<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, 1997
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 95-4100309
(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 31, 1997 -- 109,751,909
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BEVERLY ENTERPRISES, INC.
FORM 10-Q
SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
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................................................. 8
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 13
Item 6. Exhibits and Reports on Form 8-K............................................................. 13
</TABLE>
1
<PAGE> 3
PART I
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED) (NOTE)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................................... $ 42,681 $ 69,761
Accounts receivable-patient, less allowance for doubtful accounts:
1997--$32,858; 1996--$25,618................................................................ 493,053 491,063
Accounts receivable-nonpatient, less allowance for doubtful accounts:
1997--$612; 1996--$401...................................................................... 15,851 13,480
Notes receivable.............................................................................. 8,702 10,746
Operating supplies............................................................................ 57,555 55,348
Deferred income taxes......................................................................... 25,937 14,543
Prepaid expenses and other.................................................................... 50,372 42,304
----------- -----------
Total current assets....................................................................... 694,151 697,245
Property and equipment, net of accumulated depreciation and amortization:
1997--$651,480; 1996--$643,085............................................................. 1,195,019 1,248,785
Other assets:
Notes receivable, less allowance for doubtful notes:
1997--$4,430; 1996--$4,951................................................................. 25,828 37,306
Designated and restricted funds............................................................... 65,733 75,848
Goodwill, net................................................................................. 377,334 356,197
Other, net..................................................................................... 110,759 109,701
----------- -----------
Total other assets.......................................................................... 579,654 579,052
----------- -----------
$ 2,468,824 $ 2,525,082
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................................. $ 90,813 $ 99,121
Accrued wages and related liabilities......................................................... 131,964 131,072
Accrued interest.............................................................................. 12,680 16,969
Other accrued liabilities..................................................................... 101,788 93,042
Current portion of long-term obligations...................................................... 42,427 38,826
----------- -----------
Total current liabilities.................................................................. 379,672 379,030
Long-term obligations............................................................................ 845,886 1,106,256
Deferred income taxes payable.................................................................... 116,906 83,610
Other liabilities and deferred items............................................................. 58,792 95,091
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............................................... -- --
Common stock, shares issued: 1997--116,012,269; 1996--104,432,848............................ 11,601 10,443
Additional paid-in capital.................................................................... 925,760 774,672
Retained earnings............................................................................. 200,523 133,957
Treasury stock, at cost: 1997--6,274,108; 1996--5,423,408 .................................. (70,316) (57,977)
----------- -----------
Total stockholders' equity................................................................. 1,067,568 861,095
----------- -----------
$ 2,468,824 $ 2,525,082
=========== ===========
</TABLE>
NOTE: The balance sheet at December 31, 1996 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, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net operating revenues ......................... $ 804,896 $ 822,562 $2,439,115 $2,431,942
Interest income ................................ 3,030 3,377 9,756 10,312
---------- ---------- ---------- ----------
Total revenues .......................... 807,926 825,939 2,448,871 2,442,254
Costs and expenses:
Operating and administrative:
Wages and related ......................... 438,325 456,884 1,336,181 1,351,406
Other ..................................... 278,080 280,147 855,954 853,637
Interest .................................... 19,616 23,417 64,303 69,545
Depreciation and amortization ............... 26,683 27,361 81,489 78,384
---------- ---------- ---------- ----------
Total costs and expenses ................ 762,704 787,809 2,337,927 2,352,972
---------- ---------- ---------- ----------
Income before provision for income taxes ....... 45,222 38,130 110,944 89,282
Provision for income taxes ..................... 18,089 15,252 44,378 35,713
---------- ---------- ---------- ----------
Net income ..................................... $ 27,133 $ 22,878 $ 66,566 $ 53,569
========== ========== ========== ==========
Net income per share of common stock:
Primary:
Net income per share of common stock ...... $ .26 $ .23 $ .66 $ .54
========== ========== ========== ==========
Shares used to compute net income per share 105,096 99,163 101,206 99,740
========== ========== ========== ==========
Fully diluted:
Net income per share of common stock ...... $ .26 $ .22 $ .66 $ .52
========== ========== ========== ==========
Shares used to compute net income per share 108,328 110,451 101,622 111,008
========== ========== ========== ==========
</TABLE>
Primary earnings per share for the three-month and nine-month periods ended
September 30, 1997 and 1996 and fully diluted earnings per share for the
nine-month period ended September 30, 1997 were computed by dividing net income
by the weighted average number of shares of common stock outstanding during the
period and the weighted average number of shares issuable upon exercise of
common stock equivalents (principally stock options), calculated using the
treasury stock method. Fully diluted earnings per share for the three-month
period ended September 30, 1997 was computed as above and assumed conversion of
the Company's 7 5/8% convertible subordinated debentures. Fully diluted earnings
per share for the three-month and nine-month periods ended September 30, 1996
were computed as above and assumed conversion of the Company's 5 1/2%
convertible subordinated debentures. Conversion of the Company's 7 5/8%
convertible subordinated debentures and zero coupon notes would have an
anti-dilutive effect for the three-month and nine-month periods ended September
30, 1996 and, therefore, were not assumed. During the third quarter of 1997, the
Company called its 5 1/2% convertible subordinated debentures for redemption on
August 18, 1997 [See Note (iii)].
