<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 MARCH 31, 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 APRIL 30, 1997 -- 99,037,934
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<PAGE> 2
BEVERLY ENTERPRISES, INC.
FORM 10-Q
MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
----
<S> <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........................................................ 7
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 11
Item 6. Exhibits and Reports on Form 8-K............................................................. 11
</TABLE>
1
<PAGE> 3
PART I
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 64,136 $ 69,761
Accounts receivable - patient,
less allowance for doubtful accounts:
1997--$26,161; 1996--$25,618 ...................... 522,415 491,063
Accounts receivable - nonpatient,
less allowance for doubtful accounts:
1997--$275; 1996--$401 ............................ 11,628 13,480
Notes receivable .................................... 10,572 10,746
Operating supplies .................................. 56,661 55,348
Deferred income taxes ............................... 13,320 14,543
Prepaid expenses and other .......................... 42,505 42,304
------------ ------------
Total current assets ............................. 721,237 697,245
Property and equipment, net of accumulated
depreciation and amortization:
1997--$655,785; 1996--$643,085 .................... 1,262,671 1,248,785
Other assets:
Notes receivable, less
allowance for doubtful notes:
1997--$5,143; 1996--$4,951 ........................ 29,206 37,306
Designated and restricted funds ..................... 81,346 75,848
Goodwill, net ....................................... 372,637 356,197
Other, net .......................................... 115,301 109,701
------------ ------------
Total other assets ............................... 598,490 579,052
------------ ------------
$ 2,582,398 $ 2,525,082
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 122,467 $ 99,121
Accrued wages and related liabilities ............... 136,863 131,072
Accrued interest .................................... 13,714 16,969
Other accrued liabilities ........................... 84,516 93,042
Current portion of long-term obligations ............ 36,361 38,826
------------ ------------
Total current liabilities ........................ 393,921 379,030
Long-term obligations .................................. 1,119,865 1,106,256
Deferred income taxes payable .......................... 87,980 83,610
Other liabilities and deferred items ................... 99,305 95,091
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares
authorized: 25,000,000 ........................... -- --
Common stock, shares issued:
1997--104,595,272; 1996--104,432,848 .............. 10,460 10,443
Additional paid-in capital .......................... 776,424 774,672
Retained earnings ................................... 152,420 133,957
Treasury stock, at cost: 5,423,408 shares .......... (57,977) (57,977)
------------ ------------
Total stockholders' equity ....................... 881,327 861,095
------------ ------------
$ 2,582,398 $ 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 MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net operating revenues ........................... $ 816,716 $ 811,047
Interest income .................................. 3,565 3,460
---------- ----------
Total revenues ............................ 820,281 814,507
Costs and expenses:
Operating and administrative:
Wages and related ........................... 449,782 449,995
Other ....................................... 289,930 293,484
Interest ....................................... 22,716 23,145
Depreciation and amortization .................. 27,081 25,056
---------- ----------
Total costs and expenses .................. 789,509 791,680
---------- ----------
Income before provision for income taxes ......... 30,772 22,827
Provision for income taxes ....................... 12,309 9,131
---------- ----------
Net income ....................................... $ 18,463 $ 13,696
========== ==========
Net income per share of common stock:
Primary:
Net income per share of common stock ...... $ 0.19 $ 0.14
========== ==========
Shares used to compute net income per share 99,411 99,978
========== ==========
Fully diluted:
Net income per share of common stock ...... $ 0.18 $ 0.13
========== ==========
Shares used to compute net income per share 110,688 111,231
========== ==========
</TABLE>
Primary earnings per share for the three months ended March 31, 1997 and
1996 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 months ended March 31, 1997 and 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 and, therefore, were not assumed.
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 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 months ended March 31, 1997
and 1996.
See accompanying notes.
