ITEM 1. BUSINESS.
GENERAL
References herein to the Company include Beverly Enterprises, Inc. and its wholly-owned subsidiaries.
Beverly Enterprises, Inc. (formerly known as New Beverly Holdings, Inc.), which was incorporated on April 15, 1997 ("New Beverly"), is the successor to the former Beverly Enterprises, Inc., which was incorporated on February 27, 1987 ("Old Beverly"), as the result of a tax-free reorganization completed December 3, 1997 (the "Reorganization") in order to facilitate the Merger of PCA with Capstone (as discussed below). The Reorganization was accomplished in two steps. Old Beverly transferred or contributed to New Beverly all of its assets and liabilities, except for its institutional pharmacy business conducted by its wholly-owned subsidiary, Pharmacy Corporation of America and its subsidiaries ("PCA"), (the "Remaining Healthcare Business"), in exchange for all of the issued and outstanding common stock of New Beverly. Old Beverly immediately distributed the common stock of New Beverly to its stockholders on a one-for-one basis (the "Distribution"). As a result of the Distribution, New Beverly became an independent, publicly-traded company engaged in the Remaining Healthcare Business and owned by the stockholders of Old Beverly. Following the Distribution, Old Beverly, whose only assets consisted of the stock of PCA and its subsidiaries, merged with and into Capstone Pharmacy Services, Inc. ("Capstone"), with Capstone being the surviving corporation (the "Merger"). Immediately after the Merger, Capstone changed its name to PharMerica, Inc. and New Beverly changed its name to Beverly Enterprises, Inc. References to Beverly Enterprises, Inc., or the Company, prior to December 3, 1997 will mean the predecessor corporation, Old Beverly. References to Beverly Enterprises, Inc., or the Company, on or after December 3, 1997 will mean New Beverly, and New Beverly will be treated for accounting purposes as the continuing reporting entity with respect to the historical and future operations of the Company. See "Part II, Item 8 -- Note 2 of Notes to Consolidated Financial Statements" for additional information.
The business of the Company consists principally of providing long-term healthcare, including the operation of nursing facilities, acute long-term transitional hospitals, rehabilitation therapy services, outpatient therapy clinics, assisted living centers and home health centers.
The Company is one of the largest operators of nursing facilities in the United States. At January 31, 1998, the Company operated 568 nursing facilities with 63,376 licensed beds. The facilities are located in 29 states and the District of Columbia, and range in capacity from 20 to 355 beds. At January 31, 1998, the Company also operated 34 assisted living centers containing 901 units, 13 transitional hospitals containing 671 beds, 70 outpatient therapy clinics, and 25 home health centers. The Company's facilities had average occupancy of 88.9%, 87.4% and 88.1% during the years ended December 31, 1997, 1996 and 1995, respectively. See "Item 2.
ITEM 2. PROPERTIES.
At January 31, 1998, the Company operated 568 nursing facilities, 34 assisted living centers, 13 transitional hospitals, 70 outpatient therapy clinics and 25 home health centers in 31 states and the District of Columbia. Most of the Company's 188 leased nursing facilities are subject to "net" leases which require the Company to pay all taxes, insurance and maintenance costs. Most of the Company's leases have original terms from ten to fifteen years and contain at least one renewal option, which could extend the original term of the leases by five to fifteen years. Many of the Company's leases also contain purchase options. The Company considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. Certain of the nursing facilities and assisted living centers owned by the Company are included in the collateral securing the obligations under its various debt agreements. See "Part II, Item 8 -- Note 4 of Notes to Consolidated Financial Statements."
The following is a summary of the Company's nursing facilities, assisted living centers, transitional hospitals, outpatient therapy clinics and home health centers at January 31, 1998:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
On March 4, 1998, a jury in California returned a verdict of $95.1 million against a nursing facility operated by a subsidiary of the Company. The verdict, which was based on findings of fraud as well as negligence and abuse, consisted of $365,580 in compensatory damages and $94.7 million in punitive damages. Since punitive damages are generally not covered by insurance, a final judgement of this size could have a material adverse effect on the Company's consolidated results of operations and financial position. However, it is the Company's belief, based on discussions with its trial and appellate counsel, that many of the jury's findings, including fraud, are not supportable from the evidence presented in the case, and the judgement entered will be significantly reduced by the trial court or an appeal. The Company intends to aggressively pursue all post-trial remedies available to it.
There are various other lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages which are generally not covered by insurance. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 20, 1997, in conjunction with the Reorganization, the Company held a Special Meeting of Stockholders in Fort Smith, Arkansas, for the purposes of approving and adopting an Agreement and Plan of Distribution, approving and adopting an Agreement and Plan of Merger, approving the New Beverly 1997 Long-Term Incentive Plan, approving the New Beverly Non-Employee Directors Stock Option Plan, approving the possible adjournment of the Special Meeting of Stockholders for purposes of soliciting additional votes in favor of the above proposals and transacting such other business as may have properly come before the meeting or any adjournment thereof.
The Agreement and Plan of Distribution was approved at the meeting. The following table sets forth the number of votes for and against, as well as abstentions as to this matter:
The Agreement and Plan of Merger was approved at the meeting. The following table sets forth the number of votes for and against, as well as abstentions as to this matter:
The New Beverly 1997 Long-Term Incentive Plan was approved at the meeting. The following table sets forth the number of votes for and against, as well as abstentions as to this matter:
The New Beverly Non-Employee Directors Stock Option Plan was approved at the meeting. The following table sets forth the number of votes for and against, as well as abstentions as to this matter:
The possible adjournment of the Special Meeting was approved at the meeting. The following table sets forth the number of votes for and against, as well as abstentions as to this matter:
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth, as to each executive officer and director of the Company, such person's name, positions with the Company and age. Each executive officer and director of the Company 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 information below is given as of March 18, 1998.