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which is
required to be adopted in financial statements for periods ending after December
15, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements, primary earnings per share will be renamed basic
earnings per share and will exclude the dilutive effect of stock options. The
impact is not expected to result in a material change in the Company's primary
earnings per share or fully diluted earnings per share (which will be renamed
dilutive earnings per share) for the three-month and nine-month periods ended
September 30, 1997 and 1996.
See accompanying notes.
3
<PAGE> 5
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................................... $ 66,566 $ 53,569
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................................... 81,489 78,384
Provision for reserves and discounts on patient, notes and other receivables, net 25,882 18,729
Amortization of deferred financing costs ......................................... 2,029 3,417
Gains on dispositions of facilities and other assets, net ........................ (20,339) (4,924)
Deferred taxes ................................................................... 19,007 15,502
Net decrease in insurance related accounts ....................................... (27,208) (8,730)
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient ................................................ (32,702) (15,858)
Operating supplies ........................................................... (4,313) 2,501
Prepaid expenses and other receivables ....................................... (4,179) (78)
Accounts payable and other accrued expenses .................................. (8,341) (36,174)
Income taxes payable ......................................................... (10,598) 12,947
Other, net ................................................................... 207 (1,291)
----------- -----------
Total adjustments ......................................................... 20,934 64,425
----------- -----------
Net cash provided by operating activities ................................. 87,500 117,994
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired ..................................... (50,818) (78,900)
Proceeds from dispositions of facilities and other assets ........................... 146,041 23,001
Collections on notes receivable and REMIC investment ................................ 23,949 7,544
Capital expenditures ................................................................ (105,436) (95,149)
Other, net .......................................................................... (7,599) (8,450)
----------- -----------
Net cash provided by (used for) investing activities ...................... 6,137 (151,954)
Cash flows from financing activities:
Revolver borrowings ................................................................. 1,139,000 932,000
Repayments of Revolver borrowings ................................................... (1,211,000) (946,000)
Proceeds from issuance of long-term obligations ..................................... 15,862 196,618
Repayments of long-term obligations ................................................. (53,046) (142,660)
Purchase of common stock for treasury ............................................... (14,736) (10,930)
Proceeds from exercise of stock options ............................................. 3,354 2,503
Deferred financing costs ............................................................ (923) (6,107)
Dividends paid on preferred stock ................................................... -- (688)
Proceeds from designated funds, net ................................................. 772 1,803
----------- -----------
Net cash provided by (used for) financing activities ...................... (120,717) 26,539
----------- -----------
Net decrease in cash and cash equivalents .................................................. (27,080) (7,421)
Cash and cash equivalents at beginning of period ........................................... 69,761 56,303
----------- -----------
Cash and cash equivalents at end of period ................................................. $ 42,681 $ 48,882
=========== ===========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) ............................................... $ 66,563 $ 62,531
Income taxes (net of refunds) ....................................................... 35,969 7,264
</TABLE>
See accompanying notes.
