operations");
partially offset by an increase of approximately $46,900,000 due to the
acquisitions of nursing facilities and outpatient and home care businesses
during 1999 and 1998.
The decrease in net operating revenues of approximately $60,000,000 for the
first quarter of 1999, as compared to the same period in 1998, resulting from
dispositions and lease terminations that occurred during the three months ended
March 31, 1999 and the year ended December 31, 1998 are described below. During
the three months ended March 31, 1999, the Company sold or terminated the leases
on seven nursing facilities (719 beds), one assisted living center (10 units)
and certain other assets for cash proceeds of approximately $3,100,000. The
Company did not operate one of these nursing facilities (86 beds) which was
leased to another nursing home operator in a prior year transaction. The Company
recognized net pre-tax losses, which were included in net operating revenues
during the three months ended March 31, 1999, of approximately $2,000,000 as a
result of these dispositions. During the year ended December 31, 1998, the
Company sold or terminated the leases on 26 nursing facilities (3,203 beds) and
certain other assets for cash proceeds of approximately $52,500,000, notes
receivable of approximately $21,300,000, assumed debt of approximately
$4,600,000 and closing and other costs of approximately $2,300,000. The Company
did not operate seven of these nursing facilities (893 beds) which were leased
to other nursing home operators in prior year transactions. The operations of
these facilities and certain other assets were immaterial to the Company's
consolidated financial position and results of operations.
In June 1998, the Company completed the sale of its ATH subsidiary to Select
Medical Corporation for cash proceeds of approximately $65,300,000 and assumed
debt of approximately $2,400,000. Prior to the sale, ATH operated 15
transitional hospitals (743 beds) in eight states which addressed the needs of
patients requiring intense therapy regimens, but not necessarily the breadth of
services provided within traditional acute care hospitals. The operations of ATH
were immaterial to the Company's consolidated financial position and results of
operations.
The decrease in net operating revenues of approximately $47,700,000 for same
facility operations for the first quarter of 1999, as compared to the same
period in 1998, was due to the following: approximately $60,000,000 decrease
due to the impact of the Medicare prospective payment system ("PPS") and other
provisions of the Balanced Budget Act of 1997, a decline in same facility
occupancy, and a shift in the Company's patient mix; partially offset by an
increase of approximately $12,300,000 due primarily to increases in Medicaid
and private room and board rates. The Company's same facility occupancy was
88.2% for the first quarter of 1999, as compared to 89.3% for the same period
in 1998. The Company's Medicare, private and Medicaid census for same facility
operations was 9%, 20% and 70%, respectively, for the first quarter of 1999, as
compared to 12%, 20% and 67%, respectively, for the same period in 1998.
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14
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
The increase in net operating revenues of approximately $46,900,000 for the
first quarter of 1999, as compared to the same period in 1998, resulting from
acquisitions which occurred during the three months ended March 31, 1999 and the
year ended December 31, 1998 are described below. During the three months ended
March 31, 1999, the Company purchased three outpatient clinics, two home care
centers, two nursing facilities (284 beds) and certain other assets for cash of
approximately $3,500,000, acquired debt of approximately $8,700,000 and closing
and other costs of approximately $1,600,000. During the year ended December 31,
1998, the Company purchased 111 outpatient clinics, 50 home care centers, eight
nursing facilities (823 beds), one assisted living center (48 units), two
previously leased nursing facilities (228 beds) and certain other assets for
cash of approximately $163,200,000, acquired debt of approximately $8,000,000
and closing and other costs of approximately $7,000,000. The acquisitions of
such facilities and other assets were accounted for as purchases. The operations
of these facilities and certain other assets were immaterial to the Company's
consolidated financial position and results of operations.
OPERATING AND ADMINISTRATIVE EXPENSES
The Company reported operating and administrative expenses of $579,536,000
during the first quarter of 1999 compared to $629,267,000 for the same period in
1998. The decrease of approximately $49,700,000 consists of the following: a
decrease of approximately $51,800,000 due to dispositions; a decrease of
approximately $43,100,000 due to same facility operations; partially offset by
an increase of approximately $45,200,000 due to acquisitions. (See above for a
discussion of dispositions and acquisitions).
The decrease in operating and administrative expenses of approximately
$43,100,000 for same facility operations for the first quarter of 1999, as
compared to the same period in 1998, was due primarily to a decline in the
Company's Medicare census, as well as a decline in same facility occupancy, and
consists of the following: approximately $17,400,000 due to a decrease in
contracted therapy expenses; approximately $17,100,000 due to a decrease in
wages and related expenses; and approximately $8,600,000 due primarily to
decreases in purchased ancillary products, nursing supplies and other variable
costs.
INTEREST EXPENSE, NET
Interest income decreased approximately $1,600,000 to $1,428,000 for the
first quarter of 1999, as compared to $3,027,000 for the same period in 1998
primarily due to a decrease in invested funds resulting from the sale of
securities in conjunction with a loss portfolio transfer transaction during the
fourth quarter of 1998. Interest expense increased approximately $1,500,000 to
$16,983,000 for the first quarter of 1999, as compared to $15,488,000 for the
same period in 1998 primarily due to an increase in net borrowings under the
Revolver/Letter of Credit Facility during the first quarter of 1999 as compared
to the same period in 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased approximately $1,100,000 to
$24,242,000 for the first quarter of 1999, as compared to $23,118,000 for the
same period in 1998. Such increase was affected by the following: approximately
$2,700,000 increase due to acquisitions, as well as capital additions and
improvements; partially offset by a decrease of approximately $1,600,000 due to
dispositions of, or lease terminations on, certain nursing facilities and ATH.