3
<PAGE> 5
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................................... $ 18,463 $ 13,696
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................................... 27,081 25,056
Provision for reserves and discounts on patient, notes and other receivables, net 6,378 6,550
Amortization of deferred financing costs ......................................... 662 1,893
(Gains) losses on dispositions of facilities and other assets, net ............... 1,469 (2,212)
Deferred taxes ................................................................... 5,740 3,264
Net decrease in insurance related accounts ....................................... (1,364) (7,131)
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient ................................................ (36,631) (16,211)
Operating supplies ........................................................... (276) 1,610
Prepaid expenses and other receivables ....................................... (950) (1,162)
Accounts payable and other accrued expenses .................................. 25,960 (5,166)
Income taxes payable ......................................................... (4,751) 10,509
Other, net ................................................................... 320 (21)
------------ ------------
Total adjustments ......................................................... 23,638 16,979
------------ ------------
Net cash provided by operating activities ................................. 42,101 30,675
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired ..................................... (30,829) (10,630)
Proceeds from dispositions of facilities and other assets ........................... 263 6,692
Collections on notes receivable and REMIC investment ................................ 8,981 3,006
Capital expenditures ................................................................ (37,638) (29,206)
Other, net .......................................................................... 742 (4,016)
------------ ------------
Net cash used for investing activities .................................... (58,481) (34,154)
Cash flows from financing activities:
Revolver borrowings ................................................................. 387,000 284,000
Repayments of Revolver borrowings ................................................... (363,000) (333,000)
Proceeds from issuance of long-term obligations ..................................... 3,534 180,000
Repayments of long-term obligations ................................................. (16,356) (128,673)
Purchase of common stock for treasury ............................................... (2,397) --
Proceeds from exercise of stock options ............................................. 1,855 361
Deferred financing costs ............................................................ (320) (5,242)
Dividends paid on preferred stock ................................................... -- (688)
Proceeds from designated funds, net ................................................. 439 472
------------ ------------
Net cash provided by (used for) financing activities ...................... 10,755 (2,770)
------------ ------------
Net decrease in cash and cash equivalents .................................................. (5,625) (6,249)
Cash and cash equivalents at beginning of period ........................................... 69,761 56,303
------------ ------------
Cash and cash equivalents at end of period ................................................. $ 64,136 $ 50,054
============ ============
Supplemental schedule of cash flow information:
Cash paid (received) during the period for:
Interest (net of amounts capitalized) ............................................... $ 25,309 $ 17,701
Income tax payments (refunds), net .................................................. 11,320 (4,642)
</TABLE>
See accompanying notes.
4
<PAGE> 6
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 months ended
March 31, 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 months ended March 31, 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 months ended March 31,
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 months ended March 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Federal:
Current ................. $ 5,298 $ 4,553
Deferred ................ 4,840 2,765
State:
Current ................. 1,271 1,314
Deferred ................ 900 499
---------- ----------
$ 12,309 $ 9,131
========== ==========
</TABLE>
(iii) During the three months ended March 31, 1997, the Company purchased
three previously leased nursing facilities (449 beds) and certain other assets
including, among other things, 14 institutional pharmacies and six outpatient
therapy clinics, for approximately $30,500,000 cash and approximately
$1,400,000 closing and other costs. Also during such period, the Company
terminated the leases on five nursing facilities (707 beds) and disposed of
certain other assets for cash proceeds of approximately $600,000. The Company
recognized net pre-tax losses during the first quarter of 1997 of approximately
$1,500,000 as a result of these dispositions. The operations of these
facilities were immaterial to the Company's consolidated financial position and
results of operations.
In March 1997, the Company entered into a definitive agreement to sell 49 of
its skilled nursing facilities in the state of Texas to Complete Care Services,
L.P. The transaction is scheduled to close during the second quarter of 1997
and is subject to normal regulatory review. The Company anticipates using the
net cash proceeds generated from the sale for one or more of the following
purposes: strategic investments; repay indebtedness; and repurchase Common
Stock. The operations of these facilities are immaterial to the Company's
consolidated financial position and results of operations.
5
<PAGE> 7
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
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")
to create the nation's largest independent institutional pharmacy company. 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. In addition, Capstone will issue approximately
50,000,000 shares of its common stock to the Company's shareholders. The
Company's shareholders are expected to receive approximately .44 shares of
Capstone common stock for each share of the Company's Common Stock outstanding,
based on the fully diluted number of shares of the Company's Common Stock
outstanding at March 31, 1997, and will own approximately 57% of the combined
pharmacy company after the combination. The exact conversion ratio of the
Company's Common Stock to Capstone common shares will be determined based on
the total number of shares of the Company's Common Stock outstanding on the
effective date of the Merger. The Merger, which is subject to approvals by the
shareholders of both the Company and Capstone, completion of the Distribution
(as discussed below), and approvals by various government agencies, is
expected to close by year-end.
