<PAGE> 1
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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 SEPTEMBER 30, 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 OCTOBER 30, 1998 -- 102,388,374
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<PAGE> 2
BEVERLY ENTERPRISES, INC.
FORM 10-Q
SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
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...................................................................... 21
Item 6. Exhibits and Reports on Form 8-K....................................................... 21
</TABLE>
1
<PAGE> 3
PART I
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED) (NOTE)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................................... $ 23,538 $ 105,230
Accounts receivable - patient, less allowance for doubtful accounts:
1998--$13,756; 1997--$17,879 .................................................. 435,483 384,833
Accounts receivable - nonpatient, less allowance for doubtful accounts:
1998--$379; 1997--$626 ........................................................ 32,119 14,400
Notes receivable ................................................................ 3,883 4,409
Operating supplies .............................................................. 29,397 30,439
Deferred income taxes ........................................................... 22,432 27,304
Prepaid expenses and other ...................................................... 52,968 59,703
----------- -----------
Total current assets ......................................................... 599,820 626,318
Property and equipment, net of accumulated depreciation and amortization:
1998--$683,014; 1997--$638,834 ................................................. 1,148,711 1,158,329
Other assets:
Notes receivable, less allowance for doubtful notes:
1998--$2,997; 1997--$2,917 ................................................... 22,834 20,564
Designated and restricted funds ................................................. 81,788 64,233
Goodwill, net ................................................................... 222,490 99,280
Other, net ...................................................................... 123,310 104,745
----------- -----------
Total other assets ........................................................... 450,422 288,822
----------- -----------
$ 2,198,953 $ 2,073,469
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 73,326 $ 75,791
Accrued wages and related liabilities ........................................... 124,544 123,146
Accrued interest ................................................................ 10,115 15,108
Other accrued liabilities ....................................................... 101,415 98,421
Current portion of long-term obligations ........................................ 26,552 31,551
----------- -----------
Total current liabilities .................................................... 335,952 344,017
Long-term obligations .............................................................. 818,775 686,941
Deferred income taxes payable ...................................................... 124,637 111,388
Other liabilities and deferred items ............................................... 51,043 68,618
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000 ................................. -- --
Common stock, shares issued: 1998--110,275,174; 1997--109,890,205 .............. 11,028 10,989
Additional paid-in capital ...................................................... 875,527 874,335
Retained earnings ............................................................... 87,160 26,239
Accumulated other comprehensive income .......................................... 2,014 1,332
Treasury stock, at cost: 1998--7,886,800 shares; 1997--4,000,000 shares ........ (107,183) (50,390)
----------- -----------
Total stockholders' equity ................................................... 868,546 862,505
----------- -----------
$ 2,198,953 $ 2,073,469
=========== ===========
</TABLE>
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
<PAGE> 4
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net operating revenues ......................... $ 697,937 $ 804,896 $ 2,107,752 $ 2,439,115
Interest income ................................ 2,698 3,030 7,958 9,756
----------- ----------- ----------- -----------
Total revenues .......................... 700,635 807,926 2,115,710 2,448,871
Costs and expenses:
Operating and administrative:
Wages and related ......................... 428,284 438,325 1,284,506 1,336,181
Other ..................................... 196,989 278,080 614,789 855,954
Interest .................................... 16,788 19,616 48,869 64,303
Depreciation and amortization ............... 23,711 26,683 69,947 81,489
Year 2000 remediation ....................... 2,041 -- 3,875 --
----------- ----------- ----------- -----------
Total costs and expenses ................ 667,813 762,704 2,021,986 2,337,927
----------- ----------- ----------- -----------
Income before provision for income taxes ....... 32,822 45,222 93,724 110,944
Provision for income taxes ..................... 11,487 18,089 32,803 44,378
----------- ----------- ----------- -----------
Net income ..................................... $ 21,335 $ 27,133 $ 60,921 $ 66,566
=========== =========== =========== ===========
Net income per share of common stock:
Basic:
Net income per share of common stock ...... $ .21 $ .26 $ .58 $ .67
=========== =========== =========== ===========
Shares used to compute net income per
share ................................... 103,019 103,508 104,225 99,816
=========== =========== =========== ===========
Diluted:
Net income per share of common stock ...... $ .21 $ .26 $ .58 $ .66
=========== =========== =========== ===========
Shares used to compute net income per
share ................................... 103,610 107,751 105,391 100,878
=========== =========== =========== ===========
</TABLE>
Operating results for the three-month and nine-month periods ended September
30, 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
<PAGE> 5
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................. $ 60,921 $ 66,566
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ...................................................... 69,947 81,489
Provision for reserves on patient, notes and other receivables, net ................ 13,626 25,882
Amortization of deferred financing costs ........................................... 1,784 2,029