4
<PAGE> 6
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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, 1997 and 1996 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 1996 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, 1997 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.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
(ii) The provisions for income taxes for the three-month and nine-month
periods ended September 30, 1997 and 1996 were based on an estimated annual
effective tax rate of 40%. The Company's estimated annual effective tax rates
for 1997 and 1996 are different than the federal statutory rate primarily due to
the impact of state income taxes and amortization of nondeductible goodwill. The
provisions for income taxes consist of the following for the three-month and
nine-month periods ended September 30 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Federal:
Current....... $ 4,405 $ 6,188 $19,712 $15,687
Deferred...... 11,678 6,067 18,593 12,906
State:
Current....... 1,309 1,833 5,659 4,524
Deferred...... 697 1,164 414 2,596
------- ------- ------- -------
$18,089 $15,252 $44,378 $35,713
======= ======= ======= =======
</TABLE>
(iii) During the nine months ended September 30, 1997, the Company purchased
six previously leased nursing facilities (758 beds) and certain other assets
including, among other things, 14 institutional pharmacies and 29 outpatient
therapy clinics, for approximately $50,100,000 cash and approximately $5,800,000
closing and other costs. Also during such period, the Company sold or terminated
the leases on 67 nursing facilities (8,264 beds) and certain other assets for
cash proceeds of approximately $146,800,000. The Company primarily used the net
cash proceeds from the disposition of facilities and other assets to repay
Revolver borrowings, to repurchase the zero coupon notes and to repay various
other indebtedness. The Company recognized net pre-tax gains of approximately
$20,300,000 as a result of these dispositions. The operations of these
facilities were immaterial to the Company's financial position and results of
operations.
In April 1997, the Company entered into a definitive agreement with Capstone
Pharmacy Services, Inc. ("Capstone") to combine Pharmacy Corporation of America
("PCA"), a wholly-owned subsidiary of the Company, with Capstone (the "Merger").
The Company will receive approximately $275,000,000 of cash as partial repayment
for PCA's intercompany debt, with any remaining intercompany balance contributed
to PCA's capital. The Company intends to use the cash of approximately
$275,000,000 to repay Revolver borrowings, to
5
<PAGE> 7
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
pay off the 7 5/8% convertible subordinated debentures, to pay off the 8 3/4%
Notes, to repay certain other notes and mortgages and for general corporate
purposes. Pursuant to the Merger Agreement, at the effective time of the Merger
(the "Effective Time"), each share of the Company's Common Stock issued and
outstanding immediately prior to the Effective Time (other than fractional
shares) will be converted into the right to receive that number of newly issued
shares of Capstone common stock equal to the quotient, expressed to four decimal
places, of (a) 50,000,000 divided by (b) the number of shares of the Company's
Common Stock outstanding immediately prior to the Effective Time. The Merger,
which is subject to approvals by the shareholders of both the Company and
Capstone and completion of the Distribution (as discussed below), is expected to
close by year-end. The special stockholders' meetings of both the Company
and Capstone are scheduled for November 20, 1997.
In connection with the restructuring, the Company will transfer all of its
non-PCA assets and liabilities to New Beverly Holdings, Inc. ("New Beverly"), in
exchange for the issuance of New Beverly common stock. The Company will then
distribute (the "Distribution") such New Beverly common stock to the then
current shareholders of the Company's Common Stock on a one-for-one basis. In
connection with the Distribution, the Company will be required to restructure,
repay or otherwise renegotiate substantially all of its outstanding debt
instruments and renegotiate or make certain payments under various employment
agreements with officers of the Company. The Company estimates that the costs of
such undertakings will approximate $10,200,000 as it relates to restructuring,
repaying or renegotiating debt instruments. It is expected that such amounts,
along with other transaction costs, will be funded with a portion of the
$275,000,000 proceeds to be received as a partial repayment of PCA's
intercompany debt, as discussed above. In addition, the Company expects to
incur non-cash expenses of approximately $17,000,000 as it relates to
various employment agreements.
On July 17, 1997, the Company called its 5 1/2% convertible subordinated
debentures (the "5 1/2% Debentures") for redemption on August 18, 1997. A total
of $149,162,550 of the $150,000,000 aggregate principal amount outstanding was
converted to 11,189,924 shares of the Company's Common Stock, increasing the
outstanding shares of the Company's Common Stock. The remaining principal amount
of $837,450 was redeemed at 103.30%. Had the conversion been completed prior to
January 1, 1997, the pro forma net income per share for the three-month and
nine-month periods ended September 30, 1997 would have been $.25 and $.63,
respectively.