In connection with the Merger, the Company will transfer all of its non-PCA
assets and liabilities to New Beverly Holdings, Inc. ("NBHI"), in exchange for
the issuance of NBHI common stock. The Company will then distribute (the
"Distribution") such NBHI 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 has not yet determined the impact this
will have on its consolidated financial position, results of operations or cash
flows.
(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.
(v) Effective July 31, 1987, Beverly Enterprises, a California corporation
("Beverly California"), became a wholly-owned subsidiary of Beverly
Enterprises, Inc., a Delaware corporation ("Beverly Delaware"). Effective
January 1, 1995, Beverly California changed its name to Beverly Health and
Rehabilitation Services, Inc. ("BHRS"). Beverly Delaware (the parent) provides
financial, administrative and legal services to its subsidiaries, including
BHRS, for which it charges management fees.
The following summarized unaudited financial information concerning BHRS is
being reported because BHRS's 7 5/8% convertible subordinated debentures due
March 2003 and its zero coupon notes (collectively, the "Debt Securities") are
publicly-held. Beverly Delaware is co-obligor of the Debt Securities. Summary
unaudited financial information for BHRS is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
------------------ ------------------
<S> <C> <C>
Total revenues................................ $ 670,353 $ 680,273
Total costs and expenses...................... 642,355 658,740
Net income.................................... 16,799 12,920
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Current assets................................ $ 388,467 $ 369,501
Long-term assets.............................. 1,413,184 1,404,292
Current liabilities........................... 192,050 184,887
Long-term liabilities......................... 799,489 795,593
</TABLE>
6
<PAGE> 8
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 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.
Although no comprehensive healthcare, Medicare or Medicaid reform legislation
has yet been implemented, pressures to contain costs and the active discussions
between the Clinton Administration, Congress and various other groups have
impacted the healthcare delivery system. Many states are experimenting with
alternatives to traditional Medicaid delivery systems through federal waiver
programs, and efforts to provide these services more efficiently will continue
to be a priority. In August 1996, Congress passed the Health Insurance
Portability and Accountability Act of 1996 which, among other things, provides
favorable changes in the tax treatment of long-term care insurance and allows
inclusion of long-term care insurance in medical savings accounts. Although the
Company believes this legislation will have a favorable impact on the long-term
care industry, the full effect is not readily determinable. There can be no
assurances made as to the ultimate impact of this, 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 the Health
Care Financing Administration of the Department of Health and Human Services
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 results of operations or
cash flows.
The federal government recently increased the minimum wage. This new
legislation is being rolled out in two phases. The initial increase took effect
October 1, 1996, and the final increase is scheduled to take effect 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, since 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.
7
<PAGE> 9
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
OPERATING RESULTS
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
Net income was $18,463,000 for the first quarter of 1997, as compared to net
income of $13,696,000 for the same period in 1996. Income before provision for
income taxes was $30,772,000 for the first quarter of 1997, as compared to
$22,827,000 for the same period in 1996. The Company had an estimated annual
effective tax rate of 40% for the quarters ended March 31, 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 increased approximately $5,700,000 for the first
quarter of 1997, as compared to the same period in 1996. This increase consists
of the following: increases of approximately $31,400,000 for facilities which
the Company operated during each of the quarters ended March 31, 1997 and 1996
("same facility operations"); increases of approximately $19,600,000 related to
the acquisitions of eight nursing facilities in 1996, as well as certain
pharmacy, hospice and outpatient therapy businesses acquired in 1996 and 1997;
partially offset by decreases of approximately $45,300,000 due to the
disposition of, or lease terminations on, five nursing facilities in 1997 and
83 nursing facilities and the Company's MedView Services unit ("MedView") in
1996. Operating and administrative costs decreased approximately $3,800,000 for
the first quarter of 1997, as compared to the same period in 1996. This
decrease consists of the following: decreases of approximately $39,300,000 due
to the disposition of, or lease terminations on, certain nursing facilities and
MedView, as mentioned above; partially offset by increases of approximately
$17,900,000 for same facility operations and increases of approximately
$17,600,000 related to the acquisitions mentioned above.