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Quality Management Committee.
(5) Member of the Nominating Committee.
Mr. Banks has been a director of the Company since 1979 and has served as Chief Executive Officer since May 1989 and Chairman of the Board since March 1990. Mr. Banks was President of the Company from 1979 to September 1995. Mr. Banks is a director of Nationwide Health Properties, Inc., Ralston Purina Company, Wellpoint Health Networks, Inc., and trustee for Occidental College. Mr. Banks also serves as a director of PharMerica, Inc., a major supplier of institutional pharmacy services to the Company.
Mr. Hendrickson joined the Company in 1988 as a Division President. He was elected Vice President of Marketing in May 1989, Executive Vice President of Operations and Marketing in February 1990, President of Beverly Healthcare in January 1995 and President, Chief Operating Officer and a director of the Company in September 1995. He is a director of PharMerica, Inc.
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 and President of the corporations within Beverly Healthcare in September 1995.
Mr. Moore joined the Company as Executive Vice President in December 1992 and was elected President of the corporations within Beverly Specialty Hospitals in June 1996. Mr. Moore was employed at Aetna Life and Casualty from 1963 to 1992 and was elected Senior Vice President in 1990.
Mr. Pommerville first joined the Company in 1970 and left in 1976. He rejoined the Company as Vice President and General Counsel in 1984 and was elected Secretary in February 1990, Senior Vice President in March 1990 and Executive Vice President and Acting Compliance Officer in February 1995.
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 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, Acting Chief Financial Officer in September 1995 and Executive Vice President and Chief Financial Officer in October 1996. From 1980 to 1992, Mr. Tabakin was with Ernst & Young LLP.
Mr. Wortley joined the Company as Senior Vice President and President of the corporations within Beverly Care Alliance in September 1994 and was elected Executive Vice President in February 1996. From 1988 to 1994, Mr. Wortley was an officer of Therapy Management Innovations.
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. From 1985 to 1988, Ms. Daniels was with Price Waterhouse LLP.
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 is currently a part-time scholar in residence at the Sloan Health Management Program at Cornell University, Ithaca, New York. She served as Administrator of the Health Care Financing Administration of the U.S. Department of Health and Human Services from 1981 to 1985. She was a director of the Company from 1985 to 1989 and served as consultant and advisor to the Company's Board of Directors from 1989 to 1997. She was a national and international health care advisor to Ernst & Young LLP from 1985 to 1997. She is a member of the Institute of Medicine and the National Academy of Science, a trustee for the University of Pennsylvania Medical Center, a member of the board of directors for Georgetown University, a director of Beckman Instruments, Inc., Merck & Co., Inc., The Prudential Insurance Company of North America, Pharmaceutical Marketing Services, Inc. and MiniMed, 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 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 and H.J. Heinz Company and 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. From 1992 to 1994, Dr. Lavizzo-Mourey was in the Senior Executive Service in the Agency for Health Care Policy and Research, U.S. Public Health Service of the Department of Health and Human Services. She is a director of Managed Care Solutions, Inc. and Kapson Senior Quarters Corp. She has been a director of the Company since March 1995.
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. From 1990 to 1993, Ms. Seymann was Director and Vice Chairman of the Federal Housing Finance Board. Prior to that, she served as Managing Director of Andersen Asset Based Services, a unit of Arthur Andersen LLP. From 1986 to 1990, Ms. Seymann was Executive Vice President of Chase Bank of Arizona and served as President, Private Banking of Chase Trust Company from 1987 to 1990. She is a director of Claremont Technology Group, Inc. She has been a director of the Company since March 1995.
During 1997, there were eight meetings of the Board of Directors. Each director attended 75% or more of the meetings of the Board and committees on which he or she served.
In 1997, directors, other than Mr. Banks and Mr. Hendrickson, 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. The chairperson of each committee received an additional $1,000 for each committee meeting attended. Mr. Banks, the Company's current Chairman of the Board and Chief Executive Officer, and Mr. Hendrickson, the Company's current President and Chief Operating Officer, received no additional cash compensation for serving on the Board or its committees.
During 1997, the Beverly Enterprises, Inc. Non-Employee Director Deferred Compensation Plan (the "Non-Employee Director Deferred Compensation Plan") was approved. Such plan provides each nonemployee director the opportunity to receive awards equivalent to shares of Common Stock ("deferred share units") and to defer receipt of compensation for services rendered to the Company. There are three types of contributions available under the plan. First, nonemployee directors can defer all or part of retainer and meeting fees to a pre-tax deferred compensation account with two investment options. The first investment option is a cash account which is credited with interest, and the second investment option is a deferred share unit account, with each unit having a value equivalent to one share of Common Stock. The second type of contribution is a Company matching contribution whereby the Company matches 25% of the amount of fees deferred, to the extent the deferral is in the deferred share unit account. Third, as a replacement for the prior benefits under the retirement plan for outside directors, each nonemployee director receives a grant of 500 deferred share units each year which is automatically credited to the deferred share unit account. Distributions under the plan will commence upon retirement, termination, death or disability and will be made in shares of Common Stock unless the Board of Directors approves payment in cash.
During 1997, the New Beverly Non-Employee Directors Stock Option Plan (the "Non-Employee Directors Stock Option Plan") was approved. Such plan became effective December 3, 1997 and will remain in effect until December 31, 2007, subject to earlier termination by the Board of Directors. Such plan replaced the Nonemployee Directors' Plan entered into in 1994. There are 300,000 shares of the Company's $.10 par value common stock ("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 3,375 stock options be granted to each nonemployee director on June 1 of each year until the plan is terminated, subject to the availability of shares. Such grants have been made since 1994 to each of the nonemployee directors. Such stock options are granted at a purchase price equal to fair market value on the date of grant, become exercisable one year after date of grant and expire ten years after date of grant.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's 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 the Common Stock as reported on the New York Stock Exchange composite tape.
