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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 1-9550
BEVERLY ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 62-1691861
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE THOUSAND BEVERLY WAY
FORT SMITH, ARKANSAS 72919
(Address of principal executive offices)
Registrant's telephone number, including area code: (501) 201-2000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.10 par value New York Stock Exchange
Pacific Stock Exchange
9% Senior Notes due February 15, 2006 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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. [X] YES [ ]NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF
REGISTRANT WAS $784,036,126 AS OF FEBRUARY 28, 2001.
103,740,906
(NUMBER OF SHARES OF COMMON STOCK OUTSTANDING, NET OF TREASURY SHARES, AS OF
FEBRUARY 28, 2001)
PART III IS INCORPORATED BY REFERENCE FROM THE PROXY STATEMENT FOR THE
ANNUAL STOCKHOLDERS MEETING TO BE HELD ON MAY 24, 2001.
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FORWARD-LOOKING STATEMENTS
References throughout this document to the Company include Beverly
Enterprises, Inc. and its wholly-owned subsidiaries. In accordance with the
Securities and Exchange Commission's "Plain English" guidelines, this Annual
Report on Form 10-K has been written in the first person. In this document, the
words "we," "our," "ours" and "us" refer only to Beverly Enterprises, Inc. and
its wholly-owned subsidiaries and not any other person.
This Annual Report on Form 10-K, and other information we provide from time
to time, contains certain "forward-looking" statements as that term is defined
by the Private Securities Litigation Reform Act of 1995. All statements
regarding our expected future financial position, results of operations or cash
flows, continued performance improvements, ability to service and refinance our
debt obligations, ability to finance growth opportunities, ability to control
our patient care liability costs, ability to respond to changes in government
regulations, ability to execute our three-year strategic plan, ability to
execute a transaction with respect to our Florida nursing operations, and
similar statements including, without limitation, those containing words such as
"believes," "anticipates," "expects," "intends," "estimates," "plans," and other
similar expressions are forward-looking statements.
Forward-looking statements involve known and unknown risks and
uncertainties that may cause our actual results in future periods to differ
materially from those projected or contemplated in the forward-looking
statements as a result of, but not limited to, the following factors:
- national and local economic conditions, including their effect on the
availability and cost of labor, utilities and materials;
- the effect of government regulations and changes in regulations governing
the healthcare industry, including our compliance with such regulations;
- changes in Medicare and Medicaid payment levels and methodologies and the
application of such methodologies by the government and its fiscal
intermediaries;
- liabilities and other claims asserted against the Company, including
patient care liabilities, as well as the resolution of the Class Action
and Derivative Lawsuits (see "Item 3. Legal Proceedings");
- the ability to refinance certain debt obligations maturing within the
next 12 months;
- the ability to attract and retain qualified personnel;
- the availability and terms of capital to fund acquisitions and capital
improvements;
- the competitive environment in which we operate;
- the ability to maintain and increase census levels; and
- demographic changes.
See "Item 1. Business" for a discussion of various governmental regulations
and other operating factors relating to the healthcare industry and the risk
factors inherent in them. You should carefully consider the risks described
below before making any investment decisions in the Company. The risks and
uncertainties described below are not the only ones facing the Company. There
may be additional risks that we do not presently know of or that we currently
deem immaterial. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our Common Stock could decline, and
you may lose all or part of your investment. Given these risks and
uncertainties, we can give no assurances that these forward-looking statements
will, in fact, transpire and, therefore, caution investors not to place undue
reliance on them.
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PART I
ITEM 1. BUSINESS.
GENERAL
Our business consists principally of providing healthcare services,
including the operation of nursing facilities, assisted living centers, hospice
and home care centers, outpatient therapy clinics and rehabilitation therapy
services. We are one of the largest operators of nursing facilities in the
United States. On February 28, 2001, we operated 531 nursing facilities with
59,580 licensed beds. Our nursing facilities are located in 29 states and the
District of Columbia, and range in capacity from 20 to 355 beds. On February 28,
2001, we also operated 34 assisted living centers containing 1,132 units, 165
outpatient therapy clinics, and 58 hospice and home care centers. (See "Item 2.
Properties"). Our nursing facilities had average occupancy, based on operational
beds, of 87.0%, 87.2% and 88.7% during the years ended December 31, 2000, 1999
and 1998, respectively.
OPERATIONS
At December 31, 2000, we were organized into two operating segments, which
included:
- Beverly Healthcare, which provides long-term healthcare through the
operation of nursing facilities and assisted living centers; and
- Beverly Care Alliance, which operates outpatient therapy clinics, hospice
and home care centers and an inpatient rehabilitation therapy services
business.
Business in each operating segment is conducted by one or more
corporations. The corporations comprising each of the two operating segments
also have separate boards of directors. See "Part II, Item 8 -- Note 11 of Notes
to Consolidated Financial Statements" for segment information.
Beverly Healthcare's nursing facilities provide patients with routine
long-term care services, including daily nursing, dietary, social and
recreational services and a full range of pharmacy services and medical
supplies. Beverly Healthcare's skilled staff also offers complex and intensive
medical services to patients with higher acuity disorders outside the
traditional acute care hospital setting. In addition, Beverly Healthcare
provides assisted living services. Approximately 92%, 91%, and 90% of our total
net operating revenues for the years ended December 31, 2000, 1999 and 1998,
respectively, were derived from services provided by Beverly Healthcare.
Beverly Care Alliance provides outpatient and rehabilitative therapy
services, hospice and home care services, and managed care contract services
within Beverly Healthcare's nursing facilities and to other healthcare
providers. Approximately 8%, 9% and 7% of our total net operating revenues for
the years ended December 31, 2000, 1999 and 1998, respectively, were derived
from services provided by Beverly Care Alliance.
In January 2001, we implemented a new three-year strategic plan aimed at
accomplishing four fundamental strategies:
- streamline our nursing home portfolio to strengthen our long-term
financial position;
- accelerate the growth of our service and knowledge business;
- establish a leadership position in eldercare; and
- reengineer our organization in order to focus our resources on profitable
growth and new opportunities.
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In order to support the implementation of these strategies, in the first
quarter of 2001, we reorganized our business into three primary operating
segments:
- nursing homes, which will be operated in three divisions -- Coastal,
Heartland and Florida;
- service companies, which will include rehabilitation therapy, hospice,
home care and a research and development division; and
- Matrix/Theraphysics, which will operate outpatient therapy clinics and a
managed care network.
This reorganization also establishes alignment around core processes, with
individuals being fully accountable for the outcomes of each core process. Our
core processes include delivering quality care, driving census and revenues,
collecting for services rendered, influencing government policy, and recruiting,
retaining and developing the best associates.
WE RELY ON REIMBURSEMENT FROM GOVERNMENTAL PROGRAMS FOR A MAJORITY OF OUR
REVENUES.
As a provider of healthcare services, we are subject to various federal,
state and local healthcare statutes and regulations. We must comply with state
licensing requirements in order to operate healthcare facilities and to be able
to participate in government-sponsored healthcare funding programs, such as
Medicaid and Medicare. Medicaid is a medical assistance program for the
indigent, operated by individual states with the financial participation of the
federal government. Medicare is a health insurance program for the aged and
certain other chronically disabled individuals, operated by the federal
government. These programs are increasingly seeking to control healthcare costs
and to reduce or limit increases in reimbursement rates for healthcare services.
Changes in the reimbursement policies of these funding programs as a result of
budget cuts by federal and state governments or other legislative and regulatory
actions could have a material adverse effect on our consolidated financial
position, results of operations and cash flows.
We receive payments for services provided to patients from:
- each of the states in which our facilities are located under the Medicaid
program;
- the federal government under the Medicare program; and
- private payors, including commercial insurers, managed care payors and
the Veterans Administration ("VA").
The following table sets forth, for the periods indicated:
- patient days derived from the indicated sources of payment as a
percentage of total patient days;
- room and board revenues derived from the indicated sources of payment as
a percentage of total net operating revenues; and
- ancillary and other revenues derived from all sources of payment as a
percentage of total net operating revenues.
MEDICAID MEDICARE PRIVATE AND VA
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ROOM AND ROOM AND ROOM AND
PATIENT BOARD PATIENT BOARD PATIENT BOARD ANCILLARY AND
DAYS REVENUES DAYS REVENUES DAYS REVENUES OTHER REVENUES
------- -------- ------- -------- ------- -------- --------------
Year ended:
December 31, 2000............ 71% 53% 10% 15% 19% 18% 14%
December 31, 1999............ 71% 52% 9% 14% 20% 19% 15%
December 31, 1998............ 69% 46% 11% 13% 20% 18% 23%
Changes in the mix of our patient population among the Medicaid, Medicare
and private categories can significantly affect our revenues and profitability.
In most states, private patients are the most profitable, and Medicaid patients
are the least profitable.
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We receive ancillary revenues by providing occupational, physical, speech,
respiratory and intravenous therapy, as well as sales of pharmaceuticals and
other services. Such services are currently provided primarily to Medicare and
private pay patients.
Medicaid programs currently exist in all of the states in which we operate
nursing facilities. These programs differ in certain respects from state to
state, but they are all subject to federally-imposed requirements. At least 50%
of the funds available under these programs is provided by the federal
government under a matching program.
Currently, many state Medicaid programs use a cost-based reimbursement
system. This means that a facility is reimbursed for the reasonable direct and
indirect allowable costs it incurs in providing routine patient care services
(as defined by the programs). In addition, certain states provide for efficiency
incentives or a return on equity, subject to certain cost ceilings. These costs
normally include allowances for administrative and general costs, as well as the
costs of property and equipment (e.g. depreciation and interest, fair rental
allowance or rental expense).
State Medicaid reimbursement programs vary as to the level of allowable
costs which are reimbursed to operators. In some states, cost-based
reimbursement is subject to retrospective adjustment through cost report
settlement. In other states, reimbursements made to a facility that are
subsequently determined to be less than or in excess of allowable costs may be
adjusted through future reimbursements to the facility and to other facilities
owned by the same operator. Several states in which we currently operate have
enacted reimbursement programs which are based on patient acuity versus
traditional cost-based methodologies. Many other states are actively developing
reimbursement systems based on patient acuity or that follow a methodology
similar to Medicare's prospective payment system. We are unable to estimate the
ultimate impact of any changes in reimbursement programs on our future
consolidated financial position, results of operations, or cash flows.
While federal regulations do not provide states with grounds to curtail
funding of their Medicaid cost reimbursement programs due to state budget
deficiencies, states have done so in the past. No assurance can be given that
states will not do so in the future or that the future funding of Medicaid
programs will remain at levels comparable to the present levels. The United
States Supreme Court ruled in 1990 that healthcare providers could use the Boren
Amendment to require states to comply with their legal obligation to adequately
fund Medicaid programs. The 1997 Act (as discussed below) repealed the Boren
Amendment and authorized states to develop their own standards for setting
payment rates. It requires each state to use a public process for establishing
proposed rates whereby the methodologies and justifications used for setting
such rates are available for public review and comment. This requires facilities
to become more involved in the rate setting process since failure to do so may
interfere with a facility's ability to challenge rates later. Currently, a few
states in which we operate are experiencing deficits in their fiscal operating
budgets. There can be no assurance that those states in which we operate that
are experiencing budget deficits, as well as other states in which we operate,
will not reduce payment rates.
Under the Nursing Home Resident Protection Amendments of 1999, a nursing
facility is required to continue providing care to Medicaid residents, as well
as current non-Medicaid residents who may qualify for Medicaid in the future,
even if the facility decides to withdraw from the Medicaid program.
Healthcare system reform and concerns over rising Medicare and Medicaid
costs have been high priorities for both the federal and state governments. In
August 1997, the Balanced Budget Act of 1997 (the "1997 Act") was signed into
law. The 1997 Act included numerous program changes directed at balancing the
federal budget. The legislation changed Medicare and Medicaid policy in a number
of ways, including the phase in of the Medicare prospective payment system
("PPS"). PPS reimburses a skilled nursing facility based upon the acuity level
of Medicare patients in the skilled nursing facility. Acuity level is measured
by which one of 44 Resource Utilization Grouping ("RUG") categories a particular
patient is classified.
In November 1999, the Medicare, Medicaid and State Child Health Insurance
Program ("SCHIP") Balanced Budget Refinement Act of 1999 ("BBRA 1999") was
signed into law. BBRA 1999 refined the 1997
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Act and restored approximately $2.7 billion in Medicare funding for skilled
nursing providers over the next three years. The provisions of BBRA 1999
included:
- the option for a skilled nursing provider to continue being reimbursed in
accordance with the payment schedule set forth under the 1997 Act, or
100% of the federally-determined acuity-adjusted rate, effective for cost
reporting periods starting on or after January 1, 2000;
- a temporary increase of 20% in the federal adjusted per diem rates for 15
RUG categories covering extensive services, special care, clinically
complex, and high and medium rehabilitation, for the period from April 1,
2000 through September 30, 2000; however, HCFA did not recalculate the
necessary refinements to the overall RUG-III system, and the 20% increase
was extended until such time as the calculations are completed;
- a 4% increase in the federal adjusted per diem rates for all 44 RUG
categories for each of the periods October 1, 2000 through September 30,
2001 and October 1, 2001 through September 30, 2002;
- a two-year moratorium on implementing the two Part B $1,500 therapy
limitations contained in the 1997 Act, effective January 1, 2000 through
January 1, 2002;
- a retroactive provision that corrects a technical error in the 1997 Act
denying payment of Part B services to skilled nursing facilities
participating in PPS demonstration projects; and
- the exclusion from the Medicare PPS rates of ambulance services to and
from dialysis, prosthetic devices, radioisotopes and chemotherapy
furnished on or after April 1, 2000.
We chose to be reimbursed at 100% of the federally-determined
acuity-adjusted rate on approximately 300 of our nursing facilities effective
January 1, 2000 and an additional 48 effective January 1, 2001.
In December 2000, the Medicare, Medicaid and SCHIP Benefits Improvement and
Protection Act of 2000 ("BIPA") was signed into law. BIPA is intended to invest
an additional $35 billion in enhanced medical benefits and to increase Medicare
and Medicaid payments to providers over the next five years. Approximately $2
billion of this amount is expected to benefit nursing home providers and
approximately $2 billion is intended to benefit home health agencies. The
specific provisions of BIPA include, among other things:
- an inflation update to the full market basket for 2001 for skilled
nursing facilities and home health agencies, and market basket minus .5%
in 2002 and 2003 for skilled nursing facilities;
- a 16.66% increase in the nursing component of all 44 RUG categories
effective April 1, 2001, with a requirement that all skilled nursing
facilities post on a daily basis for each shift the current number of
licensed and unlicensed nursing staff directly responsible for resident
care in the facility beginning January 1, 2003;
- an additional one-year moratorium on therapy caps through 2002;
- a 6.7% increase in the federal adjusted per diem rates for certain
rehabilitation RUG categories starting April 1, 2002;
- a 5% increase in the base Medicare daily payment rates for hospice care
beginning April 1, 2001; and
- an additional one-year delay until October 1, 2002 in the 15% reduction
in aggregate PPS rates for home health agencies.
Certain of the BIPA provisions supercede those of the 1997 Act and BBRA
1999, and other provisions are supplements to those regulations. Assuming a
similar volume and mix of Medicare census as those we experienced in 2000, we
expect our net operating revenues for 2001 to increase approximately $30 million
over 2000 as a result of the BIPA provisions.
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OUR INDUSTRY IS HEAVILY REGULATED BY THE GOVERNMENT WHICH REQUIRES OUR
COMPLIANCE WITH A VARIETY OF LAWS.
The operation of our facilities and the services we provide are subject to
periodic inspection by governmental authorities to ensure that we are complying
with various standards established for continued licensure under state law and
certification for participation under the Medicare and Medicaid programs.
Additionally, in certain states, certificates of need or other similar approvals
are required for expansion of our operations. We could be adversely affected if
we cannot obtain these approvals, if the standards applicable to approvals or
the interpretation of those standards change and by possible delays and expenses
associated with obtaining approvals. Our failure to obtain, retain or renew any
required regulatory approvals, licenses or certificates could prevent us from
being reimbursed for our services.
The Health Care Financing Administration ("HCFA") of the Department of
Health and Human Services ("HHS") published survey, certification and
enforcement guidelines in July 1999 and December 1999 to implement the Medicare
and Medicaid provisions of the Omnibus Budget Reconciliation Act of 1987 ("OBRA
1987"). OBRA 1987 authorized HCFA to develop regulations governing survey,
certification and enforcement of the requirements for participation by skilled
nursing facilities under Medicare and nursing facilities under Medicaid. Among
the provisions that HCFA adopted were requirements that:
- surveys focus on residents' outcomes;
- all deviations from the participation requirements will be considered
deficiencies, but all deficiencies will not constitute noncompliance; and
- penalties will result for certain types of deficiencies.
The regulations also identify remedies, as alternatives to termination from
participation, and specify the categories of deficiencies for which these
remedies will be applied. These remedies include:
- temporary management;
- denial of payment for new admissions;
- denial of payment for all patients;
- civil monetary penalties of $50 to $10,000;
- closure of facility and/or transfer of patients in emergencies;
- directed plans of correction; and
- directed in-service training.
HCFA's most recent enforcement guidelines established criteria that:
- mandate the immediate application of remedies before the provider has an
opportunity to correct the deficiency;
- impose a "per instance" civil monetary penalty up to $10,000 per day; and
- allow termination in as few as two days.
We have analyzed the revised HCFA regulations with respect to our programs
and facilities, as well as compliance data for the past year. Results of HCFA
surveys for the past year determined that over 94% of our nursing facilities
surveyed were in compliance with the HCFA criteria. Although we could be
adversely affected if a substantial portion of our programs or facilities were
eventually determined not to be in compliance with the HCFA regulations, we
believe our programs and facilities are generally in compliance.
In the ordinary course of our business, we receive notices of deficiencies
for failure to comply with various regulatory requirements. We review such
notices and take appropriate corrective action. In most cases, the facility and
the reviewing agency will agree upon the steps to be taken to bring the facility
into compliance
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with regulatory requirements. In some cases or upon repeat violations, the
reviewing agency may take a number of adverse actions against a facility. These
adverse actions include:
- the imposition of fines;
- temporary suspension of admission of new patients to the facility;
- decertification from participation in the Medicaid or Medicare programs;
or
- in extreme circumstances, revocation of a facility's license.
We have been subject to certain of these adverse actions in the past and
could be subject to adverse actions in the future which could result in
significant penalties, as well as adverse publicity.
We have a Quality Management ("QM") program to help ensure that high
quality care is provided in each of our facilities. Our nationwide network of
healthcare professionals includes physician medical directors, registered
nurses, dieticians, social workers and other specialists who work with regional,
district and facility based professionals. Facility based QM is structured
through our Beverly Quality System. With a philosophy of quality improvement,
internal evaluations are used by local quality improvement teams to identify and
correct possible problems and improve care delivery.
The Social Security Act and regulations of HHS state that providers and
related persons who have been convicted of a criminal offense related to the
delivery of an item or service under the Medicare or Medicaid programs or who
have been convicted, under state or federal law, of a criminal offense relating
to neglect or abuse of residents in connection with the delivery of a healthcare
item or service cannot participate in the Medicare or Medicaid programs.
Furthermore, providers and related persons who have been convicted of fraud, who
have had their licenses revoked or suspended, or who have failed to provide
services of adequate quality may be excluded from the Medicare and Medicaid
programs.
In February 2000, as part of the settlement of an investigation by the
federal government into our allocation of certain costs to the Medicare program
(See "Item 3. Legal Proceedings"), we entered into a Corporate Integrity
Agreement with the Office of Inspector General (the "OIG"), which requires that
we monitor, on an ongoing basis, our compliance with the requirements of the
federal healthcare programs. This agreement addresses our obligations to ensure
that we comply with the requirements for participation in the federal healthcare
programs. It also includes our functional and training obligations, audit and
review requirements, recordkeeping and reporting requirements, as well as
penalties for breach/noncompliance of the agreement. We believe that we are in
substantial compliance with the requirements of the Corporate Integrity
Agreement.
The "fraud and abuse" anti-kickback provisions of the Social Security Act
(the "Antifraud Amendments") make it a criminal felony offense to knowingly and
willfully offer, pay, solicit or receive payment in order to induce business for
which reimbursement is provided under government health programs, including
Medicare and Medicaid. In addition, violators can be subject to civil penalties,
as well as exclusion from government health programs. The Antifraud Amendments
have been broadly interpreted to make payment of any kind, including many types
of business and financial arrangements among providers and between providers and
beneficiaries, potentially illegal if any purpose of the payment or financial
arrangement is to induce a referral. Accordingly, joint ventures, space and
equipment rentals, management and personal services contracts, and certain
investment arrangements among providers may be subject to increased regulatory
scrutiny.
From time to time, HHS puts into effect regulations describing, or
clarifying, certain arrangements that are not subject to enforcement action
under the Social Security Act (the "Safe Harbors"). The Safe Harbors described
in the regulations are narrow, leaving a wide range of economic relationships,
which many hospitals, physicians and other healthcare providers consider to be
legitimate business arrangements, possibly subject to enforcement action under
the Antifraud Amendments. The regulations do not intend to comprehensively
describe all lawful relationships between healthcare providers and referral
sources. The regulations clearly state that just because an arrangement does not
qualify for Safe Harbor protection does not mean it violates
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the Antifraud Amendments. However, it may subject a particular arrangement or
relationship to increased regulatory scrutiny.
In addition to the Antifraud Amendments, Section 1877 of the Social
Security Act (known as the "Stark Law") imposes restrictions on financial
relationships between physicians and certain entities. The Stark Law provides
that if a physician (or an immediate family member of a physician) has a
financial relationship with an entity that provides certain designated health
services, the physician may not refer a Medicare or Medicaid patient to the
entity. In addition, the entity may not bill for services provided by that
physician unless an exception to the financial relationship exists. Designated
health services include certain services, such as physical therapy, occupational
therapy, prescription drugs and home health. The types of financial
relationships that can trigger the referral and billing prohibitions include
ownership or investment interests, as well as compensation arrangements.
Penalties for violating the law are severe, and include:
- denial of payment for services provided;
- civil monetary penalties of $15,000 for each item claimed;
- assessments equal to 200% of the dollar value of each such service
provided; and
- exclusion from the Medicare and Medicaid programs.
Many states where we operate have laws similar to the Antifraud Amendments
and the Stark Law, but with broader effect since they apply regardless of the
source of payment for care. These laws typically provide criminal and civil
penalties, as well as loss of licensure. The scope of these state laws is broad
and little precedent exists for their interpretation or enforcement.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
includes comprehensive revisions or supplements to the Antifraud Amendments.
Under HIPAA, it is a federal criminal offense to commit healthcare fraud.
Healthcare fraud is defined as knowingly and willfully executing or attempting
to execute a "scheme or device" to defraud any healthcare benefit program. In
addition, for the first time, federal enforcement officials have the ability to
exclude from the Medicare and Medicaid programs any investors, officers and
managing employees associated with business entities that have committed
healthcare fraud, even if the investor, officer or employee had no actual
knowledge of the fraud. HIPAA established that it is a violation to pay a
Medicare or Medicaid beneficiary so as to influence such beneficiary to order or
receive services from a particular provider or practitioner. Most of the
provisions of HIPAA became effective January 1, 1997.
The 1997 Act also contained a significant number of new fraud and abuse
provisions. For example, civil monetary penalties may also be imposed for
violations of the Antifraud Amendments (previously, exclusion or criminal
prosecution were the only actions under the Antifraud Amendments), as well as
for contracting with an individual or entity that a provider knows or should
know is excluded from a federal healthcare program. The 1997 Act provides for
civil monetary penalties of $50,000 and damages of not more than three times the
amount of payment received from the prohibited activity.
In 1976, Congress established the OIG at HHS to identify and eliminate
fraud, abuse and waste in HHS programs and to promote efficiency and economy in
HHS departmental operations. The OIG carries out this mission through a
nationwide program of audits, investigations and inspections. In order to
provide guidance to healthcare providers on ways to engage in legitimate
business practices and avoid scrutiny under the fraud and abuse statutes, the
OIG has from time to time issued "fraud alerts" identifying segments of the
healthcare industry and particular practices that are vulnerable to abuse. The
OIG has issued three fraud alerts targeting the skilled nursing industry:
- an August 1995 alert which relates to the providing of medical supplies
to nursing facilities, the fraudulent billing for medical supplies and
equipment and fraudulent supplier transactions;
- a May 1996 alert which focuses on the providing of fraudulent
professional services to nursing facility residents; and
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- a March 1998 alert which addresses the interrelationship between hospice
services and the nursing home industry, and potentially illegal practices
and arrangements.
