ITEM 1. BUSINESS.
GENERAL
References herein to the Company include Beverly Enterprises, Inc. and its wholly-owned subsidiaries.
The business of the Company consists principally of providing long-term health care, including the operation of nursing facilities, sub-acute and acute long-term transitional hospitals, institutional pharmacies and rehabilitation therapy services. Additional operations include retirement and congregate living projects and home health care entities.
The Company is the largest operator of nursing facilities in the United States. At January 31, 1995, the Company operated 727 nursing facilities with 78,061 licensed beds. The facilities are located in 33 states and the District of Columbia, and range in capacity from 20 to 388 beds. At January 31, 1995, the Company also operated 65 pharmacies and pharmacy-related outlets, 40 retirement and congregate living projects containing 2,518 units, six transitional hospitals containing 274 beds and four home health care entities. The Company's facilities had average occupancy of 88.5%, 88.5% and 88.4% during the years ended December 31, 1994, 1993 and 1992, respectively. See "Item 2.
ITEM 2. PROPERTIES.
At January 31, 1995, the Company operated 727 nursing facilities and 40 retirement and congregate living projects in 33 states and the District of Columbia. Most of the Company's 314 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 retirement centers owned by the Company are included in the collateral securing the obligations under its various banking arrangements. See "Part II, Item 8 -- Note 4 of Notes to Consolidated Financial Statements."
The following is a summary of the Company's nursing home facilities, retirement and congregate living projects, transitional hospitals, pharmacies and home health centers at January 31, 1995:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
There are various lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the last quarter of its fiscal year ended December 31, 1994.
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth, as to each executive officer and director of the Company, his 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 20, 1995.
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(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Finance Committee.
(4) Member of the Quality Assurance Committee.
(5) Member of the Nominating Committee.
Mr. Banks has been President and 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 is a director of Nationwide Health Properties, Inc., Ralston Purina Company, Wal-Mart Stores, Inc., Wellpoint Health Networks, Inc., and trustee for the University of the Ozarks and Occidental College.
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 and President of Beverly Health and Rehabilitation Services, Inc. ("BHRS") in January 1995.
Mr. Kayne joined the Company in 1979. He was elected Vice President of Professional Services in 1983, Vice President of the Company and President of Pharmacy Corporation of America ("PCA") in 1985, and Executive Vice President of the Company in February 1990.
Mr. Moore joined the Company as Executive Vice President -- Managed Care in December 1992 and was elected President of Beverly Managed Care, Inc. in January 1995. 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. Mr. Pommerville 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 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 -- Development in February 1990. Mr. Stephens is a director of City National Bank in Fort Smith, Arkansas, Beverly Japan Corporation, Western Arkansas Counseling and Guidance Center, Inc. and Harbortown Properties, Inc.
Mr. Woltil joined the Company in 1982 as Technical Accounting Manager. From 1984 to 1990 he served in various financial positions. He was elected Vice President -- Financial Planning and Control in January 1990, Senior Vice President and Chief Financial Officer in March 1992 and Executive Vice President, Finance in January 1993.
Mr. Clarke joined the Company in 1987 as a Director of Government Program Compliance. He was elected Vice President in 1989 and Senior Vice President -- Quality Assurance in December 1991. Mr. Clarke is a director of St. Edward Mercy Medical Center.
Mr. Crosby joined the Company in 1994 with the acquisition of ATH. He was elected Senior Vice President of the Company and President of ATH in September 1994. Mr. Crosby was Chairman of the Board, President and Chief Executive Officer of ATH from 1992 to 1994 and President and Chief Executive Officer of StatCorp, Inc. from 1989 to 1991.
Mr. Hollingsworth joined the Company in June 1985 as Assistant Treasurer. He was elected Treasurer in 1988, Vice President in 1990 and Senior Vice President in March 1992. Mr. Hollingsworth is a director of Sparks Regional Medical Center.
Mr. Wortley joined the Company as Senior Vice President and President of Spectra Health and Rehabilitation Services, Inc. ("Spectra"), a wholly-owned subsidiary of the Company, in September 1994. From 1988 to 1994, Mr. Wortley was an officer of Therapy Management Innovations, which provides rehabilitation consulting services to the Company under contract.
Mr. Tabakin joined the Company in October 1992 as Vice President, Controller and Chief Accounting Officer. From 1980 to 1992, Mr. Tabakin was with Ernst & Young LLP, in Norfolk, Virginia.
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.
Mr. Bradbury served as Chairman, Chief Executive Officer and a director of Worthen Banking Corporation until February 28, 1995. He joined Worthen in 1985 as Assistant to the President, and prior thereto was a Vice President in the Corporate Finance Department of Stephens Inc., and Manager of its Bank Services Division. He has been a director of the Company since July 1989. Mr. Bradbury will not stand for reelection at the Company's Annual Meeting of Stockholders to be held on May 18, 1995.
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 a number of mutual funds of Alliance Capital Management Corporation, 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 to 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, Bessemer Trust Company, N.A., Bessemer Trust Company of New Jersey, Hercules Incorporated and H.J. Heinz Company. She has been a director of the Company since March 16, 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 the American Classic Voyages Company, Delta and Pine Land Company, Inc., Medicus Systems, Inc. and Southwestern Life Corporation. 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 and Associate Executive Vice President for health policy at the University of Pennsylvania, Ralston-Penn Center. 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 Medicus Systems, Inc., and has been a director of the Company since March 16, 1995.
Mr. Menk is Chairman of Black Mountain Gas Company. He retired in 1982 as Chairman and Chief Executive Officer of International Harvester Company, the predecessor to Navistar International Corporation. He has been a director of the Company since July 1989.
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 has been a director of the Company since March 16, 1995.
Mr. Weinstein has been Managing Partner of Genesis Merchant Group, the sole General Partner of Genesis Merchant Group Securities, and its predecessor, W.I.G. Securities, since 1989, and was President of W.I.G., Inc. from 1987 to 1989. From 1982 to 1987, Mr. Weinstein was Managing Partner of Montgomery Securities. Mr. Weinstein is a director of DHL Corporation. He has been a director of the Company since March 1989.
During 1994, there were ten meetings of the Board of Directors. Each director attended 90% or more of the meetings of the Board and committees on which he served.
In 1994, directors, other than Mr. Banks, received a retainer fee of $22,000 for serving on the Board and an additional fee of $1,000 for each Board or committee meeting attended. Mr. Banks, the current Chairman of the Board, President and Chief Executive Officer of the Company, received no additional cash compensation for serving on the Board or its committees.
During 1993, the Retirement Plan for Outside Directors was approved and implemented whereby, upon retirement, as defined, each director is eligible to receive an amount equal to the annual retainer fee for each year of service on the Board up to a maximum of ten years, with no survivor benefits. These benefits are paid on a monthly basis beginning on the date of retirement. The Company paid $18,000 under such plan during the year ended December 31, 1994.
During 1994, the Company's Nonemployee Directors' Stock Option Plan (the "Nonemployee Directors' Plan") was approved. Such plan became effective June 1, 1994 and will remain in effect until May 31, 2004,
subject to earlier termination by the Board of Directors. There are 200,000 shares of the Company's $.10 par value common stock ("Common Stock") authorized for issuance, subject to certain adjustments, under the Nonemployee Directors' Plan. The Nonemployee Directors' Plan provides that 2,500 nonqualified 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. The first of such grants was made June 1, 1994 to each of the six nonemployee directors. Such nonqualified 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.
