e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number 1-9550
Beverly Enterprises, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware |
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62-1691861 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
One Thousand Beverly Way
Fort Smith, Arkansas 72919
(Address of principal executive offices)
Registrants telephone number, including area code:
(479) 201-2000
Registrants website:
www.beverlycorp.com
Indicate by check mark whether Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if Registrant is an accelerated filer (as
defined in Exchange Act
Rule 12b-2). Yes þ No o
Shares of Registrants Common Stock, $.10 par value,
outstanding, exclusive of
treasury shares, at April 29, 2005 109,488,273
FORWARD LOOKING STATEMENTS
References throughout this document to the Company include
Beverly Enterprises, Inc. and its wholly owned subsidiaries
(BEI). In accordance with the Securities and
Exchange Commission (SEC) Plain English
guidelines, this Quarterly Report on Form 10-Q has been
written in the first person. In this document, the words
we, our, ours and
us refer only to BEI and its wholly owned
subsidiaries and not to any other person.
This document contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements may be identified by
words such as expects, anticipates,
intends, plans, believes,
seeks, estimates or words of similar
meaning and include, but are not limited to, statements about
our expected future business and financial performance.
Forward-looking statements are based on managements
current expectations and assumptions, which are inherently
subject to uncertainties, risks and changes in circumstances
that are difficult to predict. Actual outcomes and results may
differ materially from these expectations and assumptions due to
changes in, among other things, political, economic, business,
competitive, market, regulatory, demographic and other factors.
In addition, our results of operations and financial condition,
cash flows and liquidity may be adversely impacted by the
ongoing sales process (see Item 1.
Note 4). The sales process may impact our ability to
attract and retain customers, management and employees and will
result in the incurrence of significant advisory fees, legal
fees and other expenses. We undertake no obligation to publicly
update or revise any forward-looking information, whether as a
result of new information, future developments or otherwise.
You should also refer to Item 1. Business in
our Annual Report on Form 10-K for the fiscal year
ended December 31, 2004 for a discussion of various
governmental regulations and other operating factors relating to
the healthcare industry and the risks inherent in them. You
should carefully consider the risks described and referred to in
the annual report before making any investment decisions
regarding our securities. There may be additional risks that we
do not presently know of or that we currently deem immaterial.
If any of these risks actually occur, our business, financial
condition, results of operations or cash flows could be
materially and adversely affected. In that case, the trading
price of our common stock and value of our other outstanding
securities could decline, and you may lose all or part of your
investment. Given these risks and uncertainties, we can give no
assurances that any forward-looking statements, which speak only
as of the date of this report will, in fact, transpire, and,
therefore, we caution you not to place undue reliance on them.
1
BEVERLY ENTERPRISES, INC.
FORM 10-Q
March 31, 2005
TABLE OF CONTENTS
2
PART I
ITEM 1. FINANCIAL STATEMENTS.
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
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March 31, | |
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December 31, | |
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2005 | |
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2004 | |
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(Unaudited) | |
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(Note) | |
ASSETS |
Current assets:
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Cash and cash equivalents
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$ |
233,810 |
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$ |
215,665 |
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Accounts receivable less allowance for doubtful
accounts: 2005 $25,715; 2004 $26,320
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276,269 |
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235,477 |
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Notes receivable, less allowance for doubtful notes:
2005 $1,999; 2004 $1,686
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5,012 |
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2,786 |
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Operating supplies
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9,145 |
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9,181 |
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Assets held for sale
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11,443 |
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14,898 |
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Prepaid expenses and other
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31,511 |
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37,266 |
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Total current assets
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567,190 |
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515,273 |
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Property and equipment, net
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657,368 |
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653,656 |
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Other assets:
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Goodwill, net
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122,863 |
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124,066 |
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Other, less allowance for doubtful accounts and notes:
2005 $1,654; 2004 $1,538
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69,746 |
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68,390 |
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Total other assets
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192,609 |
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192,456 |
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$ |
1,417,167 |
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$ |
1,361,385 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
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Accounts payable
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$ |
75,440 |
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$ |
67,778 |
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Accrued wages and related liabilities
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84,623 |
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104,037 |
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Accrued interest
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8,865 |
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3,602 |
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General and professional liabilities
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57,099 |
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54,216 |
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Federal government settlement obligations
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14,711 |
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14,359 |
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Liabilities held for sale
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676 |
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Other accrued liabilities
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126,310 |
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83,097 |
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Current portion of long-term debt
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12,167 |
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12,240 |
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Total current liabilities
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379,215 |
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340,005 |
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Long-term debt
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543,931 |
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545,943 |
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Other liabilities and deferred items
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200,692 |
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203,024 |
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, shares authorized: 25,000,000
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Common stock, shares issued: 2005 117,956,353;
2004 116,621,715
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11,796 |
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11,662 |
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Additional paid-in capital
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908,179 |
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902,053 |
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Accumulated deficit
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(518,148 |
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(532,804 |
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Treasury stock, at cost: 8,283,316
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(108,498 |
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(108,498 |
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Total stockholders equity
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293,329 |
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272,413 |
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$ |
1,417,167 |
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$ |
1,361,385 |
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Note: |
The balance sheet at December 31, 2004 has been derived
from the audited consolidated financial statements at that date
but does not include all of the information and footnotes
required by accounting principles generally accepted in the
United States for complete financial statements. |
See accompanying notes.
3
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended | |
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March 31, | |
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2005 | |
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2004 | |
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Revenues
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$ |
562,480 |
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$ |
480,618 |
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Costs and expenses:
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Wages and related
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304,599 |
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274,303 |
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Provision for insurance and related items
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29,920 |
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28,356 |
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Other operating and administrative
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169,325 |
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127,409 |
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Depreciation and amortization
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16,784 |
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14,907 |
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Asset impairments, workforce reductions and other unusual items
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(116 |
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2,824 |
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Total costs and expenses
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520,512 |
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447,799 |
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Income before other income (expenses)
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41,968 |
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32,819 |
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Other income (expenses):
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Interest expense
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(10,597 |
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(11,804 |
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Interest income
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2,063 |
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1,523 |
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Costs related to the sales process of the Company
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(18,721 |
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Net gains on dispositions
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84 |
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37 |
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Total other expenses, net
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(27,171 |
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(10,244 |
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Income before provision for income taxes and discontinued
operations
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14,797 |
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22,575 |
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Provision for income taxes
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1,547 |
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1,442 |
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Income before discontinued operations
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13,250 |
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21,133 |
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Discontinued operations, net of taxes: 2005
$(1,495); 2004 $423
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1,406 |
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2,306 |
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Net income
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$ |
14,656 |
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$ |
23,439 |
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Net income per share of common stock:
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Basic:
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Before discontinued operations
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$ |
0.12 |
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$ |
0.20 |
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Discontinued operations, net of taxes
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0.01 |
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0.02 |
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Net income per share of common stock
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$ |
0.13 |
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$ |
0.22 |
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Shares used to compute basic net income per share
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108,738 |
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107,331 |
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Diluted:
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Before discontinued operations
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$ |
0.11 |
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$ |
0.18 |
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Discontinued operations, net of taxes
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0.01 |
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0.02 |
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Net income per share of common stock
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$ |
0.12 |
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$ |
0.20 |
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Shares used to compute diluted net income per share
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126,327 |
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123,888 |
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See accompanying notes.
4
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
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Three Months Ended | |
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March 31, | |
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2005 | |
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2004 | |
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Cash flows from operating activities:
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Net income
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$ |
14,656 |
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$ |
23,439 |
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Adjustments to reconcile net income to net cash provided by
(used for) operating activities, including discontinued
operations:
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Depreciation and amortization
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17,061 |
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15,766 |
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Provision for reserves on accounts, notes and other receivables,
net
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1,711 |
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6,194 |
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Amortization of deferred financing costs
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653 |
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624 |
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Asset impairments, workforce reductions and other unusual items
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(323 |
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4,082 |
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Costs related to the sales process of the Company
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18,721 |
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Losses (gains) on dispositions of facilities and other
assets, net
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795 |
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(4,508 |
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Insurance related accounts
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704 |
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(572 |
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Changes in operating assets and liabilities, net of acquisitions
and dispositions:
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Accounts receivable
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(43,227 |
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(59,324 |
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Operating supplies
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62 |
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104 |
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Prepaid expenses and other receivables
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3,141 |
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3,923 |
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Accounts payable and other accrued expenses
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20,277 |
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(21,602 |
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Income taxes payable
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2,178 |
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(585 |
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Other, net
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(1,639 |
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(4,113 |
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Total adjustments
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20,114 |
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(60,011 |
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Net cash provided by (used for) operating activities
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34,770 |
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(36,572 |
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Cash flows from investing activities:
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Capital expenditures
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(20,479 |
) |
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(9,777 |
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Proceeds from dispositions of facilities and other assets, net
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|
994 |
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19,198 |
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Collections on notes receivable
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29 |
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6,765 |
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Proceeds from (payments for) designated funds, net
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533 |
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(714 |
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Other, net
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703 |
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(3,746 |
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Net cash provided by (used for) investing activities
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(18,220 |
) |
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11,726 |
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Cash flows from financing activities:
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Repayments of long-term debt
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(2,085 |
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(3,629 |
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Proceeds from exercise of stock options
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3,884 |
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293 |
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Deferred financing costs paid
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(204 |
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(406 |
) |
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Net cash provided by (used for) financing activities
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1,595 |
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(3,742 |
) |
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Net increase (decrease) in cash and cash equivalents
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18,145 |
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(28,588 |
) |
Cash and cash equivalents at beginning of period
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|
215,665 |
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|
258,815 |
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Cash and cash equivalents at end of period
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$ |
233,810 |
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$ |
230,227 |
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Supplemental schedule of cash flow information:
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Cash paid (received) during the year for:
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Interest, net of amounts capitalized
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$ |
4,681 |
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$ |
5,218 |
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Income tax payments (refunds), net
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(2,126 |
) |
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|
2,450 |
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See accompanying notes.
5
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
We have prepared these condensed consolidated financial
statements without audit. In managements opinion, these
condensed consolidated financial statements include all normal
recurring adjustments necessary for a fair presentation of our
results of operations and cash flows for the three months ended
March 31, 2005 and 2004, and our financial condition at
March 31, 2005 and December 31, 2004, in accordance
with the rules and regulations of the SEC. Although certain
information and footnote disclosures required by accounting
principles generally accepted in the United States have been
condensed or omitted, we believe that the disclosures in these
condensed consolidated financial statements are adequate to make
the information presented not misleading. These condensed
consolidated financial statements should be read along with our
Annual Report on Form 10-K for the fiscal year ended
December 31, 2004, filed with the SEC. Our results of
operations for the three months ended March 31, 2005 are
not necessarily indicative of the results for a full year.