The fraud alerts encourage persons having information about potentially
abusive practices or transactions to report such information to the OIG.
In addition to laws addressing referral relationships, several federal laws
impose criminal and civil sanctions for fraudulent and abusive billing
practices. The federal False Claims Act imposes sanctions, consisting of
monetary penalties of up to $11,000 for each claim and three times the amount of
damages, on entities and persons who knowingly present or cause to be presented
to the federal government a false or fraudulent claim for payment. The Social
Security Act prohibits the knowing and willful making of a false statement or
misrepresentation of a material fact with respect to the submission of a claim
for payment under government health programs (including the Medicare and
Medicaid programs). Violations of this provision are a felony offense punishable
by fines and imprisonment. The HIPAA provisions establish criminal penalties for
fraud, theft, embezzlement, and the making of false statements with respect to
healthcare benefits programs (which includes private, as well as government
programs). Government prosecutors are increasing their use of the federal False
Claims Act to prosecute quality of care deficiencies in healthcare facilities.
Their theory behind this is that the submission of a claim for services provided
in a manner which falls short of quality of care standards can constitute the
submission of a false claim. Under federal law, private parties may bring qui
tam whistle-blower lawsuits alleging false claims. Some states have adopted
similar whistle-blower and/or false claims provisions.
In addition to increasing the resources devoted to investigating
allegations of fraud and abuse in the Medicare and Medicaid programs, federal
and state regulatory and law enforcement authorities are taking an increasingly
strict view of the requirements imposed on healthcare providers by the Social
Security Act and Medicare and Medicaid regulations. From time to time, the
Company, like other healthcare providers, is required to provide records to
state or federal agencies to aid in such investigations. It is possible that
these entities could initiate investigations in the future at facilities we
operate and that such investigations could result in significant penalties, as
well as adverse publicity.
A joint federal/state initiative, Operation Restore Trust, was created in
1995 to focus audit and law enforcement efforts on geographic areas and provider
types receiving large concentrations of Medicare and Medicaid funds. Under
Operation Restore Trust, the OIG and HCFA have undertaken a variety of
activities to address fraud and abuse by nursing homes, home health providers
and medical equipment suppliers. These activities include financial audits,
creation of a Fraud and Waste Report Hotline, and increased investigations and
enforcement activity.
In addition to its antifraud provisions, HIPAA also requires improved
efficiency in healthcare delivery by standardizing electronic data interchange
and by protecting the confidentiality and security of health data. More
specifically, HIPAA calls for:
- standardization of electronic patient health, administrative and
financial data;
- unique health identifiers for individuals, employers, health plans and
healthcare providers; and
- security standards protecting the confidentiality and integrity of
individually identifiable health information.
In August 2000, final regulations surrounding standards for electronic
transactions and code sets, as required under HIPAA, were released. These
standards will allow entities within the healthcare system to exchange medical,
billing and other information and to process transactions in a more timely and
cost effective manner. These new transactions and code sets must be implemented
by October 2002. In December 2000, the final privacy standards were released and
must be implemented by February 2003. The privacy standards are designed to
protect the privacy of patients' medical records. While the Bush administration
and Congress are reexamining these privacy standards, it is uncertain whether
there will be changes to the standards or to the effective date. Security and
other standards are expected to be issued in 2001. All standards are required to
be
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fully implemented within two years of final issuance, with civil and criminal
penalties established for noncompliance.
HHS estimates that implementation of the electronic transactions and code
sets, the privacy standards and the security standards will cost the healthcare
industry between $1.8 billion and $6.3 billion over the next five years. We have
established a working group to assess our current systems and processes, as well
as to design plans to implement these new standards. We are currently evaluating
the impact of the new standards on our consolidated financial position and
results of operations.
WE ARE SUBJECT TO INCREASINGLY EXPENSIVE AND UNPREDICTABLE PATIENT CARE
LIABILITY COSTS.
General liability and professional liability costs for the long-term care
industry, especially in the state of Florida, have become increasingly expensive
and difficult to estimate. We, along with most of our competitors, are
experiencing substantial increases in both the number of claims and lawsuits, as
well as the size of the typical claim and lawsuit. This phenomenon is most
evident in the state of Florida, where well-intended patient rights' statutes
tend to be exploited by plaintiffs' attorneys. These statutes allow for actual
damages, punitive damages and plaintiff attorney fees to be included in any
proven violation. Industry statistics show that Florida long-term care
providers:
- incur more than four times the number of general liability claims as
compared to the rest of the country;
- have general liability claims that are approximately 300% higher in cost
than the rest of the country; and
- incur 44% of the cost for general liability claims for the country, but
only represent approximately 10% of the total nursing facility beds.
Insurance companies are exiting the state of Florida, or severely
restricting their capacity to write long-term care general liability insurance.
Insurers cannot provide coverage when faced with the magnitude of losses and the
explosive growth of claims. Our overall general liability costs per bed in
Florida are severely out of line with the rest of the country and continue to
escalate.
We have been exploring strategic alternatives for our nursing home
operations in Florida. Several parties have expressed an interest in purchasing
all, or a portion, of these operations, which include 49 nursing facilities
(6,129 beds) and four assisted living centers (315 units) (the "Florida
facilities"). We plan to sell one remaining nursing facility (56 beds) in
Florida and certain other assets located in Florida in separate transactions.
Due diligence research is currently underway by potential buyers interested in
the Florida facilities. During 2000, the Florida facilities had net operating
revenues of approximately $267,000,000 and had total assets of approximately
$237,000,000 at December 31, 2000. It is too early to speculate on timing or
pricing of a potential transaction or to estimate the ultimate impact of the
sale of the Florida facilities on our consolidated financial position, results
of operations or cash flows.
OUR FAILURE TO ATTRACT QUALIFIED PERSONNEL COULD HARM OUR BUSINESS.
At December 31, 2000, we had approximately 64,000 associates. We are
subject to both federal minimum wage and applicable federal and state wage and
hour laws. In addition, we maintain various employee benefit plans.
Due to nationwide low unemployment rates, we are currently experiencing
difficulty attracting and retaining nursing assistants, nurses' aides and other
facility-based personnel. Our weighted average wage rate and use of contract
nursing personnel have increased, indicating the difficulty our facilities are
having in attracting these personnel. We are addressing this challenge through
recruiting and retention programs and training initiatives. These programs and
initiatives may not stabilize or improve our ability to attract and retain these
personnel. Our inability to control labor availability and cost could have a
material adverse affect on our future operating results.
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Approximately 7% of our associates, who work in approximately 100 of our
nursing facilities, are represented by various labor unions. Certain labor
unions have publicly stated that they are concentrating their organizing efforts
within the long-term healthcare industry. Being one of the largest employers
within the long-term healthcare industry, we have been the target of a
"corporate campaign" by two AFL-CIO affiliated unions attempting to organize
certain of our facilities. We have never experienced any material work stoppages
and believe that our relations with our associates are generally good. However,
we cannot predict the effect continued union representation or organizational
activities will have on our future activities. There can be no assurance that
continued union representation and organizational activities will not result in
material work stoppages, which could have a material adverse effect on our
operations.
Excessive litigation is a tactic common to "corporate campaigns" and one
that is being employed against us. There are several proceedings against
facilities we operate before the National Labor Relations Board ("NLRB"). These
proceedings consolidate individual cases from separate facilities. Certain of
these proceedings are currently pending before the NLRB. We are vigorously
defending these proceedings. We believe, based on advice from our Deputy General
Counsel, that many of these cases are without merit. Further, it is our belief
that the NLRB-related proceedings, individually and in the aggregate, are not
material to our consolidated financial position, results of operations, or cash
flows.
CERTAIN TRENDS IN THE HEALTHCARE INDUSTRY ARE PUTTING PRESSURE ON OUR ABILITY TO
MAINTAIN NURSING FACILITY CENSUS.
Over the past decade a number of trends have developed that have impacted
our census. These trends include:
- overbuilding of nursing facilities in states that have eliminated the
certificate of need process for new construction;
- creation of nursing facilities by acute care hospitals to keep discharged
patients within their complex;
- rapid growth of assisted living facilities, which sometimes are more
attractive to less medically complex patients; and
- the development of the scope and availability of health services
delivered to the home.
The impact of these trends on nursing facility census varies from facility
to facility, from community to community and from state to state.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We have a significant amount of indebtedness. At December 31, 2000, we had
approximately $791,358,000 of outstanding indebtedness. This outstanding
indebtedness does not include approximately $94,871,000 of amounts we owe to the
federal government under the civil settlement agreement. Our substantial
indebtedness could:
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate activities;
- limit our flexibility in planning for, or reacting to, changes in our
business and industry;
- place us at a competitive disadvantage compared to other less leveraged
competitors;
- increase our vulnerability to general adverse economic and industry
conditions; or
- limit our ability to pursue business opportunities that may be in our
interest.
If we add new indebtedness to our existing debt levels, it could increase
the related risks that we face.
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IF WE ARE UNABLE TO GENERATE SUFFICIENT CASH FLOW TO SERVICE OUR INDEBTEDNESS OR
REFINANCE OUR INDEBTEDNESS AT COMMERCIALLY REASONABLE TERMS, OUR BUSINESS AND
FINANCIAL RESULTS COULD SUFFER.
Our ability to make payments on, or to refinance, our indebtedness and to
fund planned expenditures depends on our ability to generate cash flow in the
future. This, to some extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. In addition, our ability to borrow funds under our $375,000,000 secured
revolving credit facility, which expires on December 31, 2001, depends on our
satisfying various covenants. These covenants, among other things:
- limit our ability and the ability of our subsidiaries to borrow and place
liens on our assets or their assets;
- require us to comply with a coverage ratio test;
- require us to maintain a minimum consolidated net worth;
- limit our ability to merge with other parties or sell all or
substantially all of our assets; and
- limit our and our subsidiaries' ability to make investments.
We cannot assure you that our business will generate cash flow from
operations or that future borrowings will be available to us under our credit
facility in an amount sufficient to enable us to pay our indebtedness or to fund
our other liquidity needs. Our revolving credit facility matures on December 31,
2001, and we will be required to renegotiate, extend or refinance this facility
in 2001. We cannot assure you that we will be able to refinance our credit
facility, or any other outstanding indebtedness, at commercially reasonable
terms, if at all. Refinancing our credit facility could result in:
- an increase in the interest rate over the rate we currently pay;
- additional or more restrictive covenants than those outlined above; or
- granting of a security interest in additional collateral.
Our inability to generate sufficient cash flow to service our indebtedness
or refinance our indebtedness at commercially reasonable terms could have a
material adverse affect on our business and results of operations.
THERE MAY BE VOLATILITY IN OUR STOCK PRICE.
The market price of our Common Stock is based in large part on professional
securities analysts' expectations that our business will continue to grow and
that we will achieve certain profit levels. If our financial performance in a
particular quarter does not meet the expectations of securities analysts, this
may adversely affect the views of those securities analysts concerning our
growth potential and future financial performance. If the securities analysts
who regularly follow our Common Stock lower their ratings of our Common Stock or
lower their projections for our future growth and financial performance, the
market price of our Common Stock is likely to drop significantly.
ITEM 2. PROPERTIES.
On February 28, 2001, we operated 531 nursing facilities, 34 assisted
living centers, 165 outpatient therapy clinics and 58 hospice and home care
centers in 33 states and the District of Columbia. Most of our 171 leased
nursing facilities are subject to "net" leases which require us to pay all
taxes, insurance and maintenance costs. Most of these leases have original terms
from ten to fifteen years and contain at least one renewal option. Renewal
options typically extend the original terms of the leases by five to fifteen
years. Many of these leases also contain purchase options. We consider our
physical properties to be in good operating condition and suitable for the
purposes for which they are being used. Certain of our nursing facilities and
assisted living centers are included in the collateral securing our obligations
under various debt agreements. See "Part II, Item 8 -- Note 6 of Notes to
Consolidated Financial Statements."
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The following is a summary of our nursing facilities, assisted living
centers, outpatient therapy clinics and hospice and home care centers at
February 28, 2001:
NURSING FACILITIES ASSISTED LIVING
------------------- CENTERS OUTPATIENT HOSPICE AND
---------------- THERAPY HOME CARE
TOTAL CLINICS CENTERS
LICENSED TOTAL ---------- -----------
LOCATION NUMBER BEDS NUMBER UNITS NUMBER NUMBER
- -------- ------- --------- ------- ------ ---------- -----------
Alabama....................... 21 2,743 -- -- -- --
Arizona....................... 3 480 -- -- -- --
Arkansas...................... 37 4,370 3 64 -- --
California.................... 66 7,127 3 185 39 17
Colorado...................... -- -- -- -- 15 --
Delaware...................... -- -- -- -- 4 --
District of Columbia.......... 1 355 -- -- -- --
Florida....................... 50 6,185 4 315 -- --
Georgia....................... 15 1,970 4 109 21 3
Hawaii........................ 2 396 -- -- -- --
Illinois...................... 3 275 -- -- -- --
Indiana....................... 32 4,887 1 16 -- 1
Kansas........................ 25 1,476 2 29 -- --
Kentucky...................... 8 1,039 -- -- -- --
Maryland...................... 4 585 1 16 6 --
Massachusetts................. 19 2,073 -- -- -- --
Michigan...................... 2 206 -- -- -- --
Minnesota..................... 30 2,390 2 28 -- --
Mississippi................... 21 2,598 -- -- -- --
Missouri...................... 26 2,598 3 101 -- 1
Nebraska...................... 24 2,125 1 19 -- 4
Nevada........................ -- -- -- -- -- 1
New Jersey.................... 1 120 -- -- -- --
North Carolina................ 10 1,278 1 16 10 23
Ohio.......................... 12 1,433 -- -- 5 --
Pennsylvania.................. 42 4,776 3 61 12 5
South Carolina................ 2 216 -- -- 15 --
South Dakota.................. 17 1,217 1 36 -- --
Tennessee..................... 7 929 2 57 -- --
Texas......................... -- -- -- -- 38 2
Virginia...................... 15 1,937 3 80 -- --
Washington.................... 7 648 -- -- -- --
West Virginia................. 3 310 -- -- -- --
Wisconsin..................... 26 2,838 -- -- -- 1
--- ------ -- ----- --- --
531 59,580 34 1,132 165 58
=== ====== == ===== === ==
CLASSIFICATION
Owned......................... 358 39,306 29 846 -- --
Leased........................ 171 20,162 5 286 165 58
Managed....................... 2 112 -- -- -- --
--- ------ -- ----- --- --
531 59,580 34 1,132 165 58
=== ====== == ===== === ==
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ITEM 3. LEGAL PROCEEDINGS.
On February 3, 2000, we entered into a series of agreements with the U.S.
Department of Justice and the Office of Inspector General (the "OIG") of the
Department of Health and Human Services. These agreements settled the federal
government's investigations of the Company relating to our allocation to the
Medicare program of certain nursing labor costs in our skilled nursing
facilities from 1990 to 1998 (the "Allocation Investigations").
The agreements consist of:
- a Plea Agreement;
- a Civil Settlement Agreement;
- a Corporate Integrity Agreement; and
- an agreement concerning the disposition of 10 nursing facilities.
Under the Plea Agreement, one of our subsidiaries pled guilty to one count
of mail fraud and 10 counts of making false statements to Medicare and paid a
criminal fine of $5,000,000 during the first quarter of 2000.
Under the Civil Settlement Agreement, we paid the federal government
$25,000,000 during the first quarter of 2000 and are reimbursing the federal
government an additional $145,000,000 through withholdings from our biweekly
Medicare periodic interim payments in equal installments over eight years. In
addition, we agreed to resubmit certain Medicare filings to reflect reduced
labor costs allocated to the Medicare program.
Under the Corporate Integrity Agreement, we are required to monitor, on an
ongoing basis, our compliance with the requirements of the federal healthcare
programs. This agreement addresses our obligations to ensure that we comply with
the requirements for participation in the federal healthcare programs. It also
includes our functional and training obligations, audit and review requirements,
recordkeeping and reporting requirements, as well as penalties for
breach/noncompliance of the agreement. We believe that we are in substantial
compliance with the requirements of the Corporate Integrity Agreement.
In accordance with our agreement to dispose of 10 nursing facilities, we
disposed of seven of the facilities during 2000. We expect to dispose of the
remainder during 2001. The carrying values of these facilities have been
adjusted to our best estimate of their net realizable values.
On July 6, 1999, an amended complaint was filed by the plaintiffs in a
previously disclosed purported class action lawsuit pending against the Company
and certain of our officers in the United States District Court for the Eastern
District of Arkansas (the "Class Action"). Plaintiffs filed a second amended
complaint on September 9, 1999 which asserted claims under Section 10(b)
(including Rule 10b-5 promulgated thereunder) and under Section 20 of the
Securities Exchange Act of 1934 arising from practices that were the subject of
the Allocation Investigations. The defendants filed a motion to dismiss that
complaint on October 8, 1999. Oral agreement on this motion was held on April 6,
2000. Due to the preliminary state of the Class Action and the fact the second
amended complaint does not allege damages with any specificity, we are unable at
this time to assess the probable outcome of the Class Action or the materiality
of the risk of loss. However, we believe that we acted lawfully with respect to
plaintiff investors and will vigorously defend the Class Action. However, we can
give no assurances of the ultimate impact on our consolidated financial
position, results of operations or cash flows as a result of these proceedings.
In addition, since July 29, 1999, eight derivative lawsuits have been filed
in the federal and state courts of Arkansas, California and Delaware, as well as
the federal district court in Arkansas, (collectively, the "Derivative
Actions"), including:
- Norman M. Lyons v. David R. Banks, et al., Case No. OT99-4041, was filed
in the Chancery Court of Pulaski County, Arkansas (4th Division) on or
about July 29, 1999, and the parties filed an Agreed Motion to Stay the
proceedings on January 17, 2000;
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- Alfred Badger, Jr. v. David R. Banks, et al., Case No. OT99-4353, was
filed in the Chancery Court of Pulaski County, Arkansas (1st Division) on
or about August 17, 1999 and voluntarily dismissed on November 30, 1999;
- James L. Laurita v. David R. Banks, et al., Case No. 17348NC, was filed
in the Delaware Chancery Court on or about August 2, 1999;
- Kenneth Abbey v. David R. Banks, et al., Case No. 17352NC, was filed in
the Delaware Chancery Court on or about August 4, 1999;
- Alan Friedman v. David R. Banks, et al., Case No. 17355NC, was filed in
the Delaware Chancery Court on or about August 9, 1999;
- Elles Trading Company v. David R. Banks, et al., was filed in the
Superior Court for San Francisco County, California on or about August 4,
1999 and removed to federal district court;
- Kushner v. David R. Banks, et al., Case No. LR-C-98-646, was filed in the
United States District Court for the Eastern District of Arkansas
(Western Division) on September 30, 1999; and
- Richardson v. David R. Banks, et al., Case No. LR-C-99-826, was filed in
the United States District Court for the Eastern District of Arkansas
(Western Division) on November 4, 1999.
The Laurita, Abbey and Friedman actions were subsequently consolidated by
order of the Delaware Chancery Court. On or about October 1, 1999, the
defendants moved to dismiss the Laurita, Abbey and Friedman actions. The parties
have agreed to stay the consolidated action pending the outcome of the motion to
dismiss in the Class Action. The plaintiffs in the Elles Trading Company action
filed a notice of voluntary dismissal on February 3, 2000. The Kushner and
Richardson actions were ordered to be consolidated as In Re Beverly Enterprises,
Inc. Derivative Litigation and by agreed motion, Plaintiffs filed an amended,
consolidated complaint on April 21, 2000. Defendants filed a motion to dismiss
the consolidated derivative complaint and a motion to strike portions thereof on
July 21, 2000. The parties have agreed to stay the consolidated action pending
the outcome of the motion to dismiss in the Class Action, but the stipulation
has not been entered by the Court.
The Derivative Actions each name the Company's directors as defendants, as
well as the Company as a nominal defendant. The Badger and Lyons actions also
name as defendants certain of the Company's officers. The Derivative Actions
each allege breach of fiduciary duties to the Company and its stockholders
arising primarily out of the Company's alleged exposure to loss due to the Class
Action and the Allocation Investigations. The Lyons, Badger and Richardson
actions also assert claims for abuse of control and constructive fraud arising
from the same allegations, and the Richardson action also claims unjust
enrichment.
Due to the preliminary state of the Derivative Actions and the fact the
complaints do not allege damages with any specificity, we are unable at this
time to assess the probable outcome of the Derivative Actions or the materiality
of the risk of loss. However, we believe that we acted lawfully with respect to
the allegations of the Derivative Actions and will vigorously defend the
Derivative Actions. However, we can give no assurances of the ultimate impact on
our consolidated financial position, results of operations or cash flows as a
result of these proceedings.
There are various other lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages that are generally not covered by insurance. We do not believe that the
ultimate resolution of such other matters will have a material adverse effect on
our consolidated financial position or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of our security holders during
the last quarter of our fiscal year ended December 31, 2000.
EXECUTIVE OFFICERS AND DIRECTORS
Each of our executive officers and directors holds office until a successor
is elected, or until the earliest of death, resignation or removal. Each
executive officer is elected or appointed by the Board of Directors. The
executive officers and directors, as of February 28, 2001, are as follows:
NAME POSITION AGE
---- -------- ---
David R. Banks(3)......................... Chairman of the Board and Director 64
William R. Floyd.......................... President, Chief Executive Officer and
Director 56
Douglas J. Babb........................... Executive Vice President -- Law and
Government Relations and Secretary 48
William A. Mathies........................ Executive Vice
President -- Innovation/Services 41
T. Jerald Moore........................... Executive Vice President -- Human
Resources 60
Philip W. Small........................... Executive Vice President -- Operational
Finance 44
Bobby W. Stephens......................... Executive Vice President -- Procurement 56
Scott M. Tabakin.......................... Executive Vice President and Chief
Financial Officer 42
Patrice K. Acosta......................... Senior Vice President -- Professional
Services 44
Eugene B. Clarke.......................... Senior Vice President -- Quality
Management 60
Pamela H. Daniels......................... Senior Vice President, Controller and
Chief Accounting Officer 37
David L. Devereaux........................ Senior Vice President -- Operations 38
Cletus C. Hess............................ Senior Vice President -- Compliance 36
Schuyler Hollingsworth, Jr. .............. Senior Vice President and Treasurer 54
Beryl F. Anthony, Jr.(2)(3)(4)............ Director 63
Carolyne K. Davis, R.N., Ph.D.(3)(5)...... Director 69
James R. Greene(1)(2)(5).................. Director 79
Edith E. Holiday(1)(4)(5)................. Director 49
Jon E.M. Jacoby(1)(3)..................... Director 62
Risa J. Lavizzo-Mourey, M.D.(2)(5)........ Director 46
James W. McLane(1)(2)..................... Director 62
Marilyn R. Seymann, Ph.D.(1)(4)(5)........ Director 58
- ---------------
(1) Member of the Audit and Compliance Committee.
(2) Member of the Compensation Committee.
(3) Member of the Executive Committee.
(4) Member of the Nominating Committee.
(5) Member of the Quality Management Committee.
Mr. Banks has been a director of the Company since 1979 and Chairman of the
Board since March 1990. Mr. Banks served as Chief Executive Officer from May
1989 to February 2001 and was President of the Company from 1979 to September
1995. Mr. Banks is a director of Nationwide Health Properties, Inc., Ralston
Purina Company and Agribrands International, Inc.
Mr. Floyd joined the Company in April 2000 as President and Chief Operating
Officer and was elected Chief Executive Officer in February 2001. From 1996 to
1998, he was Chief Executive Officer of Choice Hotels International, and from
1995 to 1996, he was Senior Vice President -- Operations of Taco Bell
Corporation. He has been a director of the Company since July 2000.
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Mr. Babb joined the Company in April 2000 as Executive Vice President,
General Counsel and Secretary. He was named head of Government Relations in
January 2001. Mr. Babb was Senior Vice President and Chief of Staff for
Burlington Northern Santa Fe Corporation ("BNSF") from 1995 to 1997 and Senior
Vice President -- Merchandise Business Unit for BNSF from 1997 to 1999.
Mr. Mathies joined the Company in 1981 as an Administrator in training. He
was an Administrator until 1986 at which time he became a Regional Manager. In
1988, Mr. Mathies was elected Vice President of Operations for the California
region and was elected Executive Vice President of the Company in September 1995
and served as President of the corporations within Beverly Healthcare from
September 1995 to January 2001. In January 2001, he was named head of the
Company's Innovation/Services division.