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, 1994 related to this plan was approximately $1,790,000. At December 31, 1994, there were approximately 5,800 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.
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.
The Company is subject to certain restrictions under its banking arrangements related to the payment of cash dividends on its Common Stock. During 1994 and 1993, no cash dividends were paid on the Company's Common Stock and no future dividends are currently planned.
At March 20, 1995, there were 7,738 record holders of the Common Stock.
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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OPERATING RESULTS
1994 Compared to 1993
Net income was $74,501,000 for the year ended December 31, 1994, as compared to net income of $55,611,000, as restated per discussion below, for the same period in 1993. Net income for 1994 includes a $2,412,000 extraordinary charge, net of income taxes, related to the acceleration of unamortized deferred financing costs related to the refinancings of the Company's Commercial Paper Program and Morgan Credit Agreement, as well as certain bond refundings. Net income for 1993 includes a $2,345,000 extraordinary charge, net of income taxes, related to the acceleration of unamortized deferred financing costs associated with certain debt that was repaid or refinanced in 1993. During the third quarter of 1994, the Company completed the merger of American Transitional Hospitals, Inc. ("ATH") in exchange for 2,400,000 shares of Common Stock. The merger was accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements have been restated ("as restated") to reflect ATH's financial position, results of operations and cash flows for each period prior to the merger. The merger of ATH was not material to the Company's financial position or results of operations.
The Company's annual effective tax rate was 33% for the year ended December 31, 1994, compared to 34%, as restated, for the same period in 1993. The 1994 and 1993 annual effective tax rates were lower than the statutory rate primarily due to the utilization of certain tax credit carryforwards, partially offset by the impact of state income taxes. The Company expects its annual effective tax rate for 1995 to increase to approximately 38% due to the utilization of a substantial portion of certain tax credit carryforwards in 1994 and prior years.
Net operating revenues and operating and administrative costs increased approximately $84,800,000 and $52,600,000, respectively, for the year ended December 31, 1994, as compared to the same period in 1993. These increases consist of the following: increases in net operating revenues and operating and administrative costs for facilities which the Company operated during each of the years ended December 31, 1994 and 1993 ("same facility operations") of approximately $215,200,000 and $176,900,000, respectively; increases in net operating revenues and operating and administrative costs of approximately $34,800,000 and $35,200,000, respectively, related to the operations of ATH, the acquisition of three nursing facilities in 1993 and the acquisitions of Insta-Care and Synetic in 1994; and decreases in net operating revenues and operating and administrative costs of approximately $165,200,000 and $159,500,000, respectively, due to the disposition of, or lease terminations on, 77 facilities in 1994 and 43 facilities in 1993.
The increase in net operating revenues for same facility operations for the year ended December 31, 1994, as compared to the same period in 1993, was due to the following: approximately $114,100,000 due primarily to increases in Medicaid room and board rates, and to a lesser extent, private and Medicare room and board rates; approximately $95,800,000 due to increased ancillary revenues as a result of providing additional ancillary services to the Company's Medicare and private-pay patients; approximately $7,600,000 due to a shift in the Company's patient mix to a higher Medicare census; and approximately $21,000,000 due primarily to an increase in pharmacy-related revenues and various other items. The Company's Medicare, private and Medicaid census for same facility operations was 12%, 19%, and 68%, respectively, for the year ended December 31, 1994, as compared to 11%, 19%, and 69%, respectively, for the same period in 1993. These increases in net operating revenues were partially offset by approximately $23,300,000 due to a decrease in same facility occupancy to 89.2% for the year ended December 31, 1994, as compared to 90.2% for the same period in 1993.
The increase in operating and administrative costs for same facility operations for the year ended December 31, 1994, as compared to the same period in 1993, was due to the following: approximately $88,700,000 due to increased wages and related expenses principally due to higher wages and greater benefits intended to attract and retain qualified personnel, the hiring of therapists on staff as opposed to contracting for their services, and increased staffing levels in the Company's nursing facilities to cover higher acuity patients; approximately $62,400,000 due to additional ancillary costs (excluding wages and related expenses)
associated with the increase in ancillary services provided to the Company's Medicare and private-pay patients; approximately $5,200,000 due primarily to an increase in supplies purchased to meet the needs of the Company's higher acuity patients; and approximately $20,600,000 due primarily to increases in pharmacy- related costs and various other items.
Ancillary revenues are derived from providing services to residents beyond room, board and custodial care. These services include occupational, physical, speech, respiratory and IV therapy, as well as sales of pharmaceuticals and other services. The Company's overall ancillary revenues for the year ended December 31, 1994 were $728,408,000 and represented 24.5% of net operating revenues, as compared to $618,804,000 of ancillary revenues for the same period in 1993 which represented 21.5% of 1993 net operating revenues. Although the Company is pursuing further growth of ancillary revenues through expansion of specialty services, such as rehabilitation and sales of pharmaceuticals, there can be no assurance that such growth will continue. Growth in ancillary revenues, as well as increases in Medicare census, have also resulted in higher costs for the Company due to the higher acuity services being provided to these patients. The Company's overall ancillary costs (excluding wages and related expenses) were $384,480,000 for the year ended December 31, 1994, compared to $347,951,000 for the same period in 1993.
Interest expense for the year ended December 31, 1994 decreased approximately $1,400,000 as compared to the same period in 1993 primarily due to the following: repayment of approximately $45,000,000 of debt in 1993 with a portion of the proceeds from issuance of the Series B preferred stock and the conversion of approximately $46,000,000 in principal amount of the Company's 9% convertible subordinated debentures into shares of Common Stock in 1993, net of additional interest related to the issuance or assumption of approximately $243,000,000 of long-term obligations during 1994 in conjunction with certain acquisitions. Depreciation and amortization expense for the year ended December 31, 1994 increased approximately $5,800,000 as compared to the same period in 1993 primarily due to acquisitions, the opening of newly constructed facilities and over $100,000,000 of capital additions and improvements, partially offset by a decrease due to the disposition of or lease terminations on certain facilities.
The Company's future operating performance will continue to be affected by the issues facing the long-term health care industry as a whole, including the maintenance of occupancy, its ability to continue to expand higher margin business from Medicare, managed care and private-pay payors, the availability of nursing and therapy personnel, the adequacy of funding of governmental reimbursement programs, the demand for nursing home care and the nature of any health care reform measures that may be taken by the federal government, as discussed below, as well as by any state governments. The Company's ability to control costs, including its wages and related expenses which continue to rise and represent the largest component of the Company's operating and administrative expenses, will also significantly impact its future operating results.
As a general matter, increases in the Company's operating costs result in higher patient rates under Medicaid programs in subsequent periods. However, the Company's results of operations will continue to be affected by the time lag in most states between increases in reimbursable costs and the receipt of related reimbursement rate increases. Medicaid rate increases, adjusted for inflation, are generally based upon changes in costs for a full calendar year period. The time lag before such costs are reflected in permitted rates varies from state to state, with a substantial portion of the increases taking effect up to 18 months after the related cost increases.
Health care system reform continues to be a high priority for the federal and certain state governments. Although no comprehensive health care reform legislation has been implemented, the active discussion and issues raised by the Clinton Administration, Congress and various other groups have impacted the health care delivery system. Pressures to contain costs and cover a larger percentage of the population have heightened public awareness and scrutiny over the health care market. Reform proposals still under consideration include insurance market reforms to increase the availability of group health insurance to small businesses, requirements that all businesses offer health insurance coverage to their employees and the creation of a single governmental health insurance plan that would cover all citizens. These proposals, as well as industry and other groups' recommendations, will likely impact the form and content of any future health care reform legislation. As a result, the Company is unable to predict the type of legislation or regulations that may be
adopted and their impact on the Company. There can be no assurance that any health care reform or other changes within the health care market will not adversely affect the Company's future financial position, results of operations or cash flows.