During the third quarter of 1997, the Company entered into promissory notes
totaling approximately $10,600,000 in conjunction with its purchase of nursing
facilities. Such debt instruments bear interest at rates ranging from 8.04% to
8.63%, require monthly installments of principal and interest, and are secured
by mortgage interests in the real property and security interests in the
personal property of the nursing facilities.
(iv) There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
6
<PAGE> 8
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
(v) The following summarized unaudited financial information concerning
Beverly Health and Rehabilitation Services, Inc. ("BHRS") is being reported
because BHRS's 7 5/8% convertible subordinated debentures due March 2003 (the
"Debentures") are publicly-held. Beverly Enterprises, Inc. (the parent) is
co-obligor of the Debentures. Summary unaudited financial information for BHRS
is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1997 1996 1997 1996
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenues .................. $ 646,614 $ 682,869 $1,985,858 $2,028,071
Total costs and expenses ........ 607,864 643,503 1,879,744 1,937,357
Net income ...................... 23,250 23,619 63,668 54,428
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Current assets .................. $ 356,507 $ 369,501
Long-term assets ................ 1,317,502 1,404,292
Current liabilities ............. 207,761 184,887
Long-term liabilities ........... 609,250 795,593
</TABLE>
7
<PAGE> 9
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1997
(UNAUDITED)
GENERAL
Healthcare system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for both federal and state governments. In
August 1997, the President signed into law the Balanced Budget Act of 1997 in
which the Congress included numerous program changes directed at balancing the
federal budget. The legislation changes Medicare and Medicaid policy in a number
of ways, including development of new Medicare and Medicaid health plan options,
creation of additional safeguards against healthcare fraud and abuse, repeal of
the Medicaid "Boren Amendment" payment standard and the phase in of a Medicare
prospective payment system for skilled nursing facilities beginning in July
1998. 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 assess the impact of these changes, due
in large part to uncertainty as to the details of implementation and
interpretation of the legislation by the Health Care Financing Administration of
the Department of Health and Human Services ("HCFA") and, therefore, no
assurances can be made as to the ultimate impact of this legislation or future
healthcare reform legislation on the Company's consolidated financial position,
results of operations, or cash flows. However, future federal budget legislation
and regulatory changes may negatively impact the Company.
During the first quarter of 1997, proposed rules were issued by HCFA which,
if implemented in their proposed form, would establish 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 proposed rules would revise the salary
equivalency rules already in effect for physical therapy services. The full
effect of the new rules is not readily determinable as the details of the
proposal have not yet been finalized; however, the Company does not expect this
to have a material adverse effect on its consolidated financial position,
results of operations or cash flows.
The federal government passed legislation in 1996 to increase the minimum
wage in two phases. The initial increase took effect October 1, 1996, with the
final increase effective September 1, 1997. This new legislation did not result
in a material increase in the Company's wage rates in 1996, and the Company does
not anticipate a material impact on its wage rates in 1997, because a
substantial portion of the Company's associates earn in excess of the new
minimum wage levels; however, the Company believes there may continue to be
competitive pressures to increase the wage levels of associates earning above
the new minimum wage. The effect of the new minimum wage on the Company's future
operations is not expected to be material as the Company believes that a
significant portion of such increase will be reimbursed through Medicare and
Medicaid rate increases.
The Company's future operating performance will continue to be affected by
the issues facing the long-term healthcare industry as a whole, including the
maintenance of occupancy, its ability to continue to expand higher margin
businesses, the availability of nursing, therapy and other personnel, the
adequacy of funding of governmental reimbursement programs, the demand for
nursing home care and the nature of any healthcare reform measures that may be
taken by the federal government, as discussed above, as well as by any state
governments. The Company's ability to control costs, including its wages and
related expenses which continue to rise and represent the largest component of
the Company's operating and administrative expenses, will also significantly
impact its future operating results.