Generally accepted accounting principles in the United States
require management to make estimates and assumptions when
preparing financial statements that affect:
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the reported amounts of assets and liabilities at the date of
the financial statements; and |
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the reported amounts of revenues and expenses during the
reporting period. |
They also require management to make estimates and assumptions
regarding contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those
estimates.
Our revenues are derived primarily from providing long-term
healthcare services. Approximately 80% of our revenues for each
of the three months ended March 31, 2005 and 2004, were
derived from federal and state medical assistance programs
(primarily Medicare and Medicaid). We record revenues when
services are provided at standard charges adjusted to amounts
estimated to be received under governmental programs and other
third-party contractual arrangements based on contractual terms
and historical experience. These revenues are reported at their
estimated net realizable amounts and are subject to audit and
retroactive adjustment.
All providers participating in the Medicare and Medicaid
programs are required to meet certain financial cost reporting
requirements. Federal and state regulations generally require
the submission of annual cost reports covering revenues, costs
and expenses associated with the services provided to Medicare
beneficiaries and Medicaid recipients. Annual cost reports are
subject to routine audits and retroactive adjustments. These
audits often require several years to reach the final
determination of amounts due to, or by, us under these programs.
Retroactive adjustments are estimated in the recording of
revenues in accordance with the state plan provisions in effect
during the period the related services are rendered. These
amounts are adjusted in future periods as adjustments become
known, as state plan provisions are retroactively changed or as
cost reporting years are no longer subject to audits, reviews or
investigations. Due to the complexity of the laws and
regulations governing the Medicare and Medicaid programs, there
is at least a possibility that recorded estimates will change by
a material amount in the near term. During the three months
ended March 31, 2005, we recorded the impact of an approved
Medicaid plan change for the state of Pennsylvania, which
resulted in
6
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 1. |
General (Continued) |
an increase in revenues and Accounts receivable of
$35.7 million related to prior years and an increase in
provider tax expense and Other accrued liabilities
of $28.3 million. This resulted in a net increase in
pre-tax income of $7.4 million. All other changes in
estimates related to third party receivables resulted in an
increase in revenues from continuing operations of $739,000 and
$1.8 million for the three months ended March 31, 2005
and 2004, respectively. We believe adequate provision has been
made to reflect any adjustments that could result from
subsequent audits or reviews.
Compliance with laws and regulations governing the Medicare and
Medicaid programs is subject to government review and
interpretation, as well as significant regulatory action
including fines, penalties, and possible exclusion from the
Medicare and Medicaid programs. In addition, under the Medicare
program, if the federal government makes a formal demand for
reimbursement, even related to contested items, payment must be
made for those items before the provider is given an opportunity
to appeal and resolve the issue.
The following table sets forth the calculation of basic and
diluted earnings per share from continuing operations for the
three months ended March 31 (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income per share from continuing
operations
|
|
$ |
13,250 |
|
|
$ |
21,133 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Interest on 2.75% convertible subordinated notes, net of
income taxes of $0
|
|
|
827 |
|
|
|
824 |
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per share from continuing
operations
|
|
$ |
14,077 |
|
|
$ |
21,957 |
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share from continuing
operations weighted average shares
|
|
|
108,738 |
|
|
|
107,331 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
2,157 |
|
|
|
1,125 |
|
|
|
2.75% convertible subordinated notes
|
|
|
15,432 |
|
|
|
15,432 |
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share from continuing
operations adjusted weighted average shares and
assumed conversions
|
|
|
126,327 |
|
|
|
123,888 |
|
|
|
|
|
|
|
|
|
Basic net income per share from continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
Diluted net income per share from continuing operations
|
|
$ |
0.11 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
Diluted net income per share from continuing operations does not
include the impact of 345,000 and 1.8 million of employee
stock options outstanding for the three months ended
March 31, 2005 and 2004, respectively, because their effect
would have been antidilutive. In accordance with Emerging Issues
Task Force 04-8, The Effect of Contingently Convertible Debt
on Diluted Earnings Per Share, we have included the dilutive
effect of our 2.75% convertible subordinated notes, on an
if-converted basis, in our calculation of diluted net income per
share from continuing operations.
7
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
We believe that adequate provision has been made in the
financial statements for liabilities that may arise out of
patient care and related services provided to date. These
provisions are based primarily upon the results of independent
actuarial valuations, prepared by experienced actuaries. These
independent valuations are formally prepared twice each year
using the most recent trends of claims, settlements and other
relevant data. In addition to the estimate of retained losses,
our provision for insurance includes accruals for insurance
premiums and related costs for the coverage period and our
estimate of any experience adjustments to premiums.
The following table summarizes our provision for insurance and
related items for the three months ended March 31 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
General and professional liability:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
19,076 |
|
|
$ |
17,433 |
|
|
Discontinued operations
|
|
|
1,790 |
|
|
|
4,284 |
|
|
|
|
|
|
|
|
|
|
$ |
20,866 |
|
|
$ |
21,717 |
|
|
|
|
|
|
|
|
Workers compensation:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
8,561 |
|
|
$ |
7,689 |
|
|
Discontinued operations
|
|
|
1,427 |
|
|
|
1,135 |
|
|
|
|
|
|
|
|
|
|
$ |
9,988 |
|
|
$ |
8,824 |
|
|
|
|
|
|
|
|
Other insurance:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
2,283 |
|
|
$ |
3,234 |
|
|
Discontinued operations
|
|
|
65 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
$ |
2,348 |
|
|
$ |
3,342 |
|
|
|
|
|
|
|
|
Total provision for insurance and related items:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
29,920 |
|
|
$ |
28,356 |
|
|
Discontinued operations
|
|
|
3,282 |
|
|
|
5,527 |
|
|
|
|
|
|
|
|
|
|
$ |
33,202 |
|
|
$ |
33,883 |
|
|
|
|
|
|
|
|
Our insurance liabilities are included in the consolidated
balance sheet captions as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accrued wages and related liabilities
|
|
$ |
488 |
|
|
$ |
488 |
|
General and professional liabilities
|
|
|
57,099 |
|
|
|
54,216 |
|
Other liabilities and deferred items
|
|
|
115,755 |
|
|
|
117,962 |
|
|
|
|
|
|
|
|
|
|
$ |
173,342 |
|
|
$ |
172,666 |
|
|
|
|
|
|
|
|
8
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 3. |
Asset Impairments, Workforce Reductions and Other Unusual
Items |
We recorded pre-tax charges (credits) for asset
impairments, workforce reductions and other unusual items as
follows for the three months ended March 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Asset impairments
|
|
$ |
(112 |
) |
|
$ |
2,885 |
|
Workforce reductions
|
|
|
|
|
|
|
(132 |
) |
Other unusual items, including exit costs
|
|
|
(4 |
) |
|
|
71 |
|
|
|
|
|
|
|
|
|
|
$ |
(116 |
) |
|
$ |
2,824 |
|
|
|
|
|
|
|
|
During 2005, we recorded a credit of $112,000, primarily related
to the sale of a previously impaired asset at an amount above
its carrying value. During March 2004, we recorded asset
impairments of $2.9 million, primarily related to the
write-down of property and equipment on two nursing facilities
included in the Nursing Facilities segment. During the first
quarter of 2004, management made a determination to close these
nursing facilities, which led to an impairment assessment. We
estimated the fair market values of these facilities based on
sales values for the land and buildings.
During the three months ended March 31, 2004, we recorded
$214,000 for workforce reductions, less $346,000 in related
credits primarily due to the cancellation of restricted stock.
The $214,000 for workforce reductions primarily related to six
associates who were notified in the first quarter of 2004 that
their positions would be eliminated and included $196,000 of
cash expenses, which was paid during the year ended
December 31, 2004.
During the three months ended March 31, 2005 and 2004, we
recorded special pre-tax credits of $4,000 and special pre-tax
charges of $71,000, respectively, for certain exit costs under
retention and severance agreements with employees associated
with facilities affected by our divestiture strategy. The
following table summarizes activity in our accruals for
estimated workforce reductions and exit costs for the three
months ended March 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Workforce | |
|
Exit | |
|
Workforce | |
|
Exit | |
|
|
Reductions | |
|
Costs | |
|
Reductions | |
|
Costs | |
|
|
| |
|
| |
|
| |
|
| |
Balance beginning of quarter
|
|
$ |
1,166 |
|
|
$ |
4,572 |
|
|
$ |
3,029 |
|
|
$ |
7,270 |
|
Charged to continuing operations
|
|
|
|
|
|
|
(4 |
) |
|
|
196 |
|
|
|
71 |
|
Charged to discontinued operations
|
|
|
|
|
|
|
1,331 |
|
|
|
|
|
|
|
1,596 |
|
Cash payments
|
|
|
(654 |
) |
|
|
(900 |
) |
|
|
(1,114 |
) |
|
|
(1,194 |
) |
Reversals
|
|
|
(19 |
) |
|
|
(84 |
) |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of quarter
|
|
$ |
493 |
|
|
$ |
4,915 |
|
|
$ |
2,129 |
|
|
$ |
7,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reduction and exit cost accruals are included in
Accrued wages and related liabilities and
Other accrued liabilities on our condensed
consolidated balance sheets.
9
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 4. |
Sale of the Company and Related Items |
In January 2005, a group including Formation Capital, LLC,
Appaloosa Management, LP, Franklin Mutual Advisers LLC and
Northbrook NBV LLC (the Formation Capital
Consortium), publicly announced an unsolicited indication
of interest in acquiring all of our outstanding common stock.
Arnold M. Whitman, the Chief Executive Officer of Formation
Capital, also nominated a slate of six individuals for election
to our Board of Directors.
On February 3, 2005, our Board of Directors unanimously
rejected the Formation Capital Consortiums proposal. On
March 22, 2005, we announced that our Board of Directors
had unanimously voted to conduct an auction process to maximize
value for all of our stockholders as soon as practicable through
a sale of BEI. The Board also adopted procedures to enable the
beneficial owners of not less than 20% of our outstanding common
stock to cause us to call a special meeting of stockholders to
be held on October 21, 2005 to remove and replace the Board
and for the nomination of individuals for election as directors
at the special meeting, if held.
On April 11, 2005, we entered into a Settlement Agreement
with the Formation Capital Consortium and Mr. Whitman under
which the Formation Capital Consortium and Mr. Whitman
agreed to discontinue the solicitation of proxies in connection
with the Companys April 21, 2005 Annual Meeting of
Stockholders and Mr. Whitman withdrew his nominees for
election to our Board of Directors and other proposals for
consideration at the 2005 Annual Meeting. In addition, we agreed
to reimburse the Formation Capital Consortium for up to $600,000
of out-of-pocket fees and expenses incurred by them and
Mr. Whitman in connection with their proxy solicitation. We
have also entered into a Confidentiality Agreement with the
members of the Formation Capital Consortium under which the
Formation Capital Consortium and its representatives may examine
our confidential information for the purpose of evaluating a
possible transaction with us pursuant to the same restrictions
imposed on other bidders involved in the sales process. We
committed in the Confidentiality Agreement to allow the
Formation Capital Consortium to participate in our on-going
sales process on the same basis as all other potential buyers.