The Company does not provide significant postemployment health care, life insurance or other benefits to employees. Accordingly, implementation of the requirements of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits," during 1994 did not materially impact the Company's consolidated financial position or results of operations. On an ongoing basis, the Company reviews the carrying value of its notes receivable in light of any events or circumstances that indicate they may be impaired and makes adjustments to the allowance for doubtful notes as deemed necessary. Therefore, the Company does not expect the requirements of Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan," to materially impact the Company's consolidated financial position or results of operations when implemented in 1995.
1993 Compared to 1992
Net income was $55,611,000, as restated, for the year ended December 31, 1993, compared to a net loss of $12,344,000, as restated, for the same period in 1992. Income before income taxes and extraordinary charge for 1993 was $87,640,000, as restated, compared to income before income taxes, extraordinary charge and cumulative effect of a change in accounting for income taxes in 1992 of $6,148,000, as restated. The results for 1992 included a $57,000,000 pre-tax restructuring charge, discussed below.
During 1993, the Company recorded a $2,345,000 extraordinary charge, net of income taxes, related to the acceleration of unamortized deferred financing costs associated with certain debt that was repaid with a portion of the net proceeds from issuance of the Series B preferred stock, as well as certain bond refundings. During 1992, the Company recorded $8,835,000 of extraordinary charges, net of income taxes, related to the acceleration of unamortized deferred financing costs associated with the repayment of certain debt. In addition, during 1992, the Company adopted Financial Accounting Standards Statement No. 109, "Accounting for Income Taxes," which resulted in the recording of a $5,454,000 cumulative effect adjustment.
During 1992, the Company recognized a $57,000,000 pre-tax restructuring charge related to a program to discontinue the Company's operation of 33 nursing facilities with historically poor financial performance, and to replace, relocate or sell certain other assets (the "1992 restructuring program"). The $57,000,000 pre-tax restructuring charge was comprised of the following: $28,000,000 related to the anticipated loss on disposal of 33 nursing facilities; $12,200,000 related to operating losses on such 33 nursing facilities during the anticipated one-year disposal period; $6,500,000 write-down to net realizable value of four facilities expected to be replaced; $3,000,000 write-down of corporate headquarters; and $7,300,000 related to relocation, severance and other costs associated with the centralization of the Company's accounting, finance and management information systems functions.
The Company's annual effective tax rate was 34% for the year ended December 31, 1993, as restated, compared to 68%, as restated, for the same period in 1992. The higher annual effective tax rate in 1992 resulted from the $57,000,000 pre-tax charge mentioned above which reduced the Company's pre-tax income to a level where the impact of permanent tax differences and state income taxes had a more significant impact on the effective tax rate. In addition, the 1993 annual effective tax rate was lower than the statutory rate primarily due to the utilization of certain tax credit carryforwards.
Net operating revenues and operating and administrative costs increased approximately $276,700,000 and $255,000,000, respectively, for the year ended December 31, 1993, as compared to the same period in 1992. These increases consist of the following: increases in net operating revenues and operating and administrative costs for facilities which the Company operated during each of the years ended December 31, 1993 and 1992 ("same facility operations") of approximately $265,700,000 and $261,700,000, respectively; increases in net operating revenues and operating and administrative costs of approximately $74,100,000 and $66,900,000, respectively, related to ATH operations and the acquisition of 14 facilities in 1993 and 16 facilities in 1992; and decreases in net operating revenues and operating and administrative costs of approximately $63,100,000
and $73,600,000, respectively, due to the disposition of, or lease terminations on, 43 facilities in 1993 and 23 facilities in 1992.
The increase in net operating revenues for same facility operations for the year ended December 31, 1993, as compared to the same period in 1992, was due to the following: approximately $143,200,000 due to increased ancillary revenues as a result of providing additional ancillary services to the Company's private and Medicare patients; approximately $103,200,000 due primarily to increases in Medicaid room and board rates, and to a lesser extent, private and Medicare room and board rates; approximately $12,900,000 due to an improvement in the Company's patient mix; and approximately $11,900,000 due to increases in pharmacy-related revenues and various other items. The Company's Medicare, private and Medicaid census for same facility operations was 11%, 19%, and 69%, respectively, for the year ended December 31, 1993, compared to 10%, 19%, and 70%, respectively, for the same period in 1992. These increases in net operating revenues were partially offset by approximately $5,500,000 due to one less calendar day during 1993, as compared to 1992.
The increase in operating and administrative costs for same facility operations for the year ended December 31, 1993, as compared to the same period in 1992, was due to the following: approximately $106,700,000 due to increased wages and related expenses principally due to higher wages and greater benefits intended to attract and retain qualified personnel and the hiring of therapists on staff as opposed to contracting for their services; approximately $117,100,000 due to additional ancillary costs (excluding wages and related expenses) associated with the increase in ancillary services provided to the Company's private and Medicare patients; approximately $15,100,000 due to an increase in the provision for reserves on patient, notes and other receivables primarily as a result of an increase in the Company's private and Medicare revenues, as well as reductions in the provision for doubtful notes in 1992, which did not recur in 1993; approximately $5,300,000 due to increases in supplies and other variable costs required to meet the needs of the Company's higher acuity patients; and approximately $17,500,000 due primarily to increases in pharmacy-related costs and various other items.
The Company's overall ancillary revenues for the year ended December 31, 1993, were $618,804,000, as restated, and represented 21.5% of net operating revenues, as compared to $458,281,000, as restated, of ancillary revenues for the same period in 1992 which represented 17.6% of 1992 net operating revenues. The Company's overall ancillary costs, excluding wages and related expenses, were $347,951,000, as restated, for the year ended December 31, 1993, compared to $249,509,000, as restated, for the same period in 1992.
Although there was no significant overall fluctuation in interest income in 1993 as compared to 1992, several offsetting items influenced the amounts. Interest income for the year ended December 31, 1993 increased approximately $800,000 primarily due to interest earned on $100,000,000 of the net proceeds from issuance of the Series B preferred stock, which was significantly offset by lower investment yield rates and a decrease in the Company's notes receivable. Interest expense decreased approximately $4,700,000 primarily due to the repayment of approximately $45,000,000 of debt with a portion of the net proceeds from issuance of the Series B preferred stock, the conversion of approximately $46,000,000 in principal amount of the Company's 9% Debentures into common stock and a reduction in deferred financing costs associated with the repayment of certain debt. Depreciation and amortization expense for the year ended December 31, 1993 increased approximately $2,700,000 as compared to the same period in 1992 primarily due to the acquisition of facilities and over $80,000,000 of capital additions and improvements in 1993.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, the Company had approximately $67,964,000 in cash and cash equivalents and net working capital of approximately $242,712,000. The Company anticipates that approximately $32,709,000 of its existing cash at December 31, 1994, while not legally restricted, will be utilized to fund certain workers' compensation and general liability claims, and the Company does not expect to use such cash for other purposes. The Company had approximately $103,000,000 of unused commitments under its Revolver/LOC Facility (as defined herein) as of December 31, 1994.