- ---------------
(1) After the effect of the Reorganization on December 3, 1997 (as discussed herein).
The Company is subject to certain restrictions under its long-term debt agreements related to the payment of cash dividends on its Common Stock. During 1997 and 1996, no cash dividends were paid on the Company's Common Stock and no future dividends are currently planned.
At March 18, 1998, there were 5,824 record holders of the 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 Common Stock at the current market price through payroll deductions. The Company makes contributions in the amount of 30% 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 the Company's statement of operations for the year ended December 31, 1997 related to this plan was approximately $2,449,000. At December 31, 1997, there were approximately 4,700 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 Common Stock on the New York Stock Exchange for each participant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table of selected financial data should be read in conjunction with the Company's consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.
- --------------- (1) Amounts for 1997 include the operations of PCA up until the effective date of the Merger (as discussed herein). (2) The earnings per share amounts prior to 1997 were restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." See "Part II, Item 8 -- Note 1 of Notes to Consolidated Financial Statements." (3) Average occupancy percentage for 1997 was based on operational beds, and for all periods prior to 1997, such percentage was based on licensed beds. Average occupancy percentage for 1997 based on licensed beds was 87.1%.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
Beverly Enterprises, Inc. (formerly known as New Beverly Holdings, Inc.), which was incorporated on April 15, 1997 ("New Beverly"), is the successor to the former Beverly Enterprises, Inc., which was incorporated on February 27, 1987 ("Old Beverly"), as the result of a tax-free reorganization completed December 3, 1997 (the "Reorganization") in order to facilitate the Merger of PCA with Capstone (as discussed below). The Reorganization was accomplished in two steps. Old Beverly transferred or contributed to New Beverly all of its assets and liabilities, except for its institutional pharmacy business conducted by its wholly-owned subsidiary, Pharmacy Corporation of America and its subsidiaries ("PCA"), (the "Remaining Healthcare Business"), in exchange for all of the issued and outstanding common stock of New Beverly. Old Beverly immediately distributed the common stock of New Beverly to its stockholders on a one-for-one basis (the "Distribution"). As a result of the Distribution, New Beverly became an independent, publicly-traded company engaged in the Remaining Healthcare Business and owned by the stockholders of Old Beverly. Following the Distribution, Old Beverly, whose only assets consisted of the stock of PCA and its subsidiaries, merged with and into Capstone Pharmacy Services, Inc. ("Capstone"), with Capstone being the surviving corporation (the "Merger"). Immediately after the Merger, Capstone changed its name to PharMerica, Inc. and New Beverly changed its name to Beverly Enterprises, Inc. References to Beverly Enterprises, Inc., or the Company, prior to December 3, 1997 will mean the predecessor corporation, Old Beverly. References to Beverly Enterprises, Inc., or the Company, on or after December 3, 1997 will mean New Beverly, and New Beverly will be treated for accounting purposes as the continuing reporting entity with respect to the historical and future operations of the Company. See "Part II, Item 8
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. 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 6, 1998, except for Note 5, paragraph 6, as to which the date is March 4, 1998
BEVERLY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
See accompanying notes.
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes.
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
See accompanying notes.
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
References herein to the Company include Beverly Enterprises, Inc. and its wholly-owned subsidiaries.
Beverly Enterprises, Inc. (formerly known as New Beverly Holdings, Inc.), which was incorporated on April 15, 1997 ("New Beverly"), is the successor to the former Beverly Enterprises, Inc., which was incorporated on February 27, 1987 ("Old Beverly"), as the result of a tax-free reorganization completed December 3, 1997 (the "Reorganization") in order to facilitate the Merger of PCA with Capstone (as discussed below). The Reorganization was accomplished in two steps. Old Beverly transferred or contributed to New Beverly all of its assets and liabilities, except for its institutional pharmacy business conducted by its wholly-owned subsidiary, Pharmacy Corporation of America and its subsidiaries ("PCA"), (the "Remaining Healthcare Business"), in exchange for all of the issued and outstanding common stock of New Beverly. Old Beverly immediately distributed the common stock of New Beverly to its stockholders on a one-for-one basis (the "Distribution"). As a result of the Distribution, New Beverly became an independent, publicly-traded company engaged in the Remaining Healthcare Business and owned by the stockholders of Old Beverly. Following the Distribution, Old Beverly, whose only assets consisted of the stock of PCA and its subsidiaries, merged with and into Capstone Pharmacy Services, Inc. ("Capstone"), with Capstone being the surviving corporation (the "Merger"). Immediately after the Merger, Capstone changed its name to PharMerica, Inc. and New Beverly changed its name to Beverly Enterprises, Inc. References to Beverly Enterprises, Inc., or the Company, prior to December 3, 1997 will mean the predecessor corporation, Old Beverly. References to Beverly Enterprises, Inc., or the Company, on or after December 3, 1997 will mean New Beverly, and New Beverly will be treated for accounting purposes as the continuing reporting entity with respect to the historical and future operations of the Company. See Note 2 for additional information.
The Company provides long-term healthcare in 31 states and the District of Columbia. Its operations include nursing facilities, acute long-term transitional hospitals, rehabilitation therapy services, outpatient therapy clinics, assisted living centers and home health centers. The consolidated financial statements of the Company include the accounts of the Company and all of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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 by the straight-line method over the estimated useful lives of the assets.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Intangible Assets
Goodwill (stated at cost less accumulated amortization of $21,610,000 in 1997 and $38,446,000 in 1996) is being amortized over 40 years or, if applicable, the life of the lease using the straight-line method. Operating and leasehold rights and licenses, which are included in the consolidated balance sheet caption "Other, net," (stated at cost less accumulated amortization of $17,442,000 in 1997 and $18,716,000 in 1996) 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, the Company reviews the carrying value of its 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. As of December 31, 1997, the Company does not believe there is any indication that the carrying value or the amortization period of its intangibles needs to be adjusted. See "-- Impairment of Long-Lived Assets."