Mr. Moore joined the Company as Executive Vice President in December 1992
and served as President of the corporations within Beverly Specialty Hospitals
from June 1996 to June 1998. He was named interim head of Human Resources in
January 2001. Mr. Moore was employed at Aetna Life and Casualty from 1963 to
1992 and was elected Senior Vice President in 1990.
Mr. Small joined the Company in January 1986 as Reimbursement Manager, was
promoted to Division Controller in September 1986 and Director of Finance for
the California Region in 1989. He was elected Vice President -- Reimbursement in
September 1990, Senior Vice President -- Finance in 1995, Executive Vice
President -- Strategic Planning and Operations Support in August 1998 and named
head of Operational Finance in January 2001.
Mr. Stephens joined the Company as a staff accountant in 1969. He was
elected Assistant Vice President in 1978, Vice President of the Company and
President of the Company's Central Division in 1980, and Executive Vice
President in February 1990. Mr. Stephens is a director of Sparks Regional
Medical Center, City National Bank in Fort Smith, Arkansas, Beverly Japan
Corporation, and Harbortown Properties, Inc.
Mr. Tabakin joined the Company in October 1992 as Vice President,
Controller and Chief Accounting Officer. He was elected Senior Vice President in
May 1995 and Executive Vice President and Chief Financial Officer in October
1996. From 1980 to 1992, Mr. Tabakin was with Ernst & Young LLP. Mr. Tabakin is
a director of St. Edward Mercy Medical Center.
Ms. Acosta joined the Company in October 1996 as Vice President -- Risk
Management. She was elected Senior Vice President -- Professional Services in
January 2001. Prior to joining the Company, Ms. Acosta was Vice
President -- Risk Management at Regency Health Services.
Mr. Clarke joined the Company in 1987 as Director of Government Program
Compliance. He was elected Vice President in 1989 and Senior Vice
President -- Quality Assurance in December 1991. Mr. Clarke is a director of St.
Edward Mercy Medical Center.
Ms. Daniels joined the Company in May 1988 as Audit Coordinator. She was
promoted to Financial Reporting Senior Manager in 1991 and Director of Financial
Reporting in 1992. She was elected Vice President, Controller and Chief
Accounting Officer in October 1996 and Senior Vice President in December 1999.
From 1985 to 1988, Ms. Daniels was with Price Waterhouse Coopers LLP.
Mr. Devereaux joined the Company in August 1998 as Senior Vice
President -- Operations for Specialty Services Division of Beverly Healthcare
and was elected President of the corporations within Beverly Healthcare in
January 2001. From 1996 to 1998, Mr. Devereaux was District Vice President of
Manor Care Health Services.
Mr. Hess joined the Company in May 1995 as Senior
Attorney -- Reimbursement. He was elected Vice President -- Compliance in May
1998 and Senior Vice President in December 1999. From 1990 to 1995, Mr. Hess was
with Duane Morris & Heckscher.
Mr. Hollingsworth joined the Company in June 1985 as Assistant Treasurer.
He was elected Treasurer in 1988, Vice President in 1990 and Senior Vice
President in March 1992.
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Mr. Anthony served as a member of the United States Congress and was
Chairman of the Democratic Congressional Campaign Committee from 1987 through
1990. In 1993, he became a partner in the Winston & Strawn law firm. He has been
a director of the Company since January 1993.
Dr. Davis has been an international health care consultant since 1985. She
is a director of Beckman Coulter, Inc., The Prudential Insurance Company of
America, Inc., MiniMed, Inc. and Merck & Co., Inc. She has been a director of
the Company since December 1997.
Mr. Greene's principal occupation has been that of a director and
consultant to various U.S. and international businesses since 1986. He is a
director of Buck Engineering Company and Bank Leumi. He has been a director of
the Company since January 1991.
Ms. Holiday is an attorney. She served as White House Liaison for the
Cabinet and all federal agencies during the George H.W. Bush administration.
Prior to that, Ms. Holiday served as General Counsel of the U.S. Treasury
Department, as well as its Assistant Secretary of Treasury for Public Affairs
and Public Liaison. She is a director of Amerada Hess Corporation, Hercules
Incorporated, H.J. Heinz Company and RTI International Metals, Inc. She is also
a director or trustee of various investment companies in the Franklin Templeton
group of funds. She has been a director of the Company since March 1995.
Mr. Jacoby is Executive Vice President, Chief Financial Officer and a
director of Stephens Group, Inc. Mr. Jacoby has held the indicated positions
with Stephens Group, Inc. since 1986, and prior to that time, served as Manager
of the Corporate Finance Department and Assistant to the President of Stephens
Inc. Mr. Jacoby is a director of Power-One, Inc. and Delta and Pine Land
Company, Inc. He has been a director of the Company since February 1987.
Dr. Lavizzo-Mourey is Director of the Institute of Aging, Chief of the
Division of Geriatric Medicine, Associate Executive Vice President for health
policy and Professor of Medicine at the University of Pennsylvania, Ralston-Penn
Center. She is a director of Hanger Orthopedic Group, Inc. She has been a
director of the Company since March 1995.
Mr. McLane is President and Chief Executive Officer of Healthaxis Inc. From
1997 until early 2000, he was President and Chief Operating Officer of NovaCare,
Inc. He previously served as Executive Vice President of Aetna Life and Casualty
and as Chief Executive Officer of Aetna Health Plans. He is a director of
Healthaxis Inc. and UltraTouch, Inc. He has been a director of the Company since
October 2000.
Ms. Seymann is President and Chief Executive Officer of M One, Inc., a
management and information systems consulting firm specializing in the financial
services industry. She is a director of Community First Bankshares, Inc., True
North Communications, Inc. and NorthWestern Corporation. She has been a director
of the Company since March 1995.
During 2000, there were seven meetings of the Board of Directors. Each
director, except Jon E.M. Jacoby, attended at least 75% of the meetings of the
Board and committees on which he or she served.
In 2000, non-employee directors received a retainer fee of $25,000 for
serving on the Board and an additional fee of $1,000 for each Board or committee
meeting attended ($500 if attended by telephone). The chairperson of each
committee received an additional $1,000 for each committee meeting attended.
Such fees can be deferred, at the option of the director, as provided for under
the Non-Employee Director Deferred Compensation Plan (discussed below). Mr.
Banks, our current Chairman of the Board and Mr. Floyd, our current President
and Chief Executive Officer, received no additional cash compensation during
2000 for serving on the Board or its committees.
The Non-Employee Director Deferred Compensation Plan provides each
non-employee director the opportunity to receive awards equivalent to shares of
our Common Stock ("deferred share units") and to defer
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receipt of compensation for services rendered to the Company. There are three
types of contributions available under the plan:
- deferral of all or part of retainer and meeting fees to a pre-tax
deferred compensation account either into a cash account, which is
credited with interest, or a deferred share unit account, with each unit
having a value equivalent to one share of our Common Stock;
- a 25% match on the amount of fees deferred in the deferred share unit
account; and
- a grant of 675 deferred share units each year.
Distributions under the plan will commence upon retirement, termination,
death or disability and will be made in shares of our Common Stock unless the
Board of Directors approves payment in cash.
Under the Non-Employee Directors Stock Option Plan, there are 300,000
shares of our $.10 par value common stock ("Common Stock") authorized for
issuance, subject to certain adjustments. The plan, as amended, provides that
3,375 stock options be granted to each non-employee director on June 1 of each
year until the plan is terminated, subject to the availability of shares. Such
stock options are granted at a purchase price equal to the fair market value of
our Common Stock on the date of grant, become exercisable one year after the
date of grant and expire ten years after the date of grant.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock is listed on the New York and Pacific Stock Exchanges. The
table below sets forth, for the periods indicated, the range of high and low
sales prices of our Common Stock as reported on the New York Stock Exchange
composite tape.
PRICES
-------------
HIGH LOW
----- -----
1999
First Quarter............................................. $6.94 $4.50
Second Quarter............................................ 8.19 4.31
Third Quarter............................................. 8.00 3.88
Fourth Quarter............................................ 5.19 3.50
2000
First Quarter............................................. $4.56 $2.50
Second Quarter............................................ 4.00 2.75
Third Quarter............................................. 6.38 2.56
Fourth Quarter............................................ 8.25 3.81
2001
First Quarter (through February 28)....................... $8.30 $5.94
We are subject to certain restrictions under our long-term debt agreements
related to the payment of cash dividends on our Common Stock. During 2000 and
1999, we did not pay any cash dividends on our Common Stock and no future
dividends are currently planned.
On February 28, 2001, there were 5,249 record holders of our Common Stock.
EMPLOYEE STOCK PURCHASE PLAN
The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees having completed one year of
continuous service to purchase shares of our Common Stock at the current market
price through payroll deductions. We have historically made contributions in the
amount of 30% of the participant's contribution. Effective January 1, 2001, we
reduced such contributions to 15% of the participant's contribution. Each
participant specifies the amount to be withheld from earnings per two-week pay
period, subject to certain limitations. The total charge to our statement of
operations for the year ended December 31, 2000 related to this plan was
approximately $1,192,000. On December 31, 2000, there were approximately 2,600
participants in the plan.
Merrill Lynch & Co., Merrill Lynch World Headquarters, North Tower, World
Financial Center, New York, New York 10281, was appointed broker to open and
maintain an account in each participant's name and to purchase shares of our
Common Stock on the New York Stock Exchange for each participant.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table of selected financial data should be read along with
our consolidated financial statements and related notes thereto for 2000, 1999
and 1998 included elsewhere in this Annual Report on Form 10-K.
AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998(1) 1997(2) 1996
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net operating revenues....................... $ 2,625,610 $ 2,546,672 $ 2,812,232 $ 3,217,099 $ 3,267,189
Interest income.............................. 2,650 4,335 10,708 13,201 13,839
------------ ------------ ------------ ------------ ------------
Total revenues....................... 2,628,260 2,551,007 2,822,940 3,230,300 3,281,028
Costs and expenses:
Operating and administrative............... 2,481,914 2,354,328 2,633,135 2,888,021 2,958,942
Interest................................... 80,016 72,578 65,938 82,713 91,111
Depreciation and amortization.............. 100,061 99,160 93,722 107,060 105,468
Asset impairments, workforce reductions and
other unusual items...................... 43,033 23,818 69,443 44,000 --
Special charges related to settlements of
federal government investigations........ -- 202,447 1,865 -- --
Year 2000 remediation...................... -- 12,402 9,719 -- --
------------ ------------ ------------ ------------ ------------
Total costs and expenses............. 2,705,024 2,764,733 2,873,822 3,121,794 3,155,521
------------ ------------ ------------ ------------ ------------
Income (loss) before provision for (benefit
from) income taxes, extraordinary charge
and cumulative effect of change in
accounting for start-up costs.............. (76,764) (213,726) (50,882) 108,506 125,507
Provision for (benefit from) income taxes.... (22,262) (79,079) (25,936) 49,913 73,481
Extraordinary charge, net of income tax
benefit of $1,057 in 1998 and $1,099 in
1996....................................... -- -- (1,660) -- (1,726)
Cumulative effect of change in accounting for
start-up costs, net of income tax benefit
of $2,811.................................. -- -- (4,415) -- --
------------ ------------ ------------ ------------ ------------
Net income (loss)............................ $ (54,502) $ (134,647) $ (31,021) $ 58,593 $ 50,300
============ ============ ============ ============ ============
Diluted income (loss) per share of common
stock:
Before extraordinary charge and cumulative
effect of change in accounting for
start-up costs........................... $ (0.53) $ (1.31) $ (.24) $ .57 $ .50
Extraordinary charge....................... -- -- (.02) -- (.01)
Cumulative effect of change in accounting
for start-up costs....................... -- -- (.04) -- --
------------ ------------ ------------ ------------ ------------
Net income (loss).......................... $ (0.53) $ (1.31) $ (.30) $ .57 $ .49
============ ============ ============ ============ ============
Shares used to compute per share amounts... 102,452,000 102,491,000 103,762,000 103,422,000 110,726,000
CONSOLIDATED BALANCE SHEET DATA:
Total assets................................. $ 1,875,993 $ 1,982,880 $ 2,160,511 $ 2,073,469 $ 2,525,082
Current portion of long-term debt............ $ 227,111 $ 34,052 $ 27,773 $ 31,551 $ 38,826
Long-term debt, excluding current portion.... $ 564,247 $ 746,164 $ 878,270 $ 686,941 $ 1,106,256
Stockholders' equity......................... $ 583,993 $ 641,124 $ 776,206 $ 862,505 $ 861,095
OTHER DATA:
Average occupancy percentage(3).............. 87.0% 87.2% 88.7% 88.9% 87.4%
Number of nursing home beds.................. 59,799 62,217 62,293 63,552 71,204
- ---------------
(1) Amounts for 1998 include the operations of American Transitional Hospitals,
Inc. through June 30, 1998.
(2) Amounts for 1997 include the operations of Pharmacy Corporation of America
through December 3, 1997.
(3) Average occupancy percentage for 2000, 1999, 1998 and 1997 was based on
operational beds, and for 1996, such percentage was based on licensed beds.
Average occupancy percentage for 2000, 1999, 1998 and 1997 based on licensed
beds was 84.9%, 85.3%, 86.9% and 87.1%, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OPERATING RESULTS
2000 COMPARED TO 1999
RESULTS OF OPERATIONS
Net loss was $54,502,000 for the year ended December 31, 2000, compared to
net loss of $134,647,000 for the year ended December 31, 1999. Net loss for 2000
included a pre-tax charge of approximately $44,400,000 related to increasing
reserves for patient care liability costs (See "Operating and Administrative
Expenses"), as well as pre-tax charges totaling approximately $43,000,000 for
asset impairments, workforce reductions and other unusual items (as described
below). Net loss for 1999 included special pre-tax charges of approximately
$202,400,000 related to the settlements of, and investigation costs related to,
the Allocation Investigations, as well as pre-tax charges totaling approximately
$23,800,000 for asset impairments, workforce reductions and other unusual items
(See "1999 Compared to 1998 -- Results of Operations").
During 2000, we recorded pre-tax charges totaling approximately
$43,000,000, including $35,500,000 for asset impairments, $6,100,000 for
workforce reductions and $1,400,000 for other unusual items. The asset
impairment charges of $35,500,000 primarily related to:
- write-down of goodwill of $24,800,000 and property and equipment of
$1,000,000 on certain under-performing outpatient therapy clinics having
operating losses for the past three years and expected future operating
losses. Management estimated the undiscounted future cash flows to be
generated by each clinic and reduced the carrying value to its estimate
of fair value. Management calculated the fair values of the impaired
clinics by using the present value of estimated future cash flows. These
assets were included in the total assets of Beverly Care Alliance.
- write-down of property and equipment of $5,100,000 and recording of
closing and other costs of $3,000,000 related to six nursing facilities
with an aggregate carrying value of approximately $6,000,000 that
management plans on closing, or terminating the leases on, during 2001.
These assets generated pre-tax losses of approximately $2,400,000 during
the year ended December 31, 2000 and were included in the total assets of
Beverly Healthcare. Management calculated the fair values of these
facilities by using the present value of estimated future cash flows, or
its best estimate of what these facilities, or similar facilities in that
state, would sell for in the open market.
- write-off of abandoned projects totaling $2,100,000;
- write-off of an investment in a physician practice management company of
$2,000,000; and
- reversal of $2,500,000 of prior year asset impairment charges (see "1999
Compared to 1998 -- Results of Operations").
The workforce reduction charges of $6,100,000 primarily related to
severance agreements associated with seven executives. Approximately $2,200,000
was paid during 2000, and the remainder is expected to be paid during the first
quarter of 2001. Four of the executives were notified in late 2000 that their
positions would be eliminated as part of a reorganization of our operating and
support group functions. Such reorganization was formally announced in the first
quarter of 2001. The purpose of the reorganization is to improve the level of
service provided to our nursing facilities and other business units (see "Part
I, Item 1. Business"). We currently estimate that an additional pre-tax charge
of approximately $20,000,000 will be recognized during the first quarter of 2001
related to this reorganization.
INCOME TAXES
We had an annual effective tax rate of 29% for the year ended December 31,
2000, compared to an annual effective tax rate of 37% for the year ended
December 31, 1999. The annual effective tax rate for 2000 was different than the
federal statutory rate primarily due to amortization of nondeductible goodwill
and state income taxes, partially offset by the benefit of certain tax credits.
Amortization of nondeductible goodwill was
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impacted by the write-down of goodwill on certain under-performing outpatient
therapy clinics (as discussed above). The annual effective tax rate for 1999 was
different than the federal statutory rate primarily due to the impact of state
income taxes.
At December 31, 2000, we had federal net operating loss carryforwards of
$152,824,000 for income tax purposes which expire in years 2018 through 2020 and
general business tax credit carryforwards of $12,257,000 for income tax purposes
which expire in years 2009 through 2020. For financial reporting purposes, the
federal net operating loss carryforwards and the general business tax credit
carryforwards have been utilized to offset existing net taxable temporary
differences reversing during the carryforward periods. Our net deferred tax
assets at December 31, 2000 will be realized through the reversal of temporary
taxable differences, future taxable income and the implementation of tax
planning strategies, as needed.
We have relied on various factors to conclude that it is more likely than
not that our future results of operations and/or tax planning strategies coupled
with the reversal of existing taxable temporary differences will generate
sufficient taxable income to realize our net deferred tax assets. Our results of
operations for the last three years are not reflective of our future earnings
potential. Our results of operations have been negatively impacted by the
occurrence of several events that are not anticipated to recur in future
periods. The 1997 Act phased in the Medicare prospective payment system, which
was effective for us on January 1, 1999. We experienced a reduction in our 1999
net operating revenues of approximately $114,000,000 as compared to 1998 as a
result of the 1997 Act. However, we experienced an increase in our 2000 net
operating revenues as compared to 1999 related to the impact of BBRA 1999, and
we anticipate that our net operating revenues for 2001 as compared to 2000 will
increase approximately $30,000,000 as a result of the BIPA provisions.
Our results of operations for the last three years have also included
pre-tax charges totaling approximately $87,400,000, $270,300,000 and
$163,200,000 for 2000, 1999 and 1998, respectively. These pre-tax charges
primarily related to increasing reserves for patient care liability costs, asset
impairments, workforce reductions and other unusual items, as well as special
charges related to settlements of federal government investigations and year
2000 remediation costs (as discussed herein).
Given the significant effects the above unusual charges and events had on
our recent results of operations, we believe our expectation of future income is
reasonable. In addition, we are exploring strategic alternatives, including the
possible divestiture, for our nursing home operations in Florida, where we have
incurred significant patient care liability costs. We would expect a positive
impact on our future core operating results due to the divestiture of our
Florida nursing operations; however, no assurances can be made of the ultimate
impact of the sale of these operations on our future consolidated financial
position, results of operations or cash flows. If additional income above that
produced by ordinary and recurring operations is needed to realize the benefit
of our net deferred tax assets, we could enter into sale-leaseback transactions
involving operating assets that would accelerate reversal of taxable temporary
differences. Therefore, we do not believe that a deferred tax valuation
allowance is necessary at December 31, 2000.
NET OPERATING REVENUES
We reported net operating revenues of $2,625,610,000 during the year ended
December 31, 2000 compared to $2,546,672,000 for the same period in 1999.
Approximately 92% and 91% of our total net operating revenues for the years
ended December 31, 2000 and 1999, respectively, were derived from services
provided by Beverly Healthcare. The increase in net operating revenues of
approximately $78,900,000 for the year ended December 31, 2000, as compared to
the same period in 1999, consists of the following:
- an increase of $96,800,000 due to facilities which the Company operated
during each of the years ended December 31, 2000 and 1999 ("same facility
operations");
- an increase of $50,500,000 due to acquisitions and openings of
newly-constructed facilities;
- partially offset by a decrease of $68,400,000 due to dispositions.
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25
The increase in net operating revenues of $96,800,000 from same facility
operations related to the following:
- $123,100,000 due to an increase in Medicaid, Medicare and private rates;
- $5,900,000 due to one additional calendar day during the year ended
December 31, 2000, as compared to the same period in 1999; and
- $18,600,000 due primarily to prior year cost report related settlements
and various other items.
Such increases were partially offset by decreases of:
- $20,200,000 due to lower revenues from outpatient rehabilitation services
primarily resulting from increased contractual adjustments;
- $15,400,000 due to lower revenues from home care services; and
- $15,200,000 due to a decline in same facility occupancy to 87.6% for the
year ended December 31, 2000, as compared to 88.2% for the same period in
1999.
Net operating revenues increased $50,500,000 for the year ended December
31, 2000, as compared to the same period in 1999, due to acquisitions which
occurred during the years ended December 31, 2000 and 1999. During 2000, we
acquired seven nursing facilities (1,210 beds), one previously leased nursing
facility (105 beds) and certain other assets. Also during such period, we opened
four newly-constructed nursing facilities (418 beds). During 1999, we purchased
three outpatient therapy clinics, two home care centers, two nursing facilities
(284 beds), one previously leased nursing facility (190 beds) and certain other
assets. In addition, we opened eight newly-constructed nursing facilities (979
beds) and three assisted living centers (156 units) during 1999. The
acquisitions of the facilities and other assets were accounted for as purchases.
The operations of the acquired facilities and other assets, as well as the
newly-constructed facilities, were immaterial to our consolidated financial
position and results of operations.
Net operating revenues decreased $68,400,000 for the year ended December
31, 2000, as compared to the same period in 1999, due to dispositions that
occurred during the years ended December 31, 2000 and 1999. During 2000, we
sold, closed or terminated the leases on 39 nursing facilities (4,263 beds) and
certain other assets. We recognized net pre-tax gains, which were included in
net operating revenues during the year ended December 31, 2000, of approximately
$2,000,000 as a result of these dispositions.
During 1999, we sold or terminated the leases on 12 nursing facilities
(1,291 beds), one assisted living center (10 units), 17 home care centers and
certain other assets. We recognized net pre-tax losses, which were included in
net operating revenues during the year ended December 31, 1999, of approximately
$4,000,000 as a result of these dispositions. The operations of the disposed
facilities and other assets were immaterial to our consolidated financial
position and results of operations.
OPERATING AND ADMINISTRATIVE EXPENSES
We reported operating and administrative expenses of $2,481,914,000 during
the year ended December 31, 2000 compared to $2,354,328,000 for the same period
in 1999. The increase of approximately $127,600,000 consists of the following:
- an increase of $146,600,000 from same facility operations;
- an increase of $57,100,000 due to acquisitions and openings of
newly-constructed facilities;
- partially offset by a decrease of $76,100,000 due to dispositions.
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Operating and administrative expenses increased $146,600,000 from same
facility operations for the year ended December 31, 2000, as compared to the
same period in 1999. This increase was due primarily to the following:
- $52,900,000 increase in wages and related expenses primarily due to an
increase in our weighted average wage rate;
- $10,800,000 increase in wages and related expenses due to increased use
of contract nursing personnel;
- $34,400,000 due primarily to increases in allowances for uncollectible
patient accounts receivable;
- $32,500,000 due to an increase in our provision for insurance and related
items; and
- $10,400,000 due to an increase in other contracted services.
Our weighted average wage rate and use of contract nursing personnel
increased in 2000 as compared to 1999. Many of our nursing facilities are having
increasing difficulties attracting nursing aides, assistants and other
personnel. We continue to address this challenge through several recruiting and
retention programs and training initiatives. No assurance can be given that
these programs and training initiatives will improve or stabilize our ability to
attract these nursing and related personnel.
We believe that adequate provision has been made in the financial
statements for liabilities that may arise out of patient care services. Such
provisions are made based upon the results of independent actuarial valuations
and other information available, including management's best judgements and
estimates. However, such provision and liability have been difficult to estimate
and have been escalating in recent periods. Based on a study completed by an
independent actuarial firm, we recorded a pre-tax charge during the third
quarter of 2000 of approximately $44,400,000 related to increasing reserves for
patient care liability costs, primarily in the state of Florida. There can be no
assurance that such provision and liability will not require material adjustment
in future periods.
INTEREST EXPENSE, NET
Interest income decreased to $2,650,000 for the year ended December 31,
2000, as compared to $4,335,000 for the same period in 1999 primarily due to the
payoff of various notes receivable. Interest expense increased to $80,016,000
for the year ended December 31, 2000, as compared to $72,578,000 for the same
period in 1999. This was primarily due to imputed interest on the civil
settlement of approximately $4,400,000 and an increase in Revolver borrowings
resulting from the $30,000,000 civil and criminal settlements paid in the first
quarter of 2000.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $100,061,000 for the
year ended December 31, 2000, as compared to $99,160,000 for the same period in
1999, primarily related to the impact of capital additions, improvements and
acquisitions.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair market
value. SFAS No. 133 will be effective for us during the first quarter of 2001.