Net cash provided by operating activities for the year ended December 31, 1994 decreased approximately $34,769,000 to $94,220,000 as compared to $128,989,000 for 1993, primarily due to an increase in accounts
receivable -- patient. This increase was primarily the result of an increase in Medicare census and changes in certain Medicare billing requirements which lengthened the billing period for such receivables by 30 days or more. Net cash used for investing activities was approximately $317,553,000 and net cash provided by financing activities was approximately $214,239,000 for the year ended December 31, 1994. The Company primarily used cash generated from operations to fund capital expenditures and construction totaling approximately $108,653,000. The Company received cash proceeds of approximately $71,000,000 from the sale or sublease of 58 nursing facilities in Texas, $12,000,000 from the exercise of an option for 1,000,000 shares of Common Stock at $12 per share, and approximately $309,308,000 from the issuance of long-term obligations. Such proceeds were primarily used to repay approximately $98,340,000 of long-term obligations and to fund acquisitions of approximately $267,227,000. In April 1994, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission to register the 1,000,000 shares of Common Stock issued under the exercise of the option. Such registration did not result in any additional proceeds to the Company.
In December 1994, the Company entered into an agreement to acquire Pharmacy Management Services, Inc. ("PMSI") in exchange for shares of Common Stock. PMSI is a leading nationwide provider of medical cost containment and managed care services to workers' compensation payors and claimants. On February 13, 1995, the Company filed a Registration Statement on Form S-4 with the Securities and Exchange Commission to register 14,959,209 shares of Common Stock, all or a portion of which will be used for such acquisition. The Company anticipates that the acquisition will be accounted for as a pooling of interests. The transaction is subject to the satisfaction of certain conditions, including receipt of PMSI stockholder approval.
In November 1994, Pharmacy Corporation of America ("PCA"), a wholly-owned subsidiary of the Company, completed the previously announced purchase of Insta-Care Holdings, Inc., ("Insta-Care") for cash of approximately $112,000,000, as well as other costs incurred totaling approximately $6,000,000. Insta-Care provides pharmaceutical dispensing services in six states to approximately 65,000 patients in nursing homes and correctional facilities. In December 1994, PCA completed the previously announced purchase of three institutional pharmacy subsidiaries of Synetic, Inc., ("Synetic") for cash of approximately $107,300,000, as well as other costs incurred totaling approximately $5,700,000. The Synetic businesses provide pharmaceutical dispensing services in New England and Indiana to approximately 45,000 patients in various institutions, including nursing homes, transitional care facilities, correctional facilities and group homes.
In December 1994, the Company replaced its commercial paper program with $50,000,000 of medium term notes (the "Medium Term Notes"). The Medium Term Notes bear interest at adjusted LIBOR, as defined, plus .35%. The Medium Term Notes are secured by eligible receivables of selected nursing facilities which are sold to Beverly Funding Corporation ("Beverly Funding"), a wholly-owned subsidiary of the Company.
In November 1994, the Company executed a $375,000,000 Credit Agreement (the "1994 Credit Agreement") which provides for a $225,000,000 Term Loan (the "1994 Term Loan") and a $150,000,000 Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). The proceeds from the 1994 Term Loan were used to consummate the pharmacy acquisitions discussed above. The Revolver/LOC Facility replaced the Company's revolving credit facility and letter of credit facility originally entered into in 1993. Currently, the 1994 Term Loan and any Revolver borrowings bear interest at adjusted LIBOR plus 1%, the Prime Rate, as defined, or the adjusted CD rate, as defined, plus 1 1/8%, at the Company's option. Such interest rates may be adjusted quarterly based on certain financial ratio calculations. The 1994 Term Loan requires quarterly principal and interest payments through October 1999.
In September 1994, the Board of Directors of the Company adopted a Stockholder Rights Plan (the "Plan"). The 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.
In May 1994, the Company entered into a $25,000,000 promissory note which bears interest at the rate of 7 3/4% per annum (the "7 3/4% Note"), the proceeds from which were used to repay higher interest rate debt. The 7 3/4% Note is due in equal quarterly installments of approximately $708,000, including principal and interest with a balloon payment due in June 2001. In addition, the Company has amended certain of its credit agreements in 1994 to change various restrictive covenants, release certain collateral and adjust the interest rate calculations.
In 1993, the Company registered with the Securities and Exchange Commission $100,000,000 aggregate principal amount of certain debt securities ("Debt Securities"), which are to be offered from time to time as separate series in amounts, at prices and on terms to be determined at the time of sale. During 1993, the Company issued $20,000,000 of 8 3/4% First Mortgage Bonds, $30,000,000 of 8 5/8% First Mortgage Bonds and $25,000,000 of 8 3/4% Notes under such registration. As of December 31, 1994, $25,000,000 of aggregate principal amount of Debt Securities under such registration remained unissued.
Also during 1993, the Company completed the sale of 3,000,000 shares of $2.75 Cumulative Convertible Exchangeable Preferred Stock (the "Series B preferred stock") through a public offering. On January 3, 1994, the Company used approximately $100,000,000 of the net proceeds from such offering to redeem all of the Company's cumulative convertible preferred stock (the "Series A preferred stock"). The Series A preferred stock dividend rate was scheduled to increase from 1% to 10% on January 1, 1994.
The Company believes that its existing cash and cash equivalents, working capital from operations, borrowings under its banking arrangements, issuance of Debt Securities and refinancings of certain existing indebtedness will be adequate to repay its debts due within one year of approximately $60,199,000, to make normal recurring capital additions and improvements for the twelve months ending December 31, 1995 of approximately $118,000,000, to make selective acquisitions, including the purchase of previously leased facilities, and to meet working capital requirements.
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, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. 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, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, 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.
As discussed in Note 7 to the consolidated financial statements, in 1992 the Company changed its method of accounting for income taxes.
ERNST & YOUNG LLP
Little Rock, Arkansas February 3, 1995
BEVERLY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
ASSETS
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)
---------------
(1) Amounts were recorded by ATH prior to its merger with the Company in September 1994. Total stockholders' equity at December 31, 1991 increased $1,334,000 due to the restatement for ATH.
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, 1994, 1993 AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
References herein to the Company include Beverly Enterprises, Inc. and its wholly-owned subsidiaries. The Company provides long-term health care including the operation of nursing facilities, sub-acute and acute long-term transitional hospitals, pharmacies, retirement living projects and home health care 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.
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.
Intangible Assets
Operating and leasehold rights and licenses (stated at cost less accumulated amortization of $21,899,000 in 1994 and $23,059,000 in 1993) 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. Goodwill (stated at cost less accumulated amortization of $24,171,000 in 1994 and $21,183,000 in 1993) is being amortized over 40 years or, if applicable, the life of the lease 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, 1994, the Company does not believe there is any indication that the carrying value or the amortization period of its intangibles needs to be adjusted.
Insurance
The Company insures 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 Beverly California Corporation, which is a wholly-owned subsidiary of the Company. The liabilities for estimated incurred losses not covered by third party insurance are discounted at 10% in 1994 and 1993 to their present value based on expected loss payment patterns determined by independent actuaries. The discounted insurance liabilities are included in the consolidated balance sheet captions as follows (in thousands):
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) On an undiscounted basis, the total insurance liabilities as of December 31, 1994 and 1993 were $146,830,000 and $132,333,000, respectively. As of December 31, 1994, the Company has deposited approximately $50,092,000 in funds (the "Beverly Indemnity funds") that are restricted for the payment of insured claims. In addition, the Company anticipates that approximately $32,709,000 of its existing cash at December 31, 1994, 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.