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued 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") which 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, the Company assesses the need for an impairment write-down when such indicators of impairment are present.
In the fourth quarter of 1995, the Company recorded an impairment loss of approximately $68,130,000 upon adoption of SFAS No. 121. Such loss primarily related to certain nursing facilities, transitional hospitals, institutional pharmacies and assisted living centers with current period operating losses. Such current period operating losses, combined with a history of operating losses and anticipated future operating losses, led management to believe that impairment existed at such facilities. In addition, there were certain nursing facilities for which management expected an adverse impact on future earnings and cash flows as a result of recent changes in state Medicaid reimbursement programs. Accordingly, management estimated the undiscounted future cash flows to be generated by each facility. If the undiscounted future cash flow estimates were less than the carrying value of the corresponding facility, management estimated the fair value of such facility and wrote the carrying value down to its estimate of fair value. Management calculated the fair value of the impaired facilities by using the present value of estimated future cash flows, or its best estimate of what such 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 the Company has purchased and sold in previous years. There were no material impairment adjustments recorded during the years ended December 31, 1997 and 1996.
In addition to the SFAS No. 121 charge, the Company recorded a fourth quarter of 1995 impairment loss for other long-lived assets of approximately $32,147,000 primarily related to the write-off of software and business development costs. During the fourth quarter of 1995, the Company hired a new Senior Vice President of Information Technology, who redirected the Company's systems development initiatives, causing a write-down, or a write-off, of certain software and software development projects. In addition, the Company
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) wrote off certain business development and other costs where the Company believed the carrying amounts were unrecoverable.
Insurance
The Company insures auto liability, general liability and workers' compensation risks, in most states, through insurance policies with third parties, some of which may be subject to reinsurance agreements between the insurer and Beverly Indemnity, Ltd., a wholly-owned subsidiary of the Company. 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, the Company would have incurred a pre-tax charge of approximately $1,100,000 for the year ended December 31, 1997. The discounted insurance liabilities are included in the consolidated balance sheet captions as follows (in thousands):
On an undiscounted basis, the total insurance liabilities as of December 31, 1997 and 1996 were $111,200,000 and $170,099,000, respectively. As of December 31, 1997, the Company had deposited approximately $80,800,000 in funds (the "Beverly Indemnity funds") that are restricted for the payment of insured claims. In addition, the Company anticipates that approximately $36,100,000 of its existing cash at December 31, 1997, while not legally restricted, will be utilized to fund certain workers' compensation and general liability claims, and the Company does not expect to use such cash for other purposes.
During 1997, the Company transferred a portion of its liabilities for workers' compensation and general liability related to certain of its sold nursing facilities to a third-party indemnity insurance company. In addition, the Company purchased traditional indemnity insurance coverage for its 1997 workers' compensation and auto liabilities. Since the Company does not need to set aside funds nor estimate liabilities for future payments of these claims, these transactions resulted in a significant reduction in the Company's insurance liabilities during the year ended December 31, 1997, as compared to the same period in 1996.
Stock-Based Awards
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") which encourages, but does not require, companies to recognize compensation expense for stock-based awards based on their fair value on the date of grant. The Company has elected to continue to account for its stock-based awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for its stock option grants. See Note 6 for the pro forma effects on the Company's reported net income and earnings per share assuming the election had been made to recognize compensation expense on stock-based awards in accordance with SFAS No. 123.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Revenues
The Company's revenues are derived primarily from providing long-term healthcare services. Approximately 74%, 75% and 77% of the Company's net operating revenues for 1997, 1996 and 1995, respectively, were derived from funds under federal and state medical assistance programs, and approximately 68% and 73% of the Company's net patient accounts receivable at December 31, 1997 and 1996, respectively, are due from such programs. These revenues and receivables are reported at their estimated net realizable amounts and are subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered and are adjusted in the period of settlement. Changes in estimates related to third party receivables resulted in the recording of approximately $8,900,000, $10,900,000 and $19,700,000 of net operating revenues for the years ended December 31, 1997, 1996 and 1995, respectively.
Concentration of Credit Risk
The Company has significant accounts receivable, notes receivable and other assets whose collectibility or realizability is dependent upon the performance of certain governmental programs, primarily Medicaid and Medicare. These receivables and other assets represent the only concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an adequate provision has been made for the possibility of these receivables and other assets proving uncollectible and continually monitors and adjusts these allowances as necessary.
Income Taxes
The Company follows the liability method in accounting for deferred income taxes. The liability method provides that deferred tax assets and liabilities are 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.
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No. 128"). SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31 (in thousands):
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130") which is required to be adopted in financial statements for periods beginning after December 15, 1997. SFAS No. 130 requires the presentation of comprehensive income in a company's financial statements. Comprehensive income represents all changes in the equity of a company during the reporting period, including net income and charges directly to retained earnings which are excluded from net income. The Company will adopt SFAS No. 130 in its consolidated financial statements during the first quarter of 1998 and does not expect there to be a material effect on its consolidated financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS No. 131") which is required to be adopted in financial statements for periods beginning after December 15, 1997. SFAS No. 131 provides revised disclosure guidelines for segments of a company based on a management approach to defining operating segments. The Company will provide reporting disclosures as required by SFAS No. 131 for the year ending December 31, 1998. The Company has not completed its
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) review of SFAS No. 131, but does not anticipate that there will be a significant effect on the Company's reporting disclosures.