Our results of operations, financial condition and cash flows
may be adversely impacted by the ongoing sales process. To date,
we have incurred various costs as a result of the expression of
interest, the proxy contest and the sales process including
legal, investment banking advisory fees and other related costs.
During the three months ended March 31, 2005, we engaged
two investment banking firms to assist us in evaluating
proposals, both solicited and unsolicited, to acquire the
Company or any of its assets or businesses. Under the terms of
the engagement we are required to pay a fee to these two firms
equal to a percentage of any consideration received in
connection with a sale of the Company, with their percentage
compensation increasing with an increase in the sales value, or
a flat fee if no sale was to occur. As a result, we recorded a
liability of $16.5 million at March 31, 2005. In
addition, we have incurred other costs related to the proxy
contest and have recorded a liability of $2.2 million of
which $807,000 was paid and $1.4 million remains accrued at
March 31, 2005. In addition, the sales process may impact
our ability to attract and retain customers, management and
employees and may result in the incurrence of significant
additional advisory fees, legal fees and other expenses; however
the amount and impact of these potential additional expenses
cannot be reasonably estimated at this time.
10
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 5. |
Discontinued Operations |
During the three months ended March 31, 2005, we recognized
net pre-tax losses of $878,000 relating to the following 2005
disposal activities:
|
|
|
|
|
five nursing facilities (456 beds) for cash proceeds totaling
$134,000. These assets were part of our Nursing Facilities
segment and were held for sale as of December 31,
2004; and |
|
|
|
10 outpatient clinics for $4.6 million, including $710,000
in cash and $3.9 million of notes receivable. These assets
and related liabilities were part of our former Matrix segment
and were held for sale as of December 31, 2004. |
We have included the remaining assets of 22 facilities
(2,116 beds) of our Nursing Facilities segment as held for
sale in the accompanying condensed consolidated balance sheet as
of March 31, 2005. We expect to dispose of these facilities
in the next three to six months. The remaining assets and
liabilities of our former Matrix segment and the assets of
27 nursing facilities were included in assets and
liabilities held for sale as of December 31, 2004.
A summary of the asset and liability line items from which the
reclassifications have been made at March 31, 2005 and
December 31, 2004 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Nursing | |
|
Nursing | |
|
|
|
|
Facilities | |
|
Facilities | |
|
Matrix | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Current assets
|
|
$ |
453 |
|
|
$ |
479 |
|
|
$ |
1,970 |
|
|
$ |
2,449 |
|
Property and equipment, net
|
|
|
10,785 |
|
|
|
10,655 |
|
|
|
1,212 |
|
|
|
11,867 |
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
332 |
|
|
|
332 |
|
Other assets
|
|
|
205 |
|
|
|
222 |
|
|
|
28 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets held for sale
|
|
$ |
11,443 |
|
|
$ |
11,356 |
|
|
$ |
3,542 |
|
|
$ |
14,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities held for sale
|
|
$ |
|
|
|
$ |
|
|
|
$ |
676 |
|
|
$ |
676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The results of operations of disposed facilities and other
assets in the three months ended March 31, 2005, as well as
the results of operations of held-for-sale assets, have been
reported as discontinued operations for all periods presented in
the accompanying condensed consolidated statements of income.
Also included in discontinued operations are the gains and
losses on sales and exit costs relative to these transactions.
Discontinued operations for the three months ended
March 31, 2004 also include the results of operations for
all facilities, clinics and businesses disposed of during 2004.
11
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 5. |
Discontinued Operations (Continued) |
A summary of discontinued operations by operating segment for
the three months ended March 31 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Nursing | |
|
|
|
Home | |
|
|
|
Nursing | |
|
|
|
Home | |
|
|
|
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
30,159 |
|
|
$ |
2,546 |
|
|
$ |
|
|
|
$ |
32,705 |
|
|
$ |
49,131 |
|
|
$ |
3,301 |
|
|
$ |
148 |
|
|
$ |
52,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)(1)
|
|
$ |
274 |
|
|
$ |
405 |
|
|
$ |
(97 |
) |
|
$ |
582 |
|
|
$ |
(630 |
) |
|
$ |
153 |
|
|
$ |
(7 |
) |
|
$ |
(484 |
) |
|
Gain (loss) on sales and exit costs
|
|
|
(878 |
) |
|
|
|
|
|
|
|
|
|
|
(878 |
) |
|
|
4,488 |
|
|
|
|
|
|
|
(17 |
) |
|
|
4,471 |
|
Impairments and other unusual items
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
207 |
|
|
|
(1,258 |
) |
|
|
|
|
|
|
|
|
|
|
(1,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss)
|
|
$ |
(397 |
) |
|
$ |
405 |
|
|
$ |
(97 |
) |
|
|
(89 |
) |
|
$ |
2,600 |
|
|
$ |
153 |
|
|
$ |
(24 |
) |
|
|
2,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) state income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes net interest income of $3,000 for 2005 and net interest
expense of $44,000 for 2004, as well as depreciation and
amortization expense of $277,000 and $859,000 for 2005 and 2004,
respectively. |
Note 6. Long-Term Debt
As of April 1, 2005, our 2.75% convertible
subordinated notes became eligible for conversion into common
stock. Under the indenture governing the notes, a holder may
convert any of their notes into our common stock during any
fiscal quarter if the sale price of our common stock for at
least 20 consecutive trading days in the 30 trading days ending
on the last trading day of the immediately preceding fiscal
quarter exceeds 120 percent of the conversion price on that
30th trading day.
Our
77/8% senior
subordinated notes are jointly and severally, fully and
unconditionally guaranteed by most of our subsidiaries (the
Guarantor Subsidiaries). As of March 31, 2005,
the non-guarantor subsidiaries included Beverly Indemnity, Ltd.,
our captive insurance subsidiary, and Beverly Funding
Corporation, our receivables-backed financing subsidiary (the
Non-Guarantor Subsidiaries). Since the carrying
value of the assets of the non-guarantor subsidiaries exceeds
three percent of the consolidated assets of Beverly Enterprises,
Inc., we are required to disclose consolidating financial
statements in our periodic filings with the SEC.
12
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 6. |
Long-Term Debt (Continued) |
Condensed consolidating balance sheets as of March 31, 2005
for Beverly Enterprises, Inc. (parent only), the combined
Guarantor Subsidiaries and the combined Non-Guarantor
Subsidiaries are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- | |
|
|
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
|
|
|
Parent | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
151,563 |
|
|
$ |
6,476 |
|
|
$ |
75,771 |
|
|
$ |
|
|
|
$ |
233,810 |
|
|
Accounts receivable, less allowance for doubtful accounts
|
|
|
4,887 |
|
|
|
229,450 |
|
|
|
42,108 |
|
|
|
(176 |
) |
|
|
276,269 |
|
|
Notes receivable, less allowance for doubtful notes
|
|
|
2,206 |
|
|
|
2,772 |
|
|
|
34 |
|
|
|
|
|
|
|
5,012 |
|
|
Operating supplies
|
|
|
124 |
|
|
|
9,021 |
|
|
|
|
|
|
|
|
|
|
|
9,145 |
|
|
Assets held for sale
|
|
|
|
|
|
|
11,443 |
|
|
|
|
|
|
|
|
|
|
|
11,443 |
|
|
Prepaid expenses and other
|
|
|
7,552 |
|
|
|
7,966 |
|
|
|
15,993 |
|
|
|
|
|
|
|
31,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
166,332 |
|
|
|
267,128 |
|
|
|
133,906 |
|
|
|
(176 |
) |
|
|
567,190 |
|
Property and equipment, net
|
|
|
6,370 |
|
|
|
650,998 |
|
|
|
|
|
|
|
|
|
|
|
657,368 |
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
|
|
|
|
122,863 |
|
|
|
|
|
|
|
|
|
|
|
122,863 |
|
|
Other, less allowance for doubtful accounts and notes
|
|
|
302,887 |
|
|
|
30,659 |
|
|
|
701 |
|
|
|
(264,501 |
) |
|
|
69,746 |
|
|
Due from affiliates
|
|
|
442,742 |
|
|
|
|
|
|
|
109,760 |
|
|
|
(552,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
745,629 |
|
|
|
153,522 |
|
|
|
110,461 |
|
|
|
(817,003 |
) |
|
|
192,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
918,331 |
|
|
$ |
1,071,648 |
|
|
$ |
244,367 |
|
|
$ |
(817,179 |
) |
|
$ |
1,417,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
10,303 |
|
|
$ |
65,137 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
75,440 |
|
|
Accrued wages and related liabilities
|
|
|
20,137 |
|
|
|
64,486 |
|
|
|
|
|
|
|
|
|
|
|
84,623 |
|
|
Accrued interest
|
|
|
7,458 |
|
|
|
1,100 |
|
|
|
307 |
|
|
|
|
|
|
|
8,865 |
|
|
General and professional liabilities
|
|
|
18,903 |
|
|
|
|
|
|
|
38,196 |
|
|
|
|
|
|
|
57,099 |
|
|
Federal government settlement obligations
|
|
|
|
|
|
|
14,711 |
|
|
|
|
|
|
|
|
|
|
|
14,711 |
|
|
Liabilities held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
30,905 |
|
|
|
95,581 |
|
|
|
|
|
|
|
(176 |
) |
|
|
126,310 |
|
|
Current portion of long-term debt
|
|
|
1,350 |
|
|
|
10,817 |
|
|
|
|
|
|
|
|
|
|
|
12,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
89,056 |
|
|
|
251,832 |
|
|
|
38,503 |
|
|
|
(176 |
) |
|
|
379,215 |
|
Long-term debt
|
|
|
467,583 |
|
|
|
76,348 |
|
|
|
|
|
|
|
|
|
|
|
543,931 |
|
Other liabilities and deferred items
|
|
|
68,363 |
|
|
|
54,779 |
|
|
|
77,550 |
|
|
|
|
|
|
|
200,692 |
|
Due to affiliates
|
|
|
|
|
|
|
552,502 |
|
|
|
|
|
|
|
(552,502 |
) |
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
11,796 |
|
|
|
5,908 |
|
|
|
121 |