Revenues
The Company's revenues are derived primarily from providing long-term health care services. Approximately 80% of the Company's net operating revenues for 1994, 1993 and 1992 were derived from funds under federal and state medical assistance programs, and approximately 78%, 83% and 82% of the Company's net patient accounts receivable at December 31, 1994, 1993 and 1992, 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.
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.
Earnings per Share
Net income (loss) applicable to common shares is computed by deducting preferred stock dividends (including the $20,000,000 redemption premium on the Series A preferred stock in 1993, as discussed below) from net income (loss), when dilutive. Earnings per share for the years ended December 31, 1994, 1993 and 1992 were computed by dividing net income (loss) applicable to common shares by the weighted average number of shares of Common Stock outstanding during the period and the weighted average number of shares issuable upon exercise of stock options, calculated using the treasury stock method. During the year ended December 31, 1993, the Company charged retained earnings for the $20,000,000 excess (the "redemption premium") to be paid to redeem the Company's cumulative convertible preferred stock (the "Series A preferred stock") above its $80,000,000 original recorded value. Although this amount did not impact the Company's net income, for accounting purposes the $20,000,000 redemption premium was treated as a reduction to income applicable to common shares in the calculation of earnings per share for the year ended December 31, 1993.
Other
Prior year amounts have been restated to reflect the pooling of interests of American Transitional Hospitals, Inc. ("ATH"), as discussed in Note 2. Certain prior year amounts have been reclassified to conform with the 1994 presentation.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
2. ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1994, the Company purchased 19 previously leased nursing facilities (2,202 beds), one previously leased retirement living center (20 units), and certain other assets, for approximately $43,600,000 cash, approximately $1,000,000 issuance of debt, approximately $16,900,000 assumed and acquired debt and approximately $1,400,000 security and other deposits. Also during such period, the Company sold, subleased or terminated the leases on 77 nursing facilities (7,192 beds) (13 of such facilities were included in the 1992 restructuring program discussed below) and certain other assets for cash proceeds of approximately $80,200,000, approximately $700,000 of notes receivable and approximately $40,000 of assumed debt. The operations of these facilities were immaterial to the Company's financial position and results of operations.
During the third quarter of 1994, the Company issued 2,400,000 shares of Common Stock for all of the outstanding stock of ATH. ATH operates licensed hospitals specializing in long-term acute care and transitional acute care to medically complex, chronically ill patients. The merger was accounted for as a pooling of interests and, accordingly the Company's consolidated financial statements have been restated to reflect ATH's financial position, results of operations and cash flows for each period prior to the merger. All transactions between the Company and ATH prior to the merger have been eliminated in the restated consolidated financial statements. The merger of ATH was not material to the Company's financial position or results of operations.
In November 1994, Pharmacy Corporation of America ("PCA"), a wholly-owned subsidiary of the Company, completed the previously announced acquisition of Insta-Care Holdings, Inc., ("Insta-Care") for cash of approximately $112,000,000, as well as other costs incurred totaling approximately $6,000,000. Insta-Care provides pharmaceutical dispensing services in six states to approximately 65,000 patients in nursing homes and correctional facilities. In December 1994, PCA completed the previously announced acquisition of three institutional pharmacy subsidiaries of Synetic, Inc., ("Synetic") for cash of approximately $107,300,000, as well as other costs incurred totaling approximately $5,700,000. The Synetic businesses provide pharmaceutical dispensing services in New England and Indiana to approximately 45,000 patients in various institutions, including nursing homes, transitional care facilities, correctional facilities and group homes. These acquisitions were accounted for as purchases.
In December 1994, the Company entered into an agreement to acquire Pharmacy Management Services, Inc. ("PMSI") in exchange for shares of Common Stock. PMSI is a leading nationwide provider of medical cost containment and managed care services to workers' compensation payors and claimants. In February 1995, the Company filed a Registration Statement on Form S-4 with the Securities and Exchange Commission to register 14,959,209 shares of Common Stock, all or a portion of which will be used for such acquisition. The Company anticipates that the acquisition will be accounted for as a pooling of interests. The transaction is subject to the satisfaction of certain conditions, including receipt of PMSI stockholder approval.
Summarized below are the unaudited pro forma consolidated results of operations for the Company for the years ended December 31, 1994 and 1993, assuming the following transactions had occurred as of January 1, 1993: (i) the Insta-Care and Synetic acquisitions and (ii) the merger with PMSI, assuming approximately 10,300,000 shares of Common Stock were issued to effect such merger. These unaudited pro forma consolidated results of operations have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had these transactions been made at January 1, 1993, or of results which may occur in the future.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
2. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
During the year ended December 31, 1993, the Company acquired three nursing facilities (328 beds) and leasehold interests in eight nursing facilities (829 beds) and one retirement living project (69 units), all of which were previously managed by the Company, in addition to one nursing facility (60 beds) and one retirement living project (187 units) not previously operated by the Company. The acquisitions of such facilities, and certain other assets, were accounted for as purchases and were consummated with approximately $6,915,000 cash, approximately $18,232,000 assumed and acquired debt, approximately $858,000 of security and other deposits and approximately $454,000 reduction in receivables. In addition, the Company acquired 25 nursing facilities (2,706 beds) and two retirement living projects (435 units), which were previously leased by the Company, for approximately $38,381,000 cash (including approximately $5,000,000 borrowed under the Company's revolving credit agreement), approximately $5,541,000 issuance of debt, approximately $42,285,000 assumed and acquired debt and approximately $2,313,000 of security and other deposits. The operations of these facilities were immaterial to the Company's financial position and results of operations.
During the year ended December 31, 1993, the Company sold or terminated the leases on 40 nursing facilities (4,511 beds) (20 of such facilities were included in the 33 facilities discussed below) and three retirement living projects (230 units) (two of which were included in the 33 facilities discussed below). The Company recognized pre-tax losses of approximately $3,769,000 as a result of these dispositions, which was primarily included in the $57,000,000 pre-tax restructuring charge discussed below. In addition, the Company sold certain other assets for pre-tax gains of approximately $4,850,000. Dispositions of such facilities and other assets were consummated for approximately $9,583,000 cash and approximately $5,460,000 assumption of debt. The operations of these facilities were immaterial to the Company's financial position and results of operations.
During the year ended December 31, 1992, the Company acquired 15 nursing facilities (1,669 beds), one retirement living project (24 units) and other assets, accounted for as purchases. The acquisitions were consummated with approximately $6,112,000 cash, approximately $25,639,000 issuance of debt, approximately $20,221,000 assumed and acquired debt and approximately $13,230,000 reduction in notes receivable, which the Company previously took as partial payment for the original sale of certain of the nursing facilities and interest receivable thereon. In addition, the Company acquired 14 nursing facilities (1,450 beds), which were previously leased by the Company, for approximately $12,809,000 cash, approximately $8,340,000 issuance of debt, approximately $11,325,000 assumed and acquired debt and approximately $841,000 of security and other deposits. In addition, the Company sold or terminated the leases on 22 nursing facilities (2,379 beds) (five of such facilities were included in the 33 facilities discussed below) and one retirement living project (77 units) (which was included in the 33 facilities discussed below) for approximately $1,282,000 cash and approximately $4,610,000 notes. The Company recognized pre-tax losses of approximately $5,394,000 as a result of these dispositions, a portion of which was included in the $57,000,000 pre-tax
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
2. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
restructuring charge discussed below. The operations of these facilities were immaterial to the Company's financial position and results of operations.