We do not expect there to be a material effect on our consolidated financial
position or results of operations as a result of adopting SFAS No. 133.
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1999 COMPARED TO 1998
RESULTS OF OPERATIONS
Net loss was $134,647,000 for the year ended December 31, 1999, compared to
net loss of $31,021,000 for the year ended December 31, 1998. Net loss for 1999
included special pre-tax charges of approximately $202,400,000 related to the
settlements of, and investigation costs related to, the Allocation
Investigations (as discussed below), as well as pre-tax charges totaling
approximately $23,800,000 for asset impairments, workforce reductions and other
unusual items (as discussed below). Net loss for 1998 included pre-tax charges
totaling approximately $69,400,000 for asset impairments, workforce reductions
and other unusual items (as discussed below). In addition, net loss for 1998
included a $1,660,000 extraordinary charge, net of income taxes, related to the
write-off of unamortized deferred financing costs associated with the repayment
of certain debt instruments, as well as certain bond refundings, and a
cumulative effect adjustment of $4,415,000, net of income taxes, related to the
adoption of SOP 98-5 (as defined below).
On February 3, 2000, we entered into a series of separate agreements with
the U.S. Department of Justice and the Office of Inspector General (the "OIG")
of the Department of Health and Human Services. These agreements settled the
federal government's investigations of the Company relating to our allocation to
the Medicare program of certain nursing labor costs in our skilled nursing
facilities from 1990 to 1998 (the "Allocation Investigations") (See "Part I,
Item 3. Legal Proceedings"). In anticipation of such settlements, we recorded
special pre-tax charges of approximately $202,400,000 ($127,500,000, net of
income taxes, or $1.24 per share diluted) during the year ended December 31,
1999, which included:
- provisions totaling $128,800,000 representing the net present value of
the separate civil and criminal settlements;
- impairment losses of $17,000,000 on 10 nursing facilities that pled
guilty to submitting erroneous cost reports to the Medicare program in
conjunction with the criminal settlement;
- $39,000,000 for certain prior year cost report related items affected by
the settlements;
- $3,100,000 of debt issuance and refinancing costs related to various bank
debt modifications as a result of the settlements; and
- $14,500,000 for other investigation and settlement related costs.
If, prior to January 1, 1999, the settlement obligations and related items
had been finalized and recorded, our bank debt had been refinanced and we had
closed or sold the facilities that were impacted by the criminal settlement, our
results of operations, on an unaudited pro forma basis, would have been reduced
by approximately $13,200,000, or $.13 per share diluted, for the year ended
December 31, 1999.
During the fourth quarter of 1999, we recorded pre-tax charges totaling
approximately $23,800,000 related to restructuring of agreements on certain
leased facilities, severance and other workforce reduction expenses, asset
impairments and other unusual items. We negotiated the terminations of lease
agreements on 19 nursing facilities (2,047 beds), which resulted in a pre-tax
charge of $17,300,000. We disposed of 17 of these nursing facilities during 2000
and expect to dispose of the remainder during 2001. During 2000, we reversed
$2,500,000 of the original charge for changes in our initial accounting
estimates. In addition, we accrued $5,900,000 during the fourth quarter of 1999
primarily related to severance agreements associated with three executives.
Substantially all of the $5,900,000 was paid during the first quarter of 2000.
In preparing for the January 1, 1999 implementation of the new Medicare
prospective payment system ("PPS"), as well as responding to other legislative
and regulatory changes, we reorganized our inpatient rehabilitative operations,
analyzed our businesses for impairment issues and implemented new care-delivery
and tracking software. These initiatives, among others, resulted in a fourth
quarter 1998 pre-tax charge of approximately $69,400,000, including $3,800,000
for workforce reductions, $58,700,000 for asset impairments and $6,900,000 for
various other items.
During the fourth quarter of 1998, we reorganized all employed therapy
associates into a newly formed subsidiary, Beverly Rehabilitation, Inc. ("Bev
Rehab"), which is part of Beverly Care Alliance, in order to create a more
consolidated, strategic approach to managing our inpatient rehabilitation
business under PPS.
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We accrued $2,500,000 related to the termination of 835 therapy associates in
conjunction with this reorganization. During 1999, 770 therapy associates were
paid $2,300,000 and left the Company. We reversed the remaining $200,000 during
1999 for changes in our initial accounting estimates.
In addition, our home care and outpatient therapy units underwent the
consolidation and relocation of certain services, including billing and
collections, which resulted in a workforce reduction charge of $1,300,000
associated with the termination of 236 associates. Of these 236 associates, 74
associates were paid $200,000 and left the Company by December 31, 1998. During
1999, 85 home care and outpatient therapy associates were paid $600,000 and left
the Company. We reversed the remaining $500,000 during 1999 for changes in our
initial accounting estimates.
The significant regulatory changes under PPS and other provisions of the
1997 Act were an indicator to management that the carrying values of certain of
our nursing facilities may not be fully recoverable. In addition, there were
certain assets that had 1998 operating losses, and anticipated future operating
losses, which led management to believe that these assets were impaired.
Accordingly, management estimated the undiscounted future cash flows to be
generated by each facility and reduced the carrying value to its estimate of
fair value, resulting in an impairment charge of $9,000,000 in 1998. Management
calculated the fair values of the impaired facilities by using the present value
of estimated undiscounted future cash flows, or its best estimate of what that
facility, or similar facilities in that state, would sell for in the open
market. Management believes it has the knowledge to make such estimates of open
market sales prices based on the volume of facilities we have purchased and sold
in previous years.
Also during the fourth quarter of 1998, management identified nine nursing
facilities with an aggregate carrying value of approximately $14,000,000 which
needed to be replaced in order to increase operating efficiencies, attract
additional census or upgrade the nursing home environment. Management committed
to a plan to construct new facilities to replace these buildings and reduced the
carrying values of these facilities to their estimated salvage values. These
assets were included in the total assets of Beverly Healthcare. In addition,
management committed to a plan to dispose of 24 home care centers and nine
outpatient therapy clinics which had 1998 and expected future period operating
losses. These businesses had an aggregate carrying value of approximately
$16,500,000 and were written down to their fair value less costs to sell. These
assets generated pre-tax losses of approximately $5,100,000 during the year
ended December 31, 1998. Substantially all of these assets were purchased during
1998. We disposed of a majority of these assets during 1999. These assets were
included in the total assets of Beverly Care Alliance. We incurred a fourth
quarter 1998 pre-tax charge of $30,300,000 related to these replacements,
closings and planned disposals.
In addition to the workforce reduction and impairment charges, we recorded
a fourth quarter 1998 impairment charge for other long-lived assets of
$19,400,000 primarily related to the write-off of software and software
development costs. In conjunction with the implementation of business process
changes, and the need for enhanced data-gathering and reporting required to
operate effectively under PPS, we installed new clinical software in each of our
nursing facilities during late 1998, which made obsolete the previously employed
software. In addition, certain of our other ongoing software development
projects were abandoned or written down due to obsolescence, feasibility or cost
recovery issues.
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), provides guidance on the financial reporting of start-up and
organization costs. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Prior to 1998, we capitalized
start-up costs in connection with the opening of new facilities and businesses.
We adopted the provisions of SOP 98-5 in our financial statements for the year
ended December 31, 1998. The effect of adopting SOP 98-5 was to decrease our
pre-tax loss from continuing operations in 1998 by approximately $1,000,000 and
to record a charge for the cumulative effect of an accounting change, as of
January 1, 1998, of $4,415,000, net of income taxes, or $0.04 per share, to
expense costs that had previously been capitalized.
INCOME TAXES
We had an annual effective tax rate of 37% for the year ended December 31,
1999, compared to an annual effective tax rate of 51% for the year ended
December 31, 1998. The annual effective tax rate in 1999
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29
was different than the federal statutory rate primarily due to the impact of
state income taxes. The annual effective tax rate in 1998 was different than the
federal statutory rate primarily due to the impact of the sale of American
Transitional Hospitals, Inc. ("ATH"), which operated as Beverly Specialty
Hospitals, the benefit of certain tax credits and the pre-tax charge of
$69,400,000 (as discussed above) which reduced our pre-tax income to a level
where permanent tax differences and state income taxes had more significant
impact on the effective tax rate.
At December 31, 1999, we had federal net operating loss carryforwards of
$84,259,000 for income tax purposes which expire in years 2018 through 2019 and
general business tax credit carryforwards of $8,850,000 for income tax purposes
which expire in years 2008 through 2015. For financial reporting purposes, the
federal net operating loss carryforwards and the general business tax credit
carryforwards have been utilized to offset existing net taxable temporary
differences reversing during the carryforward periods. Our net deferred tax
assets at December 31, 1999 will be realized through the reversal of temporary
taxable differences, future taxable income and the implementation of tax
planning strategies, as needed. Accordingly, we did not believe that a deferred
tax valuation allowance was necessary at December 31, 1999.
NET OPERATING REVENUES
We reported net operating revenues of $2,546,672,000 during the year ended
December 31, 1999 compared to $2,812,232,000 for the same period in 1998.
Approximately 91% and 90% of our total net operating revenues for the years
ended December 31, 1999 and 1998, respectively, were derived from services
provided by Beverly Healthcare. The decrease in net operating revenues of
approximately $265,600,000 for the year ended December 31, 1999, as compared to
the same period in 1998, consists of the following:
- a decrease of $204,000,000 due to dispositions;
- a decrease of $180,100,000 due to facilities which the Company operated
during each of the years ended December 31, 1999 and 1998 ("same facility
operations");
- partially offset by an increase of $118,500,000 due to acquisitions.
Net operating revenues decreased $204,000,000 for the year ended December
31, 1999, as compared to the same period in 1998, due to dispositions that
occurred during the years ended December 31, 1999 and 1998. (See "2000 Compared
to 1999 -- Results of Operations" for discussion of 1999 dispositions). During
1998, we sold or terminated the leases on 26 nursing facilities (3,203 beds) and
certain other assets. We recognized net pre-tax gains, which were included in
net operating revenues during the year ended December 31, 1998, of approximately
$17,900,000 as a result of these dispositions. The operations of the disposed
facilities and other assets were immaterial to our consolidated financial
position and results of operations.
In June 1998, we completed the sale of our ATH subsidiary which operated 15
transitional hospitals (743 beds) in eight states serving the needs of patients
requiring intense therapy regimens, but not necessarily the breadth of services
provided within traditional acute care hospitals. We recognized a pre-tax gain,
which was included in net operating revenues during the year ended December 31,
1998, of approximately $16,000,000 as a result of this disposition. During the
year ended December 31, 1999, we recorded a pre-tax charge to reduce the sales
price of this disposition by approximately $4,500,000, which was included in net
operating revenues. The operations of ATH were immaterial to our consolidated
financial position and results of operations.
The decrease in net operating revenues of $180,100,000 from same facility
operations related primarily to the following:
- $97,800,000 decrease in ancillary revenues and $48,800,000 decrease in
Medicare rates, both primarily due to the impact of PPS and other
provisions of the 1997 Act;
- $49,300,000 decrease due to a shift in our patient mix;
28
30
- $47,200,000 decrease due to a decline in same facility occupancy to 87.9%
for the year ended December 31, 1999, as compared to 89.3% for the same
period in 1998;
- partially offset by an increase of $78,700,000 due primarily to increases
in Medicaid and private rates.
Our Medicare, private and Medicaid census for same facility operations was
9%, 19% and 71%, respectively, for the year ended December 31, 1999, as compared
to 10%, 20% and 69%, respectively, for the same period in 1998.
Net operating revenues increased $118,500,000 for the year ended December
31, 1999, as compared to the same period in 1998, due to acquisitions which
occurred during the years ended December 31, 1999 and 1998. (See "2000 Compared
to 1999 -- Results of Operations" for discussion of 1999 acquisitions). During
1998, we purchased 111 outpatient therapy clinics, 50 home care centers, eight
nursing facilities (823 beds), one assisted living center (48 units), two
previously leased nursing facilities (228 beds) and certain other assets. The
acquisitions of these facilities and other assets were accounted for as
purchases. The operations of these acquired facilities and other assets were
immaterial to our consolidated financial position and results of operations.
OPERATING AND ADMINISTRATIVE EXPENSES
We reported operating and administrative expenses of $2,354,328,000 during
the year ended December 31, 1999 compared to $2,633,135,000 for the same period
in 1998. The decrease of approximately $278,800,000 consists of the following:
- a decrease of $216,700,000 from same facility operations;
- a decrease of $172,300,000 due to dispositions;
- partially offset by an increase of $110,200,000 due to acquisitions.
Operating and administrative expenses decreased $216,700,000 from same
facility operations for the year ended December 31, 1999, as compared to the
same period in 1998. This decrease was due primarily to a shift in our patient
mix, as well as a decline in same facility occupancy, and consists of the
following:
- $69,500,000 due to a decrease in wages and related expenses;
- $65,900,000 decrease in our provision for insurance and related items
primarily due to a loss portfolio transfer transaction that significantly
increased insurance costs during the fourth quarter of 1998;
- $50,200,000 due to a decrease in contracted therapy expenses; and
- $31,100,000 due primarily to decreases in purchased ancillary products,
nursing supplies and other variable costs.
Although our wages and related expenses decreased for the year ended
December 31, 1999, as compared to the same period in 1998, our weighted average
wage rate and use of contract nursing personnel increased. These increases
emphasize the difficulties many of our nursing facilities are having attracting
nursing aides, assistants and other personnel.
INTEREST EXPENSE, NET
Interest income decreased to $4,335,000 for the year ended December 31,
1999, as compared to $10,708,000 for the same period in 1998 primarily due to
the sale of investment securities in conjunction with the 1998 loss portfolio
transfer transaction. Interest expense increased to $72,578,000 for the year
ended December 31, 1999, as compared to $65,938,000 for the same period in 1998
primarily due to an increase in net borrowings under the Revolver/Letter of
Credit Facility, imputed interest on the civil settlement of approximately
$4,600,000, and the write-off of deferred financing costs in conjunction with
certain bond refundings.
29
31
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $99,160,000 for the year
ended December 31, 1999, as compared to $93,722,000 for the same period in 1998,
primarily related to the impact of capital additions, improvements and
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had approximately $25,900,000 in cash and cash
equivalents and approximately $178,200,000 of unused commitments under our
Revolver/Letter of Credit Facility. Our Revolver/Letter of Credit Facility
matures on December 31, 2001. As a result, $164,000,000 of Revolver borrowings
have been classified as current liabilities at December 31, 2000, which resulted
in negative working capital of approximately $89,300,000. We expect to
renegotiate, extend or refinance the agreement covering the Revolver/Letter of
Credit Facility prior to December 31, 2001. However, no assurances can be made
that we will be able to do so at commercially reasonable terms, if at all.
Net cash provided by operating activities for the year ended December 31,
2000 was approximately $37,000,000. Our operating cash flows were negatively
impacted in 2000 by $30,000,000 of criminal and civil settlement payments made
in the first quarter, as well as $16,700,000 which was withheld from our
Medicare periodic interim payments throughout 2000 as a result of the civil
settlement. Exclusive of these items, our operating cash flows would have been
approximately $83,700,000. This amount is down approximately $105,300,000 from
our reported operating cash flows for the year ended December 31, 1999 of
approximately $189,000,000. The primary reasons for this decline include:
- the deconsolidation of all Beverly Funding Corporation balances, which
positively impacted the 1999 operating cash flows;
- net income tax refunds which benefited the 1999 operating cash flows; as
well as
- an increase in patient revenues in 2000 over 1999 which led to an
increase in patient accounts receivable.
Net cash used for investing activities and net cash provided by financing
activities were approximately $42,200,000 and $6,500,000, respectively, for the
year ended December 31, 2000. We received net cash proceeds of approximately
$24,300,000 from the dispositions of facilities and other assets and
approximately $17,800,000 from collections on notes receivable. These net cash
proceeds, along with $50,000,000 of net borrowings under our Revolver/Letter of
Credit Facility and cash from operations, were used to fund capital expenditures
totaling approximately $76,000,000, to repay approximately $39,200,000 of
long-term debt, and to repurchase shares of Common Stock for approximately
$3,900,000.
At December 31, 2000, we leased 11 nursing facilities, one assisted living
center and our corporate headquarters under an off-balance sheet financing
arrangement subject to operating leases with the creditor. We have the option to
purchase the facilities at the end of the initial lease terms at fair market
value. The financing arrangement was entered into for the construction of these
facilities and had an original commitment of $125,000,000. In April 2000, the
agreement covering this financing arrangement was amended whereby availability
under the original commitment was reduced to $113,500,000, which equaled the
total construction advances made as of such date.
We have $70,000,000 of Medium Term Notes due March 2005, which is
off-balance sheet financing for the Company. The Medium Term Notes are
collateralized by patient accounts receivable, which are sold by Beverly Health
and Rehabilitation Services, Inc., one of our wholly-owned subsidiaries, to
Beverly Funding Corporation ("BFC"), a wholly-owned bankruptcy remote
subsidiary. In 1999, such debt was refinanced and we were required by Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," to
deconsolidate BFC. At December 31, 2000, BFC had total assets of approximately
$110,000,000, which cannot be used to satisfy claims of the Company or any of
our subsidiaries.
30
32
Excluding Revolver borrowings, our debts due within one year amount to
$63,111,000. We currently anticipate that cash flows from operations and
borrowings under our banking arrangements will be adequate to repay these debts,
to make normal recurring capital additions and improvements of approximately
$77,000,000, 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 December 31, 2001. If cash
flows from operations or availability under our existing banking arrangements,
including the Revolver/ Letter of Credit Facility, fall below expectations, we
may be required to delay capital expenditures, dispose of certain assets, issue
additional debt securities, or consider other alternatives to improve liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk because we utilize financial instruments. The
market risks inherent in these instruments are attributable to the potential
loss from adverse changes in the general level of U.S. interest rates. We manage
our interest rate risk exposure by maintaining a mix of fixed and variable rates
for debt and notes receivable. The following table provides information
regarding our market sensitive financial instruments and constitutes a
forward-looking statement.
FAIR VALUE FAIR VALUE
DECEMBER 31, DECEMBER 31,
EXPECTED MATURITY DATES 2001 2002 2003 2004 2005 THEREAFTER TOTAL 2000 1999
- ----------------------- -------- ------- ------- ------- ------- ---------- -------- ------------ ------------
(DOLLARS IN THOUSANDS)
----------------------
Total long-term debt:
Fixed Rate............. $ 62,344 $57,284 $29,655 $37,834 $40,647 $360,924 $588,688 $570,029 $591,199
Average Interest
Rate................. 7.55% 7.41% 8.41% 7.88% 8.74% 8.88%
Variable Rate.......... $164,767 $23,792 $ 913 $ 1,041 $ 1,270 $ 10,887 $202,670 $202,670 $153,321
Average Interest
Rate................. 9.06% 8.77% 7.68% 7.67% 7.64% 7.63%
Total notes receivable:
Fixed Rate............. $ 2,200 $ 24 $ 3,524 $ -- $ -- $ -- $ 5,748 $ 2,243 $ 19,415
Average Interest
Rate................. 10.38% 8.16% 8.99% -- -- --
Variable Rate.......... $ 49 $ 54 $ 60 $ 67 $ 74 $ 804 $ 1,108 $ 1,198 $ 1,152
Average Interest
Rate................. 10.50% 10.50% 10.50% 10.50% 10.50% 10.50%
31
33
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 33
Consolidated Balance Sheets................................. 34
Consolidated Statements of Operations....................... 35
Consolidated Statements of Stockholders' Equity............. 36
Consolidated Statements of Cash Flows....................... 37
Notes to Consolidated Financial Statements.................. 38
Supplementary Data (Unaudited) -- Quarterly Financial
Data...................................................... 61
32
34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Beverly Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Beverly
Enterprises, Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Beverly Enterprises, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ERNST & YOUNG LLP
Little Rock, Arkansas
February 5, 2001
33
35
BEVERLY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 25,908 $ 24,652
Accounts receivable -- patient, less allowance for
doubtful accounts:
2000 -- $91,636; 1999 -- $64,398....................... 323,143 319,097
Accounts receivable -- nonpatient, less allowance for
doubtful accounts:
2000 -- $1,106; 1999 -- $1,057......................... 19,831 30,890
Notes receivable, less allowance for doubtful notes:
2000 -- $72............................................ 2,197 16,930
Operating supplies........................................ 29,134 32,276
Deferred income taxes..................................... 24,379 54,932
Prepaid expenses and other................................ 18,787 15,019
---------- ----------
Total current assets.............................. 443,379 493,796
Property and equipment, net................................. 1,063,247 1,110,065
Other assets:
Goodwill, net............................................. 203,742 229,639
Deferred income taxes..................................... 27,721 --
Other, less allowance for doubtful accounts and notes:
2000 -- $3,767; 1999 -- $5,970......................... 137,904 149,380
---------- ----------
Total other assets................................ 369,367 379,019
---------- ----------
$1,875,993 $1,982,880
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 84,420 $ 93,168
Accrued wages and related liabilities..................... 106,300 92,514
Accrued interest.......................................... 15,744 14,138
Other accrued liabilities................................. 99,136 154,182
Current portion of long-term debt......................... 227,111 34,052
---------- ----------
Total current liabilities......................... 532,711 388,054
Long-term debt.............................................. 564,247 746,164
Deferred income taxes payable............................... -- 28,956
Other liabilities and deferred items........................ 195,042 178,582
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............ -- --
Common stock, shares issued: 2000 -- 112,818,798;
1999 -- 110,382,356.................................... 11,282 11,038
Additional paid-in capital................................ 876,981 875,637
Accumulated deficit....................................... (193,931) (139,429)
Accumulated other comprehensive income.................... 718 1,061
Treasury stock, at cost: 2000 -- 9,061,300 shares;
1999 -- 7,886,800 shares............................... (111,057) (107,183)
---------- ----------
Total stockholders' equity........................ 583,993 641,124
---------- ----------
$1,875,993 $1,982,880
========== ==========
See accompanying notes.
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36
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Net operating revenues................................... $2,625,610 $2,546,672 $2,812,232
Interest income.......................................... 2,650 4,335 10,708
---------- ---------- ----------
Total revenues................................. 2,628,260 2,551,007 2,822,940
Costs and expenses:
Operating and administrative:
Wages and related................................... 1,591,519 1,542,148 1,664,741
Provision for insurance and related items........... 120,893 88,377 154,267
Other............................................... 769,502 723,803 814,127
Interest............................................... 80,016 72,578 65,938
Depreciation and amortization.......................... 100,061 99,160 93,722
Asset impairments, workforce reductions and other
unusual items....................................... 43,033 23,818 69,443
Special charges related to settlements of federal
government investigations........................... -- 202,447 1,865
Year 2000 remediation.................................. -- 12,402 9,719
---------- ---------- ----------
Total costs and expenses....................... 2,705,024 2,764,733 2,873,822
---------- ---------- ----------
Loss before benefit from income taxes, extraordinary
charge and cumulative effect of change in accounting
for start-up costs..................................... (76,764) (213,726) (50,882)
Benefit from income taxes................................ (22,262) (79,079) (25,936)
---------- ---------- ----------
Loss before extraordinary charge and cumulative effect of
change in accounting for start-up costs................ (54,502) (134,647) (24,946)
Extraordinary charge, net of income tax benefit of
$1,057................................................. -- -- (1,660)
Cumulative effect of change in accounting for start-up
costs, net of income tax benefit of $2,811............. -- -- (4,415)
---------- ---------- ----------
Net loss................................................. $ (54,502) $ (134,647) $ (31,021)
========== ========== ==========
Basic and diluted loss per share of common stock:
Before extraordinary charge and cumulative effect of
change in accounting for start-up costs............. $ (0.53) $ (1.31) $ (.24)
Extraordinary charge................................... -- -- (.02)
Cumulative effect of change in accounting for start-up
costs............................................... -- -- (.04)
---------- ---------- ----------
Net loss............................................... $ (0.53) $ (1.31) $ (.30)
========== ========== ==========
Shares used to compute per share amounts............... 102,452 102,491 103,762
========== ========== ==========
See accompanying notes.
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37
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
PREFERRED COMMON PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY
STOCK STOCK CAPITAL DEFICIT) INCOME (LOSS) STOCK TOTAL
--------- ------- ---------- ------------ ------------- --------- ---------
Balances at January 1, 1998............. $ -- $10,989 $874,335 $ 26,239 $ 1,332 $ (50,390) $ 862,505
Employee stock transactions related to
385,509 shares of common stock,
net................................. -- 39 2,048 -- -- -- 2,087
Purchase of 3,886,800 shares of common
stock for treasury.................. -- -- -- -- -- (51,120) (51,120)
Settlement of amounts due from 1997
purchase of 4,000,000 shares of
common stock for treasury........... -- -- -- -- -- (5,673) (5,673)
Comprehensive income (loss):
Unrealized gains on securities, net
of income taxes of $795........... -- -- -- -- 1,183 -- 1,183
Gains reclassified into earnings
from other comprehensive income,
net of income tax benefit of
$1,180............................ -- -- -- -- (1,755) -- (1,755)
Net loss............................ -- -- -- (31,021) -- -- (31,021)
---------
Total comprehensive loss.............. -- -- -- -- -- -- (31,593)
---- ------- -------- --------- ------- --------- ---------
Balances at December 31, 1998........... -- 11,028 876,383 (4,782) 760 (107,183) 776,206
Employee stock transactions related to
106,642 shares of common stock,
net................................. -- 10 (746) -- -- -- (736)
Comprehensive income (loss):
Unrealized gains on securities, net
of income taxes of $202........... -- -- -- -- 301 -- 301
Net loss............................ -- -- -- (134,647) -- -- (134,647)
---------
Total comprehensive loss.............. -- -- -- -- -- -- (134,346)
---- ------- -------- --------- ------- --------- ---------
Balances at December 31, 1999........... -- 11,038 875,637 (139,429) 1,061 (107,183) 641,124
Employee stock transactions related to
2,436,442 shares of common stock,
net................................. -- 244 1,344 -- -- -- 1,588
Purchase of 1,174,500 shares of common
stock for treasury.................. -- -- -- -- -- (3,874) (3,874)
Comprehensive income (loss):
Foreign currency translation
adjustments, net of income taxes
of $257........................... -- -- -- -- 383 -- 383
Unrealized losses on securities, net
of income tax benefit of $177..... -- -- -- -- (263) -- (263)
Gains reclassified into earnings
from other comprehensive income,
net of income tax benefit of
$311.............................. -- -- -- -- (463) -- (463)
Net loss............................ -- -- -- (54,502) -- -- (54,502)
---------
Total comprehensive loss.............. -- -- -- -- -- -- (54,845)
---- ------- -------- --------- ------- --------- ---------
Balances at December 31, 2000........... $ -- $11,282 $876,981 $(193,931) $ 718 $(111,057) $ 583,993
==== ======= ======== ========= ======= ========= =========
See accompanying notes.
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BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net loss.................................................. $ (54,502) $ (134,647) $ (31,021)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 100,061 99,160 93,722
Provision for reserves on patient, notes and other
receivables, net...................................... 72,481 32,089 25,249
Amortization of deferred financing costs................ 2,571 2,909 2,336
Asset impairments, workforce reductions and other
unusual items......................................... 43,033 23,818 69,443
Special charges related to settlements of federal
government investigations............................. -- 202,447 1,865
Extraordinary charge.................................... -- -- 2,717
Cumulative effect of change in accounting for start-up
costs................................................. -- -- 7,226
(Gains) losses on dispositions of facilities and other
assets, net........................................... (2,013) 4,004 (33,853)
Deferred income taxes................................... (26,262) (83,079) (28,105)
Insurance related accounts.............................. 38,376 33,500 39,587
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable -- patient........................ (78,608) 901 (132,199)
Operating supplies.................................... 2,367 (800) (1,239)
Prepaid expenses and other receivables................ (3,188) 1,121 240
Accounts payable and other accrued expenses........... (47,144) (16,536) 23,080
Income taxes payable.................................. 1,348 25,175 (27,729)
Other, net............................................ (11,510) (921) (4,530)
----------- ----------- -----------
Total adjustments.................................. 91,512 323,788 37,810
----------- ----------- -----------
Net cash provided by operating activities.......... 37,010 189,141 6,789
Cash flows from investing activities:
Capital expenditures...................................... (76,027) (95,414) (150,451)
Payments for acquisitions, net of cash acquired........... (3,797) (6,985) (162,969)
Proceeds from dispositions of facilities and other
assets.................................................. 24,335 41,941 82,119
Collections on notes receivable........................... 17,804 22,185 6,089
Other, net................................................ (4,555) (33,264) (5,374)
----------- ----------- -----------
Net cash used for investing activities............. (42,240) (71,537) (230,586)
Cash flows from financing activities:
Revolver borrowings....................................... 1,508,000 1,132,000 1,328,000
Repayments of Revolver borrowings......................... (1,458,000) (1,284,000) (1,077,000)
Proceeds from issuance of long-term debt.................. -- 125,820 9,495
Repayments of long-term debt.............................. (39,217) (80,605) (70,878)
Purchase of common stock for treasury..................... (3,874) -- (56,793)
Proceeds from exercise of stock options................... 81 129 3,092
Deferred financing costs paid............................. (1,007) (3,830) (730)
Proceeds from designated funds, net....................... 503 256 659
----------- ----------- -----------
Net cash provided by (used for) financing
activities....................................... 6,486 (110,230) 135,845
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 1,256 7,374 (87,952)
Cash and cash equivalents at beginning of year.............. 24,652 17,278 105,230
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 25,908 $ 24,652 $ 17,278
=========== =========== ===========
Supplemental schedule of cash flow information:
Cash paid (received) during the year for:
Interest, net of amounts capitalized.................... $ 75,839 $ 68,314 $ 65,927
Income tax payments (refunds), net...................... 2,652 (21,175) 26,030
See accompanying notes.
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39
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
References herein to the Company include Beverly Enterprises, Inc. and its
wholly-owned subsidiaries.
We provide healthcare services in 33 states and the District of Columbia.
Our operations include nursing facilities, assisted living centers, hospice and
home care centers, outpatient therapy clinics and rehabilitation therapy
services. In addition, prior to June 30, 1998, we operated acute long-term
transitional hospitals. Our consolidated financial statements include the
accounts of the Company and all of our wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates
Generally accepted accounting principles require management to make
estimates and assumptions when preparing financial statements that affect:
- the reported amounts of assets and liabilities at the date of the
financial statements; and
- the reported amounts of revenues and expenses during the reporting
period.
They also require management to make estimates and assumptions regarding
any contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and certificates of deposit
with original maturities of three months or less.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligations
less accumulated amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets.
Intangible Assets
Goodwill (stated at cost less accumulated amortization of $34,985,000 in
2000 and $31,196,000 in 1999) is being amortized over periods not to exceed 40
years using the straight-line method. Operating and leasehold rights and
licenses, which are included in the consolidated balance sheet caption "Other
assets," (stated at cost less accumulated amortization of $17,538,000 in 2000
and $18,891,000 in 1999) are being amortized over the lives of the related
assets (principally 40 years) and leases (principally 10 to 15 years), using the
straight-line method.
On an ongoing basis, we review the carrying value of our intangible assets
in light of any events or circumstances that indicate they may be impaired or
that the amortization period may need to be adjusted. If such circumstances
suggest the intangible value cannot be recovered, calculated based on
undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such shortfall. In addition, we
assess long-lived assets for impairment under SFAS No. 121 (see below). Under
those rules, intangible assets associated with assets acquired in a purchase
business combination are included in impairment evaluations when events or
circumstances exist that indicate the carrying value of those assets may not be
recoverable. As of December 31, 2000, we do not believe there is any indication
that the carrying
38
40
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
value or the amortization period of our intangibles needs to be adjusted, after
consideration of impairments recorded in 2000.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
("SFAS No. 121") requires impairment losses to be recognized for long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows are not sufficient to recover the assets' carrying
amounts. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. In accordance with SFAS No. 121, we assess the
need for an impairment write-down when such indicators of impairment are
present. See Notes 2 and 3.
Insurance
General liability and professional liability costs for the long-term care
industry, especially in the state of Florida, have become increasingly expensive
and difficult to estimate. We believe that adequate provision has been made in
the financial statements for liabilities that may arise out of patient care
services. Such provisions are made based upon the results of independent
actuarial valuations and other information available, including management's
best judgements and estimates. However, such provision and liability have been
escalating in recent periods. Our provision for insurance and related items
increased approximately $32,500,000 for the year ended December 31, 2000, as
compared to the same period in 1999. Based on a study completed by an
independent actuarial firm, we recorded a pre-tax charge during the third
quarter of 2000 of approximately $44,400,000 related to increasing reserves for
patient care liability costs, primarily in the state of Florida. There can be no
assurance that such provision and liability will not require material adjustment
in future periods.
On December 31, 1998, Beverly Indemnity, Ltd., one of our wholly-owned
subsidiaries, completed a risk transfer of substantially all of its pre-May 1998
auto liability, general liability and workers' compensation claims liability to
a third party insurer effected through a loss portfolio transfer ("LPT") valued
as of December 31, 1998. In exchange for a premium of approximately $116,000,000
(paid primarily from restricted cash and investments), we acquired reinsurance
of approximately $180,000,000 to insure such auto liability, general liability
and workers' compensation losses. In addition, in exchange for a premium of
approximately $4,000,000, we acquired excess coverage of approximately
$20,000,000 for general liability losses. Our provision for insurance and
related items increased approximately $82,200,000 during 1998 primarily as a
result of this transaction. As of December 31, 2000, based upon estimates and
analyses by our outside actuaries, the liabilities for the excess co-insurance
were approximately $2,000,000, and the liabilities for those losses exceeding
the total aggregate limit were approximately $23,000,000 on a discounted basis.
We are required to cover such excess and increased our insurance reserves during
2000 to take such expected losses into consideration.
Prior to the LPT, and for periods not covered by the LPT, we insure the
majority of our auto liability, general liability and workers' compensation
risks through insurance policies with third parties, some of which are subject
to reinsurance agreements between the insurer and Beverly Indemnity, Ltd. The
liabilities for estimated incurred losses not covered by third party insurance
are discounted at 10% to their present value based on expected loss payment
patterns determined by independent actuaries. Had the discount rate been reduced
by one-half of a percentage point, we would have incurred a pre-tax charge of
approximately $400,000
39
41
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
for the year ended December 31, 2000. The discounted insurance liabilities are
included in the consolidated balance sheet captions as follows (in thousands):
2000 1999
-------- -------
Accrued wages and related liabilities....................... $ 2,128 $ 1,310
Other accrued liabilities................................... 8,655 10,000
Other liabilities and deferred items........................ 97,025 75,224
-------- -------
$107,808 $86,534
======== =======
On an undiscounted basis, the total insurance liabilities as of December
31, 2000 and 1999 were approximately $126,400,000 and $99,400,000, respectively.
As of December 31, 2000, we had deposited approximately $700,000 in funds (the
"Beverly Indemnity funds") that are restricted for the payment of insured
claims. In addition, we anticipate that approximately $5,000,000 of our existing
cash at December 31, 2000, while not legally restricted, will be utilized
primarily to fund certain workers' compensation and general liability claims and
expenses. We do not expect to use such cash for other purposes.
We purchased traditional indemnity insurance coverage for our 2000, 1999
and 1998 workers' compensation and auto liabilities. During 1997, we transferred
a portion of our liabilities for workers' compensation and general liability
related to sold nursing facilities in the state of Texas to a third-party
indemnity insurance company. As of December 31, 2000, based upon estimates and
analyses by our outside actuaries, we expect the ultimate losses on such
transferred liabilities to exceed the aggregate insurance limit available by
approximately $3,700,000. Such amount has been reflected in our insurance
reserves at December 31, 2000.
Stock Based Awards
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair market value on the date of grant. We have elected to continue
accounting for our stock-based awards in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
we do not recognize compensation expense for our stock option grants, which are
issued at fair market value on the date of grant. However, we recognize
compensation expense for our restricted stock grants at the fair market value of
our Common Stock on the date of grant over their respective vesting periods on a
straight-line basis. See Note 8 for the pro forma effects on our reported net
loss and diluted loss per share assuming we elected to recognize compensation
expense on stock-based awards in accordance with SFAS No. 123.
Revenues
Our revenues are derived primarily from providing long-term healthcare
services. Approximately 74%, 72% and 74% of our net operating revenues for 2000,
1999 and 1998, respectively, were derived from funds under federal and state
medical assistance programs. Approximately 52% and 42% of our net patient
accounts receivable at December 31, 2000 and 1999, respectively, are due from
such programs. We accrue for revenues when services are provided at standard
charges adjusted to amounts estimated to be received under governmental programs
and other third-party contractual arrangements based on contractual terms and
historical experience. These revenues and receivables are reported at their
estimated net realizable amounts and are subject to audit and retroactive
adjustment.
40
42
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Retroactive adjustments are considered in the recognition of revenues on an
estimated basis in the period the related services are rendered. Such amounts
are adjusted in future periods as adjustments become known or as cost reporting
years are no longer subject to audits, reviews or investigations. Due to the
complexity of the laws and regulations governing the Medicare and Medicaid
programs, there is at least a reasonable possibility that recorded estimates
will change by a material amount in the near term. Changes in estimates related
to third party receivables resulted in an increase in net operating revenues of
approximately $8,100,000 and $10,900,000 for the years ended December 31, 2000
and 1998, respectively, and a decrease in net operating revenues of
approximately $2,000,000 for the year ended December 31, 1999.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. Compliance with laws and regulations
governing the Medicare and Medicaid programs is subject to government review and
interpretation, as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
Concentration of Credit Risk
We have significant accounts receivable and notes receivable whose
collectibility or realizability is dependent upon the performance of certain
governmental programs, primarily Medicare and Medicaid. These receivables
represent our only concentration of credit risk. We do not believe there are
significant credit risks associated with these governmental programs. We believe
that an adequate provision, based on historical experience, has been made for
the possibility of these receivables proving uncollectible and continually
monitor and adjust these allowances as necessary.
Income Taxes
We follow the liability method in accounting for income taxes. The
liability method requires deferred tax assets and liabilities to be recorded at
currently enacted tax rates based on the difference between the tax basis of
assets and liabilities and their carrying amounts for financial reporting
purposes, referred to as temporary differences.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss), as well as charges
and credits to stockholders' equity not included in net income (loss).
Accumulated other comprehensive income, net of income taxes, consists of foreign
currency translation adjustments of $383,000 and net unrealized gains on
available-for-sale securities of $335,000 at December 31, 2000 and net
unrealized gains on available-for-sale securities of $1,061,000 at December 31,
1999.
During the year ended December 31, 2000, we transferred one of our
securities from the available-for-sale category to the trading category. As a
result of such transfer, we reversed $463,000 of unrealized gains, net of income
taxes, on such security and recognized a pre-tax gain of $1,477,000, which was
included in net operating revenues during the year ended December 31, 2000.
41
43
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
New Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair market
value. SFAS No. 133 will be effective for us during the first quarter of 2001.
We do not expect there to be a material effect on our consolidated financial
position or results of operations as a result of adopting SFAS No. 133.
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), provides guidance on the financial reporting of start-up and
organization costs. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Prior to 1998, we capitalized
start-up costs in connection with the opening of new facilities and businesses.
We adopted the provisions of SOP 98-5 in our financial statements for the year
ended December 31, 1998. The effect of adopting SOP 98-5 was to decrease our
pre-tax loss from continuing operations in 1998 by approximately $1,000,000 and
to record a charge for the cumulative effect of an accounting change, as of
January 1, 1998, of $4,415,000, net of income taxes, or $0.04 per share, to
expense costs that had previously been capitalized.
Other
Certain prior year amounts have been reclassified to conform with the 2000
financial statements presentation.
2. SPECIAL CHARGES RELATED TO SETTLEMENTS OF FEDERAL GOVERNMENT INVESTIGATIONS
On February 3, 2000, we entered into a series of separate agreements with
the U.S. Department of Justice and the Office of Inspector General of the
Department of Health and Human Services. These agreements settled the Allocation
Investigations (See Note 7). In anticipation of such settlements, we recorded a
special pre-tax charge of approximately $202,400,000 ($127,500,000, net of
income taxes, or $1.24 per share diluted) during the year ended December 31,
1999, which included:
- provisions totaling $128,800,000 representing the net present value of
the separate civil and criminal settlements;
- impairment losses of $17,000,000 on 10 nursing facilities that pled
guilty to submitting erroneous cost reports to the Medicare program in
conjunction with the criminal settlement;
- $39,000,000 for certain prior year cost report related items affected by
the settlements;
- $3,100,000 of debt issuance and refinancing costs related to various bank
debt modifications as a result of the settlements; and
- $14,500,000 for other investigation and settlement related costs.
At December 31, 2000, such liability totaled $143,074,000, with $84,846,000
included in the balance sheet caption "Other liabilities and deferred items,"
$39,327,000 included in "Allowances for accounts receivable -- patient" and
$18,901,000 included in "Other accrued liabilities."
42
44
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL ITEMS
During 2000, we recorded pre-tax charges totaling approximately
$43,000,000, including $35,500,000 for asset impairments, $6,100,000 for
workforce reductions and $1,400,000 for other unusual items. The asset
impairment charges of $35,500,000 primarily related to:
- write-down of goodwill of $24,800,000 and property and equipment of
$1,000,000 on certain under-performing outpatient therapy clinics having
operating losses for the past three years and expected future operating
losses. Management estimated the undiscounted future cash flows to be
generated by each clinic and reduced the carrying value to its estimate
of fair value. Management calculated the fair values of the impaired
clinics by using the present value of estimated future cash flows. These
assets were included in the total assets of Beverly Care Alliance.
- write-down of property and equipment of $5,100,000 and recording of
closing and other costs of $3,000,000 related to six nursing facilities
with an aggregate carrying value of approximately $6,000,000 that
management plans on closing, or terminating the leases on, during 2001.
These assets generated pre-tax losses of approximately $2,400,000 during
the year ended December 31, 2000 and were included in the total assets of
Beverly Healthcare. Management calculated the fair values of these
facilities by using the present value of estimated future cash flows, or
its best estimate of what these facilities, or similar facilities in that
state, would sell for in the open market.
- write-off of abandoned projects totaling $2,100,000;
- write-off of an investment in a physician practice management company of
$2,000,000; and
- reversal of $2,500,000 of prior year asset impairment charges (discussed
below).
The workforce reduction charges of $6,100,000 primarily related to
severance agreements associated with seven executives. Approximately $2,200,000
was paid during 2000, and the remainder is expected to be paid during the first
quarter of 2001. Four of the executives were notified in late 2000 that their
positions would be eliminated as part of a reorganization of our operating and
support group functions. Such reorganization was formally announced in the first
quarter of 2001. The purpose of the reorganization is to improve the level of
service provided to our nursing facilities and other business units (see "Part
I, Item 1. Business"). We currently estimate that an additional pre-tax charge
of approximately $20,000,000 will be recognized during the first quarter of 2001
related to this reorganization.
During the fourth quarter of 1999, we recorded pre-tax charges totaling
approximately $23,800,000 related to restructuring of agreements on certain
leased facilities, severance and other workforce reduction expenses, asset
impairments, and other unusual items. We negotiated the terminations of lease
agreements on 19 nursing facilities (2,047 beds), which resulted in a charge of
$17,300,000. We disposed of 17 of these nursing facilities during 2000 and
expect to dispose of the remainder during 2001. During 2000, we reversed
$2,500,000 of the original charge for changes in our initial accounting
estimates. In addition, we accrued $5,900,000 during the fourth quarter of 1999
primarily related to severance agreements associated with three executives.
Substantially all of the $5,900,000 was paid during the first quarter of 2000.
In preparing for the January 1, 1999 implementation of the new Medicare
prospective payment system ("PPS"), as well as responding to other legislative
and regulatory changes, we reorganized our inpatient rehabilitative operations,
analyzed our businesses for impairment issues and implemented new care-delivery
and tracking software. These initiatives, among others, resulted in a fourth
quarter 1998 pre-tax charge of approximately $69,400,000, including $3,800,000
for workforce reductions, $58,700,000 for asset impairments and $6,900,000 for
various other items.
43
45
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL
ITEMS -- (CONTINUED)
During the fourth quarter of 1998, we reorganized all employed therapy
associates into a newly formed subsidiary, Beverly Rehabilitation, Inc. ("Bev
Rehab"), which is part of Beverly Care Alliance, in order to create a more
consolidated, strategic approach to managing our inpatient rehabilitation
business under PPS. We accrued $2,500,000 related to the termination of 835
therapy associates in conjunction with this reorganization. During 1999, 770
therapy associates were paid $2,300,000 and left the Company. We reversed the
remaining $200,000 during 1999 for changes in our initial accounting estimates.
In addition, our home care and outpatient therapy units underwent the
consolidation and relocation of certain services, including billing and
collections, which resulted in a workforce reduction charge of $1,300,000
associated with the termination of 236 associates. Of these 236 associates, 74
associates were paid $200,000 and left the Company by December 31, 1998. During
1999, 85 home care and outpatient therapy associates were paid $600,000 and left
the Company. We reversed the remaining $500,000 during 1999 for changes in our
initial accounting estimates.
The significant regulatory changes under PPS and other provisions of the
1997 Act were an indicator to management that the carrying values of certain of
our nursing facilities may not be fully recoverable. In addition, there were
certain assets that had 1998 operating losses, and anticipated future operating
losses, which led management to believe that these assets were impaired.
Accordingly, management estimated the undiscounted future cash flows to be
generated by each facility and reduced the carrying value to its estimate of
fair value, resulting in an impairment charge of $9,000,000 in 1998. Management
calculated the fair values of the impaired facilities by using the present value
of estimated undiscounted future cash flows, or its best estimate of what that
facility, or similar facilities in that state, would sell for in the open
market. Management believes it has the knowledge to make such estimates of open
market sales prices based on the volume of facilities we have purchased and sold
in previous years.
Also during the fourth quarter of 1998, management identified nine nursing
facilities with an aggregate carrying value of approximately $14,000,000 which
needed to be replaced in order to increase operating efficiencies, attract
additional census or upgrade the nursing home environment. Management committed
to a plan to construct new facilities to replace these buildings and reduced the
carrying values of these facilities to their estimated salvage values. These
assets were included in the total assets of Beverly Healthcare. In addition,
management committed to a plan to dispose of 24 home care centers and nine
outpatient therapy clinics which had 1998 and expected future period operating
losses. These businesses had an aggregate carrying value of approximately
$16,500,000 and were written down to their fair value less costs to sell. These
assets generated pre-tax losses of approximately $5,100,000 during the year
ended December 31, 1998. Substantially all of these assets were purchased during
1998. We disposed of a majority of these assets during 1999. These assets were
included in the total assets of Beverly Care Alliance. We incurred a fourth
quarter 1998 pre-tax charge of $30,300,000 related to these replacements,
closings and planned disposals.
In addition to the workforce reduction and impairment charges, we recorded
a fourth quarter 1998 impairment charge for other long-lived assets of
$19,400,000 primarily related to the write-off of software and software
development costs. In conjunction with the implementation of business process
changes, and the need for enhanced data-gathering and reporting required to
operate effectively under PPS, we installed new clinical software in each of our
nursing facilities during late 1998, which made obsolete the previously employed
software. In addition, certain of our other ongoing software development
projects were abandoned or written down due to obsolescence, feasibility or cost
recovery issues.
44
46
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
4. ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 2000, we acquired seven nursing
facilities (1,210 beds), one previously leased nursing facility (105 beds) and
certain other assets for cash of approximately $3,000,000, closing and other
costs of approximately $1,500,000 and write-off of notes receivable of
approximately $900,000. The acquisitions of such facilities and other assets
were accounted for as purchases. Also during such period, we sold, closed or
terminated the leases on 39 nursing facilities (4,263 beds) and certain other
assets for cash proceeds of approximately $24,200,000 and notes receivable of
approximately $100,000. We did not operate five of these nursing facilities (409
beds), which were leased to other nursing home operators in prior year
transactions. We recognized net pre-tax gains, which were included in net
operating revenues during the year ended December 31, 2000, of approximately
$2,000,000 as a result of these dispositions. The operations of these facilities
and certain other assets were immaterial to our consolidated financial position
and results of operations.
During the year ended December 31, 1999, we purchased three outpatient
therapy clinics, two home care centers, two nursing facilities (284 beds), one
previously leased nursing facility (190 beds) and certain other assets for cash
of approximately $6,000,000, acquired debt of approximately $15,100,000 and
closing and other costs of approximately $1,700,000. The acquisitions of such
facilities and other assets were accounted for as purchases and resulted in the
recording of goodwill of approximately $8,400,000. Also during such period, we
sold or terminated the leases on 12 nursing facilities (1,291 beds), one
assisted living center (10 units), 17 home care centers and certain other assets
for cash proceeds of approximately $7,100,000 and notes receivable of
approximately $1,000,000. We did not operate two of the nursing facilities (166
beds), which were leased to other nursing home operators in prior year
transactions. We recognized net pre-tax losses, which were included in net
operating revenues during the year ended December 31, 1999, of approximately
$4,000,000 as a result of these dispositions. The operations of these facilities
and certain other assets were immaterial to our consolidated financial position
and results of operations.