The increase in net operating revenues for same facility operations for the
first quarter of 1997, as compared to the same period in 1996, was due to the
following: approximately $34,500,000 due primarily to increases in room and
board rates; and approximately $9,600,000 due primarily to increases in
pharmacy-related revenues and various other items. These increases in net
operating revenues were partially offset by approximately $7,100,000 due to a
decrease in same facility occupancy to 88.5% for the first quarter of 1997, as
compared to 89.8% for the same period in 1996; and approximately $5,600,000 due
to one less calendar day for the first quarter of 1997, as compared to the same
period in 1996.
The increase in operating and administrative costs for same facility
operations for the first quarter of 1997, as compared to the same period in
1996, was due to the following: approximately $13,900,000 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 $6,600,000 due to increases in
pharmacy-related costs; approximately $2,100,000 due to increases in nursing
supplies and other variable costs; and approximately $6,400,000 due to various
other items. These increases in operating and administrative costs were
partially offset by approximately $11,100,000 due to a decrease in contracted
therapy expenses as a result of hiring therapists on staff as opposed to
contracting for their services.
Although depreciation and amortization expense increased only $2,000,000 as
compared to the same period in 1996, it was affected by the following:
approximately $3,000,000 increase primarily due to capital additions and
improvements, as well as, acquisitions; partially offset by a decrease of
approximately $1,000,000 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
8
<PAGE> 10
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
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 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 months ended March 31, 1997 and
1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had approximately $64,100,000 in cash and
cash equivalents and net working capital of approximately $327,300,000. The
Company anticipates that approximately $19,600,000 of its existing cash at
March 31, 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
$162,800,000 of unused commitments under its Revolver/Letter of Credit Facility
as of March 31, 1997.
Net cash provided by operating activities for the first quarter of 1997 was
approximately $42,100,000, an increase of approximately $11,400,000 from the
prior year. Net cash used for investing activities and net cash provided by
financing activities were approximately $58,500,000 and $10,800,000,
respectively, for the first quarter of 1997. The Company primarily used cash
generated from operations, borrowings under its Revolver/Letter of Credit
Facility, collections on notes receivable and cash on hand to fund capital
expenditures totaling approximately $37,600,000; to fund acquisitions of
approximately $30,800,000; and to repay approximately $16,400,000 of long-term
obligations.
In March 1997, the Company entered into a definitive agreement to sell 49 of
its skilled nursing facilities in the state of Texas to Complete Care Services,
L.P. The transaction is scheduled to close during the second quarter of 1997
and is subject to normal regulatory review. The Company anticipates using the
net cash proceeds generated from the sale for one or more of the following
purposes: strategic investments; repay indebtedness; and repurchase Common
Stock. The operations of these facilities are immaterial to the Company's
consolidated 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")
to create the nation's largest independent institutional pharmacy company. 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. In addition, Capstone will issue approximately
50,000,000 shares of its common stock to the Company's shareholders. The
Company's shareholders are expected to receive approximately .44 shares of
Capstone common stock for each share of the Company's Common Stock outstanding,
based on the fully diluted number of shares of the Company's Common Stock
outstanding at March 31, 1997, and will own approximately 57% of the combined
pharmacy company after the combination. The exact conversion ratio of the
Company's Common Stock to Capstone common shares will be determined based on the
total number of shares of the Company's Common Stock outstanding on the
effective date of the Merger. The Merger, which is subject to approvals by the
shareholders of both the Company and Capstone, completion of the Distribution
(as discussed below), and approvals by various government agencies, is expected
to close by year-end.
In connection with the Merger, the Company will transfer all of its non-PCA
assets and liabilities to New Beverly Holdings, Inc. ("NBHI"), in exchange for
the issuance of NBHI common stock. The Company will then distribute (the
"Distribution") such NBHI 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 has not yet determined the impact this
will have on its consolidated financial position, results of operations or cash
flows.
9
<PAGE> 11
BEVERLY ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
The Company believes that its existing cash and cash equivalents, working
capital from operations, net cash proceeds from the Texas disposition,
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 $36,400,000 (including scheduled
sinking fund redemption requirements with respect to the Company's 7 5/8%
convertible subordinated debentures, which may be funded in whole or in part
from time to time through open market purchases of such debentures), to make
normal recurring capital additions and improvements for the twelve months
ending March 31, 1998 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.
As of March 31, 1997, the Company had total indebtedness of approximately
$1,156,200,000 and total stockholders' equity of approximately $881,300,000.
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."
10
<PAGE> 12
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
MARCH 31, 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
------- -----------
10.1* Form of Indemnification and Pledge Agreement
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule for the three months ended
March 31, 1997
* Exhibit 10.1 is a management contract, compensatory plan,
contract or arrangement in which a named executive officer
participates.
ITEM 6(b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 1997.
11
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEVERLY ENTERPRISES, INC.
Registrant
Dated: May 13, 1997 By: /s/ PAMELA H. DANIELS
----------------------------------
Pamela H. Daniels
Vice President, Controller
and Chief Accounting Officer
12
<PAGE> 14
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1* Form of Indemnification and Pledge Agreement
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule for the three months ended
March 31, 1997
* Exhibit 10.1 is a management contract, compensatory plan,
contract or arrangement in which a named executive officer
participates.
<PAGE> 1
EXHIBIT 10.1
INDEMNIFICATION AND PLEDGE AGREEMENT
This Indemnification and Pledge Agreement ("I&P Agreement") made as of
___________, 1996 between BEVERLY ENTERPRISES, INC., a Delaware corporation
(the "Company") and _________________ (the "Executive").
WHEREAS, on December 9, 1993 the Board of Directors of the Company
established ownership requirements for its executives making it a requirement
that each executive own the Company's common stock in amount equal to a certain
multiple of the executive's base pay (the "Stock Ownership Guidelines"); and
WHEREAS, on October 10, 1996 the Board of Directors of the Company
established an Executive Stock Purchase Program whereby the Company would
guarantee the payments of loans from the City National Bank of Fort Smith (the
"Bank") to the executives for the purpose of buying the Company's common stock
(the "Common Stock") in order to meet the Stock Ownership Guidelines; and
WHEREAS, the Executive has notified the Company that he desires to
enter into a loan agreement with the Bank and has requested that the Company
execute a guaranty for the benefit of the Bank (the "Guaranty"); and
WHEREAS, the Company and the Executive wish to set forth herein, the
terms and conditions under which the Company will be a guarantor as described
above.
NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein and for other good and valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the Company and the
Executive hereby agree as follows:
1. LOAN. The Executive will enter into a loan agreement and note for
the benefit of the Bank, in a principal amount not to exceed
____________________________________________ Dollars ($__________) with said
principal sum to be due and payable three years from the date of the loan
agreement and note (the "Loan"). Executive shall be responsible for timely
making all payments of principal and interest accruing on such principal to the
Bank. The proceeds made available to Executive from the Bank shall be used by
Executive solely to purchase _____ shares of Common Stock.
2. INDEMNIFICATION. The Executive agrees to hold harmless
and indemnify the Company for any costs, expenses and judgments
the Company may suffer, including reasonable attorney's fees, as
a result or arising out of the Company entering into the
Guaranty.
3. PLEDGE OF COMMON STOCK. As collateral to secure the
Executive's obligations to the Company hereunder, the Executive
<PAGE> 2
agrees to and hereby does pledge, assign, transfer, deliver and grant to the
Company a continuing security interest in the _____ shares of Common Stock
which will be issued to the Executive (the "Pledged Shares"). The Executive
represents and warrants that upon the delivery of the certificates representing
the Pledged Shares, the Company will have a valid and perfected security
interest in the Pledged Shares. The Executive further agrees to execute and
deliver such documents as the Company may reasonably request, including, but
not limited to, certificates representing the Pledged Shares in suitable form
for transfer by delivery or duly executed instruments of transfer or assignment
in blank, all in form and substance satisfactory to the Company.
Upon payment in full, satisfaction and cancellation of the Loan, the
security interest in the Pledged Shares shall terminate and all rights in the
Pledged Shares shall revert to the Executive.