During the year ended December 31, 1992, the Company recognized a $57,000,000 pre-tax restructuring charge related to a program to discontinue the Company's operation of 33 nursing facilities with historically poor financial performance, and to replace, relocate or sell certain other assets (the "1992 restructuring program"). The $57,000,000 pre-tax restructuring charge was comprised of the following: $28,000,000 related to the anticipated loss on disposal of 33 nursing facilities; $12,200,000 related to operating losses on such 33 nursing facilities during the anticipated one-year disposal period; $6,500,000 write-down to net realizable value of four facilities expected to be replaced; $3,000,000 write-down of corporate headquarters; and $7,300,000 related to relocation, severance and other costs associated with the centralization of the Company's accounting, finance and management information systems functions.
The $34,310,000 balance of accrued restructuring costs remaining at December 31, 1993, the date at which the 1992 restructuring program was anticipated to be completed, was as follows: $17,510,000 related to the anticipated loss on disposal of nursing facilities; $750,000 related to operating losses on such facilities; $5,750,000 write-down to net realizable value of facilities to be replaced; $3,000,000 write-down of corporate headquarters; and $7,300,000 related to relocation, severance and other costs. The 1992 restructuring program was not completed in the anticipated one-year period due primarily to the additional time required for potential purchasers to obtain financing and regulatory approvals, and extra time management needed to ensure each transaction was carried out in the best interest of the Company.
During 1994, the Company decided not to pursue the sale of two of the original 33 facilities and recognized a $2,400,000 credit to operations resulting from such decision. By December 31, 1994, the 1992 restructuring program was complete.
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, 1994, 1993 and 1992 was $77,575,000, $72,169,000 and $68,605,000, respectively.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31 (dollars in thousands, except per share amounts):
On November 1, 1994, the Company executed a $375,000,000 Credit Agreement (the "1994 Credit Agreement") which provides for a $225,000,000 Term Loan (the "1994 Term Loan") and a $150,000,000 Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). The proceeds from the 1994 Term Loan were used to consummate the pharmacy acquisitions (as discussed above). The Revolver/LOC Facility replaced the Company's revolving credit facility and letter of credit facility originally entered into in 1993. Accordingly, the Company incurred a $2,412,000 extraordinary charge, net of income taxes, in 1994 related to the acceleration of unamortized deferred financing costs associated with the 1993 revolving credit facility and letter of credit facility, as well as with the Company's commercial paper program which was replaced with
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
4. LONG-TERM OBLIGATIONS -- (CONTINUED)
Medium Term Notes, as discussed below, and certain bond refundings. Currently, the 1994 Term Loan and any Revolver borrowings bear interest at adjusted LIBOR plus 1%, the Prime Rate, as defined, or the adjusted CD rate, as defined, plus 1 1/8%, at the Company's option. Such interest rates may be adjusted quarterly based on certain financial ratio calculations. There were no outstanding Revolver borrowings at December 31, 1994. The Company pays certain commitment fees and commissions with respect to the Revolver/LOC Facility and had approximately $103,000,000 of unused commitments under such facility at December 31, 1994. The 1994 Credit Agreement is secured by a security interest in the stock of PCA and certain of its subsidiaries and imposes on the Company certain financial tests and restrictive covenants.
The Company executed a $100,000,000 Bank Credit Facility (the "Bank Credit Facility") during 1992, which provides for a seven-year term loan (the "Term Loan"). A portion of the net proceeds from the Preferred Stock offering (as discussed herein) was used to repay approximately $45,000,000 of the Term Loan during 1993. Accordingly, in 1993, the Company recorded a $2,345,000 extraordinary charge, net of income taxes, related to the acceleration of unamortized deferred financing costs associated with such debt, as well as certain bond refundings. Currently, the Term Loan bears interest at adjusted LIBOR plus 7/8% or the Prime Rate, as defined, at the Company's option, and requires interest-only payments through September 1996. Such interest rates may be adjusted quarterly based on certain financial ratio calculations. The Bank Credit Facility is secured by a mortgage interest in 25 nursing facilities and retirement centers with a net book value totaling approximately $54,176,000 at December 31, 1994, and a security interest in certain personal property and imposes on the Company certain financial tests and restrictive covenants.
The Nippon Credit Agreement, entered into in March 1993, provides for a seven-year term loan (the "Nippon Term Loan"). Currently, the Nippon Term Loan bears interest at adjusted LIBOR plus 7/8% or the Prime Rate, as defined, at the Company's option, and requires interest-only payments through February 1996. Such interest rates may be adjusted quarterly based on certain financial ratio calculations. The Nippon Credit Agreement is secured by a mortgage interest in eight nursing facilities with a net book value totaling approximately $12,435,000 at December 31, 1994.
As of December 31, 1994, the Company had $17,750,000 of fixed rate senior secured notes (the "Senior Secured Notes") outstanding which were previously issued in conjunction with a refinancing in 1990. The Senior Secured Notes have interest payable semi-annually at 14 1/4%, require a sinking fund payment on December 15, 1996 and mature on December 15, 1997. The Senior Secured Notes are secured by a mortgage interest in 20 nursing facilities with net book value totaling approximately $26,086,000 at December 31, 1994, and a security interest in certain personal property and impose on the Company certain financial tests and certain restrictive covenants.
In May 1994, the Company entered into a $25,000,000 promissory note (the "7 3/4% Note"), the proceeds from which were used to repay higher interest rate debt. The 7 3/4% Note is secured by a mortgage interest in 11 nursing facilities and one retirement center with a net book value totaling approximately $19,854,000 at December 31, 1994, and a security interest in certain personal property.
In December 1994, the Company replaced its commercial paper program with $50,000,000 of medium term notes (the "Medium Term Notes"). The Medium Term Notes bear interest at LIBOR, as defined, plus .35%. Pursuant to the Medium Term Notes agreement, eligible receivables of selected nursing facilities are sold to Beverly Funding Corporation ("Beverly Funding"), a wholly-owned subsidiary of the Company. At December 31, 1994, Beverly Funding had total assets of approximately $83,000,000 which cannot be used to satisfy claims of the Company or any of its subsidiaries.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
4. LONG-TERM OBLIGATIONS -- (CONTINUED)
In 1993, the Company registered with the Securities and Exchange Commission $100,000,000 aggregate principal amount of certain debt securities ("Debt Securities"), which are to be offered from time to time as separate series in amounts, at prices and on terms to be determined at the time of sale. During 1993, the Company issued $20,000,000 of 8 3/4% First Mortgage Bonds, $30,000,000 of 8 5/8% First Mortgage Bonds and $25,000,000 of 8 3/4% Notes under such registration. As of December 31, 1994, $25,000,000 of aggregate principal amount of Debt Securities under such registration remained unissued.
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 1994, 1993 or 1992.
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, 1994, are as follows (in thousands):
Total future minimum rental commitments are net of approximately $20,873,000 of minimum sublease rentals due in the future under noncancelable subleases. Rent expense on operating leases, net of sublease rent income, for the years ended December 31 was as follows: 1994 -- $127,187,000; 1993 -- $135,262,000; 1992 -- $140,168,000. Sublease rent income was approximately $5,410,000, $3,226,000 and $3,289,000 for the years ended December 31, 1994, 1993 and 1992, respectively. Contingent rent, based primarily on revenues,
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
5. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
was approximately $22,000,000, $20,000,000 and $19,000,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
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. The future minimum commitments required under such agreement as of December 31, 1994, are as follows: 1995 -- $7,941,000; 1996 -- $7,941,000; 1997 -- $7,941,000; 1998 -- $7,941,000; 1999 -- $4,632,000. The Company incurred approximately $8,906,000, $10,179,000 and $3,960,000 under such agreement during the years ended December 31, 1994, 1993 and 1992, respectively.