During the year ended December 31, 1998, we purchased 111 outpatient
therapy clinics, 50 home care centers, eight nursing facilities (823 beds), one
assisted living center (48 units), two previously leased nursing facilities (228
beds) and certain other assets for cash of approximately $163,200,000, acquired
debt of approximately $8,000,000 and closing and other costs of approximately
$7,000,000. The acquisitions of such facilities and other assets were accounted
for as purchases and resulted in the recording of goodwill of approximately
$143,000,000. Also during such period, we sold or terminated the leases on 26
nursing facilities (3,203 beds) and certain other assets for cash proceeds of
approximately $52,500,000, notes receivable of approximately $21,300,000,
assumed debt of approximately $4,600,000 and closing and other costs of
approximately $2,300,000. We did not operate seven of these nursing facilities
(893 beds), which were leased to other nursing home operators in prior year
transactions. We recognized net pre-tax gains, which were included in net
operating revenues during the year ended December 31, 1998, of approximately
$17,900,000 as a result of these dispositions. The operations of these
facilities and certain other assets were immaterial to our consolidated
financial position and results of operations.
In June 1998, we completed the sale of American Transitional Hospitals,
Inc. ("ATH"), which operated as Beverly Specialty Hospitals, for cash of
approximately $65,300,000 and assumed debt of approximately $2,400,000. ATH
operated 15 transitional hospitals (743 beds) in eight states serving the needs
of patients requiring intense therapy regimens, but not necessarily the breadth
of services provided within traditional acute care hospitals. We recognized a
pre-tax gain, which was included in net operating revenues, of approximately
$16,000,000 during the year ended December 31, 1998 as a result of this
disposition. During the year ended December 31, 1999, we recorded a pre-tax
charge to reduce the sales price of this disposition by approximately
$4,500,000, which was included in net operating revenues. The operations of ATH
were immaterial to our consolidated financial position and results of
operations.
45
47
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
4. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
We have been exploring strategic alternatives for our nursing home
operations in Florida. During the first quarter of 2001, a formal plan was
initiated by management to pursue the sale of these operations. Several parties
have expressed an interest in purchasing all, or a portion, of these operations,
which include 49 nursing facilities (6,129 beds) and four assisted living
centers (315 units) (the "Florida facilities"). We plan to sell one remaining
nursing facility (56 beds) in Florida and certain other assets located in
Florida in separate transactions. Due diligence research is currently underway
by potential buyers interested in the Florida facilities. During 2000, the
Florida facilities had net operating revenues of approximately $267,000,000 and
had total assets of approximately $237,000,000 at December 31, 2000. It is too
early to speculate on timing or pricing of a potential transaction or to
estimate the ultimate impact of the sale of the Florida facilities on our
consolidated financial position, results of operations or cash flows.
5. PROPERTY AND EQUIPMENT
Following is a summary of property and equipment and related accumulated
depreciation and amortization, by major classification, at December 31 (in
thousands):
TOTAL OWNED LEASED
----------------------- ----------------------- -----------------
2000 1999 2000 1999 2000 1999
---------- ---------- ---------- ---------- ------- -------
Land, buildings and
improvements............ $1,455,859 $1,446,004 $1,426,088 $1,412,715 $29,771 $33,289
Furniture and equipment... 383,749 374,855 377,197 369,388 6,552 5,467
Construction in
progress................ 29,196 32,543 29,196 32,543 -- --
---------- ---------- ---------- ---------- ------- -------
1,868,804 1,853,402 1,832,481 1,814,646 36,323 38,756
Less accumulated
depreciation and
amortization............ 805,557 743,337 780,474 716,228 25,083 27,109
---------- ---------- ---------- ---------- ------- -------
$1,063,247 $1,110,065 $1,052,007 $1,098,418 $11,240 $11,647
========== ========== ========== ========== ======= =======
We record depreciation and amortization using the straight-line method over
the following estimated useful lives: land improvements -- 5 to 15 years;
buildings -- 35 to 40 years; building improvements -- 5 to 20 years; leasehold
improvements -- 5 to 20 years or term of lease, if less; furniture and
equipment -- 5 to 15 years. Capitalized lease assets are amortized over the
remaining initial terms of the leases.
Depreciation and amortization expense related to property and equipment,
including the amortization of assets under capital lease obligations, for the
years ended December 31, 2000, 1999 and 1998 was $83,311,000, $83,328,000 and
$81,722,000, respectively.
46
48
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (dollars in
thousands):
2000 1999
-------- --------
Credit Agreement due December 31, 2001...................... $164,000 $114,000
9% Senior Notes due February 15, 2006, unsecured............ 180,000 180,000
Notes and mortgages, less imputed interest: 2000 -- $46,
1999 -- $67; due in installments through the year 2031, at
effective interest rates of 7.00% to 12.50%, a portion of
which is secured by property, equipment and other assets
with a net book value of $229,064 at December 31, 2000.... 183,416 199,831
Industrial development revenue bonds, less imputed interest:
1999 -- $9; due in installments through the year 2013, at
effective interest rates of 4.88% to 10.71%, a portion of
which is secured by property and other assets with a net
book value of $187,668 at December 31, 2000............... 134,015 145,896
7% A.I. Credit Corp. Note due in installments through
January 2002, secured by a surety bond.................... 65,000 65,000
8 3/4% First Mortgage Bonds due July 1, 2008, secured by
first mortgages on eight nursing facilities with an
aggregate net book value of $15,094 at December 31,
2000...................................................... 12,238 12,841
8 5/8% First Mortgage Bonds due October 1, 2008, secured by
first mortgages on 10 nursing facilities with an aggregate
net book value of $24,799 at December 31, 2000............ 19,700 20,640
7.24% Series 1995 Bonds due June 2005, secured by a letter
of credit................................................. 18,000 25,000
Term Loan under the GE Capital Facility..................... -- 735
-------- --------
776,369 763,943
Present value of capital lease obligations, less imputed
interest: 2000 -- $349, 1999 -- $384, at effective
interest rates of 6.04% to 16.49%......................... 14,989 16,273
-------- --------
791,358 780,216
Less amounts due within one year............................ 227,111 34,052
-------- --------
$564,247 $746,164
======== ========
The $375,000,000 Credit Agreement (the "Credit Agreement") provides for a
Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). At December
31, 2000, we had approximately $164,000,000 of outstanding borrowings and
approximately $32,800,000 of outstanding letters of credit under the Revolver/
LOC Facility. Borrowings under the Credit Agreement bear interest at adjusted
LIBOR plus 2.25%, the Base Rate, as defined, plus 1.25% or the adjusted CD rate,
as defined, plus 2.375%, at our option. Such interest rates may be adjusted
quarterly based on certain financial ratio calculations. We pay certain
commitment fees and commissions with respect to the Revolver/LOC Facility and
had approximately $178,200,000 of unused commitments under such facility at
December 31, 2000. The Credit Agreement is secured by property, equipment and
other assets associated with nine nursing facilities with an aggregate net book
value of approximately $14,100,000 at December 31, 2000, is guaranteed by
substantially all of our present and future subsidiaries (collectively, the
"Subsidiary Guarantors") and imposes on us certain financial tests and
restrictive covenants.
Effective September 30, 1999, we executed an amendment to our Credit
Agreement, as well as amendments with certain of our other lenders covering debt
of approximately $199,000,000 (collectively, the "Amendments"), which modified
certain financial covenant levels and increased the annual interest rates for
47
49
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
6. LONG-TERM DEBT -- (CONTINUED)
such debt and added real and personal property as collateral, including stock of
certain of our subsidiaries. The Amendments were required since recording of the
special charges related to the Allocation Investigations, as discussed herein,
would have resulted in our noncompliance with certain financial covenants
contained in those debt agreements.
In December 2000, we executed a second amendment to our Credit Agreement
and various other debt to modify certain financial covenant levels. These
amendments were required since recording of the pre-tax charges during 2000 (as
discussed herein) would have resulted in our noncompliance with those financial
covenants. The Credit Agreement matures on December 31, 2001. As a result, all
borrowings under the Revolver are classified as current liabilities at December
31, 2000. We expect to renegotiate, extend or refinance the Credit Agreement
prior to December 31, 2001. However, no assurances can be made that we will be
able to refinance the Credit Agreement at commercially reasonable terms, if at
all.
We have $180,000,000 of 9% Senior Notes due February 15, 2006 (the "Senior
Notes") which were sold through a public offering. The Senior Notes are
unsecured obligations guaranteed by the Subsidiary Guarantors and impose on us
certain restrictive covenants. Separate financial statements of the Subsidiary
Guarantors are not considered to be material to holders of the Senior Notes
since the guaranty of each of the Subsidiary Guarantors is joint and several and
full and unconditional (except that liability thereunder is limited to an
aggregate amount equal to the largest amount that would not render its
obligations thereunder subject to avoidance under Section 548 of the Bankruptcy
Code of 1978, as amended, or any comparable provisions of applicable state law),
and Beverly Enterprises, Inc., the parent, has no operations or assets separate
from its investment in its subsidiaries.
We have $70,000,000 of Medium Term Notes due March 2005, which is
off-balance sheet financing for the Company. The Medium Term Notes are
collateralized by patient accounts receivable, which are sold by Beverly Health
and Rehabilitation Services, Inc., one of our wholly-owned subsidiaries, to
Beverly Funding Corporation ("BFC"), a wholly-owned bankruptcy remote
subsidiary. In 1999, such debt was refinanced and we were required by Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," to
deconsolidate BFC. At December 31, 2000, BFC had total assets of approximately
$110,000,000, which cannot be used to satisfy claims of the Company or any of
our subsidiaries.
Maturities and sinking fund requirements of long-term debt, including
capital leases, for the years ended December 31 are as follows (in thousands):
2001 2002 2003 2004 2005 THEREAFTER TOTAL
-------- ------- ------- ------- ------- ---------- --------
Future minimum lease
payments............. $ 2,887 $ 2,644 $ 2,184 $ 2,223 $ 1,669 $ 15,194 $ 26,801
Less interest.......... (1,368) (1,236) (1,109) (1,014) (910) (6,175) (11,812)
-------- ------- ------- ------- ------- -------- --------
Net present value of
future minimum lease
payments............. 1,519 1,408 1,075 1,209 759 9,019 14,989
Notes, mortgages and
bonds................ 225,592 79,668 29,493 37,666 41,158 362,792 776,369
-------- ------- ------- ------- ------- -------- --------
$227,111 $81,076 $30,568 $38,875 $41,917 $371,811 $791,358
======== ======= ======= ======= ======= ======== ========
48
50
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
6. LONG-TERM DEBT -- (CONTINUED)
Most of our capital leases, as well as our operating leases, have original
terms from ten to fifteen years and contain at least one renewal option (which
could extend the term of the leases by five to fifteen years), purchase options,
escalation clauses and provisions for payments by us of real estate taxes,
insurance and maintenance costs.
The industrial development revenue bonds were originally issued prior to
1985 primarily for the construction or acquisition of nursing facilities. Bond
reserve funds of approximately $415,000 and $594,000 at December 31, 2000 and
1999, respectively, are included in the consolidated balance sheet caption
"Other assets." These funds are invested primarily in certificates of deposit
and in United States government securities and are carried at cost, which
approximates market value. Net capitalized interest relating to construction was
not material in 2000, 1999, or 1998.
7. COMMITMENTS AND CONTINGENCIES
Our future minimum rental commitments required by all noncancelable
operating leases with initial or remaining terms in excess of one year as of
December 31, 2000, are as follows (in thousands):
YEAR ENDING
DECEMBER 31,
- ------------
2001........................................................ $ 85,655
2002........................................................ 71,744
2003........................................................ 46,299
2004........................................................ 30,082
2005........................................................ 23,680
Thereafter.................................................. 47,283
--------
$304,743
========
Our total future minimum rental commitments are net of approximately
$3,697,000 of minimum sublease rental income due in the future under
noncancelable subleases. Rent expense on operating leases, net of sublease
rental income, for the years ended December 31 was as follows:
2000 -- $114,889,000; 1999 -- $115,598,000; 1998 -- $113,762,000. Sublease rent
income was approximately $3,312,000, $7,096,000, and $6,772,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. Contingent rent expense,
based primarily on revenues, was approximately $14,000,000, $18,000,000 and
$17,000,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000, we leased 11 nursing facilities, one assisted living
center and our corporate headquarters under an off-balance sheet financing
arrangement subject to operating leases with the creditor. We have the option to
purchase the facilities at the end of the initial lease terms at fair market
value. The financing arrangement was entered into for the construction of these
facilities and had an original commitment of $125,000,000. In April 2000, the
agreement covering this financing arrangement was amended whereby availability
under the original commitment was reduced to $113,500,000, which equaled the
total construction advances made as of such date.
We outsource our management information systems data processing functions
under an agreement which expires in 2002. Our future minimum commitments as of
December 31, 2000 under this agreement are as follows: 2001 -- $3,894,000; and
2002 -- $2,884,000. We incurred approximately $5,221,000, $6,515,000 and
$5,673,000 under this agreement during the years ended December 31, 2000, 1999
and 1998, respectively.
49
51
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
7. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
We are contingently liable for approximately $57,191,000 of long-term debt
maturing on various dates through 2019, as well as annual interest and letter of
credit fees totaling approximately $5,362,000. Such contingent liabilities
principally arose from our sale of nursing facilities and retirement living
centers. We operate the facilities related to approximately $27,331,000 of the
principal amount for which we are contingently liable, pursuant to long-term
agreements accounted for as operating leases. In addition, we are contingently
liable for various operating leases that were assumed by purchasers and are
secured by the rights thereto, as well as approximately $2,260,000 of loans to
certain of our officers, which are collateralized by shares of our Common Stock
pledged by the officers.
On February 3, 2000, we entered into a series of separate agreements with
the U.S. Department of Justice and the Office of Inspector General (the "OIG")
of the Department of Health and Human Services. These agreements settled the
federal government's investigations of the Company relating to our allocation to
the Medicare program of certain nursing labor costs in our skilled nursing
facilities from 1990 to 1998 (the "Allocation Investigations").
The agreements consist of:
- a Plea Agreement;
- a Civil Settlement Agreement;
- a Corporate Integrity Agreement; and
- an agreement concerning the disposition of 10 nursing facilities.
Under the Plea Agreement, one of our subsidiaries pled guilty to one count
of mail fraud and 10 counts of making false statements to Medicare and paid a
criminal fine of $5,000,000 during the first quarter of 2000.
Under the Civil Settlement Agreement, we paid the federal government
$25,000,000 during the first quarter of 2000 and are reimbursing the federal
government an additional $145,000,000 through withholdings from our biweekly
Medicare periodic interim payments in equal installments over eight years. It is
anticipated that cash flows from operations will decline approximately
$18,100,000 per year as a result of the reduction in Medicare periodic interim
payments. Our cash flows from operations were negatively impacted by
approximately $16,700,000 during the year ended December 31, 2000. At December
31, 2000, our obligations to the federal government totaled approximately
$94,900,000, which was included in the balance sheet captions "Other accrued
liabilities" and "Other liabilities and deferred items." In addition, we agreed
to resubmit certain Medicare filings to reflect reduced labor costs allocated to
the Medicare program.
Under the Corporate Integrity Agreement, we are required to monitor, on an
ongoing basis, our compliance with the requirements of the federal healthcare
programs. This agreement addresses our obligations to ensure that we comply with
the requirements for participation in the federal healthcare programs. It also
includes our functional and training obligations, audit and review requirements,
recordkeeping and reporting requirements, as well as penalties for
breach/noncompliance of the agreement. We believe that we are in substantial
compliance with the requirements of the Corporate Integrity Agreement.
In accordance with our agreement to dispose of 10 nursing facilities, we
disposed of seven of the facilities during 2000. We expect to dispose of the
remainder during 2001. The carrying values of these facilities have been
adjusted to our best estimate of their net realizable values.
On July 6, 1999, an amended complaint was filed by the plaintiffs in a
previously disclosed purported class action lawsuit pending against the Company
and certain of our officers in the United States District Court for the Eastern
District of Arkansas (the "Class Action"). Due to the preliminary state of the
50
52
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
7. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Class Action, we are unable at this time to assess the probable outcome of the
Class Action or the materiality of the risk of loss. However, we believe that we
acted lawfully with respect to plaintiff investors and will vigorously defend
the Class Action. However, we can give no assurances of the ultimate impact on
our consolidated financial position, results of operations or cash flows as a
result of these proceedings.
In addition, since July 29, 1999, eight derivative lawsuits have been filed
in the state courts of Arkansas, California and Delaware, as well as the federal
district court in Arkansas, (collectively, the "Derivative Actions"). Due to the
preliminary state of the Derivative Actions and the fact the complaints do not
allege damages with any specificity, we are unable at this time to assess the
probable outcome of the Derivative Actions or the materiality of the risk of
loss. However, we believe that we acted lawfully with respect to the allegations
of the Derivative Actions and will vigorously defend the Derivative Actions.
However, we can give no assurances of the ultimate impact on our consolidated
financial position, results of operations or cash flows as a result of these
proceedings.
There are various other lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages that are generally not covered by insurance. We do not believe that the
ultimate resolution of such other matters will have a material adverse effect on
our consolidated financial position or results of operations.
8. STOCKHOLDERS' EQUITY
We had 300,000,000 shares of authorized $.10 par value common stock
("Common Stock") at December 31, 2000 and 1999. We are subject to certain
restrictions under our long-term debt agreements related to the payment of cash
dividends on our Common Stock. During 2000 and 1999, we did not pay any cash
dividends on our Common Stock and no future dividends are currently planned. We
had 25,000,000 shares of authorized $1 par value preferred stock at December 31,
2000 and 1999, all of which remain unissued. The Board of Directors has
authority, without further stockholder action, to set rights, privileges and
preferences for any unissued shares of preferred stock.
In June 1996, our Board of Directors authorized a stock repurchase program
whereby we may repurchase, from time to time on the open market, up to a total
of 10,000,000 shares of our outstanding Common Stock. On June 2, 1998, the Board
of Directors authorized an increase to this stock repurchase program. From June
1996 through December 1999, we repurchased approximately 10,200,000 shares of
our outstanding Common Stock under the stock repurchase program. During the
first quarter of 2000, we repurchased approximately 1,200,000 additional shares
of our outstanding Common Stock under the stock repurchase program at a cost of
approximately $3,900,000. The repurchases were financed primarily through
borrowings under our Revolver/LOC Facility. If we had repurchased these
additional shares prior to January 1, 2000, the impact on our operating results
per share for the year ended December 31, 2000 would have been immaterial. We
have no current plans to continue such repurchases. We are subject to certain
restrictions under our credit arrangements related to the repurchase of our
outstanding Common Stock.
During 1997, the New Beverly 1997 Long-Term Incentive Plan was approved
(the "1997 Long-Term Incentive Plan"). Such plan became effective December 3,
1997 and will remain in effect until December 31, 2006, subject to early
termination by the Board of Directors. The Compensation Committee of the Board
of Directors (the "Committee") is responsible for administering the 1997
Long-Term Incentive Plan and has complete discretion in determining the number
of shares or units to be granted, in setting performance goals and in applying
other restrictions to awards, as needed, under the plan. We have 10,000,000
shares of Common Stock authorized for issuance, subject to certain adjustments,
under the 1997 Long-Term Incentive Plan in the form of nonqualified stock
options, incentive stock options, stock appreciation rights, restricted
51
53
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
8. STOCKHOLDERS' EQUITY -- (CONTINUED)
stock, restricted stock units, performance awards, bonus stock and other stock
unit awards. Except for options granted upon the assumption of, or in
substitution for, options of another company in which we participate in a
corporate transaction, nonqualified and incentive stock options must be granted
at a purchase price equal to the fair market value of our Common Stock on the
date of grant. Options shall be exercisable at such times and be subject to such
restrictions and conditions as the Committee shall determine and expire no later
than 10 years from the grant date. Stock appreciation rights may be granted
alone, in tandem with an option or in addition to an option. Stock appreciation
rights shall be exercisable at such times and be subject to such restrictions
and conditions as the Committee shall determine and expire no later than 10
years from the grant date. Restricted stock awards are outright stock grants
which have a minimum vesting period of one year for performance-based awards and
three years for other awards. Performance awards, bonus stock and other stock
unit awards may be granted based on the achievement of certain performance or
other goals and will carry certain restrictions, as defined.
During 1997, the New Beverly Non-Employee Directors Stock Option Plan was
approved (the "Non-Employee Directors Stock Option Plan"). Such plan became
effective December 3, 1997 and will remain in effect until December 31, 2007,
subject to early termination by the Board of Directors. We have 300,000 shares
of Common Stock authorized for issuance, subject to certain adjustments, under
the Non-Employee Directors Stock Option Plan. The Non-Employee Directors Stock
Option Plan was amended by the Board of Directors on December 11, 1997 to
provide that each nonemployee director be granted an option to purchase 3,375
shares of our Common Stock on June 1 of each year until the plan is terminated,
subject to the availability of shares. Such options are granted at a purchase
price equal to the fair market value of our Common Stock on the date of grant,
become exercisable one year after the date of grant and expire 10 years after
the date of grant.
During the third quarter of 2000, we offered all employees holding stock
options granted prior to February 2000 the opportunity to exchange all or part
of their stock options for shares of restricted stock. This resulted in the
issuance of approximately 2,400,000 shares of restricted stock, which vest four
years after the grant date, in exchange for approximately 4,800,000 stock
options. Had we issued these additional shares prior to January 1, 2000, our
operating results per share would have been reduced by $.01 per share for the
year ended December 31, 2000.
In January 2001, we filed a registration statement under Form S-8 with the
Securities and Exchange Commission registering 1,174,500 shares of our Common
Stock. These shares were previously repurchased by the Company and are being
held in treasury. Such shares are expected to be issued under the Beverly
Enterprises, Inc. Stock Grant Plan (the "Stock Grant Plan"). Shares of Common
Stock will be issued under the Stock Grant Plan to holders of restricted shares
who by virtue of the terms of their employment contracts, severance agreements
or other similar arrangements have a claim to the immediate vesting of their
restricted stock. In conjunction with the reorganization in the first quarter of
2001, 545,542 shares of Common Stock under the Stock Grant Plan were issued to
various officers who made such claims.
52
54
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
8. STOCKHOLDERS' EQUITY -- (CONTINUED)
The following table summarizes stock option and restricted stock data
relative to our long-term incentive plans for the years ended December 31:
2000 1999 1998
---------------------- --------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- --------- --------- ---------- ---------
Options outstanding at beginning
of year........................ 7,307,459 $9.08 8,163,565 $9.20 6,561,903 $9.29
Changes during the year:
Granted........................ 2,569,325 3.32 121,627 6.51 3,341,994 8.81
Exercised...................... (134,035) 3.52 (40,450) 6.44 (428,069) 6.89
Cancelled...................... (5,952,423) 9.31 (937,283) 9.88 (1,312,263) 9.42
---------- --------- ----------
Options outstanding at end of
year........................... 3,790,326 5.02 7,307,459 9.08 8,163,565 9.20
========== ========= ==========
Options exercisable at end of
year........................... 1,104,815 7.30 4,107,067 8.56 3,761,259 8.50
========== ========= ==========
Options available for grant at
end of year.................... 3,343,233 2,413,967 1,701,426
========== ========= ==========
Restricted stock outstanding at
beginning of year.............. 67,519 -- --
Changes during the year:
Granted........................ 2,453,832 84,491 --
Vested......................... (90,181) (16,972) --
Forfeited...................... (76,297) -- --
---------- --------- ----------
Restricted stock outstanding at
end of year.................... 2,354,873 67,519 --
========== ========= ==========
Exercise prices for options outstanding as of December 31, 2000 ranged from
$3.00 to $14.38. The weighted-average remaining contractual life of these
options is eight years. The following table provides certain information with
respect to stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ----------------------------
WEIGHTED- AVERAGE WEIGHTED-
OPTIONS AVERAGE REMAINING OPTIONS AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- -------------- ---------------- ----------- --------------
$ 3.00 - $ 6.50.................... 3,175,010 $3.57 7.99 673,967 $4.31
$ 7.19 - $ 9.44.................... 175,500 8.82 5.69 175,500 7.85
$10.46 - $12.88.................... 64,125 11.94 6.65 55,689 11.80
$14.25 - $14.38.................... 375,691 14.26 7.18 199,659 14.27
--------- ---------
$ 3.00 - $14.38.................... 3,790,326 $5.02 7.78 1,104,815 $7.30
========= =========
We recognize compensation expense for our restricted stock grants at the
fair market value of our Common Stock on the date of grant, amortized over their
respective vesting periods on a straight-line basis. The total charges to our
consolidated statements of operations for the years ended December 31, 2000 and
1999 related to these restricted stock grants were approximately $1,149,000 and
$198,000, respectively.