Gains on dispositions of facilities and other assets, net .......................... (20,496) (20,339)
Deferred taxes ..................................................................... 12,877 19,007
Net decrease in insurance related accounts ......................................... (26,906) (27,208)
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient ................................................. (89,693) (32,702)
Operating supplies ............................................................ (437) (4,313)
Prepaid expenses and other receivables ........................................ 2,170 (4,179)
Accounts payable and other accrued expenses ................................... 14,584 (8,341)
Income taxes payable .......................................................... (2,108) (10,598)
Other, net .................................................................... (3,997) 207
----------- -----------
Total adjustments ........................................................... (28,649) 20,934
----------- -----------
Net cash provided by operating activities ................................... 32,272 87,500
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired .................................... (146,672) (50,818)
Capital expenditures ............................................................... (103,234) (105,436)
Proceeds from dispositions of facilities and other assets, net ..................... 67,740 146,041
Collections on notes receivable and REMIC investment ............................... 3,800 23,949
Other, net ......................................................................... (11,422) (7,599)
----------- -----------
Net cash provided by (used for) investing activities ........................ (189,788) 6,137
Cash flows from financing activities:
Revolver borrowings ................................................................ 944,000 1,139,000
Repayments of Revolver borrowings .................................................. (763,000) (1,211,000)
Proceeds from issuance of long-term obligations .................................... -- 15,862
Repayments of long-term obligations ................................................ (52,040) (53,046)
Purchase of common stock for treasury .............................................. (56,332) (14,736)
Proceeds from exercise of stock options ............................................ 3,090 3,354
Deferred financing costs ........................................................... (624) (923)
Proceeds from designated funds, net ................................................ 730 772
----------- -----------
Net cash provided by (used for) financing activities ........................ 75,824 (120,717)
----------- -----------
Net decrease in cash and cash equivalents ..................................................... (81,692) (27,080)
Cash and cash equivalents at beginning of period .............................................. 105,230 69,761
----------- -----------
Cash and cash equivalents at end of period .................................................... $ 23,538 $ 42,681
=========== ===========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) .................................................. $ 52,078 $ 66,563
Income taxes (net of refunds) .......................................................... 22,034 35,969
</TABLE>
See accompanying notes.
4
<PAGE> 6
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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-month and
nine-month periods ended September 30, 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-month and
nine-month periods ended September 30, 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 1997, the Company adopted 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 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-month and nine-month periods ended September 30
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic earnings per share - income
available to common stockholders ....................... $ 21,335 $ 27,133 $ 60,921 $ 66,566
Effect of dilutive securities:
7 5/8% convertible subordinated debentures,
net of income taxes .................................... -- 728 -- --
-------- -------- -------- --------
Numerator for diluted earnings per share - income
available to common stockholders after assumed
conversions ............................................ $ 21,335 $ 27,861 $ 60,921 $ 66,566
======== ======== ======== ========
DENOMINATOR:
Denominator for basic earnings per share - weighted
average shares ......................................... 103,019 103,508 104,225 99,816
Effect of dilutive securities:
Employee stock options ................................. 591 1,191 1,166 1,062
7 5/8% convertible subordinated debentures ............. -- 3,052 -- --
-------- -------- -------- --------
Dilutive potential common shares ......................... 591 4,243 1,166 1,062
-------- -------- -------- --------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions ........ 103,610 107,751 105,391 100,878
======== ======== ======== ========
Basic earnings per share ................................... $ 0.21 $ 0.26 $ 0.58 $ 0.67
======== ======== ======== ========
Diluted earnings per share ................................. $ 0.21 $ 0.26 $ 0.58 $ 0.66
======== ======== ======== ========
</TABLE>
5
<PAGE> 7
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 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-month and nine-month periods ended
September 30 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income ............................. $ 21,335 $ 27,133 $ 60,921 $ 66,566
Unrealized gains on securities ......... 505 -- 682 --
-------- -------- -------- --------
Comprehensive income ................... $ 21,840 $ 27,133 $ 61,603 $ 66,566
======== ======== ======== ========
</TABLE>
Accumulated other comprehensive income, net of income taxes, is made up of
unrealized gains on securities of $2,014,000 and $1,332,000 at September 30,
1998 and December 31, 1997, respectively.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants 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. 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 it to have a material effect on its
consolidated financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants 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. Initial application of SOP 98-5
will require the Company to report all previously capitalized start-up costs and
organization costs as a cumulative effect of a change in accounting principle.