|
|
|
(6,029 |
) |
|
|
11,796 |
|
|
Additional paid-in capital
|
|
|
908,179 |
|
|
|
414,340 |
|
|
|
44,434 |
|
|
|
(458,774 |
) |
|
|
908,179 |
|
|
Retained earnings (accumulated deficit)
|
|
|
(518,148 |
) |
|
|
(284,061 |
) |
|
|
83,759 |
|
|
|
200,302 |
|
|
|
(518,148 |
) |
|
Treasury stock, at cost
|
|
|
(108,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(108,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
293,329 |
|
|
|
136,187 |
|
|
|
128,314 |
|
|
|
(264,501 |
) |
|
|
293,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
918,331 |
|
|
$ |
1,071,648 |
|
|
$ |
244,367 |
|
|
$ |
(817,179 |
) |
|
$ |
1,417,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 6. |
Long-Term Debt (Continued) |
Condensed consolidating balance sheets as of December 31,
2004 for Beverly Enterprises, Inc. (parent only), the combined
Guarantor Subsidiaries and the combined Non-Guarantor
Subsidiaries are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- | |
|
|
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
|
|
|
Parent | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
142,515 |
|
|
$ |
5,237 |
|
|
$ |
67,913 |
|
|
$ |
|
|
|
$ |
215,665 |
|
|
Accounts receivable, less allowance for doubtful accounts
|
|
|
8,160 |
|
|
|
183,920 |
|
|
|
43,397 |
|
|
|
|
|
|
|
235,477 |
|
|
Notes receivable, less allowance for doubtful notes
|
|
|
18 |
|
|
|
2,768 |
|
|
|
|
|
|
|
|
|
|
|
2,786 |
|
|
Operating supplies
|
|
|
101 |
|
|
|
9,080 |
|
|
|
|
|
|
|
|
|
|
|
9,181 |
|
|
Assets held for sale
|
|
|
|
|
|
|
14,898 |
|
|
|
|
|
|
|
|
|
|
|
14,898 |
|
|
Prepaid expenses and other
|
|
|
10,952 |
|
|
|
10,285 |
|
|
|
16,029 |
|
|
|
|
|
|
|
37,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
161,746 |
|
|
|
226,188 |
|
|
|
127,339 |
|
|
|
|
|
|
|
515,273 |
|
Property and equipment, net
|
|
|
6,392 |
|
|
|
647,264 |
|
|
|
|
|
|
|
|
|
|
|
653,656 |
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
|
|
|
|
124,066 |
|
|
|
|
|
|
|
|
|
|
|
124,066 |
|
|
Other, less allowance for doubtful accounts and notes
|
|
|
255,350 |
|
|
|
32,385 |
|
|
|
709 |
|
|
|
(220,054 |
) |
|
|
68,390 |
|
|
Due from affiliates
|
|
|
453,483 |
|
|
|
|
|
|
|
132,141 |
|
|
|
(585,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
708,833 |
|
|
|
156,451 |
|
|
|
132,850 |
|
|
|
(805,678 |
) |
|
|
192,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
876,971 |
|
|
$ |
1,029,903 |
|
|
$ |
260,189 |
|
|
$ |
(805,678 |
) |
|
$ |
1,361,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
2,696 |
|
|
$ |
65,082 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
67,778 |
|
|
Accrued wages and related liabilities
|
|
|
28,240 |
|
|
|
75,797 |
|
|
|
|
|
|
|
|
|
|
|
104,037 |
|
|
Accrued interest
|
|
|
2,618 |
|
|
|
875 |
|
|
|
109 |
|
|
|
|
|
|
|
3,602 |
|
|
General and professional liabilities
|
|
|
23,323 |
|
|
|
|
|
|
|
45,934 |
|
|
|
(15,041 |
) |
|
|
54,216 |
|
|
Federal government settlement obligations
|
|
|
|
|
|
|
14,359 |
|
|
|
|
|
|
|
|
|
|
|
14,359 |
|
|
Liabilities held for sale
|
|
|
|
|
|
|
676 |
|
|
|
|
|
|
|
|
|
|
|
676 |
|
|
Other accrued liabilities
|
|
|
18,694 |
|
|
|
64,403 |
|
|
|
|
|
|
|
|
|
|
|
83,097 |
|
|
Current portion of long-term debt
|
|
|
1,350 |
|
|
|
10,890 |
|
|
|
|
|
|
|
|
|
|
|
12,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
76,921 |
|
|
|
232,082 |
|
|
|
46,043 |
|
|
|
(15,041 |
) |
|
|
340,005 |
|
Long-term debt
|
|
|
467,858 |
|
|
|
78,085 |
|
|
|
|
|
|
|
|
|
|
|
545,943 |
|
Other liabilities and deferred items
|
|
|
59,779 |
|
|
|
56,269 |
|
|
|
86,976 |
|
|
|
|
|
|
|
203,024 |
|
Due to affiliates
|
|
|
|
|
|
|
585,624 |
|
|
|
|
|
|
|
(585,624 |
) |
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
11,662 |
|
|
|
5,908 |
|
|
|
121 |
|
|
|
(6,029 |
) |
|
|
11,662 |
|
|
Additional paid-in capital
|
|
|
902,053 |
|
|
|
414,340 |
|
|
|
44,434 |
|
|
|
(458,774 |
) |
|
|
902,053 |
|
|
Retained earnings (accumulated deficit)
|
|
|
(532,804 |
) |
|
|
(342,405 |
) |
|
|
82,615 |
|
|
|
259,790 |
|
|
|
(532,804 |
) |
|
Treasury stock, at cost
|
|
|
(108,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(108,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
272,413 |
|
|
|
77,843 |
|
|
|
127,170 |
|
|
|
(205,013 |
) |
|
|
272,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
876,971 |
|
|
$ |
1,029,903 |
|
|
$ |
260,189 |
|
|
$ |
(805,678 |
) |
|
$ |
1,361,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 6. |
Long-Term Debt (Continued) |
Condensed consolidating statements of income for the three
months ended March 31, 2005 for Beverly Enterprises, Inc.
(parent only), the combined Guarantor Subsidiaries and the
combined Non-Guarantor Subsidiaries are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- | |
|
|
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
|
|
|
Parent | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
191 |
|
|
$ |
562,289 |
|
|
$ |
14,185 |
|
|
$ |
(14,185 |
) |
|
$ |
562,480 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and related
|
|
|
17,477 |
|
|
|
287,122 |
|
|
|
|
|
|
|
|
|
|
|
304,599 |
|
|
Provision for insurance and related items
|
|
|
1,407 |
|
|
|
28,513 |
|
|
|
14,364 |
|
|
|
(14,364 |
) |
|
|
29,920 |
|
|
Other operating and administrative
|
|
|
26,577 |
|
|
|
142,902 |
|
|
|
155 |
|
|
|
(309 |
) |
|
|
169,325 |
|
|
Overhead allocation
|
|
|
(20,401 |
) |
|
|
20,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,570 |
|
|
|
15,214 |
|
|
|
|
|
|
|
|
|
|
|
16,784 |
|
|
Asset impairments, workforce reductions and other unusual items
|
|
|
|
|
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
26,630 |
|
|
|
494,036 |
|
|
|
14,519 |
|
|
|
(14,673 |
) |
|
|
520,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other income (expenses)
|
|
|
(26,439 |
) |
|
|
68,253 |
|
|
|
(334 |
) |
|
|
488 |
|
|
|
41,968 |
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(11,613 |
) |
|
|
(176 |
) |
|
|
1,192 |
|
|
|
(10,597 |
) |
|
|
Interest income
|
|
|
1,387 |
|
|
|
214 |
|
|
|
1,654 |
|
|
|
(1,192 |
) |
|
|
2,063 |
|
|
|
Costs related to the sales process of the Company
|
|
|
(18,721 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,721 |
) |
|
|
Net gains on dispositions
|
|
|
|
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
Equity in income of affiliates
|
|
|
59,976 |
|
|
|
|
|
|
|
|
|
|
|
(59,976 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
42,642 |
|
|
|
(11,315 |
) |
|
|
1,478 |
|
|
|
(59,976 |
) |
|
|
(27,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and discontinued
operations
|
|
|
16,203 |
|
|
|
56,938 |
|
|
|
1,144 |
|
|
|
(59,488 |
) |
|
|
14,797 |
|
Provision for income taxes
|
|
|
1,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations
|
|
|
14,656 |
|
|
|
56,938 |
|
|
|
1,144 |
|
|
|
(59,488 |
) |
|
|
13,250 |
|
Discontinued operations, net of taxes of $(1,495)
|
|
|
|
|
|
|
1,406 |
|
|
|
|
|
|
|
|
|
|
|
1,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
14,656 |
|
|
$ |
58,344 |
|
|
$ |
1,144 |
|
|
$ |
(59,488 |
) |
|
$ |
14,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 6. |
Long-Term Debt (Continued) |
Condensed consolidating statements of income for the three
months ended March 31, 2004 for Beverly Enterprises, Inc.
(parent only), the combined Guarantor Subsidiaries and the
combined Non-Guarantor Subsidiaries are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- | |
|
|
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
|
|
|
Parent | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
1,039 |
|
|
$ |
479,579 |
|
|
$ |
12,847 |
|
|
$ |
(12,847 |
) |
|
$ |
480,618 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and related
|
|
|
11,724 |
|
|
|
262,579 |
|
|
|
|
|
|
|
|
|
|
|
274,303 |
|
|
Provision for insurance and related items
|
|
|
2,389 |
|
|
|
25,967 |
|
|
|
11,665 |
|
|
|
(11,665 |
) |
|
|
28,356 |
|
|
Other operating and administrative
|
|
|
5,732 |
|
|
|
121,677 |
|
|
|
|
|
|
|
|
|
|
|
127,409 |
|
|
Overhead allocation
|
|
|
(20,282 |
) |
|
|
20,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,542 |
|
|
|
13,365 |
|
|
|
|
|
|
|
|
|
|
|
14,907 |
|
|
Asset impairments, workforce reductions and other unusual items
|
|
|
(225 |
) |
|
|
3,049 |
|
|
|
|
|
|
|
|
|
|
|
2,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
880 |
|
|
|
446,919 |
|
|
|
11,665 |
|
|
|
(11,665 |
) |
|
|
447,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other income (expenses)
|
|
|
159 |
|
|
|
32,660 |
|
|
|
1,182 |
|
|
|
(1,182 |
) |
|
|
32,819 |
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(13,139 |
) |
|
|
|
|
|
|
1,335 |
|
|
|
(11,804 |
) |
|
|
Interest income
|
|
|
743 |
|
|
|
628 |
|
|
|
1,487 |
|
|
|
(1,335 |
) |
|
|
1,523 |
|
|
|
Net gains on dispositions
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
Equity in income of affiliates
|
|
|
23,979 |
|
|
|
|
|
|
|
|
|
|
|
(23,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
24,722 |
|
|
|
(12,474 |
) |
|
|
1,487 |
|
|
|
(23,979 |
) |
|
|
(10,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and discontinued
operations
|
|
|
24,881 |
|
|
|
20,186 |
|
|
|
2,669 |
|
|
|
(25,161 |
) |
|
|
22,575 |
|
Provision for income taxes
|
|
|
1,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations
|
|
|
23,439 |
|
|
|
20,186 |
|
|
|
2,669 |
|
|
|
(25,161 |
) |
|
|
21,133 |
|
Discontinued operations, net of taxes of $423
|
|
|
|
|
|
|
2,306 |
|
|
|
|
|
|
|
|
|
|
|
2,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
23,439 |
|
|
$ |
22,492 |
|
|
$ |
2,669 |
|
|
$ |
(25,161 |
) |
|
$ |
23,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 6. |
Long-Term Debt (Continued) |
Condensed consolidating statements of cash flows for the three
months ended March 31, 2005 for Beverly Enterprises, Inc.