The Company is contingently liable for approximately $68,505,000 of long-term obligations maturing on various dates through 2019, as well as annual interest and letter of credit fees of approximately $5,943,000. Such contingent liabilities principally arose from the Company's sale of nursing facilities and retirement living projects. In addition, the Company has working capital guarantees resulting from the disposition of facilities totaling $3,000,000. The Company operates the facilities or projects related to approximately $47,147,000 of the principal amount for which it is contingently liable, pursuant to long-term agreements accounted for as operating leases or management contracts. In addition, the Company is contingently liable for various operating leases that were assumed by purchasers and are secured by the rights thereto.
There are various lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations.
6. STOCKHOLDERS' EQUITY
The Company had 300,000,000 shares of authorized $.10 par value common stock ("Common Stock") at December 31, 1994 and 1993. The Company is subject to certain restrictions under its banking arrangements 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, 1994 and 1993, a portion of which has been issued, as described below. The Board of Directors has authority, without further stockholder action, to set rights, privileges and preferences for any unissued shares of preferred stock.
In December 1986, the Company issued 999,999 shares of its preferred stock ("the Series A preferred stock") with a stated and liquidation value of $100 per share to a wholly-owned subsidiary of Stephens Group, Inc. On January 3, 1994, the Company used approximately $100,000,000 of the net proceeds from the Preferred Stock offering (as defined below) to redeem the Series A preferred stock. The Series A preferred stock dividend rate was scheduled to increase from 1% to 10% on January 1, 1994.
In September 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.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
On August 5, 1993, the Company completed the sale of 3,000,000 shares of $2.75 Cumulative Convertible Exchangeable Preferred Stock (the "Series B preferred stock"), with a liquidation value of $50 per share through a public offering (the "Preferred Stock offering"). As of December 31, 1993, the Series B preferred stock is convertible into 11,252,813 shares of the Company's Common Stock. The holders of the Series B preferred stock are entitled to receive out of legally available funds, when and as declared by the Company's Board of Directors, quarterly cash dividends equal to $2.75 per share (aggregate of $8,250,000 per annum). Except as required by law, holders of the Series B preferred stock have no voting rights unless dividends on the Series B preferred stock have not been paid in an aggregate amount equal to at least six full quarters (whether or not consecutive), in which case holders of the Series B preferred stock will be entitled to elect two additional directors to the Company's Board of Directors to serve until such dividend arrearage is eliminated. The Company paid all required quarterly dividends on the Series B preferred stock during 1994 and 1993. The Series B preferred stock is exchangeable, in whole or in part (but in no more than two parts), at the option of the Company, on any dividend payment date beginning November 1, 1995, for the Company's 5 1/2% Convertible Subordinated Debentures due August 1, 2018 (the "5 1/2% Debentures"), at the rate of $50 principal amount of 5 1/2% Debentures for each share of the Series B preferred stock. The Series B preferred stock is redeemable at any time on and after August 1, 1996, in whole or in part, only at the option of the Company, initially at a redemption price of $51.925 per share, and thereafter at prices decreasing ratably annually to $50 per share on and after August 1, 2003, plus accrued and unpaid dividends. The Series B preferred stock is not a common stock equivalent and is accounted for only in the computation of fully diluted earnings per share.
During 1994, the Company's Nonemployee Directors' Stock Option Plan (the "Nonemployee Directors' Plan") was approved. Such plan became effective June 1, 1994 and will remain in effect until May 31, 2004, subject to earlier termination by the Board of Directors. There are 200,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under the Nonemployee Directors' Plan. The Nonemployee Directors' Plan provides that 2,500 nonqualified 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 nonqualified 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.
During 1993, the Beverly Enterprises, Inc. 1993 Long-Term Incentive Stock Plan was approved. Such plan, as amended and restated (the "1993 Incentive Stock Plan"), became effective July 1, 1993 and will remain in effect until June 30, 2003, subject to the earlier termination by the Board of Directors. The Company has 3,000,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under the 1993 Incentive Stock Plan in the form of nonqualified stock options, incentive stock options, restricted stock, performance awards and other stock unit awards. Incentive stock options must be granted at a purchase price equal to market price on the date of grant. Nonqualified stock options may be granted at no less than 85% of market price on the date of grant. All grants made at less than market price must be in lieu of cash payments. All options are exercisable no sooner than one year from the grant date and expire 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 and other stock unit awards, including phantom units, will be granted based on the achievement of certain performance or other goals and will carry certain restrictions, as defined. The Compensation Committee of the Board of Directors is responsible for administering the 1993 Incentive Stock 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.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The Company has 2,400,000 shares of Common Stock authorized for issuance under its 1985 Nonqualified Stock Option Plan. Under the plan, options are granted at a purchase price equal to market price on the date of grant, become exercisable no sooner than one year after date of grant and expire no later than twelve years after date of grant, as determined by a committee appointed by the Board of Directors. In addition to options, the plan provides for outright grants of Common Stock, subject to forfeiture provisions. As a condition precedent to the release of such shares, the employee must be continuously employed with the Company from and after the date of grant and remain employed on share release dates. Commencing one year after the grant date, the shares will be released in accordance with a schedule determined at the time of grant.
The following table summarizes stock option, restricted stock and other stock units data relative to the Company's 1985 Nonqualified Stock Option Plan, the 1993 Incentive Stock Plan and the Nonemployee Directors' Plan for the years ended December 31:
---------------
(1) Includes 2,269,356 options exercisable at December 31, 1994.
During 1994, in conjunction with the merger of ATH, the Company assumed ATH's 1993 Nonqualified Stock Option Plan (the "ATH Plan") and issued options to purchase shares of the Company's Common Stock in exchange for each option then outstanding under the ATH Plan. During 1994, 451 of such options were exercised at a price of $.83 per share. At December 31, 1994, there were 114,452 options outstanding under such plan at a price of $.83 per share, of which 32,608 were exercisable. In addition, the Company signed an option agreement with an officer of ATH and issued options to purchase shares of the Company's Common Stock in exchange for each option to purchase shares of ATH stock previously held by such officer. At December 31, 1994, there were 38,548 options outstanding under such agreement at a price of $.83 per share, all of which were exercisable. In September 1994, the Company filed a Registration Statement with the
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
Securities and Exchange Commission to register the shares issued subject to these plans. Also during 1994, in conjunction with the acquisition of Insta-Care, the Company issued options to purchase shares of its Common Stock in exchange for each option then outstanding under the Insta-Care Holdings, Inc. First Employees Stock Option Plan (the "Insta-Care Plan"). At December 31, 1994, there were 116,169 options outstanding under the Insta-Care Plan at prices ranging from $1.54 to $2.12 per share, none of which were exercisable. No options are available for grant under the ATH Plan or the Insta-Care Plan.
As of December 31, 1993, the Company had 1,000,000 shares of Common Stock authorized for issuance under a separate option grant at an option price of $12.00 per share. On January 26, 1994, such option was exercised in full and the Company received $12,000,000 in cash proceeds from such transaction. In April 1994, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission to register such 1,000,000 shares. Such registration did not result in any additional proceeds to the Company.