53
55
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
8. STOCKHOLDERS' EQUITY -- (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if we accounted for our
stock option grants under the fair market value method as prescribed by such
statement. The fair market value of our stock options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the years ended December 31, 2000, 1999 and
1998, respectively:
- risk-free interest rates of 5.3%, 6.8% and 5.0%;
- volatility factors of the expected market price of our Common Stock of
.57, .46 and .41; and
- expected option lives of 10 years.
We do not currently pay cash dividends on our Common Stock and no future
dividends are currently planned. Such weighted-average assumptions resulted in a
weighted average fair market value of options granted during 2000, 1999 and 1998
of $2.40 per share, $4.27 per share and $5.35 per share, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair market value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair market value of our stock options.
For purposes of pro forma disclosures, the estimated fair market value of
the stock options is amortized to expense over their respective vesting periods.
The pro forma effects on our reported net loss and diluted loss per share
assuming we accounted for our stock option grants in accordance with SFAS No.
123 for the years ended December 31, 2000, 1999 and 1998 would have been a net
loss of $51,256,000 or $.50 per share, a net loss of $137,015,000 or $1.34 per
share and a net loss of $32,202,000 or $.31 per share, respectively. The pro
forma amounts for 2000 reflect the impact of the cancellation of approximately
4,800,000 stock options in exchange for approximately 2,400,000 shares of
restricted stock (as discussed above). Such pro forma effects are not
necessarily indicative of the effects on future years.
The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees having completed one year of
continuous service to purchase shares of our Common Stock at the current market
price through payroll deductions. We have historically made contributions in the
amount of 30% of the participant's contribution. Effective January 1, 2001, we
reduced such contributions to 15% of the participant's contribution. Each
participant specifies the amount to be withheld from earnings per two-week pay
period, subject to certain limitations. The total charges to our consolidated
statements of operations for the years ended December 31, 2000, 1999 and 1998
related to this plan were approximately $1,192,000, $1,723,000 and $2,435,000,
respectively.
54
56
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
9. INCOME TAXES
The benefit from taxes on loss before extraordinary charge and the
cumulative effect of change in accounting for start-up costs (see Note 1)
consists of the following for the years ended December 31 (in thousands):
2000 1999 1998
-------- -------- --------
Federal:
Current............................................ $ -- $ -- $ --
Deferred........................................... (26,962) (72,001) (28,227)
State:
Current............................................ 4,000 4,000 2,169
Deferred........................................... 700 (11,078) 122
-------- -------- --------
$(22,262) $(79,079) $(25,936)
======== ======== ========
We had an annual effective tax rate of 29% for the year ended December 31,
2000, compared to annual effective tax rates of 37% and 51% for the years ended
December 31, 1999 and 1998, respectively. The annual effective tax rate in 2000
was different than the federal statutory rate primarily due to the impact of
amortization of nondeductible goodwill and state income taxes, partially offset
by the benefit of certain tax credits. Amortization of nondeductible goodwill
was impacted by the write-down of goodwill on certain under-performing
outpatient therapy clinics (see Note 3). The annual effective tax rate in 1999
was different than the federal statutory rate primarily due to the impact of
state income taxes. The annual effective tax rate in 1998 was different than the
federal statutory rate primarily due to the impact of the sale of ATH (see Note
4), the benefit of certain tax credits, and the pre-tax charge of approximately
$69,400,000 (see Note 3) which reduced our pre-tax income to a level where
permanent tax differences and state income taxes had a more significant impact
on the effective tax rate.
A reconciliation of the benefit from income taxes, computed at the
statutory rate, to our annual effective tax rate is summarized as follows for
the years ended December 31 (dollars in thousands):
2000 1999 1998
-------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
-------- --- -------- --- -------- ---
Benefit at statutory rate............ $(26,868) 35 $(74,804) 35 $(17,809) 35
General business tax credits......... (2,138) 3 (2,470) 1 (2,315) 5
State tax provision, net............. 3,055 (4) (4,601) 2 1,489 (3)
Nondeductible amortization of
intangibles........................ 5,701 (8) 1,192 -- (74) --
Sale of ATH.......................... -- -- -- -- (6,867) 13
Other................................ (2,012) 3 1,604 (1) (360) 1
-------- -- -------- -- -------- --
$(22,262) 29 $(79,079) 37 $(25,936) 51
======== == ======== == ======== ==
55
57
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
9. INCOME TAXES -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of temporary
differences giving rise to our deferred tax assets and liabilities at December
31, 2000 and 1999 are as follows (in thousands):
2000 1999
-------------------- --------------------
ASSET LIABILITY ASSET LIABILITY
-------- --------- -------- ---------
Insurance reserves......................... $ 40,399 $ -- $ 25,512 $ --
General business tax credit
carryforwards............................ 12,257 -- 8,850 --
Alternative minimum tax credit
carryforwards............................ 15,873 -- 15,772 --
Provision for dispositions................. 17,705 2,688 35,454 3,882
Provision for Medicare repayment........... 40,757 -- 55,175 --
Provision for doubtful accounts............ 22,451 -- 11,483 --
Depreciation and amortization.............. 2,388 123,548 6,582 132,863
Operating supplies......................... -- 13,246 -- 13,004
Federal net operating loss carryforwards... 53,489 -- 29,491 --
Other...................................... 11,913 25,650 13,224 25,818
-------- -------- -------- --------
$217,232 $165,132 $201,543 $175,567
======== ======== ======== ========
At December 31, 2000, we had federal net operating loss carryforwards of
$152,824,000 for income tax purposes which expire in years 2018 through 2020 and
general business tax credit carryforwards of $12,257,000 for income tax purposes
which expire in years 2009 through 2020. For financial reporting purposes, the
federal net operating loss carryforwards and the general business tax credit
carryforwards have been utilized to offset existing net taxable temporary
differences reversing during the carryforward periods. Our net deferred tax
assets at December 31, 2000 will be realized through the reversal of temporary
taxable differences, future taxable income and the implementation of tax
planning strategies, as needed.
We have relied on various factors to conclude that it is more likely than
not that our future results of operations and/or tax planning strategies coupled
with the reversal of existing taxable temporary differences will generate
sufficient taxable income to realize our net deferred tax assets. Our results of
operations for the last three years are not reflective of our future earnings
potential. Our results of operations have been negatively impacted by the
occurrence of several events that are not anticipated to recur in future
periods. The 1997 Act phased in the Medicare prospective payment system, which
was effective for us on January 1, 1999. We experienced a reduction in our 1999
net operating revenues of approximately $114,000,000 as compared to 1998 as a
result of the 1997 Act. However, we experienced an increase in our 2000 net
operating revenues as compared to 1999 related to the impact of BBRA 1999, and
we anticipate that our net operating revenues for 2001 as compared to 2000 will
increase approximately $30,000,000 as a result of the BIPA provisions.
Our results of operations for the last three years have also included
pre-tax charges totaling approximately $87,400,000, $270,300,000 and
$163,200,000 for 2000, 1999 and 1998, respectively. These pre-tax charges
primarily related to increasing reserves for patient care liability costs, asset
impairments, workforce reductions and other unusual items, as well as special
charges related to settlements of federal government investigations and year
2000 remediation costs (as discussed herein).
Given the significant effects the above unusual charges and events had on
our recent results of operations, we believe our expectation of future income is
reasonable. In addition, we are exploring strategic alternatives, including the
possible divestiture, for our nursing home operations in Florida, where we have
incurred
56
58
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
9. INCOME TAXES -- (CONTINUED)
significant patient care liability costs. We would expect a positive impact on
our future core operating results due to the divestiture of our Florida nursing
operations; however, no assurances can be made of the ultimate impact of the
sale of these operations on our future consolidated financial position, results
of operations or cash flows. If additional income above that produced by
ordinary and recurring operations is needed to realize the benefit of our net
deferred tax assets, we could enter into sale-leaseback transactions involving
operating assets that would accelerate reversal of taxable temporary
differences. Therefore, we do not believe that a deferred tax valuation
allowance is necessary at December 31, 2000.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Statement No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent our underlying value. We used the following methods and assumptions in
estimating our fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents approximates its fair value.
Notes Receivable, Net (Including Current Portion)
For variable-rate notes that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for fixed-rate notes are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Beverly Indemnity Funds
The carrying amount reported in the consolidated balance sheets for the
Beverly Indemnity funds approximates its fair value and is included in the
consolidated balance sheet caption "Prepaid expenses and other".
Long-term Debt (Including Current Portion)
The carrying amounts of our variable-rate borrowings approximate their fair
values. The fair values of the remaining long-term debt are estimated using
discounted cash flow analyses, based on our incremental borrowing rates for
similar types of borrowing arrangements.
Federal Government Settlements (Including Current Portion)
The carrying amount of our obligations to the federal government resulting
from the settlements of the Allocation Investigations is included in the
consolidated balance sheet captions "Other accrued liabilities" and
57
59
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
10. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
"Other liabilities and deferred items." Such obligations are non-interest
bearing, and as such, were imputed at their approximate fair market rate of 9%
for accounting purposes. Therefore, the carrying amount of such obligations
should approximate its fair value.
The carrying amounts and estimated fair values of our financial instruments
at December 31, 2000 and 1999 are as follows (in thousands):
2000 1999
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Cash and cash equivalents.................... $ 25,908 $ 25,908 $ 24,652 $ 24,652
Notes receivable, net (including current
portion)................................... 3,304 3,441 20,588 20,567
Beverly Indemnity funds...................... 669 669 561 561
Long-term debt (including current portion)... 791,358 772,699 780,216 744,520
Federal government settlements (including
current portion)........................... 94,871 94,871 133,314 133,314
At December 31, 2000 and 1999, we had outstanding defeased long-term debt
with aggregate carrying values of $1,750,000 and $13,785,000, respectively. The
fair values of such defeased debt were approximately $1,821,000 and $14,071,000
at December 31, 2000 and 1999, respectively. The fair values were estimated
using discounted cash flow analyses, based on our incremental borrowing rates
for similar types of borrowing arrangements.
In order to consummate certain dispositions and other transactions, we have
agreed to guarantee the debt assumed or acquired by the purchaser or the
performance under a lease, by the lessor. It is not practicable to estimate the
fair value of our off-balance sheet guarantees (See Note 7). We do not charge a
fee for entering into such agreements and contracting with a financial
institution to estimate such amounts could not be done without incurring
excessive costs. In addition, unlike us, a financial institution would not be in
a position to assume the underlying obligations and operate the nursing
facilities collateralizing the obligations, which would significantly impact the
calculation of the fair value of such off-balance sheet guarantees.
At December 31, 2000 and 1999, we guaranteed approximately $2,260,000 and
$2,784,000, respectively, of loans to certain of our officers, which are
collateralized by shares of our Common Stock pledged by the officers. The fair
values of such loans were approximately $2,341,000 and $2,806,000 at December
31, 2000 and 1999, respectively. The fair values were estimated using discounted
cash flow analyses, based on our incremental borrowing rates for similar types
of borrowing arrangements.
11. SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" provides disclosure
guidelines for segments of a company based on a management approach to defining
operating segments.
Description of the Types of Services from which each Operating Segment Derives
its Revenues
At December 31, 2000 and 1999, we were organized into two operating
segments, which support our delivery of long-term healthcare services. These
operating segments included:
- Beverly Healthcare, which provides long-term healthcare through the
operation of nursing facilities and assisted living centers; and
58
60
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
11. SEGMENT INFORMATION -- (CONTINUED)
- Beverly Care Alliance, which operates outpatient therapy clinics, hospice
and home care centers and an inpatient rehabilitation therapy services
business.
In addition to the two operating segments mentioned above, we operated
Beverly Specialty Hospitals through June 1998. Beverly Specialty Hospitals
operated transitional hospitals. In June 1998, we completed the sale of this
segment (see Note 4).
Measurement of Segment Income or Loss and Segment Assets
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (see Note 1). We
evaluate performance and allocate resources based on income or loss from
operations before income taxes, excluding any unusual items.
Factors Management Used to Identify Our Operating Segments
Our operating segments are strategic business units that offer different
services within the long-term healthcare continuum. Business in each operating
segment is conducted by one or more corporations. The corporations comprising
each operating segment also have separate boards of directors.
59
61
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
11. SEGMENT INFORMATION -- (CONTINUED)
The following table summarizes certain information for each of our
operating segments (in thousands):
BEVERLY BEVERLY
BEVERLY CARE SPECIALTY
HEALTHCARE ALLIANCE HOSPITALS ALL OTHER(1) TOTALS
---------- -------- --------- ------------ ----------
Year ended December 31, 2000
Revenues from external customers... $2,427,554 $202,555 $ -- $ (4,499) $2,625,610
Intercompany revenues.............. -- 139,024 -- 11,695 150,719
Interest income.................... 225 130 -- 2,295 2,650
Interest expense................... 27,107 241 -- 52,668 80,016
Depreciation and amortization...... 78,984 14,802 -- 6,275 100,061
Pre-tax income (loss).............. 105,192 9,578 -- (191,534) (76,764)
Total assets....................... 1,508,748 271,621 -- 95,624 1,875,993
Capital expenditures............... 59,818 7,259 -- 8,950 76,027
Year ended December 31, 1999
Revenues from external customers... $2,305,341 $237,014 $ -- $ 4,317 $2,546,672
Intercompany revenues.............. -- 140,216 -- 11,643 151,859
Interest income.................... 240 88 -- 4,007 4,335
Interest expense................... 28,434 425 -- 43,719 72,578
Depreciation and amortization...... 79,454 13,228 -- 6,478 99,160
Pre-tax income (loss).............. 109,884 23,417 -- (347,027) (213,726)
Total assets....................... 1,501,670 325,771 -- 155,439 1,982,880
Capital expenditures............... 73,029 10,518 -- 11,867 95,414
Year ended December 31, 1998
Revenues from external customers... $2,531,496 $192,627 $61,775 $ 26,334 $2,812,232
Intercompany revenues.............. -- 13,518 539 10,682 24,739
Interest income.................... 410 160 3 10,135 10,708
Interest expense................... 29,359 108 93 36,378 65,938
Depreciation and amortization...... 78,269 8,662 1,578 5,213 93,722
Pre-tax income (loss).............. 165,707 6,878 (670) (222,797) (50,882)
Total assets....................... 1,526,091 303,913 -- 330,507 2,160,511
Capital expenditures............... 87,209 15,149 4,937 43,156 150,451
- ---------------
(1) All Other consists of the operations of our corporate headquarters and
related overhead, as well as certain non-operating revenues and expenses.
Such amounts also include pre-tax charges totaling approximately
$87,400,000, $270,300,000 and $163,200,000 for 2000, 1999 and 1998,
respectively. Such pre-tax charges primarily related to increasing reserves
for patient care liability costs, asset impairments, workforce reductions
and other unusual items, as well as special charges related to settlements
of federal government investigations and year 2000 remediation costs (as
discussed herein).
60
62
BEVERLY ENTERPRISES, INC.
SUPPLEMENTARY DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following is a summary of our quarterly results of operations for the
years ended December 31, 2000 and 1999.
2000 1999
------------------------------------------------------ ------------------------------------------
1ST 2ND 3RD 4TH TOTAL 1ST 2ND 3RD 4TH
-------- -------- -------- -------- ---------- -------- --------- -------- --------
Total revenues............. $646,927 $655,888 $665,889 $659,556 $2,628,260 $635,029 $ 633,678 $638,331 $643,969
======== ======== ======== ======== ========== ======== ========= ======== ========
Income (loss) before
provision for (benefit
from) income taxes....... $ 10,098 $ 13,001 $(32,831) $(67,032) $ (76,764) $ 9,377 $(183,901) $ 12,535 $(51,737)
Provision for (benefit
from) income taxes....... 3,837 4,479 (10,360) (20,218) (22,262) 3,470 (68,044) 4,638 (19,143)
-------- -------- -------- -------- ---------- -------- --------- -------- --------
Net income (loss).......... $ 6,261 $ 8,522 $(22,471) $(46,814) $ (54,502) $ 5,907 $(115,857) $ 7,897 $(32,594)
======== ======== ======== ======== ========== ======== ========= ======== ========
Income (loss) per share of
common stock:
Basic and diluted:
Net income (loss)...... $ .06 $ .08 $ (.22) $ (.45) $ (.53) $ .06 $ (1.13) $ .08 $ (.32)
======== ======== ======== ======== ========== ======== ========= ======== ========
Shares used to compute
basic net income
(loss) per share..... 102,281 101,321 102,473 103,720 102,452 102,480 102,494 102,495 102,496
======== ======== ======== ======== ========== ======== ========= ======== ========
Shares used to compute
diluted net income
(loss) per share..... 102,402 101,323 102,473 103,720 102,452 102,693 102,494 102,715 102,496
======== ======== ======== ======== ========== ======== ========= ======== ========
Common stock price range:
High..................... $ 4.56 $ 4.00 $ 6.38 $ 8.25 $ 6.94 $ 8.19 $ 8.00 $ 5.19
Low...................... $ 2.50 $ 2.75 $ 2.56 $ 3.81 $ 4.50 $ 4.31 $ 3.88 $ 3.50
1999
----------
TOTAL
----------
Total revenues............. $2,551,007
==========
Income (loss) before
provision for (benefit
from) income taxes....... $ (213,726)
Provision for (benefit
from) income taxes....... (79,079)
----------
Net income (loss).......... $ (134,647)
==========
Income (loss) per share of
common stock:
Basic and diluted:
Net income (loss)...... $ (1.31)
==========
Shares used to compute
basic net income
(loss) per share..... 102,491
==========
Shares used to compute
diluted net income
(loss) per share..... 102,491
==========
Common stock price range:
High.....................
Low......................
- ---------------
We had an annual effective tax rate of 29% for the year ended December 31,
2000 compared to an annual effective tax rate of 37% for the year ended December
31, 1999. The annual effective tax rate in 2000 was different than the federal
statutory rate primarily due to the impact of amortization of nondeductible
goodwill and state income taxes, partially offset by the benefit of certain tax
credits. Amortization of nondeductible goodwill was impacted by the write-down
of goodwill on certain under-performing outpatient therapy clinics (see Note 3).
The annual effective tax rate in 1999 was different than the federal statutory
rate primarily due to the impact of state income taxes.
61
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Incorporated herein by reference from our definitive proxy statement for
the Annual Stockholders Meeting to be held on May 24, 2001, to be filed pursuant
to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference from our definitive proxy statement for
the Annual Stockholders Meeting to be held on May 24, 2001, to be filed pursuant
to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference from our definitive proxy statement for
the Annual Stockholders Meeting to be held on May 24, 2001, to be filed pursuant
to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Jon E.M. Jacoby, a director, serves as Executive Vice President, Chief
Financial Officer and director of Stephens Group, Inc. During the year ended
December 31, 1998, we used Stephens Group, Inc., or its affiliates, for
investment banking services.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1 and 2. The Consolidated Financial Statements and Consolidated Financial
Statement Schedule
The consolidated financial statements and consolidated financial statement
schedule listed in the accompanying index to consolidated financial statements
and financial statement schedules are filed as part of this annual report.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are incorporated
by reference herein or are filed as part of this annual report.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the quarter ended December
31, 2000.
(c) Exhibits
See the accompanying index to exhibits referenced in Item 14(a)(3) above
for a list of exhibits incorporated herein by reference or filed as part of this
annual report.
(d) Financial Statement Schedule
See the accompanying index to consolidated financial statements and
financial statement schedules referenced in Item 14(a)1 and 2, above.
62
64
BEVERLY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
(ITEM 14(A))
PAGE
----
1. Consolidated financial statements:
Report of Ernst & Young LLP, Independent Auditors........ 33
Consolidated Balance Sheets at December 31, 2000 and
1999................................................... 34
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 2000...... 35
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended December 31,
2000................................................... 36
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2000...... 37
Notes to Consolidated Financial Statements............... 38
Supplementary Data (Unaudited) -- Quarterly Financial
Data................................................... 61
2. Consolidated financial statement schedule for each of the
three years in the period ended December 31, 2000:
II -- Valuation and Qualifying Accounts.................. 64
All other schedules are omitted because they are either
not applicable or the items do not exceed the various
disclosure levels.
63
65
BEVERLY ENTERPRISES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
CHARGED DUE TO
BALANCE AT (CREDITED) ACQUISITIONS BALANCE
BEGINNING TO WRITE-OFFS/ AND AT END OF
DESCRIPTION OF YEAR OPERATIONS RECOVERIES DISPOSITIONS OTHER YEAR
- ----------- ---------- ---------- ----------- ------------ ------- ---------
Year ended December 31, 2000:
Allowance for doubtful accounts:
Accounts receivable -- patient...... $64,398 $ 72,420 $(42,090) $ 949 $(4,041) $91,636
Accounts receivable -- nonpatient... 1,423 932 (983) -- -- 1,372*
Notes receivable.................... 5,604 (871) (709) (451) -- 3,573
------- -------- -------- ------- ------- -------
$71,425 $ 72,481 $(43,782) $ 498 $(4,041) $96,581
======= ======== ======== ======= ======= =======
Year ended December 31, 1999:
Allowance for doubtful accounts:
Accounts receivable -- patient...... $21,764 $ 67,400(A) $(26,901) $ 1,901 $ 234 $64,398
Accounts receivable -- nonpatient... 677 963 17 -- (234) 1,423*
Notes receivable.................... 2,921 3,733 (1,400) -- 350 5,604
------- -------- -------- ------- ------- -------
$25,362 $ 72,096 $(28,284) $ 1,901 $ 350 $71,425
======= ======== ======== ======= ======= =======
Year ended December 31, 1998:
Allowance for doubtful accounts:
Accounts receivable -- patient...... $17,879 $ 25,549 $(19,807) $(1,857) $ -- $21,764
Accounts receivable -- nonpatient... 862 (90) (13) (82) -- 677
Notes receivable.................... 2,917 (210) (66) -- 280 2,921
------- -------- -------- ------- ------- -------
$21,658 $ 25,249 $(19,886) $(1,939) $ 280 $25,362
======= ======== ======== ======= ======= =======
- ---------------
(A) Includes $39,000,000 for certain prior year cost report related items
affected by the Allocation Investigations, as well as $1,007,000 for
additional accounts receivable-patient reserves required on the 10 nursing
facilities being disposed of as a result of the settlements of such
investigations. These amounts are included in the "Special charges related
to settlements of federal government investigations".
* Includes amounts classified in long-term other assets as well as current
assets.
64
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BEVERLY ENTERPRISES, INC.
INDEX TO EXHIBITS
(ITEM 14(a)(3))
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 -- Form of Restated Certificate of Incorporation of New
Beverly Holdings, Inc. (incorporated by reference to
Exhibit 3.1 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1997)
3.2 -- Form of Certificate of Amendment of Certificate of
Incorporation of New Beverly Holdings Inc., changing its
name to Beverly Enterprises, Inc. (incorporated by
reference to Exhibit 3.2 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1997)
3.3 -- By-Laws of Beverly Enterprises, Inc. (incorporated by
reference to Exhibit 3.4 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on June 4, 1997
(File No. 333-28521))
4.1 -- Indenture dated as of February 1, 1996 between Beverly
Enterprises, Inc. and Chemical Bank, as Trustee, with
respect to Beverly Enterprises, Inc.'s 9% Senior Notes
due February 15, 2006 (the "9% Indenture") (incorporated
by reference to Exhibit 4.1 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995)
4.2 -- Form of Supplemental Indenture No. 2 to the 9% Indenture
dated as of November 19, 1997 (incorporated by reference
to Exhibit 4.2 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on September 8,
1997 (File No. 333-35137))
4.3 -- Indenture dated as of April 1, 1993 (the "First Mortgage
Bond Indenture"), among Beverly Enterprises, Inc.,
Delaware Trust Company, as Corporate Trustee, and Richard
N. Smith, as Individual Trustee, with respect to First
Mortgage Bonds (incorporated by reference to Exhibit 4.1
to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1993)
4.4 -- First Supplemental Indenture dated as of April 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 3/4%
First Mortgage Bonds due 2008 (incorporated by reference
to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993)
4.5 -- Second Supplemental Indenture dated as of July 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 5/8%
First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to
Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated July 15, 1993) (incorporated by reference to
Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993)
4.6 -- Trust Indenture dated as of December 1, 1994 from Beverly
Funding Corporation, as Issuer, to Chemical Bank, as
Trustee (the "Chemical Indenture") (incorporated by
reference to Exhibit 10.45 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on February 13,
1995 (File No.33-57663))
4.7 -- First Amendment and Restatement, dated as of June 1,
1999, of Trust Indenture, dated as of December 1, 1994,
from Beverly Funding Corporation, as Issuer, to The Chase
Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 10.2 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999)
65
67
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
4.8 -- Series Supplement dated as of December 1, 1994 to the
Chemical Indenture (incorporated by reference to Exhibit
10.46 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))
4.9 -- Series Supplement, dated as of June 1, 1999, by and
between Beverly Funding Corporation and The Chase
Manhattan Bank ("1999-1 Series Supplement") (incorporated
by reference to Exhibit 10.3 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999)
4.10 -- First Amendment, dated as of July 14, 1999, to the 1999-1
Series Supplement (incorporated by reference to Exhibit
10.4 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999)
In accordance with item 601(b)(4)(iii) of Regulation S-K,
certain instruments pertaining to Beverly Enterprises,
Inc.'s long-term obligations have not been filed; copies
thereof will be furnished to the Securities and Exchange
Commission upon request.