4. RIGHT OF SET-OFF. In addition to any other rights granted under
this I&P Agreement, in the event Executive's employment with the Company
terminates for any reason, the Company shall have, with respect to the
Executive's obligations to the Company hereunder a right of set-off with
respect to any claim or obligation of the Company to the Executive with respect
to or in connection with the termination of employment.
5. SEVERABILITY; ENFORCEMENT. If any provision of this I&P Agreement,
or the application thereof to any person, place, or circumstance shall be held
by a Court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this I&P Agreement and such provisions as applied to other
persons, places and circumstances shall remain in full force and effect.
6. GOVERNING LAW. This I&P Agreement shall be interpreted,
administered and enforced in accordance with the laws of the
State of Arkansas.
<PAGE> 3
The parties have duly executed this I&P Agreement as of the date first
written above.
BEVERLY ENTERPRISES, INC.
By:_______________________
Boyd W. Hendrickson
President & Chief Operating
Officer
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919-0155
EXECUTIVE
---------------------------------------
NAME:
ADDRESS
<PAGE> 1
EXHIBIT 11.1
BEVERLY ENTERPRISES, INC.
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
PRIMARY:
<S> <C> <C>
Net income applicable to common shares ............................................. $ 18,463 $ 13,696
========== ==========
Applicable common shares:
Weighted average outstanding shares during the period ............................ 98,144 98,739
Weighted average shares issuable upon exercise of common stock equivalents
outstanding (principally stock options) using the "treasury stock" method ...... 1,267 1,239
---------- ----------
Total ............................................................................ 99,411 99,978
========== ==========
Net income per share of common stock ............................................... $ 0.19 $ 0.14
========== ==========
FULLY DILUTED:
Net income ......................................................................... $ 18,463 $ 13,696
Reduction of interest expense resulting from assumed conversion
of 7 5/8% convertible subordinated debentures .................................... --(a) --(a)
Reduction of interest expense resulting from assumed conversion
of 5 1/2% convertible subordinated debentures .................................... 2,063 2,063
Reduction of interest expense resulting from assumed conversion
of zero coupon notes ............................................................. --(a) --(a)
Less applicable income taxes ....................................................... (825) (825)
---------- ----------
Adjusted net income applicable to common shares .................................... $ 19,701 $ 14,934
========== ==========
Applicable common shares:
Weighted average outstanding shares during the period ............................ 98,144 98,739
Weighted average shares issuable upon exercise of common stock equivalents
outstanding (principally stock options) using the "treasury stock" method ...... 1,291 1,239
Assumed conversion of 7 5/8% convertible subordinated debentures ................. --(a) --(a)
Assumed conversion of 5 1/2% convertible subordinated debentures ................. 11,253 11,253
Assumed conversion of zero coupon notes .......................................... --(a) --(a)
---------- ----------
Total ............................................................................ 110,688 111,231
========== ==========
Net income per share of common stock ............................................... $ 0.18 $ 0.13
========== ==========
</TABLE>
- -------------
(a) Conversion would be anti-dilutive and is therefore not assumed in the
computation of earnings per share of common stock.
<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 MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 64,136
<SECURITIES> 0
<RECEIVABLES> 571,051<F1>
<ALLOWANCES> 26,436<F2>
<INVENTORY> 56,661
<CURRENT-ASSETS> 721,237
<PP&E> 1,918,456
<DEPRECIATION> 655,785
<TOTAL-ASSETS> 2,582,398
<CURRENT-LIABILITIES> 393,921
<BONDS> 1,119,865
0
0
<COMMON> 10,460
<OTHER-SE> 870,867
<TOTAL-LIABILITY-AND-EQUITY> 2,582,398
<SALES> 816,716
<TOTAL-REVENUES> 820,281
<CGS> 0
<TOTAL-COSTS> 739,712
<OTHER-EXPENSES> 27,081
<LOSS-PROVISION> 0<F3>
<INTEREST-EXPENSE> 22,716
<INCOME-PRETAX> 30,772
<INCOME-TAX> 12,309
<INCOME-CONTINUING> 18,463
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,463
<EPS-PRIMARY> .19
<EPS-DILUTED> .18
<FN>
<F1>Excludes $34,349 of long-term notes receivable.
<F2>Excludes $5,143 of allowance for doubtful long-term notes receivable.
<F3>Included in Total costs and expenses line.
</FN>
</TABLE>