Other
Certain prior year amounts have been reclassified to conform with the 1997 presentation.
2. ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1997, the Company purchased six previously leased nursing facilities (758 beds) and certain other assets including, among other things, 14 institutional pharmacies and 40 outpatient therapy clinics, for approximately $60,800,000 cash and approximately $9,500,000 closing and other costs. Also during such period, the Company sold or terminated the leases on 68 nursing facilities (8,314 beds) and certain other assets for cash proceeds of approximately $146,800,000. The Company primarily used the net cash proceeds from the disposition of facilities and other assets to repay Revolver borrowings, to repurchase the zero coupon notes and to repay various other indebtedness. The Company recognized net pre-tax gains of approximately $19,900,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations.
On December 3, 1997, the Company completed its previously announced Merger of PCA with Capstone. As a result of the Merger, the Company received approximately $281,000,000 of cash as partial repayment for PCA's intercompany debt, with a charge to the Company's retained earnings of approximately $45,100,000 for the remaining intercompany balance which was not repaid. The Company used such cash to repay Revolver borrowings, to redeem the 7 5/8% convertible subordinated debentures, to pay off the 8 3/4% Notes, to repay certain other notes and mortgages and for general corporate purposes. Pursuant to the Reorganization, each of the Company's stockholders of record at the close of business on December 3, 1997 received .4551 shares of PharMerica, Inc.'s common stock for each share of the Company's Common Stock held. The conversion ratio was based on a total of 109,873,230 outstanding shares of the Company's Common Stock at the close of business on December 3, 1997 divided into the 50,000,000 shares issued by PharMerica, Inc.
In connection with the Reorganization, the Company incurred $44,000,000 of transaction costs related to the restructuring, repayment or renegotiating of substantially all of the Company's outstanding debt instruments, as well as the renegotiating or making of certain payments, primarily in the form of accelerated vesting of stock-based awards, under various employment agreements with officers of the Company. Such amounts were funded with a portion of the $281,000,000 proceeds received as partial repayment of PCA's intercompany debt, as discussed above. Included in the $44,000,000 of transaction costs were approximately $18,000,000 of non-cash expenses related to various long-term incentive agreements.
At the date of the Merger, PCA had total assets of approximately $489,200,000, total liabilities of approximately $368,000,000 and total stockholder's equity of approximately $121,200,000. Total net operating revenues for PCA for the years ended December 31, 1997, 1996 and 1995 were approximately $564,200,000, $516,400,000 and $451,700,000, respectively. Total net operating revenues for the year ended December 31, 1997 represent the operations of PCA prior to the Merger.
During the year ended December 31, 1996, the Company acquired 22 nursing facilities (2,138 beds)(15 of such facilities (1,747 beds) were previously leased), one previously managed nursing facility (180 beds) and certain other assets including, among other things, pharmacy, hospice and outpatient therapy businesses, for approximately $80,000,000 cash, approximately $7,500,000 acquired debt, approximately $7,000,000
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED) closing and other costs, approximately $4,800,000 reduction in receivables and approximately $1,900,000 security and other deposits. The acquisitions of such facilities and other assets were accounted for as purchases. The Company did not operate three of such nursing facilities which were subleased to other nursing home operators in prior year transactions. Also during such period, the Company sold or terminated the leases on 83 nursing facilities (5,230 beds) (including the three nursing facilities which were not operated by the Company, as mentioned above) and certain other assets for cash proceeds of approximately $36,700,000 and approximately $4,200,000 of notes receivable. The Company recognized net pre-tax gains of approximately $6,300,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations.
In November 1996, the Company sold its MedView Services unit ("MedView") for cash of approximately $89,700,000 (approximately $2,200,000 of which was included in accounts receivable-nonpatient at December 31, 1996). MedView provides a full range of managed care services to the workers' compensation market and is the nation's largest workers' compensation-related preferred provider organization with 120,000 member providers. It also offers case management and injury reporting and tracking services. The Company recognized net pre-tax gains of approximately $14,700,000 as a result of this disposition. The operations of MedView were immaterial to the Company's consolidated financial position and results of operations.
During the year ended December 31, 1995, the Company purchased 17 previously leased nursing facilities (2,118 beds), one previously leased retirement living center (17 units) and certain other assets for approximately $32,700,000 cash, approximately $40,400,000 acquired debt and approximately $1,700,000 security and other deposits. The Company did not operate four of such facilities which were subleased to other nursing home operators in prior year transactions. Also during such period, the Company sold, subleased or terminated the leases on 11 nursing facilities (1,199 beds), 12 homes for the developmentally disabled (1,065 beds), six retirement living centers (1,141 units) and certain other assets for cash proceeds of approximately $39,400,000, approximately $3,700,000 of notes receivable and the assumption of approximately $52,800,000 of debt. In addition, the Company terminated a management agreement on two nursing facilities (150 beds) and four assisted living centers (510 units). The Company recognized net pre-tax gains of approximately $2,300,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations.
In June 1995, the Company acquired Pharmacy Management Services, Inc. ("PMSI") in exchange for approximately 12,400,000 shares of the Company's Common Stock plus closing and related costs. PMSI is a leading nationwide provider of medical cost containment and managed care services to workers' compensation payors and claimants. The acquisition was accounted for as a purchase and was not material to the Company's consolidated financial position or results of operations.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. 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):
The Company provides 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 for the years ended December 31, 1997, 1996 and 1995 was $87,286,000, $85,221,000 and $82,752,000, respectively.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31 (dollars in thousands, except per share amounts):
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. LONG-TERM OBLIGATIONS -- (CONTINUED) On July 17, 1997, the Company called its 5 1/2% convertible subordinated debentures (the "5 1/2% Debentures") for redemption on August 18, 1997. A total of $149,162,550 of the $150,000,000 aggregate principal amount outstanding was converted to 11,189,924 shares of the Company's Common Stock, increasing the Company's outstanding shares. The remaining principal amount of $837,450 was redeemed at 103.30% of the principal amount. Had the conversion been completed prior to January 1, 1997, the pro forma diluted net income per share for the year ended December 31, 1997 would have been $.56.