(parent only), the combined Guarantor Subsidiaries and the
combined Non-Guarantor Subsidiaries are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
|
Parent | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Cash flows provided by (used for) operating activities:
|
|
$ |
5,868 |
|
|
$ |
20,968 |
|
|
$ |
7,934 |
|
|
$ |
34,770 |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,233 |
) |
|
|
(18,246 |
) |
|
|
|
|
|
|
(20,479 |
) |
|
Proceeds from dispositions of facilities and other assets, net
|
|
|
|
|
|
|
994 |
|
|
|
|
|
|
|
994 |
|
|
Collections on notes receivable
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
29 |
|
|
Proceeds from (payments for) designated funds, net
|
|
|
(35 |
) |
|
|
568 |
|
|
|
|
|
|
|
533 |
|
|
Other, net
|
|
|
2,064 |
|
|
|
(1,327 |
) |
|
|
(34 |
) |
|
|
703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(204 |
) |
|
|
(17,982 |
) |
|
|
(34 |
) |
|
|
(18,220 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(338 |
) |
|
|
(1,747 |
) |
|
|
|
|
|
|
(2,085 |
) |
|
Proceeds from exercise of stock options
|
|
|
3,884 |
|
|
|
|
|
|
|
|
|
|
|
3,884 |
|
|
Deferred financing costs paid
|
|
|
(162 |
) |
|
|
|
|
|
|
(42 |
) |
|
|
(204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
3,384 |
|
|
|
(1,747 |
) |
|
|
(42 |
) |
|
|
1,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
9,048 |
|
|
|
1,239 |
|
|
|
7,858 |
|
|
|
18,145 |
|
Cash and cash equivalents at beginning of period
|
|
|
142,515 |
|
|
|
5,237 |
|
|
|
67,913 |
|
|
|
215,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
151,563 |
|
|
$ |
6,476 |
|
|
$ |
75,771 |
|
|
$ |
233,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 6. |
Long-Term Debt (Continued) |
Condensed consolidating statements of cash flows for the three
months ended March 31, 2004 for Beverly Enterprises, Inc.
(parent only), the combined Guarantor Subsidiaries and the
combined Non-Guarantor Subsidiaries are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
|
Parent | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Cash flows provided by (used for) operating activities:
|
|
$ |
(41,051 |
) |
|
$ |
(8,691 |
) |
|
$ |
13,170 |
|
|
$ |
(36,572 |
) |
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(987 |
) |
|
|
(8,790 |
) |
|
|
|
|
|
|
(9,777 |
) |
|
Proceeds from dispositions of facilities and other assets, net
|
|
|
|
|
|
|
19,198 |
|
|
|
|
|
|
|
19,198 |
|
|
Collections on notes receivable
|
|
|
|
|
|
|
6,765 |
|
|
|
|
|
|
|
6,765 |
|
|
Payments for designated funds, net
|
|
|
(3 |
) |
|
|
(711 |
) |
|
|
|
|
|
|
(714 |
) |
|
Other, net
|
|
|
(881 |
) |
|
|
(2,865 |
) |
|
|
|
|
|
|
(3,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(1,871 |
) |
|
|
13,597 |
|
|
|
|
|
|
|
11,726 |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(338 |
) |
|
|
(3,291 |
) |
|
|
|
|
|
|
(3,629 |
) |
|
Proceeds from exercise of stock options
|
|
|
293 |
|
|
|
|
|
|
|
|
|
|
|
293 |
|
|
Deferred financing costs paid
|
|
|
(406 |
) |
|
|
|
|
|
|
|
|
|
|
(406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
(451 |
) |
|
|
(3,291 |
) |
|
|
|
|
|
|
(3,742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(43,373 |
) |
|
|
1,615 |
|
|
|
13,170 |
|
|
|
(28,588 |
) |
Cash and cash equivalents at beginning of period
|
|
|
223,575 |
|
|
|
5,351 |
|
|
|
29,889 |
|
|
|
258,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
180,202 |
|
|
$ |
6,966 |
|
|
$ |
43,059 |
|
|
$ |
230,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provisions for income taxes from continuing operations of
$1.5 million and $1.4 million for the three months
ended March 31, 2005 and 2004, respectively, primarily
relate to state income taxes estimated to be due in
separate return filing states where we conduct
business and to federal alternative minimum tax
(AMT). We recorded a tax benefit in discontinued
operations of $1.5 million for the three months ended
March 31, 2005, related to state tax refunds in a state
where we have ceased operations.
The provisions differ from those calculated using the federal
statutory rate due to changes in the valuation allowance,
established at December 31, 2001, for net deferred tax
assets. In 2005, the valuation allowance decreased
$36.5 million primarily due to the reversal of temporary
differences and the utilization of net operating loss
carryforwards, general business credits and AMT credits to
offset taxable income during the quarter. In 2004, the valuation
allowance decreased primarily due to the reversal of temporary
differences and the utilization of net operating loss
carryforwards to offset taxable income during the quarter,
partially offset by an increase in AMT credits generated during
the quarter.
18
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 8. |
Stockholders Equity |
During March 2005, we issued approximately 722,000 shares
of restricted stock to certain officers and other employees, all
of which vest on the third anniversary of the grant date. If
these additional shares had been issued prior to January 1,
2005, there would have been no material impact on our diluted
net income per share for the three months ended March 31,
2005.
Statement of Financial Accounting Standards (SFAS)
No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure
(SFAS No. 148), issued on
December 31, 2002, provides companies alternative methods
of transitioning to the fair value method of accounting for
stock-based compensation, and amends certain disclosure
requirements. SFAS No. 148 does not mandate fair value
accounting for stock-based compensation. We currently do not
recognize compensation expense for our stock option grants,
which are issued at fair market value on the date of grant and
are accounted for under the intrinsic value method. We are in
compliance with the current accounting rules regarding
stock-based compensation (see discussion of
SFAS No. 123R below).
For purposes of pro forma disclosures, the estimated fair market
value of all outstanding stock options is amortized to expense
over the respective vesting periods. The fair market value has
been estimated at the date of grant using a Black-Scholes option
pricing model. The pro forma effects are not necessarily
indicative of the effects on future quarters or future years.
The following table summarizes our pro forma net income and
diluted net income per share for the three months ended
March 31 assuming we accounted for our stock option grants
using the fair value method, (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Reported net income(a)
|
|
$ |
14,656 |
|
|
$ |
23,439 |
|
Stock option compensation expense
|
|
|
1,148 |
|
|
|
1,790 |
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
13,508 |
|
|
$ |
21,649 |
|
|
|
|
|
|
|
|
Reported basic net income per share
|
|
$ |
0.13 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
Pro forma basic net income per share
|
|
$ |
0.12 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
Reported diluted net income per share
|
|
$ |
0.12 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
Pro forma diluted net income per share
|
|
$ |
0.11 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes total charges to our condensed consolidated statements
of income related to restricted stock grants for the three
months ended March 31, 2005 and 2004 of approximately
$1.4 million and $620,000, respectively. |
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 123 (revised), Share-Based Payment
(SFAS No. 123R), which eliminates the
intrinsic value method as an alternative method of accounting
for stock-based awards. SFAS No. 123R also revises the
fair value-based method of accounting for share-based payment
liabilities, forfeitures and modifications of stock-based awards
and clarifies guidance surrounding measuring fair value,
classifying an award as equity or as a liability and attributing
compensation cost to reporting periods. In addition,
SFAS No. 123R amends SFAS No. 95 to require
that excess tax benefits be reported as a financing cash inflow
rather than as a reduction of taxes paid, which is included
within operating cash flows.
In the first quarter of 2005, the SEC issued Staff Accounting
Bulletin No. 107, which provided further clarification on
the implementation of SFAS No. 123R and provided
alternative phase-in methods. The SEC
19
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 8. |
Stockholders Equity (Continued) |
announced in the second quarter of 2005 that it is extending the
phase-in period, which will extend our effective date for
implementation of SFAS No. 123R to January 1,
2006. We expect to use the modified version of prospective
application when we implement SFAS No. 123R. Based on
the estimated value of unvested stock options, we expect wages
and related expenses to increase $469,000 in 2006.
|
|
Note 9. |
Contingencies and Legal Proceedings |
We are contingently liable for approximately $11.8 million
of long-term debt maturing on various dates through 2019, as
well as annual interest on that debt. These contingent
liabilities principally arose from previous sales of nursing
facilities. We also guarantee certain third-party operating
leases. Those guarantees arose from our dispositions of leased
facilities and the underlying leases have $56.0 million of
minimum rental commitments remaining through the initial lease
terms. In accordance with the FASBs Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, we have recorded approximately
$685,000, included in Other accrued liabilities on
the condensed consolidated balance sheets, as the estimated fair
value of guarantees.
We are a party to various legal matters relating to patient
care, including claims that our services have resulted in injury
or death to residents of our facilities. Over the past few
years, we have experienced an increasing trend in the number and
severity of the claims asserted against us. We believe that
there has been, and will continue to be, an increase in
governmental investigations of long-term care providers. Adverse
determinations in legal proceedings or governmental
investigations, whether currently asserted or arising in the
future, could have a material adverse effect on us.