The Company will adopt SOP 98-5 in its consolidated financial statements by the
first quarter of 1999 and does not expect the cumulative effect adjustment to
exceed $10,000,000.
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
6
<PAGE> 8
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
(ii) The provisions for income taxes for the three-month and nine-month
periods ended September 30, 1998 and 1997 were based on estimated annual
effective tax rates of 35% and 40%, respectively. The Company's estimated annual
effective tax rate decreased to 35% in 1998 primarily due to the impact of the
sale of American Transitional Hospitals, Inc. ("ATH") (see Note iii) and the
benefit of certain tax credits. In addition, the Company's estimated annual
effective tax rate in 1997 was different than the federal statutory rate
primarily due to the impact of state income taxes and amortization of
nondeductible goodwill. The provision for income taxes consists of the following
for the three-month and nine-month periods ended September 30 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Federal:
Current ....... $ 6,348 $ 4,405 $ 15,685 $ 19,712
Deferred ...... 3,036 11,678 10,861 18,593
State:
Current ....... 1,771 1,309 4,241 5,659
Deferred ...... 332 697 2,016 414
-------- -------- -------- --------
$ 11,487 $ 18,089 $ 32,803 $ 44,378
======== ======== ======== ========
</TABLE>
(iii) During the nine months ended September 30, 1998, the Company
purchased 103 outpatient clinics, 50 home health centers, eight nursing
facilities (823 beds), one assisted living center (48 units), one previously
leased nursing facility (120 beds) and certain other assets for cash of
approximately $146,700,000, acquired debt of approximately $8,000,000 and
closing and other costs of approximately $5,900,000. Also, during such period,
the Company sold or terminated the leases on 13 nursing facilities (1,417 beds)
and certain other assets for cash proceeds of approximately $13,100,000
(approximately $10,600,000 of which was included in accounts
receivable-nonpatient at September 30, 1998), assumed debt of approximately
$4,600,000, notes receivable of approximately $3,500,000 and closing and other
costs of approximately $2,300,000. The Company did not operate five of such
nursing facilities (644 beds) which were leased to other nursing home operators
in prior year transactions. The Company recognized net pre-tax gains during the
nine months ended September 30, 1998 of approximately $2,300,000 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.
In June 1998, the Company completed the sale of its ATH subsidiary to
Select Medical Corporation for cash of approximately $65,300,000 and assumed
debt of approximately $2,400,000. ATH operates 15 transitional hospitals (743
beds) in eight states which address the needs of patients requiring intense
therapy regimens, but not necessarily the breadth of services provided within
traditional acute care hospitals. The Company recognized a pre-tax gain of
approximately $18,200,000 during the nine months ended September 30, 1998 as a
result of this disposition. The operations of ATH were immaterial to the
Company's consolidated financial position and results of operations.
In October 1998, the Company completed the acquisition of M-K Medical, a
home medical equipment ("HME") supplier for cash of approximately $11,700,000
and closing and other costs of approximately $600,000. M-K Medical operations
consist of HME for resale and rental, as well as the sale of respiratory
supplies, in the states of California and Nevada. The operations of M-K Medical
are 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
7
<PAGE> 9
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
was paid during 1998). During 1998, the Company repurchased 3,000,000 shares of
its Common Stock, through a similar transaction, and approximately 900,000
shares on the open market at a total cost of approximately $51,100,000. The
repurchases were financed primarily through borrowings under the Company's
Revolver/Letter of Credit Facility. On June 2, 1998, the Company announced that
its Board of Directors had authorized an increase in its stock repurchase
program. The Company may repurchase from time to time on the open market, up to
an additional 10,000,000 shares of its outstanding Common Stock. Since June
1996, the Company has repurchased approximately 10,200,000 shares of its
outstanding Common Stock under the stock repurchase program. The Company is
subject to certain restrictions under its credit arrangements related to the
repurchase of its outstanding Common Stock.
(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 it intends to
aggressively pursue all appellate remedies available to it.
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 or its intended scope. 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. Two former employees of the Company have received
letters from the United States Attorney for the Northern District of California
indicating they are targets of the grand jury investigation. The United States
Attorney has also informally indicated to the Company that he will be seeking
testimony before the grand jury from current employees of the Company. To date,
the United States Attorney has identified two current employees of the Company
that he wishes to call as witnesses. The Company has cooperated with the United
States Attorney's office in his investigation. In addition, the Company has also
been notified by its current Medicare fiscal intermediary, Blue Cross of
California, that it intends to examine 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 inquiry, 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - General".
