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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission file number 1-9550

Beverly Enterprises, Inc.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code:

      Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

Shares of Registrant’s Common Stock, $.10 par value, outstanding, exclusive of treasury shares,

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BEVERLY ENTERPRISES, INC.

FORM 10-Q

SEPTEMBER 30, 2002

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PART I

BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

NOTE: The balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.     General

      References throughout this document to the Company include Beverly Enterprises, Inc. and its wholly owned consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this Quarterly Report on Form 10-Q 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 consolidated subsidiaries and not to any other person.

      We have prepared the condensed consolidated financial statements, without audit. In management’s opinion, these financial statements include all normal recurring adjustments necessary for a fair presentation of the results of operations for the three-month and nine-month periods ended September 30, 2002 and 2001 in accordance with the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures required by accounting principles generally accepted in the United States have been condensed or omitted, we believe that the disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read along with our 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Our results of operations for the three-month and nine-month periods ended September 30, 2002 are not necessarily indicative of the results for a full year.

      Certain prior year amounts have been reclassified to conform with the 2002 presentation.

      Generally accepted accounting principles require management to make estimates and assumptions when preparing financial statements that affect certain 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.

      Approximately 77% of our net operating revenues for the three-month and nine-month periods ended September 30, 2002 and 2001, were derived from funds under federal and state medical assistance programs (primarily Medicare and Medicaid). We accrue for revenues when services are provided at standard charges. These charges are adjusted to amounts that we estimate we will receive under governmental programs and other third-party contractual arrangements based on contractual terms and historical experience. These revenues are reported at their estimated net realizable amounts and certain amounts are subject to audit and retroactive adjustment.

      Retroactive adjustments are estimated in the recognition of revenues in the period the related services are rendered. These 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 and evolving nature 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      The following table sets forth the calculation of basic and diluted earnings per share for the three-month and nine-month periods ended September 30 (in thousands, except per share amounts):

      Comprehensive income (loss) includes net income (loss), as well as charges and credits to stockholders’ equity not included in net income (loss). Comprehensive income (loss), net of income taxes, consists of the following for the three-month and nine-month periods ended September 30 (in thousands):

      Accumulated other comprehensive income, net of income taxes, consists of the following (in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      During the third quarter of 2002, we recorded pre-tax charges totaling approximately $4.5 million, relating to the following:

	—	approximately $3.4 million of workforce reduction costs for 59 associates who were notified that their positions would be eliminated. Approximately $318,000 was paid during the quarter ended September 30, 2002.
	—	$1.1 million of legal and other costs associated with our internal investigation into past billing practices at MK Medical, our medical equipment business unit.

      During the second quarter of 2002, we recorded pre-tax charges relating to the following:

	Based on the results of a semi-annual actuarial study performed by our independent actuary, completed in mid-July, we recorded a total increase of $43.3 million ($0.26 per share diluted for the nine-month period ended September 30, 2002) in our estimated reserves for prior policy-year patient care liability costs. Included in this amount was $22.2 million to increase reserves related to our previously operated Florida facilities, which have been sold. The balance of the increase in reserves, $21.1 million, is included in the “Provision for Insurance and Related Items” in the accompanying financial statements.
	In connection with the results of this actuarial study, commencing May 1, 2002 we also increased our operating expense accruals by $2.5 million, to approximately $5.4 million per month, to reflect an estimated increase in patient care liability costs for the current policy year, which began on the same date.