As a general matter, increases in the Company's operating costs result in
higher patient rates under Medicaid programs in subsequent periods. However, the
Company's results of operations will continue to be affected by the time lag in
most states between increases in reimbursable costs and the receipt of related
reimbursement rate increases. Medicaid rate increases, adjusted for inflation,
are generally based upon changes in costs for a full calendar year period. The
time lag before such costs are reflected in permitted rates varies from state to
state, with a substantial portion of the increases taking effect up to 18 months
after the related cost increases.
8
<PAGE> 10
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
OPERATING RESULTS
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
Net income was $27,133,000 for the third quarter of 1997, as compared to net
income of $22,878,000 for the same period in 1996. Income before provision for
income taxes was $45,222,000 for the third quarter of 1997, as compared to
$38,130,000 for the same period in 1996. The Company had an estimated annual
effective tax rate of 40% in 1997 and 1996. The Company's estimated annual
effective tax rates for 1997 and 1996 were 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 $17,700,000 and $20,600,000, respectively, for the third quarter
of 1997, as compared to the same period in 1996. These decreases consist of the
following: decreases in net operating revenues and operating and administrative
costs of approximately $79,000,000 and $70,600,000, respectively, due to the
disposition of, or lease terminations on, 67 nursing facilities in 1997 and 83
nursing facilities and the Company's MedView Services unit ("MedView") in 1996;
partially offset by increases in net operating revenues and operating and
administrative costs of approximately $37,200,000 and $28,600,000, respectively,
for facilities which the Company operated during each of the quarters ended
September 30, 1997 and 1996 ("same facility operations"); and increases in net
operating revenues and operating and administrative costs of approximately
$24,100,000 and $21,400,000, respectively, related to the acquisitions of eight
nursing facilities in 1996, as well as certain pharmacy, hospice and outpatient
therapy businesses acquired in 1997 and 1996.
The increase in net operating revenues for same facility operations for the
third quarter of 1997, as compared to the same period in 1996, was due to the
following: approximately $27,700,000 due to increases in room and board rates;
approximately $12,000,000 due to increases in Pharmacy Corporation of America's
("PCA") outside sales; and approximately $1,500,000 due to various other items.
These increases in net operating revenues were partially offset by
approximately $4,000,000 due to a decrease in same facility occupancy to 89.8%
for the third quarter of 1997, as compared to 90.6% for the same period in
1996.
The increase in operating and administrative costs for same facility
operations for the third quarter of 1997, as compared to the same period in
1996, was due to the following: approximately $13,400,000 due to increased wages
and related expenses (excluding pharmacy) principally due to higher wages and
greater benefits required to attract and retain qualified personnel, the hiring
of therapists on staff as opposed to contracting for their services and
increased staffing levels in the Company's nursing facilities to cover increased
patient acuity; approximately $9,200,000 due to increases in PCA's operating
expenses; approximately $4,600,000 due primarily to increases in purchased
ancillary products; and approximately $4,400,000 due to various other items.
These increases in operating and administrative costs were partially offset by
approximately $3,000,000 due to a decrease in contracted therapy expenses as a
result of hiring therapists on staff as opposed to contracting for their
services.
Interest expense decreased approximately $3,800,000 as compared to the same
period in 1996 primarily due to repayments of the term loan and revolver
borrowings under the Company's 1994 Credit Agreement, the term loan under the
Company's 1992 Credit Facility and the Nippon Term Loan during late 1996 with
the proceeds from a new credit facility, as well as the redemption of the
Company's 5 1/2% Debentures in the third quarter of 1997 (as discussed below).
The decrease in depreciation and amortization expense of approximately $700,000
as compared to the same period in 1996, was affected by the following:
approximately $2,900,000 decrease related to the disposition of, or lease
terminations on, certain nursing facilities and MedView; partially offset by an
increase of approximately $2,200,000 primarily due to acquisitions, as well as
capital additions and improvements.
NINE MONTHS 1997 COMPARED TO NINE MONTHS 1996
Net income was $66,566,000 for the nine months ended September 30, 1997, as
compared to net income of $53,569,000 for the same period in 1996. Income before
provision for income taxes was $110,944,000 for the nine months ended September
30, 1997, as compared to $89,282,000 for the same period in 1996.