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.
8
<PAGE> 10
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 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, 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 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, including the
outcome of the federal government investigation (see below); 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 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.
FEDERAL GOVERNMENT INVESTIGATION
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 or its intended scope. 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. Two former employees of the Company have received
letters from the United States Attorney for the Northern District of California
indicating they are targets of the grand jury investigation. The United States
Attorney has also informally indicated to the Company that he will be seeking
testimony before the grand jury from current employees of the Company. To date,
the United States Attorney has identified two current employees of the Company
that he wishes to call as witnesses. The Company has cooperated with the United
States Attorney's office in his investigation. In addition, the Company has also
been notified by its current Medicare fiscal intermediary, Blue Cross of
California, that it intends to examine 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 inquiry, 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.
It is too early to predict the outcome or effect that the ongoing
investigation, and related media coverage, could have on the Company's
consolidated financial position or results of operations. If the Company were
found to be in violation of federal or state laws relating to Medicare, Medicaid
or similar programs, the Company could be subject to substantial monetary fines,
civil and criminal penalties and exclusion from participation in the Medicare
and Medicaid programs. Any such finding could have a material adverse effect on
the Company's consolidated financial position and results of operations.
9
<PAGE> 11
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
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 fee schedules established by the Health Care Financing
Administration ("HCFA") of the Department of Health and Human Services ("HHS");
(v) the phase in of a Medicare prospective payment system ("PPS") for skilled
nursing facilities effective July 1, 1998 (see below); 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. However, the Company currently estimates a decrease in its
1999 net operating revenues of approximately $75,000,000 related to the impact
of PPS and estimates a decrease in its 1999 net operating revenues related to
the impact of Part B therapy cost reductions, including the establishment of
beneficiary limits, not to exceed $30,000,000. However, future federal budget
legislation and federal and state regulatory changes may negatively impact the
Company.
PPS will be in effect for the Company on January 1, 1999 and will
significantly change the manner in which its skilled nursing facilities are paid
for inpatient services provided to Medicare beneficiaries. PPS will be phased in
over a three year period. In year one (1999 for the Company), Medicare PPS rates
will be based 75% on 1995 facility-specific Medicare costs (as adjusted for
inflation) and 25% will be federally-determined based upon the acuity level of
Medicare patients served in the Company's skilled nursing facilities. In year
two, Medicare PPS rates will be based 50% on 1995 facility-specific costs (as
adjusted for inflation) and 50% on the federally-determined acuity-adjusted
rate. In year three, Medicare PPS rates will be based 25% on 1995
facility-specific costs (as adjusted for inflation) and 75% on the
federally-determined acuity-adjusted rate. In year four, Medicare PPS rates will
be based entirely on the federally-determined acuity-adjusted rate.
The Company has analyzed its 1995 facility-specific costs, as well
as the current acuity level of Medicare patients in its skilled nursing
facilities. In addition, the Company has identified the significant changes in
its facility-specific costs since 1995 to determine the major reasons for such
changes. Based on such analyses, the Company is developing facility-specific
plans to deliver care to Medicare patients at a lower cost and in a manner
consistent with PPS requirements. The Company has not yet finalized its
facility-specific plans. However, such plans will result in material changes in
staffing in the Company's skilled nursing facilities, primarily in the area of
rehabilitation services. Such staffing changes will result in a fourth quarter
charge which is not expected to exceed $5,000,000. The Company is also analyzing
whether other cost reductions can be achieved in its skilled nursing facilities.
If the Company is unable to execute facility-specific plans to reduce the cost
of care to Medicare patients, PPS could have a material adverse effect on the
Company's consolidated financial position and results of operations.
PPS also imposes significant documentation requirements on skilled nursing
facilities to demonstrate the acuity level of Medicare patients and other
factors which will directly impact billing and payment rates to the Company, as
well as compliance with PPS rules and regulations. The Company is implementing
new and enhanced information systems to help ensure compliance with PPS.
Company-wide training on PPS, and other 1997 Act provisions, is also in
progress. As a result of these and other preparations, the Company believes it
will be positioned to operate effectively under PPS by January 1, 1999.
10
<PAGE> 12
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
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.
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 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 1994, HHS published a proposed rule aimed at clarifying the
existing Safe Harbors. As of October 1, 1998, these
11
<PAGE> 13
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
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, 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
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 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
12
<PAGE> 14
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
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 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 and 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
13
<PAGE> 15
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
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.
YEAR 2000 UPDATE
GENERAL
The Company's year 2000 Project (the "Y2K Project") is addressing the issue
of computer programs and embedded chips that utilize a two digit year in their
processing logic. For date-sensitive computer applications or embedded chip
technology, the year "00" may be interpreted 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.