10.1* -- Beverly Enterprises, Inc. Annual Incentive Plan
(incorporated by reference to Exhibit 10.4 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4
filed on February 13, 1995 (File No. 33-57663))
10.2* -- New Beverly Holdings, Inc. 1997 Long-Term Incentive Plan
(the "1997 LTIP") (incorporated by reference to Exhibit
4.1 to Beverly Enterprises, Inc.'s Registration Statement
on Form S-8 filed on December 8, 1997 (File No.
333-41669))
10.3* -- Amendment No. 1 to the 1997 LTIP dated as of December 3,
1997 (incorporated by reference to Exhibit 10.3 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1997)
10.4* -- New Beverly Holdings, Inc. Non-Employee Directors' Stock
Option Plan (the "Directors' Option Plan") (incorporated
by reference to Exhibit 4.1 to Beverly Enterprises,
Inc.'s Registration Statement on Form S-8 filed on
December 12, 1997 (File No. 333-42131))
10.5* -- Amendment No. 1 to the Directors' Option Plan dated as of
December 3, 1997 (incorporated by reference to Exhibit
10.5 to Beverly Enterprises, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997)
10.6* -- Beverly Enterprises, Inc. Stock Grant Plan
10.7* -- Executive Medical Reimbursement Plan (incorporated by
reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1987)
10.8* -- Form of the Beverly Enterprises, Inc. Executive Life
Insurance Plan Split Dollar Agreement
10.9* -- Executive Physicals Policy (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993)
10.10* -- Amended and Restated Deferred Compensation Plan effective
July 18, 1991 (incorporated by reference to Exhibit 10.6
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1991)
10.11* -- Amendment No. 1, effective September 29, 1994, to the
Deferred Compensation Plan (incorporated by reference to
Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))
66
68
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.12* -- Executive Retirement Plan (incorporated by reference to
Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1987)
10.13* -- Amendment No. 1, effective as of July 1, 1991, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1991)
10.14* -- Amendment No. 2, effective as of December 12, 1991, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1991)
10.15* -- Amendment No. 3, effective as of July 31, 1992, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1992)
10.16* -- Amendment No. 4, effective as of January 1, 1993, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1994)
10.17* -- Amendment No. 5, effective as of September 29, 1994, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1994)
10.18* -- Amendment No. 6, effective as of January 1, 1996, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997)
10.19* -- Amendment No. 7, effective as of September 1, 1997, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997)
10.20* -- Amendment No. 8, dated as of December 11, 1997, to the
Executive Retirement Plan, changing its name to the
"Executive SavingsPlus Plan" (incorporated by reference
to Exhibit 10.20 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997)
10.21* -- Beverly Enterprises, Inc. Amended and Restated
Supplemental Executive Retirement Plan effective as of
April 1, 2000
10.22* -- Beverly Enterprises, Inc. Amended and Restated Executive
Deferred Compensation Plan effective July 1, 2000
10.23* -- Beverly Enterprises, Inc. Non-Employee Director Deferred
Compensation Plan (the "Directors' Plan") (incorporated
by reference to Exhibit 10.1 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997)
10.24* -- Amendment No. 1, effective as of December 3, 1997, to the
Directors' Plan (incorporated by reference to Exhibit
10.26 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1997)
10.25* -- Beverly Enterprises, Inc.'s Supplemental Long-Term
Disability Plan (incorporated by reference to Exhibit
10.24 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1996)
10.26* -- Form of Indemnification Agreement between Beverly
Enterprises, Inc. and its officers, directors and certain
of its employees (incorporated by reference to Exhibit
19.14 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1987)
67
69
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.27* -- Form of request by Beverly Enterprises, Inc. to certain
of its officers or directors relating to indemnification
rights (incorporated by reference to Exhibit 19.5 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987)
10.28* -- Form of request by Beverly Enterprises, Inc. to certain
of its officers or employees relating to indemnification
rights (incorporated by reference to Exhibit 19.6 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987)
10.29* -- Agreement dated December 29, 1986 between Beverly
Enterprises, Inc. and Stephens Inc. (incorporated by
reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on January 18,
1990 (File No. 33-33052))
10.30* -- Employment Contract, made as of August 22, 1997, between
New Beverly Holdings, Inc. and David R. Banks
(incorporated by reference to Exhibit 10.17 to Amendment
No. 2 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-1 filed on September 22, 1997 (File
No. 333-28521))
10.31* -- Employment Contract, made as of April 10, 2000, between
Beverly Enterprises, Inc. and William R. Floyd
10.32* -- Form of Employment Contract, made as of August 22, 1997,
between New Beverly Holdings, Inc. and certain of its
officers (incorporated by reference to Exhibit 10.20 to
Amendment No. 2 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on September 22,
1997 (File No. 333-28521))
10.33 -- Master Lease Document -- General Terms and Conditions
dated December 30, 1985 for Leases between Beverly
California Corporation and various subsidiaries thereof
as lessees and Beverly Investment Properties, Inc. as
lessor (incorporated by reference to Exhibit 10.12 to
Beverly California Corporation's Annual Report on Form
10-K for the year ended December 31, 1985)
10.34 -- Agreement dated as of December 29, 1986 among Beverly
California Corporation, Beverly Enterprises -- Texas,
Inc., Stephens Inc. and Real Properties, Inc. (incor-
porated by reference to Exhibit 28 to Beverly California
Corporation's Current Report on Form 8-K dated December
30, 1986) and letter agreement dated as of July 31, 1987
among Beverly Enterprises, Inc., Beverly California
Corporation, Beverly Enterprises -- Texas, Inc. and
Stephens Inc. with reference thereto (incorporated by
reference to Exhibit 19.13 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 1987)
68
70
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.35 -- Participation Agreement, dated as of August 28, 1998,
among Vantage Healthcare Corporation, Petersen Health
Care, Inc., Beverly Savana Cay Manor, Inc., Beverly
Enterprises -- Georgia, Inc., Beverly
Enterprises -- California, Inc., Beverly Health and
Rehabilitation Services, Inc., Beverly
Enterprises -- Arkansas, Inc., Beverly
Enterprises -- Florida, Inc. and Beverly
Enterprises -- Washington, Inc. as Lessees and Structural
Guarantors; Beverly Enterprises, Inc. as Representative,
Construction Agent and Parent Guarantor; Bank of Montreal
Global Capital Solutions, Inc. as Agent Lessor and
Lessor; The Long-Term Credit Bank of Japan, LTD., Los
Angeles Agency, Bank of America National Trust and
Savings Association and Bank of Montreal, as Lenders; The
Long-Term Credit Bank of Japan, LTD., Los Angeles Agency
as Arranger; and Bank of Montreal as Co-Arranger and
Syndication Agent and Administrative Agent for the
Lenders with respect to the Lease Financing of New
Headquarters for Beverly Enterprises, Inc., Assisted
Living and Nursing Facilities for Beverly Enterprises,
Inc. (incorporated by reference to Exhibit 10.37 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998)
10.36 -- Master Amendment No. 1 to Amended and Restated
Participation Agreement and Amended and Restated Master
Lease and Open-End Mortgage, entered into as of September
30, 1999, among Beverly Enterprises, Inc. as
Representative, Construction Agent, Parent Guarantor and
Lessee; Bank of Montreal Global Capital Solutions, Inc.,
as Lessor and Agent Lessor; and Bank of Montreal, as
Administrative Agent, Arranger and Syndication Agent
(incorporated by reference to Exhibit 10.5 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999)
10.37 -- Amendment No. 2 to Amended and Restated Participation
Agreement entered into as of April 14, 2000
10.38 -- Amendment to Participation Agreement dated as of December
29, 2000
10.39 -- Amended and Restated Credit Agreement, dated as of April
30, 1998, among Beverly Enterprises, Inc., the Banks
listed therein and Morgan Guaranty Trust Company of New
York, as Issuing Bank and Agent (the "Credit Agreement")
(incorporated by reference to Exhibit 10.38 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998)
10.40 -- Amendment No. 1 to the Credit Agreement, dated as of
September 30, 1999 (incorporated by reference to Exhibit
10.1 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999)
10.41 -- Amendment No. 2 to the Credit Agreement dated as of
October 31, 1999
10.42 -- Amendment No. 3 to the Credit Agreement dated as of
December 22, 2000
10.43 -- Master Services Agreement, dated as of September 18,
1997, by and between Alltel Information Services, Inc.
and Beverly Enterprises, Inc. (incorporated by reference
to Exhibit 10.41 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1999)
10.44 -- Form of Irrevocable Trust Agreement for the Beverly
Enterprises, Inc. Executive Benefits Plan (incorporated
by reference to Exhibit 10.55 to Beverly Enterprises,
Inc.'s Registration Statement on Form S-4 filed on
February 13, 1995 (File No. 33-57663))
69
71
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.45 -- Corporate Integrity Agreement between the Office of
Inspector General of the Department of Health and Human
Services and Beverly Enterprises, Inc. (incorporated by
reference to Exhibit 10.43 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1999)
10.46 -- Plea Agreement (incorporated by reference to Exhibit
10.44 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1999)
10.47 -- Addendum to Plea Agreement (incorporated by reference to
Exhibit 10.45 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1999)
10.48 -- Settlement Agreement between the United States of
America, Beverly Enterprises, Inc. and Domenic Todarello
(incorporated by reference to Exhibit 10.46 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1999)
10.49 -- Agreement Regarding the Operations of Beverly
Enterprises -- California, Inc. (incorporated by
reference to Exhibit 10.47 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1999)
21.1 -- Subsidiaries of Registrant
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
- ---------------
* Exhibits 10.1 through 10.32 are the management contracts, compensatory plans,
contracts and arrangements in which any director or named executive officer
participates.
70
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 2001 By: /s/ WILLIAM R. FLOYD
----------------------------------
William R. Floyd
President, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Registrant
and in the capacities and on the dates indicated:
/s/ DAVID R. BANKS Chairman of the Board and March 30, 2001
- ----------------------------------------------------- Director
David R. Banks
/s/ WILLIAM R. FLOYD President, Chief March 30, 2001
- ----------------------------------------------------- Executive Officer and
William R. Floyd Director
/s/ SCOTT M. TABAKIN Executive Vice President March 30, 2001
- ----------------------------------------------------- and Chief Financial
Scott M. Tabakin Officer
/s/ PAMELA H. DANIELS Senior Vice President, March 30, 2001
- ----------------------------------------------------- Controller and Chief
Pamela H. Daniels Accounting Officer
/s/ BERYL F. ANTHONY, JR. Director March 30, 2001
- -----------------------------------------------------
Beryl F. Anthony, Jr.
/s/ CAROLYNE K. DAVIS Director March 30, 2001
- -----------------------------------------------------
Carolyne K. Davis
/s/ JAMES R. GREENE Director March 30, 2001
- -----------------------------------------------------
James R. Greene
/s/ EDITH E. HOLIDAY Director March 30, 2001
- -----------------------------------------------------
Edith E. Holiday
/s/ JON E.M. JACOBY Director March 30, 2001
- -----------------------------------------------------
Jon E.M. Jacoby
/s/ JAMES W. MCLANE Director March 30, 2001
- -----------------------------------------------------
James W. McLane
/s/ RISA J. LAVIZZO-MOUREY Director March 30, 2001
- -----------------------------------------------------
Risa J. Lavizzo-Mourey
/s/ MARILYN R. SEYMANN Director March 30, 2001
- -----------------------------------------------------
Marilyn R. Seymann
71
73
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 -- Form of Restated Certificate of Incorporation of New
Beverly Holdings, Inc. (incorporated by reference to
Exhibit 3.1 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1997)
3.2 -- Form of Certificate of Amendment of Certificate of
Incorporation of New Beverly Holdings Inc., changing its
name to Beverly Enterprises, Inc. (incorporated by
reference to Exhibit 3.2 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1997)
3.3 -- By-Laws of Beverly Enterprises, Inc. (incorporated by
reference to Exhibit 3.4 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on June 4, 1997
(File No. 333-28521))
4.1 -- Indenture dated as of February 1, 1996 between Beverly
Enterprises, Inc. and Chemical Bank, as Trustee, with
respect to Beverly Enterprises, Inc.'s 9% Senior Notes
due February 15, 2006 (the "9% Indenture") (incorporated
by reference to Exhibit 4.1 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995)
4.2 -- Form of Supplemental Indenture No. 2 to the 9% Indenture
dated as of November 19, 1997 (incorporated by reference
to Exhibit 4.2 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on September 8,
1997 (File No. 333-35137))
4.3 -- Indenture dated as of April 1, 1993 (the "First Mortgage
Bond Indenture"), among Beverly Enterprises, Inc.,
Delaware Trust Company, as Corporate Trustee, and Richard
N. Smith, as Individual Trustee, with respect to First
Mortgage Bonds (incorporated by reference to Exhibit 4.1
to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1993)
4.4 -- First Supplemental Indenture dated as of April 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 3/4%
First Mortgage Bonds due 2008 (incorporated by reference
to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993)
4.5 -- Second Supplemental Indenture dated as of July 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 5/8%
First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to
Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated July 15, 1993) (incorporated by reference to
Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993)
4.6 -- Trust Indenture dated as of December 1, 1994 from Beverly
Funding Corporation, as Issuer, to Chemical Bank, as
Trustee (the "Chemical Indenture") (incorporated by
reference to Exhibit 10.45 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on February 13,
1995 (File No.33-57663))
4.7 -- First Amendment and Restatement, dated as of June 1,
1999, of Trust Indenture, dated as of December 1, 1994,
from Beverly Funding Corporation, as Issuer, to The Chase
Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 10.2 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999)
74
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
4.8 -- Series Supplement dated as of December 1, 1994 to the
Chemical Indenture (incorporated by reference to Exhibit
10.46 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))
4.9 -- Series Supplement, dated as of June 1, 1999, by and
between Beverly Funding Corporation and The Chase
Manhattan Bank ("1999-1 Series Supplement") (incorporated
by reference to Exhibit 10.3 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999)
4.10 -- First Amendment, dated as of July 14, 1999, to the 1999-1
Series Supplement (incorporated by reference to Exhibit
10.4 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999)
In accordance with item 601(b)(4)(iii) of Regulation S-K,
certain instruments pertaining to Beverly Enterprises,
Inc.'s long-term obligations have not been filed; copies
thereof will be furnished to the Securities and Exchange
Commission upon request.
10.1* -- Beverly Enterprises, Inc. Annual Incentive Plan
(incorporated by reference to Exhibit 10.4 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4
filed on February 13, 1995 (File No. 33-57663))
10.2* -- New Beverly Holdings, Inc. 1997 Long-Term Incentive Plan
(the "1997 LTIP") (incorporated by reference to Exhibit
4.1 to Beverly Enterprises, Inc.'s Registration Statement
on Form S-8 filed on December 8, 1997 (File No.
333-41669))
10.3* -- Amendment No. 1 to the 1997 LTIP dated as of December 3,
1997 (incorporated by reference to Exhibit 10.3 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1997)
10.4* -- New Beverly Holdings, Inc. Non-Employee Directors' Stock
Option Plan (the "Directors' Option Plan") (incorporated
by reference to Exhibit 4.1 to Beverly Enterprises,
Inc.'s Registration Statement on Form S-8 filed on
December 12, 1997 (File No. 333-42131))
10.5* -- Amendment No. 1 to the Directors' Option Plan dated as of
December 3, 1997 (incorporated by reference to Exhibit
10.5 to Beverly Enterprises, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997)
10.6* -- Beverly Enterprises, Inc. Stock Grant Plan
10.7* -- Executive Medical Reimbursement Plan (incorporated by
reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1987)
10.8* -- Form of the Beverly Enterprises, Inc. Executive Life
Insurance Plan Split Dollar Agreement
10.9* -- Executive Physicals Policy (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993)
10.10* -- Amended and Restated Deferred Compensation Plan effective
July 18, 1991 (incorporated by reference to Exhibit 10.6
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1991)
10.11* -- Amendment No. 1, effective September 29, 1994, to the
Deferred Compensation Plan (incorporated by reference to
Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))
75
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.12* -- Executive Retirement Plan (incorporated by reference to
Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1987)
10.13* -- Amendment No. 1, effective as of July 1, 1991, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1991)
10.14* -- Amendment No. 2, effective as of December 12, 1991, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1991)
10.15* -- Amendment No. 3, effective as of July 31, 1992, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1992)
10.16* -- Amendment No. 4, effective as of January 1, 1993, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1994)
10.17* -- Amendment No. 5, effective as of September 29, 1994, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1994)
10.18* -- Amendment No. 6, effective as of January 1, 1996, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997)
10.19* -- Amendment No. 7, effective as of September 1, 1997, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997)
10.20* -- Amendment No. 8, dated as of December 11, 1997, to the
Executive Retirement Plan, changing its name to the
"Executive SavingsPlus Plan" (incorporated by reference
to Exhibit 10.20 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997)
10.21* -- Beverly Enterprises, Inc. Amended and Restated
Supplemental Executive Retirement Plan effective as of
April 1, 2000
10.22* -- Beverly Enterprises, Inc. Amended and Restated Executive
Deferred Compensation Plan effective July 1, 2000
10.23* -- Beverly Enterprises, Inc. Non-Employee Director Deferred
Compensation Plan (the "Directors' Plan") (incorporated
by reference to Exhibit 10.1 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997)
10.24* -- Amendment No. 1, effective as of December 3, 1997, to the
Directors' Plan (incorporated by reference to Exhibit
10.26 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1997)
10.25* -- Beverly Enterprises, Inc.'s Supplemental Long-Term
Disability Plan (incorporated by reference to Exhibit
10.24 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1996)
10.26* -- Form of Indemnification Agreement between Beverly
Enterprises, Inc. and its officers, directors and certain
of its employees (incorporated by reference to Exhibit
19.14 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1987)
76
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.27* -- Form of request by Beverly Enterprises, Inc. to certain
of its officers or directors relating to indemnification
rights (incorporated by reference to Exhibit 19.5 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987)
10.28* -- Form of request by Beverly Enterprises, Inc. to certain
of its officers or employees relating to indemnification
rights (incorporated by reference to Exhibit 19.6 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987)
10.29* -- Agreement dated December 29, 1986 between Beverly
Enterprises, Inc. and Stephens Inc. (incorporated by
reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on January 18,
1990 (File No. 33-33052))
10.30* -- Employment Contract, made as of August 22, 1997, between
New Beverly Holdings, Inc. and David R. Banks
(incorporated by reference to Exhibit 10.17 to Amendment
No. 2 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-1 filed on September 22, 1997 (File
No. 333-28521))
10.31* -- Employment Contract, made as of April 10, 2000, between
Beverly Enterprises, Inc. and William R. Floyd
10.32* -- Form of Employment Contract, made as of August 22, 1997,
between New Beverly Holdings, Inc. and certain of its
officers (incorporated by reference to Exhibit 10.20 to
Amendment No. 2 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on September 22,
1997 (File No. 333-28521))
10.33 -- Master Lease Document -- General Terms and Conditions
dated December 30, 1985 for Leases between Beverly
California Corporation and various subsidiaries thereof
as lessees and Beverly Investment Properties, Inc. as
lessor (incorporated by reference to Exhibit 10.12 to
Beverly California Corporation's Annual Report on Form
10-K for the year ended December 31, 1985)
10.34 -- Agreement dated as of December 29, 1986 among Beverly
California Corporation, Beverly Enterprises -- Texas,
Inc., Stephens Inc. and Real Properties, Inc. (incor-
porated by reference to Exhibit 28 to Beverly California
Corporation's Current Report on Form 8-K dated December
30, 1986) and letter agreement dated as of July 31, 1987
among Beverly Enterprises, Inc., Beverly California
Corporation, Beverly Enterprises -- Texas, Inc. and
Stephens Inc. with reference thereto (incorporated by
reference to Exhibit 19.13 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 1987)
77
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.35 -- Participation Agreement, dated as of August 28, 1998,
among Vantage Healthcare Corporation, Petersen Health
Care, Inc., Beverly Savana Cay Manor, Inc., Beverly
Enterprises -- Georgia, Inc., Beverly
Enterprises -- California, Inc., Beverly Health and
Rehabilitation Services, Inc., Beverly
Enterprises -- Arkansas, Inc., Beverly
Enterprises -- Florida, Inc. and Beverly
Enterprises -- Washington, Inc. as Lessees and Structural
Guarantors; Beverly Enterprises, Inc. as Representative,
Construction Agent and Parent Guarantor; Bank of Montreal
Global Capital Solutions, Inc. as Agent Lessor and
Lessor; The Long-Term Credit Bank of Japan, LTD., Los
Angeles Agency, Bank of America National Trust and
Savings Association and Bank of Montreal, as Lenders; The
Long-Term Credit Bank of Japan, LTD., Los Angeles Agency
as Arranger; and Bank of Montreal as Co-Arranger and
Syndication Agent and Administrative Agent for the
Lenders with respect to the Lease Financing of New
Headquarters for Beverly Enterprises, Inc., Assisted
Living and Nursing Facilities for Beverly Enterprises,
Inc. (incorporated by reference to Exhibit 10.37 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998)
10.36 -- Master Amendment No. 1 to Amended and Restated
Participation Agreement and Amended and Restated Master
Lease and Open-End Mortgage, entered into as of September
30, 1999, among Beverly Enterprises, Inc. as
Representative, Construction Agent, Parent Guarantor and
Lessee; Bank of Montreal Global Capital Solutions, Inc.,
as Lessor and Agent Lessor; and Bank of Montreal, as
Administrative Agent, Arranger and Syndication Agent
(incorporated by reference to Exhibit 10.5 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999)
10.37 -- Amendment No. 2 to Amended and Restated Participation
Agreement entered into as of April 14, 2000
10.38 -- Amendment to Participation Agreement dated as of December
29, 2000
10.39 -- Amended and Restated Credit Agreement, dated as of April
30, 1998, among Beverly Enterprises, Inc., the Banks
listed therein and Morgan Guaranty Trust Company of New
York, as Issuing Bank and Agent (the "Credit Agreement")
(incorporated by reference to Exhibit 10.38 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998)
10.40 -- Amendment No. 1 to the Credit Agreement, dated as of
September 30, 1999 (incorporated by reference to Exhibit
10.1 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999)
10.41 -- Amendment No. 2 to the Credit Agreement dated as of
October 31, 1999
10.42 -- Amendment No. 3 to the Credit Agreement dated as of
December 22, 2000
10.43 -- Master Services Agreement, dated as of September 18,
1997, by and between Alltel Information Services, Inc.
and Beverly Enterprises, Inc. (incorporated by reference
to Exhibit 10.41 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1999)
10.44 -- Form of Irrevocable Trust Agreement for the Beverly
Enterprises, Inc. Executive Benefits Plan (incorporated
by reference to Exhibit 10.55 to Beverly Enterprises,
Inc.'s Registration Statement of Form S-4 filed on
February 13, 1995 (File No. 33-57663))
78
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.45 -- Corporate Integrity Agreement between the Office of
Inspector General of the Department of Health and Human
Services and Beverly Enterprises, Inc. (incorporated by
reference to Exhibit 10.43 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1999)
10.46 -- Plea Agreement (incorporated by reference to Exhibit
10.44 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1999)
10.47 -- Addendum to Plea Agreement (incorporated by reference to
Exhibit 10.45 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1999)
10.48 -- Settlement Agreement between the United States of
America, Beverly Enterprises, Inc. and Domenic Todarello
(incorporated by reference to Exhibit 10.46 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1999)
10.49 -- Agreement Regarding the Operations of Beverly
Enterprises -- California, Inc. (incorporated by
reference to Exhibit 10.47 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1999)
21.1 -- Subsidiaries of Registrant
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
- ---------------
* Exhibits 10.1 through 10.32 are the management contracts, compensatory plans,
contracts and arrangements in which any director or named executive officer
participates.