9
<PAGE> 11
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
Net operating revenues increased approximately $7,200,000 for the nine
months ended September 30, 1997, as compared to the same period in 1996. This
increase consists of the following: increases of approximately $111,500,000 for
facilities which the Company operated during each of the nine-month periods
ended September 30, 1997 and 1996 ("same facility operations"); increases of
approximately $69,600,000 related to the acquisitions of eight nursing
facilities in 1996, as well as certain pharmacy, hospice and outpatient therapy
businesses acquired in 1997 and 1996; partially offset by decreases of
approximately $173,900,000 due to the disposition of, or lease terminations on,
67 nursing facilities in 1997 and 83 nursing facilities and MedView in 1996.
Operating and administrative costs decreased approximately $12,900,000 for the
nine months ended September 30, 1997, as compared to the same period in 1996.
This decrease consists of the following: decreases of approximately $156,100,000
due to the disposition of, or lease terminations on, certain nursing facilities
and MedView, as mentioned above; partially offset by increases of approximately
$81,000,000 for same facility operations and increases of approximately
$62,200,000 related to the acquisitions mentioned above.
The increase in net operating revenues for same facility operations for the
nine months ended September 30, 1997, as compared to the same period in 1996,
was due to the following: approximately $81,700,000 due to increases in room and
board rates; approximately $34,800,000 due to increases in PCA's outside sales;
and approximately $9,800,000 due primarily to increases in ancillary revenues
and various other items. These increases in net operating revenues were
partially offset by approximately $9,500,000 due to a decrease in same facility
occupancy to 89.8% for the nine months ended September 30, 1997, as compared to
90.4% for the same period in 1996; and approximately $5,300,000 due to one less
calendar day for the nine months ended September 30, 1997, as compared to the
same period in 1996.
The increase in operating and administrative costs for same facility
operations for the nine months ended September 30, 1997, as compared to the same
period in 1996, was due to the following: approximately $46,100,000 due to
increased wages and related expenses (excluding pharmacy) principally due to
higher wages and greater benefits required to attract and retain qualified
personnel, the hiring of therapists on staff as opposed to contracting for their
services and increased staffing levels in the Company's nursing facilities to
cover increased patient acuity; approximately $25,600,000 due to increases in
PCA's operating expenses; approximately $15,200,000 due primarily to increases
in purchased ancillary products; approximately $4,600,000 due to increases in
nursing supplies and other variable costs; and approximately $7,800,000 due to
various other items. These increases in operating and administrative costs were
partially offset by approximately $18,300,000 due to a decrease in contracted
therapy expenses as a result of hiring therapists on staff as opposed to
contracting for their services.
Interest expense decreased approximately $5,200,000 as compared to the same
period in 1996 primarily due to repayments of the term loan and revolver
borrowings under the Company's 1994 Credit Agreement, the term loan under the
Company's 1992 Credit Facility and the Nippon Term Loan during late 1996 with
the proceeds from a new credit facility, as well as the redemption of the
Company's 5 1/2% Debentures in the third quarter of 1997 (as discussed below).
The increase in depreciation and amortization expense of approximately
$3,100,000 as compared to the same period in 1996, was affected by the
following: approximately $8,500,000 increase primarily due to capital additions
and improvements, as well as acquisitions; partially offset by a decrease of
approximately $5,400,000 related to the disposition of, or lease terminations
on, certain nursing facilities and MedView.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which is
required to be adopted in financial statements for periods ending after December
15, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements, primary earnings per share will be renamed basic
earnings per share and will exclude the dilutive effect of stock options. The
impact is not expected to result in a material change in the Company's primary
earnings per share or fully diluted earnings per share (which will be renamed
dilutive earnings per share) for the three-month and nine-month periods ended
September 30, 1997 and 1996.
10
<PAGE> 12
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had approximately $42,700,000 in cash and
cash equivalents and net working capital of approximately $314,500,000. The
Company anticipates that approximately $24,500,000 of its existing cash at
September 30, 1997, while not legally restricted, will be utilized to fund
certain workers' compensation and general liability claims, and the Company does
not expect to use such cash for other purposes. The Company had approximately
$255,300,000 of unused commitments under its Revolver/Letter of Credit Facility
as of September 30, 1997.