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 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.
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. These two
internal information technology components are on schedule, and the Company
estimates that approximately 70% of the activities related to these components
had been completed at September 30, 1998. 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 is ongoing as hardware or software is
remediated, upgraded, or replaced; and upon successful completion of this phase
of testing, the application is moved back into the production environment. The
second phase of year 2000 testing will occur after all systems have been
remediated, upgraded, or replaced, and have been successfully tested and put
back into production. At that time, fully-integrated, end-to-end testing will be
done in a parallel operating environment in which the internal system clock will
be set forward in time to cross over the century time boundary. The remediation,
upgrade, replacement, and initial testing of mainframe hardware and software is
expected to be completed by December 31, 1998. The integrated, end-to-end
testing is scheduled to begin during the first quarter of 1999 and to continue
through the second quarter of 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 and is in the process of following up with
any that have not responded to the first communication. Detailed evaluations of
the responses for the most critical third-parties will be initiated during
14
<PAGE> 16
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
the fourth quarter of 1998. Based on the data obtained and the detailed
evaluations to be performed, contingency plans are scheduled to be developed
beginning in the fourth quarter of 1998 with completion by mid-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 fashion could materially impact the Company. The Company cannot
determine the effect of non-compliance by third-parties.
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. Although this
component is currently slightly behind schedule, the Company estimates that all
remediation and testing will be completed by mid-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 $40,000,000 and is being funded
through operating cash flows. The total amount expended on the Y2K Project
through September 30, 1998 was approximately $7,000,000 ($4,000,000 expensed and
$3,000,000 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, $13,000,000 is attributable to the purchase of new
hardware, software and operating equipment, which will be capitalized. The
remaining $20,000,000 relates to remediation of hardware, software, and
operating equipment, and will be expensed as incurred.
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, the Company could potentially 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 HCFA, 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 or its operations. 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 through mid-1999. These contingency plans involve, among other
actions, manual workarounds, increasing inventories, and adjusting staffing
strategies.
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.
15
<PAGE> 17
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
OPERATING RESULTS
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
Operating results for 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 $21,335,000 for
the third quarter of 1998, as compared to net income of $27,133,000 for the same
period in 1997. Income before provision for income taxes was $32,822,000 for the
third quarter of 1998, as compared to $45,222,000 for the same period in 1997.
The Company had an estimated annual effective tax rate of 35% and 40% in 1998
and 1997, respectively. The Company's estimated annual effective tax rate
decreased to 35% in 1998 primarily due to the impact of the sale of American
Transitional Hospitals, Inc. ("ATH") and the benefit of certain tax credits. In
addition, the Company's estimated annual effective tax rate in 1997 was
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 $107,000,000 and $91,100,000, respectively, for the third 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 $161,500,000 and $140,400,000, respectively, due to the
disposition of, or lease terminations on, 13 nursing facilities and ATH in 1998
and 68 nursing facilities and PCA in 1997; partially offset by increases in net
operating revenues and operating and administrative costs of approximately
$9,000,000 and $8,900,000, respectively, for facilities which the Company
operated during each of the quarters ended September 30, 1998 and 1997 ("same
facility operations"); and increases in net operating revenues and operating and
administrative costs of approximately $45,500,000 and $40,400,000, respectively,
due to the acquisitions of nursing facilities and outpatient, home health and
hospice businesses during 1998 and 1997.
The decreases in net operating revenues and operating and administrative
costs for 1998, as compared to the same period in 1997, resulting from
dispositions and lease terminations that occurred during the nine months ended
September 30, 1998 and the year ended December 31, 1997 are described below.
During the nine months ended September 30, 1998, the Company sold or terminated
the leases on 13 nursing facilities (1,417 beds) and certain other assets for
cash proceeds of approximately $13,100,000 (approximately $10,600,000 of which
was included in accounts receivable-nonpatient at September 30, 1998), assumed
debt of approximately $4,600,000, notes receivable of approximately $3,500,000
and closing and other costs of approximately $2,300,000. The Company did not
operate five of such nursing facilities (644 beds) which were leased to other
nursing home operators in prior year transactions. The Company recognized net
pre-tax gains during the nine months ended September 30, 1998 of approximately
$2,300,000 as a result of these dispositions. During the year ended December 31,
1997, the Company sold or terminated the leases on 68 nursing facilities (8,314
beds) and certain other assets for cash proceeds of approximately $146,800,000.
The Company recognized net pre-tax gains during the year ended December 31, 1997
of approximately $19,900,000 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.