13
15
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had approximately $19,100,000 in cash and cash
equivalents and net working capital of approximately $274,400,000. The Company
anticipates that approximately $1,600,000 of its existing cash at March 31,
1999, while not legally restricted, will be utilized to fund certain workers'
compensation and general liability claims and expenses, and the Company does not
expect to use such cash for other purposes. The Company had approximately
$191,200,000 of unused commitments under its Revolver/Letter of Credit Facility
as of March 31, 1999.
Net cash provided by operating activities for the first quarter of 1999 was
approximately $44,300,000, an increase of approximately $15,100,000 from the
prior year primarily as a result of certain income tax refunds received during
the first quarter of 1999. Net cash provided by investing activities and net
cash used for financing activities were approximately $9,000,000 and
$51,500,000, respectively, for the first quarter of 1999. The Company received
net cash proceeds of approximately $65,000,000 from the issuance of long-term
obligations and approximately $38,800,000 from the dispositions of facilities
and other assets. Such net cash proceeds, along with cash generated from
operations and cash on hand, were used to repay approximately $95,000,000 of net
borrowings under its Revolver/Letter of Credit Facility, to fund capital
expenditures totaling approximately $25,200,000, to repay approximately
$21,400,000 of long-term obligations, and to fund acquisitions of approximately
$3,500,000.
In January 1999, the Company entered into a $65,000,000 promissory note at an
annual interest rate of 6.50%, payable in three annual installments beginning in
January 2000 and maturing in January 2002. The proceeds from this promissory
note were used to pay down Revolver borrowings and is secured by a surety bond.
The Company has a $125,000,000 financing arrangement available for the
construction of certain facilities. The Company will lease the facilities, under
operating leases with the creditor, upon completion of construction. The Company
will have the option to purchase these facilities at the end of the initial
lease terms at fair market value. Total construction advances under the
financing arrangement as of March 31, 1999 were approximately $73,500,000.
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 $52,400,000,
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, 2000.
Any settlement of the federal government investigation could result in a
substantial additional liability for the Company. The timing and amount of such
ultimate liability cannot, at this time, be reasonably estimated; however, it is
possible that the ultimate resolution of this investigation could have a
material adverse effect on the Company's consolidated financial position,
results of operations and cash flows. There can be no assurances that the
Company would have the financial resources available to pay any liabilities that
may arise from this investigation. See "Part II, Item 1. Legal Proceedings."
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PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
MARCH 31, 1999
(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. At a
post-trial hearing on June 3, 1998, the trial judge reduced the compensatory
damages to $125,000 and reduced the punitive damages to $3,000,000. The Company
believes that these reduced damages are excessive and has appealed on this
basis. The plaintiff has cross-appealed. The Company intends to aggressively
pursue all appellate remedies available.
The Company is the subject of a federal government investigation relating to
the allocation to the Medicare program of certain nursing labor costs in its
skilled nursing facilities from 1990 to 1997. The federal government has not
disclosed the origin of this investigation. The investigation is being conducted
by the Office of Inspector General of the Department of Health and Human
Services and by the Department of Justice. The Company has received subpoenas
and has provided substantial information voluntarily. The Company's independent
auditors, Ernst & Young LLP, also received a subpoena relating to its evaluation
of the Company's internal controls. In addition, the Company has been notified
that a federal grand jury in San Francisco is currently investigating practices
which are the subject of the above civil investigation. To date, five current
employees of the Company have appeared as witnesses before the grand jury. The
Company has cooperated with the United States Attorney's office in its
investigation. In addition, the Company's current Medicare fiscal intermediary,
Blue Cross of California, is examining cost reports of the Company's facilities
with respect to the areas that are the focus of the government investigation.
Skilled nursing facilities are required to allocate nursing labor costs to
Medicare-certified units on an equitable basis. The Company has relied on a
variety of internal and external processes and practices that are designed to
ensure compliance with this requirement. The Company believes that its cost
reporting policies and procedures are consistent with government regulations and
reflect industry norms for determination of these cost allocations. While it is
not possible to predict the outcome of this investigation, a determination that
the Company has violated these regulations could have a material adverse effect
on the Company's consolidated financial position and results of operations,
which could include the payment of fines and penalties and exclusion from
participation in the Medicare and Medicaid programs.
On October 2, 1998, a purported class action lawsuit was filed in the United
States District Court for the Eastern District of Arkansas by Jack Kushner
against the Company and certain of its officers. The class action lawsuit
alleges, among other things, that the Company and certain of its officers
committed violations of the federal securities laws by materially inflating the
Company's revenues and earnings through practices that are the subject of the
federal government investigation (see above) and disseminating false and
misleading statements concerning compliance with Medicare regulations. The class
action lawsuit seeks damages, costs and expenses. The Company intends to
aggressively pursue all defenses 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 such other matters will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
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17
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
ITEM 6(a). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule for the three months ended March 31, 1999
27.2 Restated Financial Data Schedule for the three months ended March 31, 1998
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, 1999.
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18
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 14, 1999 By: /s/ PAMELA H. DANIELS
------------------------------------
Pamela H. Daniels
Vice President, Controller
and Chief Accounting Officer
17