The Company primarily used the net cash proceeds from the disposition of facilities and other assets, as well as the cash received from the Merger, to repay Revolver borrowings, to repurchase the zero coupon notes, to redeem the 7 5/8% convertible subordinated debentures, to pay off the 8 3/4% Notes, to repay certain other notes and mortgages and for general corporate purposes (See Note 2).
During 1997, the Company entered into promissory notes totaling approximately $25,800,000 in conjunction with its purchase of certain nursing facilities. Such debt instruments bear interest at rates ranging from 7.78% to 8.63%, require monthly installments of principal and interest, and are secured by mortgage interests in the real property and security interests in the personal property of the purchased nursing facilities.
In December 1996, the Company entered into a $375,000,000 Amended and Restated Credit Agreement (the "1996 Credit Agreement") which provides for a Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). Borrowings under the 1996 Credit Agreement bear interest at adjusted LIBOR plus .875%, the Prime Rate, as defined, or the adjusted CD rate, as defined, plus 1%, at the Company's option. Such interest rates may be adjusted quarterly based on certain financial ratio calculations. The Company pays certain commitment fees and commissions with respect to the Revolver/LOC Facility and had approximately $324,300,000 of unused commitments under such facility at December 31, 1997. The 1996 Credit Agreement is secured by a security interest in the stock of certain of the Company's subsidiaries and imposes on the Company certain financial tests and restrictive covenants.
In July 1996, the Company entered into a term loan facility (the "GE Capital Facility"), whereby the Company may borrow up to $25,000,000 from time to time in separate series, in amounts and at interest rates based on the three-year U.S. Treasury Note rate plus 230 basis points at the date of funding. The GE Capital Facility requires monthly principal and interest payments and is secured by a security interest in certain lighting equipment of various nursing facilities. As of December 31, 1997, approximately $9,600,000 of aggregate principal amount under the GE Capital Facility remained unissued.
In February 1996, the Company completed the sale of $180,000,000 of 9% Senior Notes due February 15, 2006 (the "Senior Notes") through a public offering (the "Senior Notes offering"). The Senior Notes are unsecured obligations, guaranteed by substantially all of the Company's present and future subsidiaries (collectively, the "Subsidiary Guarantors"), and impose on the Company 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.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. LONG-TERM OBLIGATIONS -- (CONTINUED) Maturities and sinking fund requirements of long-term obligations, including capital leases, for the years ending December 31 are as follows (in thousands):
Many of the capital and operating leases 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 the Company 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 are included in designated funds. 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 1997, 1996 or 1995.
5. COMMITMENTS AND CONTINGENCIES
The future minimum rental commitments required by all noncancelable operating leases with initial or remaining terms in excess of one year as of December 31, 1997, are as follows (in thousands):
Total future minimum rental commitments are net of approximately $22,594,000 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: 1997 -- $114,694,000; 1996 -- $116,718,000; 1995 -- $127,074,000. Sublease rent income was approximately $5,638,000, $4,595,000 and $5,426,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Contingent rent expense, based primarily on revenues, was approximately $18,000,000, $18,000,000 and $22,000,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) In 1992, the Company entered into an agreement to outsource its management information systems functions for a period of seven years, with an option to renew based on mutual agreement among the parties. Such agreement was renegotiated during 1997 to allow the Company to bring the programming functions under its direct control but continue to outsource the data processing functions. The future minimum commitments as of December 31, 1997 required under such agreement are as follows: 1998 -- $4,127,000; 1999 -- $4,033,000; 2000 -- $3,944,000; 2001 -- $3,859,000; 2002 -- $2,849,000. The Company incurred approximately $4,498,000, $8,711,000 and $8,529,000 under such agreement during the years ended December 31, 1997, 1996 and 1995, respectively.
The Company is contingently liable for approximately $79,375,000 of long-term obligations maturing on various dates through 2019, as well as annual interest and letter of credit fees of approximately $7,274,000. Such contingent liabilities principally arose from the Company's sale of nursing facilities and retirement living centers. The Company operates the facilities related to approximately $25,895,000 of the principal amount for which it is contingently liable, pursuant to long-term agreements accounted for as operating leases. In addition, the Company is contingently liable for various operating leases that were assumed by purchasers and are secured by the rights thereto.
Approximately 100 of the Company's facilities, or 7% of the Company's employees, 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. The Company, being one of the largest employers within the long-term healthcare industry, has been the target of a "corporate campaign" by two AFL-CIO affiliated unions attempting to organize certain of the Company's facilities. Although the Company has never experienced any material work stoppages and believes that its relations with its employees (and the existing unions that represent certain of them) are generally good, the Company cannot predict the effect continued union representation or organizational activities will have on the Company's 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 the Company's operations.
On March 4, 1998, a jury in California returned a verdict of $95.1 million against a nursing facility operated by a subsidiary of the Company. The verdict, which was based on findings of fraud as well as negligence and abuse, consisted of $365,580 in compensatory damages and $94.7 million in punitive damages. Since punitive damages are generally not covered by insurance, a final judgement of this size could have a material adverse effect on the Company's consolidated results of operations and financial position. However, it is the Company's belief, based on discussions with its trial and appellate counsel, that many of the jury's findings, including fraud, are not supportable from the evidence presented in the case, and the judgement entered will be significantly reduced by the trial court or an appeal. The Company intends to aggressively pursue all post-trial remedies available to it.