In June 1998, the Company completed the sale of its ATH subsidiary to Select
Medical Corporation for cash of approximately $65,300,000 and assumed debt of
approximately $2,400,000. ATH operates 15 transitional hospitals (743 beds) in
eight states which address the needs of patients requiring intense therapy
regimens, but not necessarily the breadth of services provided within
traditional acute care hospitals. The Company recognized a pre-tax gain of
approximately $18,200,000 during the nine months ended September 30, 1998 as a
result of this disposition. The operations of ATH were immaterial to the
Company's consolidated financial position and results of operations.
16
<PAGE> 18
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
On December 3, 1997, the Company completed its merger of PCA with Capstone
Pharmacy Services, Inc. (the "Merger"). As a result of the Merger, the Company
received approximately $281,000,000 of cash as partial repayment for PCA's
intercompany debt, with a charge to the Company's retained earnings of
approximately $45,100,000 for the remaining intercompany balance which was not
repaid. At the date of the Merger, PCA had total assets of approximately
$489,200,000, total liabilities of approximately $368,000,000 and total
stockholder's equity of approximately $121,200,000. Total net operating revenues
for the year ended December 31, 1997 for PCA was approximately $564,200,000.
Such net operating revenues represent the operations of PCA prior to the Merger.
The increase in net operating revenues for same facility operations for the
third quarter of 1998, as compared to the same period in 1997, was due to the
following: approximately $21,400,000 due to increases in room and board rates
and approximately $4,300,000 due to various other items; partially offset by
approximately $13,100,000 decrease in ancillary revenues due to a decline in the
Company's Medicare census and, to a lesser extent, as a result of hiring
therapists on staff as opposed to contracting for their services and
approximately $3,600,000 due to a decrease in same facility occupancy to 89.4%
for the third quarter of 1998, as compared to 89.8% for the same period in 1997.
The increase in operating and administrative costs for same facility
operations for the third quarter of 1998, as compared to the same period in
1997, was due to the following: approximately $13,800,000 due to increased wages
and related expenses principally due to higher wages and greater benefits
required to attract and retain qualified personnel and the hiring of therapists
on staff as opposed to contracting for their services; approximately $1,000,000
due to increases in purchased ancillary products, nursing supplies and other
variable costs; and approximately $3,000,000 due to various other items. These
increases in operating and administrative costs were partially offset by
approximately $8,900,000 due primarily to a decrease in contracted therapy
expenses as a result of hiring therapists on staff as opposed to contracting for
their services.
The increases in net operating revenues and operating and administrative
costs for 1998, as compared to the same period in 1997, resulting from
acquisitions which occurred during the nine months ended September 30, 1998 and
the year ended December 31, 1997 are described below. During the nine months
ended September 30, 1998, the Company purchased 103 outpatient clinics, 50 home
health centers, eight nursing facilities (823 beds), one assisted living center
(48 units), one previously leased nursing facility (120 beds) and certain other
assets for cash of approximately $146,700,000, acquired debt of approximately
$8,000,000 and closing and other costs of approximately $5,900,000. During the
year ended December 31, 1997, the Company purchased six previously leased
nursing facilities (758 beds) and certain other assets including, among other
things, 14 institutional pharmacies and 40 outpatient therapy clinics, for cash
of approximately $60,800,000 and closing and other costs of approximately
$9,500,000. The operations of these facilities and certain other assets were
immaterial to the Company's consolidated financial position and results of
operations.
Interest expense decreased approximately $2,800,000 as compared to the same
period in 1997 primarily due to the conversion of the Company's 5 1/2%
convertible subordinated debentures to Common Stock 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 PCA transaction. The decrease
in depreciation and amortization expense of approximately $3,000,000 as compared
to the same period in 1997 was affected by the following: approximately
$5,900,000 decrease due to the dispositions of, or lease terminations on,
certain nursing facilities, ATH and PCA; partially offset by an increase of
approximately $2,900,000 primarily due to acquisitions, as well as capital
additions and improvements.
NINE MONTHS 1998 COMPARED TO NINE MONTHS 1997
Net income was $60,921,000 for the nine months ended September 30, 1998, as
compared to net income of $66,566,000 for the same period in 1997. Income before
provision for income taxes was $93,724,000 for the nine months ended September
30, 1998, as compared to $110,944,000 for the same period in 1997.