There are various other lawsuits and regulatory actions pending
against us arising in the normal course of business, some of
which seek punitive damages that are generally not covered by
insurance. We do not believe that the ultimate resolution of
such other matters will have a material adverse effect on our
consolidated financial position, results of operations or cash
flows.
|
|
Note 10. |
Segment Information |
Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related
Information, provides disclosure guidelines for segments of
a company based on a management approach to defining operating
segments. Our operations are organized into three primary
segments:
|
|
|
|
|
Nursing Facilities, which provide long-term healthcare
through the operation of skilled nursing homes and assisted
living centers; |
|
|
|
Aegis, which provides rehabilitation therapy services
under contract to our nursing facilities and third-party nursing
facilities; and |
|
|
|
AseraCare, which primarily provides hospice services. |
20
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2005
(Unaudited)
|
|
Note 10. |
Segment Information (Continued) |
The following table summarizes certain information for each of
our operating segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nursing | |
|
|
|
|
|
|
|
|
|
Discontinued | |
|
|
Facilities | |
|
Aegis(1) | |
|
AseraCare | |
|
All Other(2) | |
|
Total | |
|
Operations(3) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Three months ended March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ |
500,872 |
|
|
$ |
36,204 |
|
|
$ |
24,043 |
|
|
$ |
1,361 |
|
|
$ |
562,480 |
|
|
$ |
32,705 |
|
|
Intercompany revenues
|
|
|
87 |
|
|
|
40,462 |
|
|
|
|
|
|
|
708 |
|
|
|
41,257 |
|
|
|
|
|
|
Interest income
|
|
|
86 |
|
|
|
5 |
|
|
|
57 |
|
|
|
1,915 |
|
|
|
2,063 |
|
|
|
3 |
|
|
Interest expense
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
9,097 |
|
|
|
10,597 |
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14,419 |
|
|
|
250 |
|
|
|
197 |
|
|
|
1,918 |
|
|
|
16,784 |
|
|
|
277 |
|
|
Pre-tax income (loss)
|
|
|
34,185 |
|
|
|
15,141 |
|
|
|
1,963 |
|
|
|
(36,492 |
) |
|
|
14,797 |
|
|
|
(89 |
) |
|
Goodwill
|
|
|
44,758 |
|
|
|
|
|
|
|
78,104 |
|
|
|
1 |
|
|
|
122,863 |
|
|
|
|
|
|
Total assets
|
|
|
891,343 |
|
|
|
32,699 |
|
|
|
105,126 |
|
|
|
362,514 |
|
|
|
1,391,682 |
|
|
|
25,485 |
|
|
Capital expenditures
|
|
|
16,987 |
|
|
|
246 |
|
|
|
348 |
|
|
|
2,345 |
|
|
|
19,926 |
|
|
|
553 |
|
Three months ended March 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ |
439,988 |
|
|
$ |
27,180 |
|
|
$ |
10,970 |
|
|
$ |
2,480 |
|
|
$ |
480,618 |
|
|
$ |
52,580 |
|
|
Intercompany revenues
|
|
|
|
|
|
|
37,527 |
|
|
|
|
|
|
|
453 |
|
|
|
37,980 |
|
|
|
|
|
|
Interest income
|
|
|
623 |
|
|
|
|
|
|
|
|
|
|
|
900 |
|
|
|
1,523 |
|
|
|
45 |
|
|
Interest expense
|
|
|
1,989 |
|
|
|
|
|
|
|
|
|
|
|
9,815 |
|
|
|
11,804 |
|
|
|
89 |
|
|
Depreciation and amortization
|
|
|
12,725 |
|
|
|
205 |
|
|
|
108 |
|
|
|
1,869 |
|
|
|
14,907 |
|
|
|
859 |
|
|
Pre-tax income (loss)
|
|
|
24,279 |
|
|
|
12,380 |
|
|
|
1,317 |
|
|
|
(15,401 |
) |
|
|
22,575 |
|
|
|
2,729 |
|
|
Goodwill
|
|
|
44,747 |
|
|
|
|
|
|
|
11,723 |
|
|
|
|
|
|
|
56,470 |
|
|
|
365 |
|
|
Total assets
|
|
|
865,502 |
|
|
|
25,912 |
|
|
|
21,444 |
|
|
|
363,750 |
|
|
|
1,276,608 |
|
|
|
64,942 |
|
|
Capital expenditures
|
|
|
8,141 |
|
|
|
222 |
|
|
|
36 |
|
|
|
1,009 |
|
|
|
9,408 |
|
|
|
369 |
|
|
|
(1) |
Pre-tax income includes profit on intercompany revenues, which
is eliminated in All Other. |
|
(2) |
Consists of the operations of our corporate headquarters and
related overhead, as well as certain non-operating revenues and
expenses. Such amounts also include special pre-tax credits
totaling $116,000 and pre-tax charges totaling $2.8 million
for the three months ended March 31, 2005 and 2004,
respectively, for asset impairments, workforce reductions and
other unusual items, as well as $18.7 million of costs
related to the sales process. |
|
(3) |
In accordance with the provisions of SFAS No. 144, the
results of operations of certain nursing facilities, clinics and
other assets have been reclassified, for all periods presented,
as discontinued operations. Pre-tax income (loss) for
discontinued operations includes net gains (losses) on sales,
exit costs, asset impairments and other unusual items of
$671,000 and $3.2 million for the three months ended March
2005 and 2004, respectively. The remaining assets of
22 nursing facilities are classified as held for sale at
March 31, 2005. (See Note 5.) |
21
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Beverly Enterprises, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of Beverly Enterprises, Inc. as of March 31, 2005,
and the related condensed consolidated statements of income and
cash flows for the three months ended March 31, 2005 and
2004 (Form 10-Q). These financial statements
are the responsibility of the Companys management.
We conducted our reviews in accordance with standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with standards of the Public Company Accounting
Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to
be in conformity with U.S. generally accepted accounting
principles.
We have previously audited, in accordance with standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Beverly Enterprises, Inc. as of
December 31, 2004 and the related consolidated statements
of income, stockholders equity, and cash flows for the
year then ended, not presented in the Companys
Form 10-Q, and in our report dated March 8, 2005, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of
December 31, 2004, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.
Fort Smith, Arkansas
April 29, 2005
22
BEVERLY ENTERPRISES, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND
ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This document contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements may be identified by
words such as expects, anticipates,
intends, plans, believes,
seeks, estimates or words of similar
meaning and include, but are not limited to, statements about
our expected future business and financial performance.
Forward-looking statements are based on managements
current expectations and assumptions, which are inherently
subject to uncertainties, risks and changes in circumstances
that are difficult to predict. Actual outcomes and results may
differ materially from these expectations and assumptions due to
changes in, among other things, political, economic, business,
competitive, market, regulatory, demographic and other factors.
In addition, our results of operations and financial condition,
cash flows and liquidity may be adversely impacted by the
ongoing sales process (see Item 1.
Note 4). The sales process may impact our ability to
attract and retain customers, management and employees and will
result in the incurrence of significant advisory fees, legal
fees and other expenses. We undertake no obligation to publicly
update or revise any forward-looking information, whether as a
result of new information, future developments or otherwise.
Overview
|
|
|
Sales Process and Related Items |
In January 2005, a group including Formation Capital, LLC,
Appaloosa Management, LP, Franklin Mutual Advisers LLC and
Northbrook NBV LLC (the Formation Capital
Consortium), publicly announced an unsolicited indication
of interest in acquiring all of our outstanding common stock.
Arnold M. Whitman, the Chief Executive Officer of Formation
Capital also nominated a slate of six individuals for election
to our Board of Directors.
On February 3, 2005, our Board of Directors unanimously
rejected the Formation Capital Consortiums proposal. On
March 22, 2005, we announced that our Board of Directors
had unanimously voted to conduct an auction process to maximize
value for all of our stockholders as soon as practicable through
a sale of BEI. The Board also adopted procedures to enable the
beneficial owners of not less than 20% of our outstanding common
stock to cause us to call a special meeting of stockholders to
be held on October 21, 2005 to remove and replace the Board
and for the nomination of individuals for election as directors
at the special meeting, if held.
On April 11, 2005, we entered into a Settlement Agreement
with the Formation Capital Consortium and Mr. Whitman under
which the Formation Capital Consortium and Mr. Whitman
agreed to discontinue the solicitation of proxies in connection
with the Companys April 21, 2005 Annual Meeting of
Stockholders and Mr. Whitman withdrew his nominees for
election to our Board of Directors and other proposals for
consideration at the 2005 Annual Meeting. In addition, we agreed
to reimburse the Formation Capital Consortium for up to $600,000
of out-of-pocket fees and expenses incurred by them and
Mr. Whitman in connection with their proxy solicitation. We
have also entered into a Confidentiality Agreement with the
members of the Formation Capital Consortium under which the
Formation Capital Consortium and its representatives may examine
our confidential information for the purpose of evaluating a
possible transaction with us pursuant to the same restrictions
imposed on other bidders involved in the sales process. We
committed in the Confidentiality Agreement to allow the
Formation Capital Consortium to participate in our on-going
sales process on the same basis with all other potential buyers.
The sales process is being overseen by independent members of
our Board of Directors. We have established a due diligence
process to assist potential bidders in evaluating their level of
interest in acquiring us and in developing bids. Multiple
potential bidders or bidding groups already have signed
confidentiality agreements and obtained access to information
about BEI contained in an online data room we established.
23
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
All interested parties have been requested to submit initial
proposals that would include information on price, financing
plans, and potential financial and operating partners. The
independent board members plan to evaluate these proposals when
received, and then select a smaller number of interested parties
to participate in a second round of more detailed due diligence
and bidding.
Our results of operations, financial condition and cash flows
may be adversely impacted by the ongoing sales process. To date
we have incurred various costs as a result of the expression of
interest, the proxy contest and the sales process including
legal, investment banking advisory fees and other related costs.
During the three months ended March 31, 2005, we engaged
two investment banking firms to assist us in evaluating
proposals, both solicited and unsolicited, to acquire the
Company or any of its assets or businesses. Under the terms of
the engagement we are required to pay a fee to these two firms
equal to a percentage of any consideration received in
connection with a sale of the Company, with their percentage
compensation increasing with an increase in the sales value, or
a flat fee if no sale was to occur. As a result, we recorded a
liability of $16.5 million at March 31, 2005. In
addition, we have incurred other costs related to the proxy
contest and have recorded a liability of $2.2 million of
which $807,000 was paid and $1.4 million remains accrued at
March 31, 2005. In addition, the sales process may impact
our ability to attract and retain customers, management and
employees and will result in the incurrence of significant
additional advisory fees, legal fees and other expenses; however
the amount and impact of these potential additional expenses
cannot be reasonably estimated at this time.
Despite the expression of interest and subsequent sales process,
our business unit operating and financial trends continue to be
positive. Our first quarter included revenue growth of nearly
17% with improvements in operating margins, compared to the
year-earlier period. We are dedicated to providing quality of
care and executing the specific initiatives we have developed to
achieve profitable growth in our business segments and to
increase our financial position.
Our three principal business segments performed well ahead of
2004 first-quarter results. On a continuing operations basis,
our Nursing Facility revenues increased 13.8% and pre-tax income
increased $13.0 million primarily due to favorable rate
increases in Pennsylvania. Aegis revenues from third-party
customers rose 33%, compared with the 2004 first quarter,
reflecting increased business with existing clients and the net
addition of 13 customers. AseraCare revenues from core
operations were up 38%, primarily due to an increase in average
daily census of 35%. The balance of the revenue growth from
AseraCare is related to our July 2004 acquisition of Hospice
USA, LLC and the openings of 15 new hospice locations.