Net cash provided by operating activities for the nine months ended
September 30, 1997 was approximately $87,500,000. Net cash provided by investing
activities and net cash used for financing activities were approximately
$6,100,000 and $120,700,000, respectively, for the nine months ended September
30, 1997. The Company primarily used cash generated from operations to fund
capital expenditures totaling approximately $105,400,000. The Company received
net cash proceeds of approximately $146,000,000 from the dispositions of
facilities and other assets, approximately $23,900,000 from collections on notes
receivable and the Company's REMIC investment and approximately $15,900,000 from
the issuance of long-term obligations. Such net cash proceeds were used to fund
acquisitions of approximately $50,800,000, to repay approximately $53,000,000 of
long-term obligations, to repurchase shares of Common Stock, and to repay
Revolver borrowings.
In April 1997, the Company entered into a definitive agreement with Capstone
Pharmacy Services, Inc. ("Capstone") to combine Pharmacy Corporation of America
("PCA"), a wholly-owned subsidiary of the Company, with Capstone (the "Merger").
The Company will receive approximately $275,000,000 of cash as partial repayment
for PCA's intercompany debt, with any remaining intercompany balance contributed
to PCA's capital. The Company intends to use the cash of approximately
$275,000,000 to repay Revolver borrowings, to pay off the 7 5/8% convertible
subordinated debentures, to pay off the 8 3/4% Notes, to repay certain other
notes and mortgages and for general corporate purposes. Pursuant to the Merger
Agreement, at the effective time of the Merger (the "Effective Time"), each
share of the Company's Common Stock issued and outstanding immediately prior to
the Effective Time (other than fractional shares) will be converted into the
right to receive that number of newly issued shares of Capstone common stock
equal to the quotient, expressed to four decimal places, of (a) 50,000,000
divided by (b) the number of shares of the Company's Common Stock outstanding
immediately prior to the Effective Time. The Merger, which is subject to
approvals by the shareholders of both the Company and Capstone and completion of
the Distribution (as discussed below), is expected to close by year-end. The
special stockholders' meetings of both the Company and Capstone are scheduled
for November 20, 1997.
In connection with the restructuring, the Company will transfer all of its
non-PCA assets and liabilities to New Beverly Holdings, Inc. ("New Beverly"), in
exchange for the issuance of New Beverly common stock. The Company will then
distribute (the "Distribution") such New Beverly common stock to the then
current shareholders of the Company's Common Stock on a one-for-one basis. In
connection with the Distribution, the Company will be required to restructure,
repay or otherwise renegotiate substantially all of its outstanding debt
instruments and renegotiate or make certain payments under various employment
agreements with officers of the Company. The Company estimates that the costs of
such undertakings will approximate $10,200,000 as it relates to restructuring,
repaying or renegotiating debt instruments. It is expected that such amounts,
along with other transaction costs, will be funded with a portion of the
$275,000,000 proceeds to be received as a partial repayment of PCA's
intercompany debt, as discussed above. In addition, the Company expects to incur
non-cash expenses of approximately $17,000,000 as it relates to various
employment agreements.
On July 17, 1997, the Company called its 5 1/2% convertible subordinated
debentures (the "5 1/2% Debentures") for redemption on August 18, 1997. A total
of $149,162,550 of the $150,000,000 aggregate principal amount outstanding was
converted to 11,189,924 shares of the Company's Common Stock, increasing the
outstanding shares of the Company's Common Stock. The remaining principal amount
of $837,450 was redeemed at 103.30%. Had the conversion been completed prior to
January 1, 1997, the pro forma net income per share for the three-month and
nine-month periods ended September 30, 1997 would have been $.25 and $.63,
respectively.
11
<PAGE> 13
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
During the third quarter of 1997, the Company entered into promissory notes
totaling approximately $10,600,000 in conjunction with its purchase of nursing
facilities. Such debt instruments bear interest at rates ranging from 8.04% to
8.63%, require monthly installments of principal and interest, and are secured
by mortgage interests in the real property and security interests in the
personal property of the nursing facilities.
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 $42,400,000,
to make normal recurring capital additions and improvements of approximately
$138,000,000, 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, 1998.