Net operating revenues and operating and administrative costs decreased
approximately $331,400,000 and $292,800,000, respectively, for the nine months
ended September 30, 1998, as compared to the same period in 1997. These
decreases
17
<PAGE> 19
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
consist of the following: decreases in net operating revenues and operating and
administrative costs of approximately $487,500,000 and $427,200,000,
respectively, due to the disposition of, or lease terminations on, 13 nursing
facilities and ATH in 1998 and 68 nursing facilities and PCA in 1997; partially
offset by increases in net operating revenues and operating and administrative
costs of approximately $62,900,000 and $51,000,000, respectively, for facilities
which the Company operated during each of the nine months ended September 30,
1998 and 1997 ("same facility operations"); and increases in net operating
revenues and operating and administrative costs of approximately $93,200,000 and
$83,400,000, respectively, due to the acquisitions of nursing facilities and
outpatient, home health and hospice businesses during 1998 and 1997. (See above
for a discussion of dispositions and acquisitions).
The increase in net operating revenues for same facility operations for the
nine months ended September 30, 1998, as compared to the same period in 1997,
was due to the following: approximately $76,400,000 due to increases in room and
board rates and approximately $3,000,000 due to various other items; partially
offset by approximately $9,700,000 decrease in ancillary revenues due to a
decline in the Company's Medicare census and, to a lesser extent, as a result of
hiring therapists on staff as opposed to contracting for their services and
approximately $6,800,000 due to a decrease in same facility occupancy to 89.3%
for the nine months ended September 30, 1998, as compared to 89.8% for the same
period in 1997.
The increase in operating and administrative costs for same facility
operations for the nine months ended September 30, 1998, as compared to the same
period in 1997, was due to the following: approximately $53,400,000 due to
increased wages and related expenses principally due to higher wages and greater
benefits required to attract and retain qualified personnel and the hiring of
therapists on staff as opposed to contracting for their services; approximately
$12,500,000 due to increases in purchased ancillary products, nursing supplies
and other variable costs; and approximately $6,900,000 due to various other
items. These increases in operating and administrative costs were partially
offset by approximately $21,800,000 primarily 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 $15,400,000 as compared to the same
period in 1997 primarily due to the conversion of the Company's 5 1/2%
convertible subordinated debentures to Common Stock 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 PCA transaction. The decrease
in depreciation and amortization expense of approximately $11,500,000 as
compared to the same period in 1997 was affected by the following: approximately
$19,200,000 decrease due to the dispositions of, or lease terminations on,
certain nursing facilities, ATH and PCA; partially offset by an increase of
approximately $7,700,000 primarily due to capital additions and improvements, as
well as acquisitions.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants 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. 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 it to have a material effect on its
consolidated financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants 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. Initial application of SOP 98-5
will require the Company to report all previously capitalized start-up costs and
organization costs as a cumulative effect of a change in accounting principle.
The Company will adopt
18
<PAGE> 20
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
SOP 98-5 in its consolidated financial statements by the first quarter of 1999
and does not expect the cumulative effect adjustment to exceed $10,000,000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had approximately $23,500,000 in cash and
cash equivalents and net working capital of approximately $263,900,000. The
Company had approximately $163,800,000 of unused commitments under its
Revolver/Letter of Credit Facility as of September 30, 1998.
Net cash provided by operating activities for the nine months ended September
30, 1998 decreased approximately $55,228,000 to $32,272,000 as compared to
$87,500,000 for 1997, primarily due to an increase in accounts
receivable-patient. This increase was primarily the result of changes in certain
Medicare documentation requirements which has lengthened the billing period for
these and other receivables. Net cash used for investing activities and net cash
provided by financing activities were approximately$189,800,000 and $75,800,000,
respectively, for the nine months ended September 30, 1998. The Company received
net cash proceeds of approximately $67,700,000 from the dispositions of
facilities and other assets. Such net cash proceeds, along with cash generated
from operations, net borrowings under its Revolver/Letter of Credit Facility and
cash on hand, were used to fund acquisitions of approximately $146,700,000, to
fund capital expenditures totaling approximately $103,200,000, to repay
approximately $52,000,000 of long-term obligations and to repurchase shares of
Common Stock.
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
paid during 1998). During 1998, the Company repurchased 3,000,000 shares of its
Common Stock, through a similar transaction, and approximately 900,000 shares on
the open market at a total cost of approximately $51,100,000. The repurchases
were financed primarily through borrowings under the Company's Revolver/Letter
of Credit Facility. On June 2, 1998, the Company announced that its Board of
Directors had authorized an increase in its stock repurchase program. The
Company may repurchase from time to time on the open market, up to an additional
10,000,000 shares of its outstanding Common Stock. Since June 1996, the Company
has repurchased approximately 10,200,000 shares of its outstanding Common Stock
under the stock repurchase program. The Company is subject to certain
restrictions under its credit arrangements related to the repurchase of its
outstanding Common Stock.