Based on the growth trends we are seeing in our principal
business units, improved operating metrics and a generally
positive reimbursement environment at both federal and state
levels, our pre-tax income from continuing operations, excluding
$18.7 million of costs related to the sales process
discussed above, would have increased 48% to $33.5 million
for the 2005 first quarter compared to $22.6 million for
the same period in 2004.
Operating Results
Results of operations for the three months ended March 31,
2005, and 2004, reflect asset dispositions during 2005 and 2004,
and assets classified as held for sale, as discontinued
operations. The following discussions reflect this
reclassification.
24
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
|
|
First Quarter 2005 Compared to First Quarter 2004 |
|
|
|
Results of Operations Continuing
Operations |
We reported a 34% decrease in pre-tax income from continuing
operations to $14.8 million for the three months ended
March 31, 2005, compared to $22.6 million for the same
period in 2004. The quarter-over-quarter comparisons of our
financial results are affected by material special pre-tax
charges discussed below. Excluding these special pre-tax
charges, our pre-tax income from continuing operations would
have increased 32% for the three months ended March 31,
2005, compared to the same period in 2004.
Pre-tax income from continuing operations for 2005 included a
special pre-tax charge of $18.7 million for costs related
to the expression of interest, the proxy contest and the sales
process, of which $807,000 was paid and $17.9 million
remains accrued as of March 31, 2005 (see
Item 1. Note 4). These costs include
legal, investment banking advisory fees and other related costs.
Pre-tax income from continuing operations for 2004 included the
following special pre-tax charges:
|
|
|
|
|
$2.9 million for asset impairments, primarily related to
two nursing facilities; |
|
|
|
$214,000 for workforce reduction charges, less $346,000 in
related credits primarily due to the cancellation of restricted
stock. The $214,000 for workforce reductions primarily related
to six associates who were notified in the first quarter of 2004
that their positions would be eliminated and included $196,000
of cash expenses paid during the year ended December 31,
2004 (see Item 1. Note 3). |
Revenues from external customers by operating segment for the
three months ended March 31 (in thousands) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
2005 vs. 2004 | |
|
|
|
|
|
|
| |
|
|
2005 | |
|
2004 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
Nursing Facilities
|
|
$ |
500,872 |
|
|
$ |
439,988 |
|
|
$ |
60,884 |
|
|
|
13.8 |
% |
Aegis Therapies
|
|
|
36,204 |
|
|
|
27,180 |
|
|
|
9,024 |
|
|
|
33.2 |
% |
AseraCare
|
|
|
24,043 |
|
|
|
10,970 |
|
|
|
13,073 |
|
|
|
119.2 |
% |
Other
|
|
|
1,361 |
|
|
|
2,480 |
|
|
|
(1,119 |
) |
|
|
(45.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
562,480 |
|
|
$ |
480,618 |
|
|
$ |
81,862 |
|
|
|
17.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 89% and 92% of our revenues for the three months
ended March 31, 2005 and 2004, respectively, were derived
from services provided by our Nursing Facilities segment. The
increase in total revenues of $81.9 million for the three
months ended March 31, 2005, as compared to the same period
in 2004, is primarily due to the following, by operating segment:
|
|
|
|
|
an increase of $35.7 million primarily due to a retroactive
Medicaid rate adjustment in Pennsylvania; |
|
|
|
an increase of $17.8 million, $7.4 million and
$3.7 million due to increases in Medicaid, Medicare and
private payment rates, respectively; |
|
|
|
an increase of $3.3 million in Medicare Part B
revenues, primarily due to increased therapy-related services; |
25
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
|
|
|
|
an increase of $1.7 million due to a positive shift in our
patient mix; partially offset by |
|
|
|
a decrease of $4.6 million due to one less calendar day
during the first quarter of 2005, as compared to the same period
in 2004; |
|
|
|
a decrease of $3.0 million due to a decline in census; |
|
|
|
|
|
an increase of $9.0 million from growth in Aegis
external therapy business, including a 9.3% increase in the
number of contracts and a 5% growth in average revenue per
contract; |
|
|
|
|
|
an increase of $8.8 million due to the Hospice USA
acquisition; and |
|
|
|
an increase of $4.3 million, primarily due to openings of
new hospice locations and a 35% increase in average daily census
in our AseraCare business. |
The following table details costs and expenses, excluding
special pre-tax charges, for the three months ended
March 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
2005 vs. 2004 | |
|
|
|
|
|
|
| |
|
|
2005 | |
|
2004 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
Wages and related
|
|
$ |
304,599 |
|
|
$ |
274,303 |
|
|
$ |
30,296 |
|
|
|
11.0% |
|
Provision for insurance and related items
|
|
|
29,920 |
|
|
|
28,356 |
|
|
|
1,564 |
|
|
|
5.5% |
|
Other operating and administrative
|
|
|
169,325 |
|
|
|
127,409 |
|
|
|
41,916 |
|
|
|
32.9% |
|
Depreciation and amortization
|
|
|
16,784 |
|
|
|
14,907 |
|
|
|
1,877 |
|
|
|
12.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses excluding special pre-tax charges
(adjustments)
|
|
$ |
520,628 |
|
|
$ |
444,975 |
|
|
$ |
75,653 |
|
|
|
17.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding special pre-tax charges discussed above, our total
costs and expenses increased $75.7 million, primarily due
to the following:
|
|
|
|
|
an increase of $35.4 million in state-imposed provider
taxes, primarily associated with the retroactive Medicaid rate
adjustment in Pennsylvania, included in our Nursing Facilities
segment; and |
|
|
|
an increase of $10.2 million in Aegis wages and related
expenses due to increased staffing related to the increased
volume of new contracts. This increase also includes a
$2.2 million, or 65%, increase in Aegis contract therapy
cost; |
|
|
|
an increase of $9.5 million in our Nursing Facilities wages
and related expenses, primarily due to a 4.5% increase in our
weighted average wage rate and an increase in nursing hours per
patient day; |
|
|
|
an increase of $9.3 million due to the Hospice USA
acquisition and the opening of 15 new hospice locations; |
|
|
|
an increase of $2.6 million in contracted services,
primarily due to outsourcing certain housekeeping, laundry and
dietary services in our Nursing Facilities segment; |
26
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
|
|
|
|
an increase in depreciation and amortization expense, primarily
due to an increase in capital expenditures in our Nursing
Facilities segment. |
|
|
|
Other Income and Expenses, Net |
Other income and expenses for the three months ended
March 31 (in thousands) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
2005 vs. 2004 | |
|
|
|
|
|
|
| |
|
|
2005 | |
|
2004 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$ |
(10,597 |
) |
|
$ |
(11,804 |
) |
|
$ |
1,207 |
|
|
|
(10.2 |
)% |
|
Interest income
|
|
|
2,063 |
|
|
|
1,523 |
|
|
|
540 |
|
|
|
35.5 |
% |
|
Costs related to the sales process of the
Company(1)
|
|
|
(18,721 |
) |
|
|
|
|
|
|
(18,721 |
) |
|
|
|
|
|
Net gains on dispositions
|
|
|
84 |
|
|
|
37 |
|
|
|
47 |
|
|
|
127.0 |
% |
|
|
(1) |
See Results of Operations Continuing Operations
for a discussion of this special pre-tax charge. |
Interest expense decreased 10% in the 2005 first quarter, as
compared to the same period in 2004, primarily due to the June
2004 refinancing of our 9 5/8% senior notes and the
reduction of debt using proceeds from sales of facilities in
2004.
|
|
|
Results of Operations Discontinued
Operations |
The results of operations of facilities, clinics and other
assets disposed of in the three-month period ended
March 31, 2005, as well as the results of operations of
held-for-sale assets, have been reported as discontinued
operations for all periods presented in the accompanying
condensed consolidated statements of income. Also included in
discontinued operations are gains and losses on sales,
additional impairments and exit costs related
27
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
to these transactions. A summary of discontinued operations by
operating segment for the three months ended March 31,
2005, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Nursing | |
|
|
|
Home | |
|
|
|
Nursing | |
|
|
|
Home | |
|
|
|
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
30,159 |
|
|
$ |
2,546 |
|
|
$ |
|
|
|
$ |
32,705 |
|
|
$ |
49,131 |
|
|
$ |
3,301 |
|
|
$ |
148 |
|
|
$ |
52,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)(1)
|
|
$ |
274 |
|
|
$ |
405 |
|
|
$ |
(97 |
) |
|
$ |
582 |
|
|
$ |
(630 |
) |
|
$ |
153 |
|
|
$ |
(7 |
) |
|
$ |
(484 |
) |
Gain (loss) on sales and exit costs
|
|
|
(878 |
) |
|
|
|
|
|
|
|
|
|
|
(878 |
) |
|
|
4,488 |
|
|
|
|
|
|
|
(17 |
) |
|
|
4,471 |
|
Impairments and other unusual items
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
207 |
|
|
|
(1,258 |
) |
|
|
|
|
|
|
|
|
|
|
(1,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss)
|
|
$ |
(397 |
) |
|
$ |
405 |
|
|
$ |
(97 |
) |
|
|
(89 |
) |
|
$ |
2,600 |
|
|
$ |
153 |
|
|
$ |
(24 |
) |
|
|
2,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) state income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes net interest income of $3,000 for 2005 and net interest
expense of $44,000 for 2004, as well as depreciation and
amortization expense of $277,000, and $859,000 for 2005, and
2004, respectively. |
Our provision for income taxes from continuing operations of
$1.5 million for the three months ended March 31,
2005, primarily relates to state income taxes estimated to be
due in separate return states where we conduct
business and to federal alternative minimum tax. We recorded a
tax benefit in discontinued operations of $1.5 million for
the three months ended March 31, 2005, relating to state
tax refunds in a state where we have ceased operations. We
decreased the valuation allowance on our deferred tax assets by
$36.5 million during the three months ended March 31,
2005 to $121.8 million, primarily due to the reversal of
temporary differences and the utilization of net operating loss
carryforwards, general business tax credits, and alternative
minimum tax credits to offset taxable income for the quarter
(see Tax Valuation Allowance in our Critical Accounting
Policies Update above).
In December 2004, the FASB issued SFAS No. 123R which
eliminates the intrinsic value method as an alternative method
of accounting for stock-based awards. SFAS No. 123R
also revises the fair value-based method of accounting for
share-based payment liabilities, forfeitures and modifications
of stock-based awards and clarifies guidance surrounding
measuring fair value, classifying an award as equity or as a
liability and attributing compensation cost to reporting
periods. In addition, SFAS No. 123R amends
SFAS No. 95 to require that excess tax benefits be
reported as a financing cash inflow rather than as a reduction
of taxes paid, which is included within operating cash flows.