As of September 30, 1997, the Company had total indebtedness of
approximately $888,300,000 and total stockholders' equity of approximately
$1,067,600,000. The ability of the Company to satisfy its long-term obligations
will be dependent upon its future performance, which will be subject to
prevailing economic conditions and to financial, business and other factors
beyond the Company's control, such as federal and state healthcare reform. In
addition, healthcare service providers, such as the Company, operate in an
industry that is currently subject to significant changes from business
combinations, new strategic alliances, legislative reform, increased regulatory
oversight, aggressive marketing practices by competitors and market pressures.
In this environment, the Company is frequently contacted by, and otherwise
engages in discussions with, other healthcare companies and financial advisors
regarding possible strategic alliances, joint ventures, business combinations
and other financial alternatives. The terms of substantially all of the
Company's debt instruments require the Company to repay or refinance
indebtedness under such debt instruments in the event of a change of control.
There can be no assurance that the Company will have the financial resources to
repay such indebtedness upon a change of control. See "-- General."
12
<PAGE> 14
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
SEPTEMBER 30, 1997
(UNAUDITED)
ITEM 1. LEGAL PROCEEDINGS
There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
ITEM 6(a). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule for the nine months ended September 30, 1997
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, 1997.
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEVERLY ENTERPRISES, INC.
Registrant
Dated: November 14, 1997 By: /s/ PAMELA H. DANIELS
------------------------------
Pamela H. Daniels
Vice President, Controller and
Chief Accounting Officer
14
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule for the nine months ended September 30, 1997
</TABLE>
<PAGE> 1
BEVERLY ENTERPRISES, INC.
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
PRIMARY:
Net income applicable to common shares ........................... $ 27,133 $ 22,878 $ 66,566 $ 53,569
========= ========= ========== =========
Applicable common shares:
Weighted average outstanding shares during the period .......... 103,508 98,239 99,816 98,652
Weighted average shares issuable upon exercise of
common stock equivalents outstanding (principally
stock options) using the "treasury stock" method ............. 1,588 924 1,390 1,088
--------- --------- ---------- ---------
Total .......................................................... 105,096 99,163 101,206 99,740
========= ========= ========== =========
Net income per share of common stock ............................. $ 0.26 $ 0.23 $ 0.66 $ 0.54
========= ========= ========== =========
FULLY DILUTED:
Net income ....................................................... $ 27,133 $ 22,878 $ 66,566 $ 53,569
Reduction of interest expense resulting from assumed
conversion of 7 5/8% convertible subordinated debentures ...... 1,213 -- (a) -- (a) -- (a)
Reduction of interest expense resulting from assumed
conversion of 5 1/2% convertible subordinated debentures ...... -- (b) 2,063 -- (b) 6,189
Reduction of interest expense resulting from assumed
conversion of zero coupon notes ............................... -- (c) -- (a) -- (c) -- (a)
Less applicable income taxes ..................................... (485) (825) -- (2,475)
--------- --------- ---------- ---------
Adjusted net income applicable to common shares .................. $ 27,861 $ 24,116 $ 66,566 $ 57,283
========= ========= ========== =========
Applicable common shares:
Weighted average outstanding shares during the period .......... 103,508 98,239 99,816 98,652
Weighted average shares issuable upon exercise of
common stock equivalents outstanding (principally
stock options) using the "treasury stock" method ............. 1,768 959 1,806 1,103
Assumed conversion of 7 5/8% convertible subordinated
debentures ................................................... 3,052 -- (a) -- (a) -- (a)
Assumed conversion of 5 1/2% convertible subordinated
debentures ................................................... -- (b) 11,253 -- (b) 11,253
Assumed conversion of zero coupon notes ........................ -- (c) -- (a) -- (c) -- (a)
--------- --------- ---------- ---------
Total .......................................................... 108,328 110,451 101,622 111,008
========= ========= ========== =========
Net income per share of common stock ............................ $ 0.26 $ 0.22 $ 0.66 $ 0.52
========= ========= ========== =========
</TABLE>
- -------------
(a) Conversion would be anti-dilutive and is therefore not assumed in the
computation of earnings per share of common stock.
(b) The 5 1/2% convertible subordinated debentures were converted to 11,189,924
shares of common stock during the third quarter of 1997, with the remaining
principal amount redeemed at 103.30%.
(c) The zero coupon notes were repurchased during the second quarter of 1997.
<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>
<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> .66
<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>