In October 1998, the Company completed the acquisition of M-K Medical, a home
medical equipment ("HME") supplier for cash of approximately $11,700,000 and
closing and other costs of approximately $600,000. M-K Medical operations
consist of HME for resale and rental, as well as the sale of respiratory
supplies, in the states of California and Nevada. The operations of M-K Medical
are immaterial to the Company's consolidated financial position and results of
operations.
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 $26,600,000,
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 September 30, 1999.
Any potential 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.
As of September 30, 1998, the Company had total indebtedness of approximately
$845,300,000 and total stockholders' equity of approximately $868,500,000. The
ability of the Company to satisfy its long-term obligations will be dependent
19
<PAGE> 21
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
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."
20
<PAGE> 22
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
SEPTEMBER 30, 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. 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 it intends to
aggressively pursue all appellate remedies available to it.
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 or its intended scope. 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. Two former employees of the Company have received
letters from the United States Attorney for the Northern District of California
indicating they are targets of the grand jury investigation. The United States
Attorney has also informally indicated to the Company that he will be seeking
testimony before the grand jury from current employees of the Company. To date,
the United States Attorney has identified two current employees of the Company
that he wishes to call as witnesses. The Company has cooperated with the United
States Attorney's office in his investigation. In addition, the Company has also
been notified by its current Medicare fiscal intermediary, Blue Cross of
California, that it intends to examine 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 inquiry, 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General".
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.
ITEM 6(a). EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule for the nine months ended September 30, 1998
27.2 Restated Financial Data Schedule for the nine months ended September 30, 1997
</TABLE>
ITEM 6(b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1998.
21
<PAGE> 23
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: November 13, 1998 By: /s/ PAMELA H. DANIELS
-----------------------------
Pamela H. Daniels
Vice President, Controller
and Chief Accounting Officer
22
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 Financial Data Schedule for the nine months ended September 30, 1998
27.2 Restated Financial Data Schedule for the nine months ended September 30, 1997
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENT INCLUDED IN ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 23,538
<SECURITIES> 0
<RECEIVABLES> 485,620<F1>
<ALLOWANCES> 14,135<F2>
<INVENTORY> 29,397
<CURRENT-ASSETS> 599,820
<PP&E> 1,831,725
<DEPRECIATION> 683,014
<TOTAL-ASSETS> 2,198,953
<CURRENT-LIABILITIES> 335,952
<BONDS> 818,775
0
0
<COMMON> 11,028
<OTHER-SE> 857,518
<TOTAL-LIABILITY-AND-EQUITY> 2,198,953
<SALES> 2,107,752
<TOTAL-REVENUES> 2,115,710
<CGS> 0
<TOTAL-COSTS> 1,899,295
<OTHER-EXPENSES> 73,822
<LOSS-PROVISION> 0<F3>
<INTEREST-EXPENSE> 48,869
<INCOME-PRETAX> 93,724
<INCOME-TAX> 32,803
<INCOME-CONTINUING> 60,921
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,921
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
<FN>
<F1>Excludes $25,831 of long-term notes receivable.
<F2>Excludes $2,997 of allowance for long-term notes receivable.
<F3>Included in Total costs and expenses line.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 42,681
<SECURITIES> 0
<RECEIVABLES> 551,076<F1>
<ALLOWANCES> 33,470<F2>
<INVENTORY> 57,555
<CURRENT-ASSETS> 694,151
<PP&E> 1,846,499
<DEPRECIATION> 651,480
<TOTAL-ASSETS> 2,468,824
<CURRENT-LIABILITIES> 379,672
<BONDS> 845,886
0
0
<COMMON> 11,601
<OTHER-SE> 1,055,967
<TOTAL-LIABILITY-AND-EQUITY> 2,468,824
<SALES> 2,439,115
<TOTAL-REVENUES> 2,448,871
<CGS> 0
<TOTAL-COSTS> 2,192,135
<OTHER-EXPENSES> 81,489
<LOSS-PROVISION> 0<F3>
<INTEREST-EXPENSE> 64,303
<INCOME-PRETAX> 110,944
<INCOME-TAX> 44,378
<INCOME-CONTINUING> 66,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,566
<EPS-PRIMARY> .67
<EPS-DILUTED> .66
<FN>
<F1>Excludes $30,258 of long-term notes receivable.
<F2>Excludes $4,430 of allowance for long-term notes receivable.
<F3>Included in Total costs and expenses line.
</FN>
</TABLE>