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, 1994, 1993 and 1992 related to this plan were approximately $1,790,000, $1,493,000 and $1,102,000, respectively.
7. INCOME TAXES
Effective January 1, 1992, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by Financial Accounting Standards Statement No. 109, "Accounting for Income Taxes." The cumulative effect as of January 1, 1992 of adopting the Statement was to increase net loss for the year ended December 31, 1992 by $5,454,000. The provision for taxes on income before extraordinary charge and cumulative effect of change in accounting for income taxes consists of the following for the years ended December 31 (in thousands):
The Company's annual effective tax rates for the years ended December 31, 1994, 1993 and 1992 were 33%, 34% and 68%, respectively. The Company's annual effective tax rates for 1994 and 1993 were lower than the federal statutory rate primarily due to the utilization of certain tax credit carryforwards, partially offset by the impact of state income taxes. In addition, the higher annual effective tax rate in 1992 primarily resulted from the $57,000,000 pre-tax charge (as discussed herein) which reduced the Company's pre-tax income to a level where the impact of permanent tax differences and state income taxes had a more significant impact on the effective tax rate.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
7. INCOME TAXES -- (CONTINUED) A reconciliation of the provision for income taxes, computed at the statutory rate, to the Company's annual effective tax rate is summarized as follows (dollars in thousands):
In accordance with Statement No. 109, deferred income taxes for 1994, 1993 and 1992 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, 1994 and 1993 are as follows (in thousands):
At December 31, 1994, the Company had targeted jobs tax credit carryforwards of $21,658,000 for income tax purposes which expire in years 2004 through 2008. For financial reporting purposes, the targeted jobs tax credit carryforwards have been utilized to offset existing net taxable temporary differences reversing during the carryforward periods. However, due to taxable losses in prior years, future taxable income has not been assumed and a valuation allowance of $198,000 and $15,097,000 for the years ended December 31, 1994 and 1993, respectively, has been recognized to offset the deferred tax assets related to those carryforwards. The valuation allowance decreased $14,899,000 from January 1, 1994 due to the utilization of targeted jobs tax credits.
8. RELATED PARTY TRANSACTIONS
On January 3, 1994, the Company redeemed the Series A preferred stock and paid the holder of such stock approximately $18,000 of interest for the two days it remained outstanding in 1994. During 1993 and 1992, the Company declared and paid all required quarterly dividends to the holder of its Series A preferred stock which amounted to $1,000,000 per year. An affiliate of the Company's former Series A preferred
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
8. RELATED PARTY TRANSACTIONS -- (CONTINUED)
stockholder provides investment services relating to certain of the Company's acquisitions and dispositions and has provided underwriting and placement services on the Company's public and private offerings. Fees paid by the Company for such services amounted to approximately $745,000 and $2,180,000 for the years ended December 31, 1994 and 1993, respectively. The Company did not require such services in 1992.
9. 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 (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 other loans 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 primarily from one to five years. The Company intends to hold such securities to maturity.
Investment in a Real Estate Mortgage Investment Conduit (REMIC)
The fair value of the Company's REMIC investment, which is included in the consolidated balance sheet caption "Other, net," is based on information obtained from the REMIC servicer. The Company intends to hold such investment to maturity.
Invested Funds Designated for the Redemption of Series A preferred stock
The carrying amount reported in the consolidated balance sheet at December 31, 1993 for these invested funds approximates their fair value.
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
9. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED) Long-term Obligations (Including Current Portion)
The carrying amounts of the Company's 1994 Term Loan, Term Loan under the Bank Credit Facility, Nippon Term Loan, Commercial Paper, Medium Term Notes and certain other 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, 1994 and 1993 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) since 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.
10. ADDITIONAL INFORMATION
Effective July 31, 1987, Beverly Enterprises, a California corporation ("Beverly California"), became a wholly-owned subsidiary of Beverly Enterprises, Inc., a Delaware corporation ("Beverly Delaware"). Beverly Delaware (the parent) provides financial, administrative and legal services to Beverly California for which Beverly California is charged management fees.
The following summarized financial information is being reported because Beverly California's 7.625% convertible subordinated debentures due March 2003 and its zero coupon notes (collectively, the "Debt Securities") and the Senior Secured Notes are publicly held. Beverly Delaware is co-obligor of these Debt Securities and guarantor of the Senior Secured Notes. Summary financial information for Beverly California is as follows (in thousands):
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
10. ADDITIONAL INFORMATION -- (CONTINUED)
In addition to Beverly Delaware, one of its direct wholly-owned subsidiaries and each of Beverly California's material wholly-owned subsidiaries (collectively, the "Subsidiary Guarantors") have guaranteed the obligations of Beverly California under the Senior Secured Notes. Separate financial statements of Beverly California and the Subsidiary Guarantors are not considered to be material to holders of the Senior Secured 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 the aggregate net assets, earnings and equity of the Subsidiary Guarantors and Beverly California together, after adjustment for intercompany management fees, are substantially equivalent to the net assets, earnings and equity of Beverly Delaware on a consolidated basis.
Effective January 1, 1995, Beverly California changed its name to Beverly Health and Rehabilitation Services, Inc. ("BHRS") and spun-off certain of its wholly-owned subsidiaries to Beverly Delaware in an effort to better focus management's attention on specific services delivered by the Company within the long-term health care arena. Such subsidiaries include, among others, PCA, ATH, Beverly Indemnity, Ltd., and Beverly REMIC Depositor, Inc., all of which are Subsidiary Guarantors.
BEVERLY ENTERPRISES, INC.
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, 1994 and 1993.
During the third quarter of 1994, the Company issued 2,400,000 shares of its Common Stock for all of the outstanding stock of ATH. Such transaction was accounted for as a pooling of interests and, accordingly the Company's consolidated financial statements have been restated to reflect ATH's financial position, results of operations and cash flows for each period prior to the merger.
The annual effective tax rates for 1994 and 1993 were 33% and 34%, as restated, respectively. The Company's annual effective tax rates in 1994 and 1993 were lower than the federal statutory rate primarily due to the utilization of certain tax credit carryforwards, partially offset by the impact of state income taxes.
Where fully diluted earnings per share would be anti-dilutive, primary earnings per share was used.
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 18, 1995, 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 18, 1995, 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 18, 1995, 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 18, 1995, 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 November 2, 1994, which reported under Item 5 that on September 29, 1994, the Board of Directors of the Company declared a dividend of one common stock purchase right for each share of Common Stock outstanding at the close of business on November 2, 1994, and described the Company's Stockholder Rights Plan.
The Company filed a Current Report on Form 8-K, dated December 14, 1994, which reported under Item 5 the acquisitions of Insta-Care and Synetic and the execution of the 1994 Credit Agreement and filed under Item 7 the stock purchase agreements related to such acquisitions. On February 10, 1995, the Company filed an amendment on Form 8-K/A, which reported under Item 5 the proposed merger with PMSI and filed under Item 7 the unaudited pro forma combined financial statements giving effect to the proposed merger and the acquisitions of Insta-Care and Synetic.
(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 statements and 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, 1994, 1993 AND 1992
(IN THOUSANDS)
(ITEM 14(D))
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* Includes amounts classified in long-term other assets as well as current assets.
(1) Primarily relates to costs of relocating certain administrative, operational and management information system support functions.
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.
BEVERLY ENTERPRISES, INC. Registrant
Dated: March 30, 1995 By: /s/ DAVID R. BANKS ------------------------------ David R. Banks Chairman of the Board, President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated: