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 September 30, 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 the 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 whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
Shares of Registrants Common Stock, $.10 par value,
outstanding, exclusive of
treasury shares, at October 31, 2005 109,532,108
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 the 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
September 30, 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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September 30, | |
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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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$ |
217,843 |
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$ |
215,665 |
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Accounts receivable less allowance for doubtful
accounts: 2005 $24,119; 2004 $26,320
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270,396 |
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235,477 |
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Notes receivable, less allowance for doubtful notes:
2005 $2,717; 2004 $1,686
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4,729 |
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2,786 |
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Operating supplies
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|
9,308 |
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|
9,660 |
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Assets held for sale
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3,542 |
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Prepaid expenses and other
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44,984 |
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37,266 |
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Total current assets
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547,260 |
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504,396 |
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Property and equipment, net
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672,583 |
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664,311 |
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Other assets:
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Goodwill, net
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122,090 |
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124,066 |
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Other, less allowance for doubtful accounts and notes:
2005 $1,027; 2004 $1,538
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69,614 |
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68,612 |
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Total other assets
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191,704 |
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192,678 |
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$ |
1,411,547 |
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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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$ |
66,541 |
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$ |
67,778 |
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Accrued wages and related liabilities
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93,617 |
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104,037 |
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Accrued interest
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|
8,787 |
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|
3,602 |
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General and professional liabilities
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58,187 |
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54,216 |
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Federal government settlement obligations
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15,386 |
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|
14,359 |
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Liabilities held for sale
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|
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|
676 |
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Other accrued liabilities
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105,341 |
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83,097 |
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Current portion of long-term debt
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8,158 |
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12,240 |
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Total current liabilities
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356,017 |
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340,005 |
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Long-term debt
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536,544 |
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545,943 |
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Other liabilities and deferred items
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153,366 |
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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 117,812,924;
2004 116,621,715
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11,781 |
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11,662 |
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Additional paid-in capital
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912,400 |
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902,053 |
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Accumulated deficit
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(450,063 |
) |
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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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365,620 |
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272,413 |
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$ |
1,411,547 |
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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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Nine Months Ended | |
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September 30, | |
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September 30, | |
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2005 | |
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2004 | |
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2005 | |
|
2004 | |
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Revenues
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$ |
583,942 |
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$ |
524,842 |
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$ |
1,761,555 |
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$ |
1,536,796 |
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Costs and expenses:
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Wages and related
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331,126 |
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311,850 |
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971,216 |
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|
889,193 |
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Provision for insurance and related items
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|
35,807 |
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29,590 |
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|
97,416 |
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|
94,225 |
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Other operating and administrative
|
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156,527 |
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|
134,962 |
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495,506 |
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402,036 |
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Depreciation and amortization
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|
19,355 |
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|
15,624 |
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|
53,621 |
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|
45,863 |
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Asset impairments, workforce reductions and other unusual items
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|
504 |
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|
(473 |
) |
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|
479 |
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|
1,122 |
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Total costs and expenses
|
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|
543,319 |
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|
491,553 |
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1,618,238 |
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|
1,432,439 |
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Income before other income (expenses)
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|
40,623 |
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|
33,289 |
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|
143,317 |
|
|
|
104,357 |
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|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Interest expense
|
|
|
(10,704 |
) |
|
|
(11,089 |
) |
|
|
(32,051 |
) |
|
|
(34,965 |
) |
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|
Costs related to early extinguishment of debt
|
|
|
|
|
|
|
(176 |
) |
|
|
|
|
|
|
(40,430 |
) |
|
|
Costs related to the sales process of the Company
|
|
|
(11,514 |
) |
|
|
|
|
|
|
(36,566 |
) |
|
|
|
|
|
|
Interest income
|
|
|
2,407 |
|
|
|
1,246 |
|
|
|
6,434 |
|
|
|
4,090 |
|
|
|
Net gains on dispositions
|
|
|
44 |
|
|
|
582 |
|
|
|
667 |
|
|
|
614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
(19,767 |
) |
|
|
(9,437 |
) |
|
|
(61,516 |
) |
|
|
(70,691 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for (benefit from) income taxes and
discontinued operations
|
|
|
20,856 |
|
|
|
23,852 |
|
|
|
81,801 |
|
|
|
33,666 |
|
Provision for (benefit from)income taxes
|
|
|
(590 |
) |
|
|
536 |
|
|
|
2,688 |
|
|
|
3,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations
|
|
|
21,446 |
|
|
|
23,316 |
|
|
|
79,113 |
|
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|
30,628 |
|
Discontinued operations, net of taxes: for the quarters
2005 $(80) and 2004 ($59); for the nine
months 2005 ($1,438) and 2004 $286
|
|
|
520 |
|
|
|
1,084 |
|
|
|
3,628 |
|
|
|
(8,712 |
) |
|
|
|
|
|
|
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|
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|
|
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|
Net income
|
|
$ |
21,966 |
|
|
$ |
24,400 |
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|
$ |
82,741 |
|
|
$ |
21,916 |
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|
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|
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Net income (loss) per share of common stock:
|
|
|
|
|
|
|
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Basic:
|
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|
|
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Before discontinued operations
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|
$ |
0.20 |
|
|
$ |
0.22 |
|
|
$ |
0.72 |
|
|
$ |
0.28 |
|
|
Discontinued operations, net of taxes
|
|
|
|
|
|
|
0.01 |
|
|
|
0.04 |
|
|
|
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
$ |
0.20 |
|
|
$ |
0.23 |
|
|
$ |
0.76 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic net income (loss) per share
|
|
|
109,506 |
|
|
|
108,039 |
|
|
|
109,246 |
|
|
|
107,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before discontinued operations
|
|
$ |
0.18 |
|
|
$ |
0.19 |
|
|
$ |
0.64 |
|
|
$ |
0.27 |
|
|
Discontinued operations, net of taxes
|
|
|
|
|
|
|
0.01 |
|
|
|
0.03 |
|
|
|
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income per share of common stock
|
|
$ |
0.18 |
|
|
$ |
0.20 |
|
|
$ |
0.67 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute diluted net income (loss) per share
|
|
|
127,184 |
|
|
|
124,493 |
|
|
|
126,862 |
|
|
|
124,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
82,741 |
|
|
$ |
21,916 |
|
|
Adjustments to reconcile net income to net cash provided by
(used for) operating activities, including discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
53,973 |
|
|
|
47,656 |
|
|
|
Provision for reserves on accounts, notes and other receivables,
net
|
|
|
6,530 |
|
|
|
10,772 |
|
|
|
Amortization of deferred financing costs
|
|
|
2,072 |
|
|
|
2,107 |
|
|
|
Asset impairments, workforce reductions and other unusual items
|
|
|
479 |
|
|
|
3,799 |
|
|
|
Costs related to early extinguishments of debt
|
|
|
|
|
|
|
40,430 |
|
|
|
Costs related to the sales process of the Company
|
|
|
36,566 |
|
|
|
|
|
|
|
Gains on dispositions of facilities and other assets, net
|
|
|
(2,493 |
) |
|
|
(455 |
) |
|
|
Insurance related accounts
|
|
|
(49,455 |
) |
|
|
(12,833 |
) |
|
|
Changes in operating assets and liabilities, net of acquisitions
and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(45,161 |
) |
|
|
(53,955 |
) |
|
|
|
Prepaid expenses and other receivables
|
|
|
933 |
|
|
|
8,139 |
|
|
|
|
Accounts payable and other accrued expenses
|
|
|
(20,034 |
) |
|
|
(23,140 |
) |
|
|
|
Income taxes payable
|
|
|
3,081 |
|
|
|
(2,497 |
) |
|
|
|
Other, net
|
|
|
1,872 |
|
|
|
(4,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(11,637 |
) |
|
|
15,804 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
71,104 |
|
|
|
37,720 |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(68,194 |
) |
|
|
(37,964 |
) |
|
Payments for acquisitions, net of cash acquired
|
|
|
|
|
|
|
(71,479 |
) |
|
Proceeds from dispositions of facilities and other assets, net
|
|
|
14,158 |
|
|
|
22,346 |
|
|
Collections on notes receivable
|
|
|
63 |
|
|
|
32,268 |
|
|
Payments for designated funds, net
|
|
|
(185 |
) |
|
|
(958 |
) |
|
Proceeds from Beverly Funding Corporation investment
|
|
|
|
|
|
|
28,956 |
|
|
Other, net
|
|
|
(6,409 |
) |
|
|
(24,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(60,567 |
) |
|
|
(51,147 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of new debt
|
|
|
5,200 |
|
|
|
211,384 |
|
|
Repayments of long-term debt
|
|
|
(18,681 |
) |
|
|
(207,479 |
) |
|
Proceeds from exercise of stock options
|
|
|
5,428 |
|
|
|
1,399 |
|
|
Deferred financing costs paid
|
|
|
(306 |
) |
|
|
(43,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(8,359 |
) |
|
|
(38,028 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,178 |
|
|
|
(51,455 |
) |
Cash and cash equivalents at beginning of period
|
|
|
215,665 |
|
|
|
258,815 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
217,843 |
|
|
$ |
207,360 |
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for:
|
|
|
|
|
|
|
|
|
|
Interest, net of amounts capitalized
|
|
$ |
24,834 |
|
|
$ |
30,969 |
|
|
Income tax payments (refunds), net
|
|
|
(1,831 |
) |
|
|
5,821 |
|
See accompanying notes.
5
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 for the three-month and nine-month periods
ended September 30, 2005 and 2004, our cash flows for the
nine months ended September 30, 2005 and 2004, and our
financial condition at September 30, 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-month and nine-month periods ended September 30, 2005
are not necessarily indicative of the results for a full year.
The accompanying condensed consolidated financial statements
have been restated for all periods presented to reflect the
reclassification of our California nursing facilities as held
and used (see Note 5).
Generally accepted accounting principles in the United States
require management to make estimates and assumptions when
preparing financial statements that affect:
|
|
|
|
|
the reported amounts of assets and liabilities at the date of
the financial statements; and |
|
|
|
the reported amounts of revenues and expenses during the
reporting period. |
They also require management to make estimates and assumptions
regarding 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-month and nine-month periods ended
September 30, 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.
6
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
|
|
Note 1. |
General (Continued) |
Retroactive adjustments are estimated in the recording of
revenues in accordance with Medicare and Medicaid 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 September 30, 2005, we
recorded the impact of an approved retroactive Medicaid plan
change for the state of California, which resulted in an
increase in revenues and Accounts receivable of
$2.3 million and an increase in provider tax expense
included in Other operating and administrative
expenses and Other accrued liabilities of
$968,000, related to prior years. This resulted in a net
increase in pre-tax income for the third quarter of 2005 of
$1.4 million ($0.01 per share diluted). Also included in
pre-tax income for the third quarter of 2005 is the net impact
related to the first and second quarters of 2005 of
$1.5 million ($0.01 per share diluted).
For the nine-month period ended September 30, 2005, our
pre-tax income increased $19.9 million ($0.16 per share
diluted) as a result of the prior year impacts of retroactive
Medicaid plan changes for the states of Indiana, Pennsylvania
and California. All other changes in estimates related to
third-party receivables resulted in an increase in revenues from
continuing operations of $417,000 and $3.2 million for the
three months ended September 30, 2005 and 2004,
respectively, and $2.0 million and $8.3 million for
the nine months ended September 30, 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.
7
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
|
|
Note 1. |
General (Continued) |
The following table sets forth the calculation of basic and
diluted earnings per share from continuing operations (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income per share from continuing
operations
|
|
$ |
21,446 |
|
|
$ |
23,316 |
|
|
$ |
79,113 |
|
|
$ |
30,628 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on 2.75% convertible subordinated notes, net of income
taxes of $0
|
|
|
828 |
|
|
|
825 |
|
|
|
2,482 |
|
|
|
2,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per share from continuing
operations
|
|
$ |
22,274 |
|
|
$ |
24,141 |
|
|
$ |
81,595 |
|
|
$ |
33,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share from continuing
operations weighted average shares
|
|
|
109,506 |
|
|
|
108,039 |
|
|
|
109,246 |
|
|
|
107,613 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
2,283 |
|
|
|
1,022 |
|
|
|
2,221 |
|
|
|
1,060 |
|
|
|
2.75% convertible subordinated notes
|
|
|
15,395 |
|
|
|
15,432 |
|
|
|
15,395 |
|
|
|
15,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share from continuing
operations adjusted weighted average shares and
assumed conversions
|
|
|
127,184 |
|
|
|
124,493 |
|
|
|
126,862 |
|
|
|
124,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share from continuing operations
|
|
$ |
0.20 |
|
|
$ |
0.22 |
|
|
$ |
0.72 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share from continuing operations
|
|
$ |
0.18 |
|
|
$ |
0.19 |
|
|
$ |
0.64 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share from continuing operations does not
include the impact of 10,000 employee stock options outstanding
for the three-month and nine-month periods ended
September 30, 2005 and 1.8 million and
6.9 million for the three-month and nine-month periods
ended September 30, 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 for
the three-month and nine-month periods ended September 30,
2005 and 2004. On September 30, 2005, one holder converted
$276,000 of our 2.75% convertible subordinated notes for 37,037
shares of our common stock.
Our provision for insurance is 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
8
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
Note 2. Insurance
(Continued)
period and our estimate of any experience adjustments to
premiums. Our next actuarial study is expected to be completed
in January 2006 using data through September 30, 2005.
Based on the foregoing, 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.
The following table summarizes our provision for insurance and
related items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
General and professional liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
23,506 |
|
|
$ |
15,341 |
|
|
$ |
64,610 |
|
|
$ |
54,820 |
|
|
Discontinued operations
|
|
|
|
|
|
|
1,252 |
|
|
|
(317 |
) |
|
|
9,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,506 |
|
|
$ |
16,593 |
|
|
$ |
64,293 |
|
|
$ |
63,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
9,934 |
|
|
$ |
10,991 |
|
|
$ |
25,773 |
|
|
$ |
29,570 |
|
|
Discontinued operations
|
|
|
(552 |
) |
|
|
383 |
|
|
|
261 |
|
|
|
1,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,382 |
|
|
$ |
11,374 |
|
|
$ |
26,034 |
|
|
$ |
31,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
2,367 |
|
|
$ |
3,258 |
|
|
$ |
7,033 |
|
|
$ |
9,835 |
|
|
Discontinued operations
|
|
|
2 |
|
|
|
26 |
|
|
|
30 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,369 |
|
|
$ |
3,284 |
|
|
$ |
7,063 |
|
|
$ |
9,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for insurance and related items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
35,807 |
|
|
$ |
29,590 |
|
|
$ |
97,416 |
|
|
$ |
94,225 |
|
|
Discontinued operations
|
|
|
(550 |
) |
|
|
1,661 |
|
|
|
(26 |
) |
|
|
11,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,257 |
|
|
$ |
31,251 |
|
|
$ |
97,390 |
|
|
$ |
105,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our insurance liabilities are included in the consolidated
balance sheet captions as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accrued wages and related liabilities
|
|
$ |
127 |
|
|
$ |
488 |
|
General and professional liabilities
|
|
|
58,187 |
|
|
|
54,216 |
|
Other liabilities and deferred items
|
|
|
61,783 |
|
|
|
117,962 |
|
|
|
|
|
|
|
|
|
|
$ |
120,097 |
|
|
$ |
172,666 |
|
|
|
|
|
|
|
|
Our long-term other liabilities and deferred items decreased
$56.2 million from December 31, 2004, and our cash
flows for the nine months ended September 30, 2005,
decreased $49.5 million, primarily due to payments for
patient claims settlements. Total claim payments for the three
months and nine months ended September 30, 2005, were in
excess of the estimates derived from our last actuarial study
completed in the second quarter of 2005. A portion of this
amount relates to an $18.9 million class action settlement
associated
9
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
|
|
Note 2. |
Insurance (Continued) |
with two previously disposed facilities in the state of
Arkansas. This class action settlement amount, along with
certain related patient care claim settlements, were funded
during the third quarter of 2005 and recorded against previously
recorded patient care liability reserves. Our general and
professional liability expense from continuing operations
increased during the third quarter of 2005, as compared to the
third quarter of 2004, primarily due to the impact of these
accelerated settlements on the discount provisions of the
liability.
Between each independent actuarial evaluation, the trends with
respect to claims and settlements made and other relevant data
may change. As a result, there is a reasonable possibility that
our liabilities for patient care and related services, as
determined by us and our actuaries, may be adjusted by a
material amount in the near term. We cannot currently predict
the impact, if any, of our current data trends on the actuarial
study to be completed in January 2006.
|
|
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Asset impairments
|
|
$ |
70 |
|
|
$ |
|
|
|
$ |
55 |
|
|
$ |
2,885 |
|
Workforce reductions
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
97 |
|
Other unusual items, including exit costs
|
|
|
434 |
|
|
|
(97 |
) |
|
|
424 |
|
|
|
(161 |
) |
Reversal of previously recorded charges
|
|
|
|
|
|
|
(375 |
) |
|
|
|
|
|
|
(1,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
504 |
|
|
$ |
(473 |
) |
|
$ |
479 |
|
|
$ |
1,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes activity in our accruals for
estimated workforce reductions and exit costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, | |
|
Nine Months Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
Workforce | |
|
Exit | |
|
Workforce | |
|
Exit | |
|
Workforce | |
|
Exit | |
|
Workforce | |
|
Exit | |
|
|
Reductions | |
|
Costs | |
|
Reductions | |
|
Costs | |
|
Reductions | |
|
Costs | |
|
Reductions | |
|
Costs | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance beginning of period
|
|
$ |
443 |
|
|
$ |
4,353 |
|
|
$ |
1,535 |
|
|
$ |
6,667 |
|
|
$ |
1,166 |
|
|
$ |
4,572 |
|
|
$ |
3,029 |
|
|
$ |
7,270 |
|
Charged to continuing operations
|
|
|
|
|
|
|
432 |
|
|
|
126 |
|
|
|
(52 |
) |
|
|
|
|
|
|
529 |
|
|
|
553 |
|
|
|
51 |
|
Charged to discontinued operations
|
|
|
|
|
|
|
594 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
3,684 |
|
|
|
|
|
|
|
2,991 |
|
Cash payments
|
|
|
(24 |
) |
|
|
(789 |
) |
|
|
(364 |
) |
|
|
(1,649 |
) |
|
|
(711 |
) |
|
|
(4,103 |
) |
|
|
(2,302 |
) |
|
|
(5,299 |
) |
Reversals
|
|
|
(22 |
) |
|
|
(42 |
) |
|
|
(127 |
) |
|
|
|
|
|
|
(58 |
) |
|
|
(134 |
) |
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of period
|
|
$ |
397 |
|
|
$ |
4,548 |
|
|
$ |
1,170 |
|
|
$ |
5,013 |
|
|
$ |
397 |
|
|
$ |
4,548 |
|
|
$ |
1,170 |
|
|
$ |
5,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reduction and exit cost accruals are included in
Accrued wages and related liabilities and
Other accrued liabilities on our condensed
consolidated balance sheets.
10
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 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. Our Board of Directors unanimously
rejected the Formation Capital Consortiums proposal, and
on March 22, 2005, we announced that our Board of Directors
had unanimously voted to conduct an auction process, to be
overseen by the independent members of the Board, to maximize
value for all of our stockholders as soon as practicable through
a sale of BEI.
On April 11, 2005, we entered into a Settlement Agreement
with the Formation Capital Consortium and Mr. Whitman under
which, among other things, they 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. Concurrently, we agreed to allow the Formation
Capital Consortium to participate in our on-going sales process
on the same basis as all other potential buyers.
On August 16, 2005, following two rounds of due diligence
and bidding by potential buyers, we entered into an Agreement
and Plan of Merger (the Merger Agreement) with North
American Senior Care, Inc. (NASC), NASC Acquisition
Corp., a wholly-owned subsidiary of NASC (Merger
Sub), and SBEV Property Holdings LLC, which provides that
Merger Sub will be merged with and into the Company (the
Merger) and the holders of outstanding shares of our
common stock would receive cash consideration of $12.80 per
share.
On August 19, 2005, we announced that we had received a
proposal from the Formation Capital Consortium to acquire,
subject to certain conditions, all of the outstanding shares of
our common stock for $12.90 per share in cash. On
August 23, 2005, we entered into a First Amendment to the
Merger Agreement with NASC, pursuant to which NASC agreed to
increase the merger consideration to $13.00 per share of our
outstanding common stock. On September 22, 2005, we entered
into a Second Amendment to the Merger Agreement with NASC which,
among other things, granted NASC an extension of time to deliver
debt commitment letters and a solvency opinion. In exchange for
the extension of time, NASC paid BEI an additional
$3.0 million good faith deposit, which increased the total
initial good faith deposit to $10.0 million. In addition,
NASC is obligated to deliver the full $60.0 million good
faith deposit on an unconditional basis and to provide an
unconditional $350.0 million equity commitment by
November 18, 2005. NASC delivered the debt commitment
letters and the solvency opinion on October 21, 2005.
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 Formation
Capital Consortiums indication of interest, the proxy
contest and the sales process, including legal fees, investment
banking advisory fees and other related costs. During the first
quarter of 2005, we engaged two investment banking firms to
assist us in evaluating proposals, both solicited and
unsolicited, to acquire us or any of our assets or businesses.
Under the terms of the engagement we are required to pay fees to
the two firms whether or not we are sold. In the case of a sale,
the fees are a percentage of the consideration received in
connection with our sale, with the percentage of compensation
increasing with an increase in the sales value. If there is no
sale, the firms each receive a flat fee. As a result, we
recorded a liability of $19.8 million, of which
$4.5 million has been paid as of September 30, 2005,
with the remaining liability included in Other accrued
liabilities on the September 30, 2005 condensed
consolidated balance sheet. We have also incurred other costs
related to the sales process and have recorded expenses of
$16.8 million, of which $13.6 million has been paid
and $3.2 million remains accrued at September 30,
2005. In addition, the sales process may impact our ability to
attract and retain
11
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
|
|
Note 4. |
Sale of the Company and Related Items
(Continued) |
customers, management and employees and may result in the
incurrence of additional advisory fees, legal fees and other
expenses.
Note 5. Discontinued
Operations
During the nine months ended September 30, 2005, we
recognized net pre-tax gains of $1.8 million, primarily
relating to the sale of seven nursing facilities (889 beds) for
cash proceeds totaling $13.3 million. These assets were
part of our Nursing Facilities segment, five of which were held
for sale as of December 31, 2004. In addition, we sold 10
outpatient clinics for $4.6 million, including $710,000 in cash
and $3.8 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.
During the quarter ended September 30, 2005, the Centers
for Medicare and Medicaid Services (CMS) approved a
Medicaid rate plan change for the state of California (see
Note 1). This plan change improves the projected cash flows
of our facilities in California, all of which had previously
been held for sale. Based on the new cash flow projections for
the facilities, during the third quarter we reassessed the fair
value of these 22 properties. The expected sales proceeds for
these leased assets would not provide us with sufficient
proceeds to offset the present value of their expected future
cash flows. Consequently, management recommended, and the Board
of Directors approved, that we continue to operate the
California facilities and no longer market them for sale. The
impact of this decision resulted in, among other things,
incremental depreciation and amortization of $1.4 million
during the three months and nine months ended September 30,
2005, of which $567,000 relates to the prior year. These assets
have been reclassified as held and used on our condensed
consolidated balance sheets for all periods presented and are
stated at the lower of carrying value less incremental
depreciation.
The remaining assets and liabilities of our former Matrix
segment were included in assets and liabilities held for sale as
of December 31, 2004. The asset line items from which the
reclassifications were made was $2.0 million from
Current assets, $1.2 million from
Property and equipment-net, $332,000 from
Goodwill and $28,000 from Other assets.
The results of operations of disposed facilities and other
assets in the three-month and nine-month periods ended
September 30, 2005, 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-month and nine-month periods ended
September 30, 2004 also include the results of operations
for all facilities, clinics and businesses disposed of during
2004.
12
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
Note 5. Discontinued
Operations (Continued)
A summary of discontinued operations by operating segment is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Nursing | |
|
|
|
Home | |
|
|
|
Nursing | |
|
|
|
Home | |
|
|
|
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Three Months Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
393 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
393 |
|
|
$ |
12,926 |
|
|
$ |
3,563 |
|
|
$ |
|
|
|
$ |
16,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)(1)
|
|
$ |
733 |
|
|
$ |
4 |
|
|
$ |
14 |
|
|
$ |
751 |
|
|
$ |
(31 |
) |
|
$ |
211 |
|
|
$ |
33 |
|
|
$ |
213 |
|
Gain (loss) on sales and exit costs
|
|
|
(311 |
) |
|
|
|
|
|
|
|
|
|
|
(311 |
) |
|
|
228 |
|
|
|
(24 |
) |
|
|
366 |
|
|
|
570 |
|
Impairments and other unusual items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
$ |
422 |
|
|
$ |
4 |
|
|
$ |
14 |
|
|
|
440 |
|
|
$ |
439 |
|
|
$ |
187 |
|
|
$ |
399 |
|
|
|
1,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit from state income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes net interest expense of $41,000 for 2004, as well as
depreciation and amortization expense of $6,000 and $323,000 for
2005 and 2004, respectively. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Nursing | |
|
|
|
Home | |
|
|
|
Nursing | |
|
|
|
Home | |
|
|
|
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Nine Months Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
8,943 |
|
|
$ |
2,546 |
|
|
$ |
|
|
|
$ |
11,489 |
|
|
$ |
64,856 |
|
|
$ |
10,466 |
|
|
$ |
148 |
|
|
$ |
75,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)(1)
|
|
$ |
129 |
|
|
$ |
456 |
|
|
$ |
(220 |
) |
|
$ |
365 |
|
|
$ |
(5,898 |
) |
|
$ |
859 |
|
|
$ |
1 |
|
|
$ |
(5,038 |
) |
Gain (loss) on sales and exit costs
|
|
|
1,825 |
|
|
|
|
|
|
|
|
|
|
|
1,825 |
|
|
|
(853 |
) |
|
|
(49 |
) |
|
|
369 |
|
|
|
(533 |
) |
Impairments and other unusual items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,855 |
) |
|
|
|
|
|
|
|
|
|
|
(2,855 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss)
|
|
$ |
1,954 |
|
|
$ |
456 |
|
|
$ |
(220 |
) |
|
|
2,190 |
|
|
$ |
(9,606 |
) |
|
$ |
810 |
|
|
$ |
370 |
|
|
|
(8,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) state income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(8,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes net interest expense of $36,000 and $262,000 for 2005
and 2004, respectively, as well as depreciation and amortization
expense of $352,000 and $1.8 million for 2005 and 2004,
respectively. |
Note 6. Long-term Debt
As of October 1, 2005, our 2.75% convertible subordinated
notes continue to be eligible for conversion into common stock.
Under the indenture governing the notes, a holder may convert
any of the 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. On September 30, 2005, one holder converted
$276,000 of our 2.75% convertible subordinated notes for 37,037
shares of our common stock.
13
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
Note 6. Long-term
Debt (Continued)
During June 2005, we entered into a mortgage loan for
$5.2 million for the construction of a nursing facility.
This loan bears interest at 30-day LIBOR plus 2.5%, requires
monthly principal and interest payments and is secured by the
real property and a security interest in the personal property
of the nursing facility.
Our
77/8%
senior subordinated notes are jointly and severally, fully and
unconditionally guaranteed by most of our subsidiaries (the
Guarantor Subsidiaries). As of September 30,
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.
14
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
Note 6. Long-term
Debt (Continued)
Condensed consolidating balance sheets as of September 30,
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
|
|
$ |
168,910 |
|
|
$ |
5,968 |
|
|
$ |
42,965 |
|
|
$ |
|
|
|
$ |
217,843 |
|
|
Accounts receivable, less allowance for doubtful accounts
|
|
|
3,933 |
|
|
|
223,233 |
|
|
|
42,491 |
|
|
|
739 |
|
|
|
270,396 |
|
|
Notes receivable, less allowance for doubtful notes
|
|
|
2,116 |
|
|
|
2,576 |
|
|
|
37 |
|
|
|
|
|
|
|
4,729 |
|
|
Operating supplies
|
|
|
127 |
|
|
|
9,181 |
|
|
|
|
|
|
|
|
|
|
|
9,308 |
|
|
Prepaid expenses and other
|
|
|
23,267 |
|
|
|
8,824 |
|
|
|
12,893 |
|
|
|
|
|
|
|
44,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
198,353 |
|
|
|
249,782 |
|
|
|
98,386 |
|
|
|
739 |
|
|
|
547,260 |
|
Property and equipment, net
|
|
|
6,342 |
|
|
|
666,241 |
|
|
|
|
|
|
|
|
|
|
|
672,583 |
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
|
|
|
|
122,090 |
|
|
|
|
|
|
|
|
|
|
|
122,090 |
|
|
Other, less allowance for doubtful accounts and notes
|
|
|
370,586 |
|
|
|
29,841 |
|
|
|
601 |
|
|
|
(331,414 |
) |
|
|
69,614 |
|
|
Due from affiliates
|
|
|
438,149 |
|
|
|
|
|
|
|
76,791 |
|
|
|
(514,940 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
808,735 |
|
|
|
151,931 |
|
|
|
77,392 |
|
|
|
(846,354 |
) |
|
|
191,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,013,430 |
|
|
$ |
1,067,954 |
|
|
$ |
175,778 |
|
|
$ |
(845,615 |
) |
|
$ |
1,411,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
3,384 |
|
|
$ |
63,157 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
66,541 |
|
|
Accrued wages and related liabilities
|
|
|
22,701 |
|
|
|
70,916 |
|
|
|
|
|
|
|
|
|
|
|
93,617 |
|
|
Accrued interest
|
|
|
7,694 |
|
|
|
874 |
|
|
|
219 |
|
|
|
|
|
|
|
8,787 |
|
|
General and professional liabilities
|
|
|
28,871 |
|
|
|
|
|
|
|
29,316 |
|
|
|
|
|
|
|
58,187 |
|
|
Federal government settlement obligations
|
|
|
|
|
|
|
15,386 |
|
|
|
|
|
|
|
|
|
|
|
15,386 |
|
|
Other accrued liabilities
|
|
|
36,311 |
|
|
|
69,027 |
|
|
|
(736 |
) |
|
|
739 |
|
|
|
105,341 |
|
|
Current portion of long-term debt
|
|
|
1,350 |
|
|
|
6,808 |
|
|
|
|
|
|
|
|
|
|
|
8,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
100,311 |
|
|
|
226,168 |
|
|
|
28,799 |
|
|
|
739 |
|
|
|
356,017 |
|
Long-term debt
|
|
|
466,763 |
|
|
|
69,781 |
|
|
|
|
|
|
|
|
|
|
|
536,544 |
|
Other liabilities and deferred items
|
|
|
80,736 |
|
|
|
43,314 |
|
|
|
29,316 |
|
|
|
|
|
|
|
153,366 |
|
Due to affiliates
|
|
|
|
|
|
|
514,940 |
|
|
|
|
|
|
|
(514,940 |
) |
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
11,781 |