On August 1, 2002, the Company and the State of California reached an agreement on the settlement of an investigation by the Attorney General’s office and the District Attorney of Santa Barbara County of patient care issues in a number of California nursing facilities. In accordance with the terms of the settlement agreement, Beverly Enterprises — California, Inc. has entered a plea of nolo contendere to two felony charges under California’s Elder Abuse statute and during July 2002, paid a fine of $54,000 related to the plea. In addition, Beverly Enterprises — California, Inc. reimbursed the Attorney General and the Santa Barbara County District Attorney $533,000 for the costs of their investigations and will pay a $2.0 million civil penalty in four equal, quarterly installments of $500,000 beginning in the third quarter of 2002. The first quarterly installment was paid during August 2002. In addition, a permanent injunction (“Permanent Injunction”) was entered requiring that the Company and its operating subsidiaries operate their California nursing facilities in compliance with all applicable laws and regulations and conduct training and education programs identified therein. The Company recorded a charge against earnings of $6.3 million during the second quarter of 2002 to reflect the terms of the settlement and related costs, and we expect to incur additional annual costs for implementation of the Permanent Injunction. We have been in discussions with the Officer of Inspector General (“OIG”) about possible revisions to the Corporate Integrity Agreement (“CIA”) in connection with the Permanent Injunction.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	In February 2002, we made a settlement offer to the Centers for Medicare and Medicaid Services of the Department of Health and Human Services (“CMS”) to resolve reimbursement issues relating to: (1) costs of services provided to Medicare patients during 1996 through 1998 under the federal government’s former cost-reimbursement system; and (2) co-payments due from Medicare beneficiaries, who were also eligible for Medicaid, for the years 1996 through 2000.
	In connection with the proposed settlement offer, and based on further discussions with CMS, we have revised the amount of legal fees and other costs we expect to incur. Accordingly, legal and related fees accrued in 2001 for these matters have been reduced by $6.9 million.
	Effective October 15, 2002, we entered into a settlement agreement with CMS (the “Settlement Agreement”), which resolves the above issues and all outstanding issues from the Allocation Investigations (as described in “Part I, Item 3. Legal Proceedings” of our Form 10-K for the fiscal year ended December 31, 2001). Under the terms of the Settlement Agreement, we will pay CMS $35.0 million in November 2002. During the fourth quarter of 2001, we recorded a charge related to this matter of $77.5 million, which included $35.0 million for the cash payment. The Settlement Agreement did not result in any change to the fourth quarter 2001 estimated accrual.

      During the nine-month period ended September 30, 2002, we have paid approximately $5.5 million relating to the costs we accrued for workforce reductions during 2001 (see “Item 8. Consolidated Financial Statements and Supplementary Data” of our Form 10-K for the fiscal year ended December 31, 2001).

Note 3.     Income Taxes

      The provision for (benefit from) income taxes for the three-month and nine-month periods ended September 30, 2002 and 2001 were based on estimated annual effective tax rates of 10% and 45%, respectively. Total annual tax expense for 2002, which primarily relates to state income taxes, is estimated to be approximately $5 million. The tax provision for the nine-month period ended September 30, 2002 represents approximately three-quarters of that amount. At September 30, 2002, our estimated annual effective tax rate for 2002 differs from the federal statutory rate primarily due to a reduction in the valuation allowance for deferred tax assets established at December 31, 2001. This reduction in the valuation allowance is principally due to our expected realization of a portion of the net operating loss carryforwards in 2002.

      Our estimated annual effective tax rate for 2001 differs from the federal statutory rate primarily due to the pre-tax charges for asset impairments, workforce reductions and other unusual items of approximately $115.5 million. These charges reduced our pre-tax income for 2001 to a level where the impact of permanent tax differences and state income taxes had a significant impact on the effective tax rate.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      The provision for (benefit from) income taxes consists of the following for the three-month and nine-month periods ended September 30 (in thousands):

Note 4.     Acquisitions and Dispositions

      During the nine-month period ended September 30, 2002, we sold, closed or terminated the leases on 58 nursing facilities (6,973 beds), four assisted living centers (315 units), four home care centers, seven outpatient clinics and certain other assets for cash proceeds of approximately $158.2 million and notes receivable of approximately $15.7 million. In December 2001, we had leased to another operator 49 of the nursing facilities (6,129 beds) and four assisted living centers, all of which were located in Florida. Excluding the Florida properties, which had been written down to net realizable value in 2001, we recognized net pre-tax losses of approximately $2.6 million as a result of these disposal activities. These losses were included in net operating revenues during the nine months ended September 30, 2002. The operations of these facilities and other assets were immaterial to our consolidated financial position and results of operations.

Note 5.     New Accounting Standards

      In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), which established new rules on the accounting for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized; however, they are subject to annual impairment tests as prescribed by the Statement. Intangible assets with definite lives will continue to be amortized over their estimated useful lives. With respect to our goodwill and intangible assets, SFAS No. 142 was effective for us beginning in the first quarter of 2002.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Following is a summary of adjusted operating results reflecting the effects of adopting SFAS No. 142, net of income taxes, for the three-month and nine-month periods ended September 30 (in thousands, except per share amounts):

      We completed the impairment assessment of our indefinite lived intangible assets, other than goodwill, during the first quarter of 2002, with no impairment identified. SFAS No. 142 describes a two-step process for testing goodwill for impairment. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. We have completed the first step of the goodwill impairment test for all reporting units of the Company. The results of that test have indicated that goodwill does not appear to be impaired except for our Matrix and Home Care Services — Care Focus reporting units where we expect to record impairment losses. As required by SFAS No. 142, the measurement of these impairments will be completed by the end of the fourth quarter of 2002. The resulting impairment losses will be recorded as the cumulative effect of a change in accounting principle as of January 1, 2002.

      In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of (other than goodwill and intangibles). SFAS No. 144 broadens the definition of a discontinued operation for financial reporting purposes, and will require assets below the reportable segment level to be presented as discontinued operations. SFAS No. 144 became effective for us beginning in the first quarter of 2002. We do not expect there to be a material impact on our consolidated financial position or results of operations as a result of adopting SFAS No. 144.

      In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS No. 145”). This Statement eliminates extraordinary accounting treatment for reporting gains or losses on debt extinguishments, and amends certain other existing accounting pronouncements. The provisions of this Statement will be effective for the Company beginning with the first quarter of fiscal year 2003. Debt extinguishments reported as

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

extraordinary items prior to adoption of this Statement will be reclassified to the appropriate line item on the statement of operations. 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. 145.

      In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured at its fair value when the liability is incurred rather than when an entity commits to an exit plan. Depending on the terms of the exit or disposal, under SFAS No. 146, severance pay could be recognized over time or up front. Also, SFAS No. 146 requires a liability be recognized, measured at its fair value, when an entity ceases operation at a location covered under a preexisting contract, such as a lease. Fair value in this case would represent the present value of the future payment obligations, net of assumed receipts, such as sublease income at current market value. SFAS No. 146 is effective for all exit or disposal activities initiated after December 31, 2002. We have not yet determined the effect on our consolidated financial position or results of operations as a result of adopting SFAS No. 146.

Note 6.     Contingencies and Legal Proceedings

      As previously disclosed, we have notified federal and California healthcare regulatory authorities (CMS, OIG, the California Attorney General’s office and the California Department of Health) that we are conducting an internal investigation of past billing practices at MK Medical, our medical equipment business unit based in Fresno, California. An independent third party has been engaged to audit MK Medical’s billing of government payors. Until the results of this audit are known, the extent of potential overpayments, penalties or fines cannot be quantified, but they could have a material adverse effect on our consolidated financial position, results of operations and cash flows. Annualized cash receipts since the October 1998 acquisition of MK Medical have averaged approximately $20.0 million, of which approximately $15.0 million is related to government payors.

      See “Part II, Item 1. Legal Proceedings” for a description of certain legal proceedings pending against the Company.

Note 7.     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. During the first quarter of 2002, we reorganized certain of our operations in order to continue the momentum towards achieving our three-year strategic plan objectives. This reorganization required an adjustment to our reportable segments, which are now as follows:

	—	Nursing facilities, which provide long-term healthcare through the operation of nursing homes and assisted living centers;
	—	AEGIS, which provides rehabilitation therapy services under contract to Beverly and non-Beverly facilities;
	—	Home Care, which provides home health, hospice and home medical equipment services; and
	—	Matrix, which operates outpatient therapy and other clinics and a managed care network.

      Segment information for all periods presented reflects our first quarter 2002 operating reorganization.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      The following table summarizes certain information for each of our reportable segments (in thousands):