In the first quarter of 2005, the SEC issued Staff Accounting
Bulletin No. 107, which provided further clarification on
the implementation of SFAS No. 123R and provided
alternative phase-in methods. The SEC announced in the second
quarter of 2005 that it is extending the phase-in period, which
will extend our effective date for implementation of
SFAS No. 123R to January 1, 2006. We expect to
use the modified
28
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
version of prospective application when we implement
SFAS No. 123R. Based on the estimated value of
unvested stock options, we expect wages and related expenses to
increase $469,000 in 2006.
Liquidity and Capital Resources
At March 31, 2005, we had $233.8 million in cash and
cash equivalents and $3.0 million of investments with
maturities between three and six months. We anticipate that
$74.3 million of this cash balance, while not legally
restricted, will be utilized primarily to fund certain general
and professional liabilities and workers compensation
claims and expenses. In addition, at March 31, 2005, we had
approximately $16.0 million in funds that are restricted
for the payment of insured claims and are included in
Prepaid expenses and other on our condensed
consolidated balance sheet. At March 31, 2005, we had
positive working capital of $188.0 million reflected on our
condensed consolidated balance sheet, an increase of 7% from
year-end 2004. At March 31, 2005, we had $90.0 million
of unused commitments under our revolving credit facility and
$15.7 million of unused commitments under our letter of
credit facility.
Cash Flows. Our cash flows consisted of the following for
the three months ended March 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net cash provided by (used for):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
34,770 |
|
|
$ |
(36,572 |
) |
|
Investing activities
|
|
|
(18,220 |
) |
|
|
11,726 |
|
|
Financing activities
|
|
|
1,595 |
|
|
|
(3,742 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$ |
18,145 |
|
|
$ |
(28,588 |
) |
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities, under the
direct method, for the three months ended March 31,
consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash received from patients and third-party payors
|
|
$ |
551,958 |
|
|
$ |
473,874 |
|
Interest received
|
|
|
2,066 |
|
|
|
1,568 |
|
Cash paid to suppliers and employees
|
|
|
(516,699 |
) |
|
|
(504,346 |
) |
Interest paid
|
|
|
(4,681 |
) |
|
|
(5,218 |
) |
Income tax (paid) refunds received
|
|
|
2,126 |
|
|
|
(2,450 |
) |
|
|
|
|
|
|
|
Net cash provided (used for) by operating activities
|
|
$ |
34,770 |
|
|
$ |
(36,572 |
) |
|
|
|
|
|
|
|
The $34.8 million of net cash provided by operating
activities was primarily used to fund capital expenditures of
$20.7 million for the three months ended March 31,
2005. For the three months ended March 31, 2004, the
$36.6 million net cash used for operating activities was
not caused by operational issues, but was primarily due to a
$55.9 million increase in accounts receivable resulting
from the termination of daily purchases of receivables by
Beverly Funding Corporation (BFC) from Beverly
Health and Rehabilitation Services (BHRS) on
March 1, 2004. With the termination of daily purchases of
receivables by BFC from BHRS, our accounts receivable increased
and resulted in a use of cash from operating activities on our
condensed consolidated statement of cash flows for the first
quarter of 2004.
Divestitures. During February 2005, we sold 10 outpatient
clinics for $4.6 million consisting of $710,000 cash and
$3.9 million of notes receivable. The purchase price is
subject to adjustment based on a working capital settlement,
which is expected to be finalized by the third quarter of 2005.
As of March 31, 2005, we
29
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
had 22 nursing facilities classified as held for sale that
met the appropriate criteria set forth in SFAS No. 144
and we expect to dispose of them within the next three to six
months.
Sale of the Company. Our results of operations, financial
condition, cash flows and liquidity may be adversely impacted by
the ongoing sales process. To date we have incurred various
costs as a result of the expression of interest, the proxy
contest and the sales process including legal, investment
banking advisory fees and other related costs. During the three
months ended March 31, 2005, we recorded $18.7 million
of these costs of which $807,000 was paid and $17.9 million
remains accrued as of March 31, 2005. In addition, the sale
process may impact our ability to attract and retain customers,
management and employees and will result in the incurrence of
significant additional advisory fees, legal fees and other
expenses; however the amount and impact of these potential
additional expenses cannot be reasonably estimated at this time.
Summary. We currently anticipate that cash on hand, cash
flows from operations and availability under our banking
arrangements will be adequate to repay our debts due within one
year of $12.2 million, to make capital additions and
improvements of approximately $100.0 million, to make
operating lease and other contractual obligation payments, to
make selective acquisitions, including the purchase of
previously leased facilities and to meet working capital
requirements for the twelve months ending March 31, 2006.
Our ability to make payments on, and to refinance, our
indebtedness, as well as to fund planned capital expenditures,
including strategic acquisitions, and research and development
efforts, will depend on our ability to generate cash in the
future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. However, based on our
current level of operations and anticipated cost savings and
operating improvements, we believe our cash flows from
operations, current cash and cash equivalents and available
borrowings will be adequate to meet our future liquidity needs.
We cannot assure you, however, that our business will generate
sufficient cash flows from operations, that currently
anticipated cost savings and operating improvements will be
realized on schedule or that future borrowings will be available
to us in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. We also
cannot assure you as to what the potential impact of the sales
process will ultimately be on our business and our operations.
We may need to refinance all or a portion of our indebtedness on
or before maturity. We cannot assure you that we will be able to
refinance any of our indebtedness on commercially reasonable
terms or at all. If cash flows from operations or availability
under our existing banking arrangements fall below expectations,
we may be required to utilize cash on hand, delay capital
expenditures, dispose of certain assets, issue additional debt
securities, or consider other alternatives to improve liquidity.
Obligations and Commitments
There have been no material changes in the information related
to obligations and commitments provided in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2004
under Item 7.
30
|
|
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK. |
There have been no material changes in the information provided
in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2004 under Item 7A.
|
|
ITEM 4. |
CONTROLS AND PROCEDURES. |
Evaluation of Disclosure
Controls and Procedures
We maintain disclosure controls and procedures, which are
designed to ensure that information required to be disclosed in
our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms. Such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we have carried out an
evaluation as of March 31, 2005, the end of the period
covered by this report, under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures.
Based upon their evaluation and subject to the foregoing, the
Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective at
the reasonable assurance level.
Changes in Internal Control
Over Financial Reporting
There has been no change in our internal controls over financial
reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.
31
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
March 31, 2005
(Unaudited)
|
|
ITEM 1. |
LEGAL PROCEEDINGS. |
There have been no material developments to the information
presented under Item 3. Legal Proceedings in
our Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.
|
|
ITEM 5. |
OTHER INFORMATION. |
(b) The information contained in Item 8.01 of our
Current Report on Form 8-K filed March 23, 2005,
and Item 8.01 of our Current Report on Form 8-K filed
April 7, 2005, is hereby incorporated by reference. These
items pertain to the procedures adopted by our Board of
Directors to enable the beneficial owners of not less than
20 percent of our outstanding common stock to cause us to
call a special meeting of stockholders to remove and replace the
Board and the nomination of individuals for election as
directors at the special meeting, if held.
|
|
|
|
|
Exhibit |
|
|
Number |
|
|
|
|
|
|
3 |
.1 |
|
Form of Restated Certificate of Incorporation of New Beverly
Holdings, Inc. (incorporated by reference to Exhibit 3.1 to
Beverly Enterprises, Inc.s Annual Report on Form 10-K
for the year ended December 31, 1997) |
|
3 |
.2 |
|
Form of Certificate of Amendment of Certificate of Incorporation
of New Beverly Holdings, Inc., changing its name to Beverly
Enterprises, Inc. (incorporated by reference to Exhibit 3.2
to Beverly Enterprises, Inc.s Annual Report on Form 10-K
for the year ended December 31, 1997) |
|
3 |
.3 |
|
By-Laws of Beverly Enterprises, Inc. (incorporated by reference
to Exhibit 3.4 to Beverly Enterprises, Inc.s
Registration Statement on Form S-1 filed on June 4,
1997 (File No. 333-28521)) |
|
4 |
.1 |
|
Rights agreement, dated as of January 26, 2005, between
Beverly Enterprises, Inc. and the Bank of New York, as Rights
Agent, which includes the form of Certificate of Designations of
the Series A Junior Participating Preferred Stock of
Beverly Enterprises, Inc. as Exhibit A, the form of Right
Certificate as Exhibit B and the Summary of Rights to
Purchase Preferred Shares as Exhibit C (incorporated by
reference to Exhibit 4.1 to Beverly Enterprises,
Inc.s Current Report on Form 10-K filed
January 28, 2005) |
|
4 |
.2 |
|
Amendment to Rights Agreement, dated April 7, 2005, between
Beverly Enterprises, Inc. and the Bank of New York, as Rights
Agent (incorporated by reference to Exhibit 4.1 to Beverly
Enterprises, Inc.s Current Report on Form 8-K filed
April 7, 2005) |
|
10 |
.1 |
|
Settlement Agreement, dated April 11, 2005, between Beverly
Enterprises, Inc. and Arnold Whitman, Appaloosa Management L.P.,
Formation Capital LLC, Franklin Mutual Advisers, LLC and
Northbrook NBV, LLC (incorporated by reference to
Exhibit 10.1 to Beverly Enterprises, Inc.s Current
Report on Form 8-K filed April 13, 2005) |
32
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION (Continued)
March 31, 2005
(Unaudited)
|
|
|
|
|
Exhibit |
|
|
Number |
|
|
|
|
|
|
10 |
.2 |
|
Summary of Executive Compensation for 2005. |
|
15 |
|
|
Acknowledgement Letter of Ernst & Young LLP re:
Unaudited Condensed Consolidated Interim Financial Statements |
|
31 |
.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer |
|
31 |
.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer |
|
32 |
.1 |
|
Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer |
|
99 |
.1 |
|
Resolution of the Beverly Enterprises, Inc. Board of Directors
(incorporated by reference to Exhibit 99.1 to Beverly
Enterprises, Inc.s Current Report on Form 8-K filed
March 23, 2005) |
|
99 |
.2 |
|
Resolution of the Beverly Enterprises, Inc. Board of Directors
(incorporated by reference to Exhibit 99.1 to Beverly
Enterprises, Inc.s Current Report on Form 8-K filed
April 7, 2005) |
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
|
|
Beverly Enterprises, Inc.
|
|
Registrant |
|
|
|
|
By: |
/s/ Pamela H. Daniels
|
|
|
|
|
|
Pamela H. Daniels |
|
Senior Vice President, Controller |
|
and Chief Accounting Officer |
Dated: May 4, 2005
34