There are various other lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages which are generally not covered by insurance. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations.
6. STOCKHOLDERS' EQUITY
The Company had 300,000,000 shares of authorized $.10 par value common stock ("Common Stock") at December 31, 1997 and 1996. The Company is subject to certain restrictions under its long-term debt agreements related to the payment of cash dividends on its Common Stock. The Company had 25,000,000 shares of authorized $1 par value preferred stock at December 31, 1997 and 1996, all of which remained BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. STOCKHOLDERS' EQUITY -- (CONTINUED) 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, the Company announced that its Board of Directors had authorized a stock repurchase program whereby the Company may repurchase, from time to time on the open market, up to a total of 10,000,000 shares of its outstanding Common Stock. During 1997, the Company repurchased approximately 4,900,000 shares of its Common Stock at a cost of approximately $62,700,000. The repurchases were financed primarily through proceeds from dispositions and borrowings under the Company's Revolver/LOC Facility. In connection with the Reorganization, the Company cancelled and retired 6,274,108 shares of Common Stock, with a book value of approximately $70,300,000, held in treasury on the effective date of the Reorganization.
During 1994, the Board of Directors of the Company adopted a Stockholder Rights Plan (the "Rights Plan"). The Rights Plan provides for the distribution of one Common Stock Purchase Right (the "Rights") for each share of Common Stock outstanding at the close of business on November 2, 1994. Under certain circumstances, the Rights become exercisable to purchase shares of Common Stock, or securities of an acquiring entity, at one-half of market value. The Rights are designed to protect stockholders in the event of an unsolicited attempt to acquire the Company and to deal with the possibility of unilateral actions by hostile acquirors. These Rights are redeemable at the option of the Company at $.01 per Right. The issuance of the Rights has no dilutive effect on the Company's earnings per share. On May 18, 1995, the Company's stockholders approved certain amendments to the Rights Plan which provided, among other things, that the Rights Plan will expire on the date of the 1998 Annual Meeting of Stockholders, which has been set for May 28, 1998, unless an extension of the term is approved by the stockholders at the 1998 Annual Meeting of Stockholders (the "Amended Rights Plan"). The Board of Directors adopted a stockholder rights plan to be effective on the effective date of the Reorganization with the same terms as the Amended Rights Plan.
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 the earlier termination by the Board of Directors. Such plan replaced the 1996 Long-Term Incentive Plan, the 1993 Incentive Stock Plan and the 1985 Nonqualified Stock Option Plan. The Compensation Committee of the Board of Directors (the "Committee") is responsible for administering the 1997 Long-Term Incentive Plan and will have 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. The Company has 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 stock, 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 the Company participates in a corporate transaction or the options as described below, nonqualified and incentive stock options must be granted at a purchase price equal to the market price 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.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. STOCKHOLDERS' EQUITY -- (CONTINUED) 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 the earlier termination by the Board of Directors. Such plan replaced the Nonemployee Directors' Plan. The Company has 300,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under its 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 the Company's 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 fair market value on the date of grant, become exercisable one year after date of grant and expire ten years after date of grant.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. STOCKHOLDERS' EQUITY -- (CONTINUED) The following table summarizes stock option, restricted stock and other stock units data relative to the Company's long-term incentive plans for the years ended December 31:
- ---------------
(1) Exercise prices for options outstanding as of December 31, 1997 ranged from $3.24 to $12.88. The weighted-average remaining contractual life of these options is eight years.
As a result of the Reorganization (as discussed herein), immediately prior to the Distribution, (i) each option to purchase the Company's Common Stock then outstanding became fully vested and exercisable, (ii) all restrictions on outstanding restricted shares lapsed and became fully vested, (iii) each outstanding award of phantom units became fully vested, and (iv) each outstanding performance share became fully
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. STOCKHOLDERS' EQUITY -- (CONTINUED) vested. The Company incurred non-cash expenses of approximately $18,000,000 as it related to these stock-based awards, which was included in the $44,000,000 of transaction costs. In addition, all options outstanding immediately after the Distribution were cancelled and replaced with new options issued by the Company under the 1997 Long-Term Incentive Plan. Such options are exercisable upon the same terms and conditions (except that all options are 100% vested) as under the applicable option agreement issued thereunder, except that (i) the number of shares for which such options may be converted, and (ii) the option exercise price per share of such options were adjusted to take into account the effect of the Reorganization.
The Company accounts for its stock-based awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related Interpretations because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Since the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized for employee stock options under APB No. 25. The Company recognizes compensation expense for its restricted stock grants, performance share grants (when the performance targets are achieved) and other stock unit awards. The total charges to the Company's consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995 related to these stock-based awards were approximately $19,767,000, $509,000 and $3,065,000, respectively. The total charges for 1997 included approximately $18,000,000 related to the impact of the Reorganization on the Company's stock-based awards (as discussed above), which was included in the $44,000,000 of transaction costs.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its 1997, 1996 and 1995 stock option and performance share grants under the fair value method as prescribed by such statement. The fair value for 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, 1997, 1996 and 1995, respectively: risk-free interest rates of 5.9%, 6.5% and 6.0%; volatility factors of the expected market price of the Company's Common Stock of .35, .34 and .35; and a weighted-average expected life of the option of 8 years, 10 years and 10 years. The Company does not currently pay cash dividends on its Common Stock and no future dividends are currently planned. Such weighted-average assumptions resulted in a weighted average fair value of options granted during 1997, 1996 and 1995 of $7.84 per share, $7.30 per share and $7.65 per share, respectively. The fair value of the performance share grants was based on the market value of the Company's Common Stock on the date of grant.
The Black-Scholes option valuation model was developed for use in estimating the fair 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 the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the stock options and performance shares is amortized to expense over their respective vesting periods. The pro forma effects on reported net income (loss) and diluted earnings per share assuming the Company had elected to account for its stock option and performance share grants in accordance with SFAS No. 123 for the years ended December 31, 1997, 1996 and 1995, respectively, would have been net income of $47,244,000 or $.46 per share, net income
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. STOCKHOLDERS' EQUITY -- (CONTINUED) of $48,964,000 or $.49 per share and net loss of $8,408,000 or $.17 per share. The pro forma amounts for 1997 reflect the impact of the Reorganization on the Company's outstanding stock options (as discussed above). Such pro forma effects are not necessarily indicative of the effect 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 Common Stock at the current market price through payroll deductions. The Company makes contributions in the amount of 30% 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 the Company's consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995 related to this plan were approximately $2,449,000, $2,258,000 and $2,201,000, respectively.
7. INCOME TAXES
The provisions for taxes on income before extraordinary charge consist of the following for the years ended December 31 (in thousands):
The Company had an annual effective tax rate of 46% for the year ended December 31, 1997, compared to an annual effective tax rate of 59% and a negative annual effective tax rate of 32% for the years ended December 31, 1996 and 1995, respectively. The annual effective tax rate in 1997 was different than the federal statutory rate primarily due to the impact of nondeductible transaction costs associated with the Reorganization (see Note 2). The annual effective tax rate in 1996 was different than the federal statutory rate primarily due to the impact of nondeductible goodwill associated with the MedView disposition (see Note 2). In addition, the annual effective tax rate in 1995 was different than the federal statutory rate primarily due to the impact of nondeductible goodwill included in the adjustments resulting from the adoption of SFAS No. 121 (see Note 1).
A reconciliation of the provision for (benefit from) income taxes, computed at the statutory rate, to the Company's annual effective tax rate is summarized as follows (dollars in thousands):
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
7. 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 the Company's deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows (in thousands):
8. 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 the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its 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 fair value of the Beverly Indemnity funds is based on information obtained from the trustee and the manager of such funds. Such funds are included in the consolidated balance sheet captions "Prepaid expenses and other" and "Designated and restricted funds" based on when the corresponding claims are expected to be paid. These funds are invested primarily in United States government securities with maturity dates ranging
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED) primarily from one to five years. During 1997, the Company purchased traditional indemnity insurance coverage for its 1997 workers' compensation and auto liabilities (see Note 1) which resulted in the Company selling a portion of these securities, with a book value of approximately $10,100,000, to fund such purchase. The gain on the sale of such securities was immaterial to the Company's consolidated results of operations for the year ended December 31, 1997. The remaining securities are classified as available-for-sale and as such are carried at fair value.
Investment in a Real Estate Mortgage Investment Conduit (REMIC)
The fair value of the Company's REMIC investment, which was included in the consolidated balance sheet caption "Other, net" in 1996, is based on information obtained from the REMIC servicer. The Company converted the REMIC investment to notes receivable from the underlying note makers during 1997.
Long-term Obligations (Including Current Portion)
The carrying amounts of the Company's variable-rate borrowings approximate their fair values. The fair values of the remaining long-term obligations are estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows (in thousands):
In order to consummate certain dispositions and other transactions, the Company has agreed to guarantee the debt assumed or acquired by the purchaser or the performance under a lease, by the lessor. It was not practicable to estimate the fair value of the Company's off-balance sheet guarantees (See Note 5). The Company does 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 the Company, 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.
SUPPLEMENTARY DATA (UNAUDITED) QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996.
- ---------------
(1) After the effect of the Reorganization on December 3, 1997 (as discussed herein).
The Company had an annual effective tax rate of 46% for the year ended December 31, 1997 compared to an annual effective tax rate of 59% for the year ended December 31, 1996. The annual effective tax rate in 1997 was different than the federal statutory rate primarily due to the impact of nondeductible transaction costs associated with the Reorganization (as discussed herein). In addition, the annual effective tax rate in 1996 was different than the federal statutory rate primarily due to the impact of nondeductible goodwill associated with the MedView disposition (as discussed herein).
Earnings per share for 1996 and the first three quarters of 1997 have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." See "Part II, Item 8 -- Note 1 of Notes to Consolidated Financial Statements."
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to be filed pursuant to Regulation 14A.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to be filed pursuant to Regulation 14A.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to be filed pursuant to Regulation 14A.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to be filed pursuant to Regulation 14A.
PART IV
ITEM 14.
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
The Company filed a Current Report on Form 8-K, dated December 3, 1997, which reported under Item 5 that the Company completed the closing of the transactions contemplated by the definitive Agreement and Plan of Merger dated April 15, 1997 which combined Pharmacy Corporation of America with Capstone Pharmacy Services, Inc. to create one of the nation's largest independent institutional pharmacy companies and filed under Item 7 the Company's press releases dated December 3, 1997 and December 10, 1997.
(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.
BEVERLY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEM 14(a))
All other schedules are omitted because they are either not applicable or the items do not exceed the various disclosure levels.
BEVERLY ENTERPRISES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
- ---------------
* Includes amounts classified in long-term other assets as well as current assets.
BEVERLY ENTERPRISES, INC. INDEX TO EXHIBITS (ITEM 14(a)(3))
- ---------------
* Exhibits 10.1 through 10.33 are the management contracts, compensatory plans, contracts and arrangements in which any director or named executive officer participates.
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.
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:
BEVERLY ENTERPRISES, INC.
INDEX TO EXHIBITS (ITEM 14(A)(3))
- ---------------
* Exhibits 10.1 through 10.33 are the management contracts, compensatory plans, contracts and arrangements in which any director or named executive officer participates.