|
|
|
5,908 |
|
|
|
121 |
|
|
|
(6,029 |
) |
|
|
11,781 |
|
|
Additional paid-in capital
|
|
|
912,400 |
|
|
|
414,340 |
|
|
|
44,434 |
|
|
|
(458,774 |
) |
|
|
912,400 |
|
|
Retained earnings (accumulated deficit)
|
|
|
(450,063 |
) |
|
|
(206,497 |
) |
|
|
73,108 |
|
|
|
133,389 |
|
|
|
(450,063 |
) |
|
Treasury stock, at cost
|
|
|
(108,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(108,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
365,620 |
|
|
|
213,751 |
|
|
|
117,663 |
|
|
|
(331,414 |
) |
|
|
365,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,013,430 |
|
|
$ |
1,067,954 |
|
|
$ |
175,778 |
|
|
$ |
(845,615 |
) |
|
$ |
1,411,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 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 |
|
|
|
9,559 |
|
|
|
|
|
|
|
|
|
|
|
9,660 |
|
|
Assets held for sale
|
|
|
|
|
|
|
3,542 |
|
|
|
|
|
|
|
|
|
|
|
3,542 |
|
|
Prepaid expenses and other
|
|
|
10,952 |
|
|
|
10,285 |
|
|
|
16,029 |
|
|
|
|
|
|
|
37,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
161,746 |
|
|
|
215,311 |
|
|
|
127,339 |
|
|
|
|
|
|
|
504,396 |
|
Property and equipment, net
|
|
|
6,392 |
|
|
|
657,919 |
|
|
|
|
|
|
|
|
|
|
|
664,311 |
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
|
|
|
|
124,066 |
|
|
|
|
|
|
|
|
|
|
|
124,066 |
|
|
Other, less allowance for doubtful accounts and notes
|
|
|
255,350 |
|
|
|
32,607 |
|
|
|
709 |
|
|
|
(220,054 |
) |
|
|
68,612 |
|
|
Due from affiliates
|
|
|
453,483 |
|
|
|
|
|
|
|
132,141 |
|
|
|
(585,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
708,833 |
|
|
|
156,673 |
|
|
|
132,850 |
|
|
|
(805,678 |
) |
|
|
192,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
Note 6. Long-term
Debt (Continued)
Condensed consolidating statements of income for the three
months ended September 30, 2005 for Beverly Enterprises,
Inc. (parent only), the combined Guarantor Subsidiaries and the
combined Non-Guarantor Subsidiaries are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- | |
|
|
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
|
|
|
Parent | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
227 |
|
|
$ |
583,715 |
|
|
$ |
1,930 |
|
|
$ |
(1,930 |
) |
|
$ |
583,942 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and related
|
|
|
18,563 |
|
|
|
312,563 |
|
|
|
|
|
|
|
|
|
|
|
331,126 |
|
|
Provision for insurance and related items
|
|
|
1,401 |
|
|
|
34,406 |
|
|
|
10,897 |
|
|
|
(10,897 |
) |
|
|
35,807 |
|
|
Other operating and administrative
|
|
|
6,578 |
|
|
|
150,103 |
|
|
|
164 |
|
|
|
(318 |
) |
|
|
156,527 |
|
|
Overhead allocation
|
|
|
(21,530 |
) |
|
|
21,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,551 |
|
|
|
17,804 |
|
|
|
|
|
|
|
|
|
|
|
19,355 |
|
|
Asset impairments, workforce reductions and other unusual items
|
|
|
|
|
|
|
504 |
|
|
|
|
|
|
|
|
|
|
|
504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
6,563 |
|
|
|
536,910 |
|
|
|
11,061 |
|
|
|
(11,215 |
) |
|
|
543,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other income (expenses)
|
|
|
(6,336 |
) |
|
|
46,805 |
|
|
|
(9,131 |
) |
|
|
9,285 |
|
|
|
40,623 |
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(11,167 |
) |
|
|
(178 |
) |
|
|
641 |
|
|
|
(10,704 |
) |
|
Costs related to the sales process of the Company
|
|
|
(11,514 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,514 |
) |
|
Interest income
|
|
|
1,636 |
|
|
|
97 |
|
|
|
1,315 |
|
|
|
(641 |
) |
|
|
2,407 |
|
|
Net gains on dispositions
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
Equity in income of affiliates
|
|
|
37,590 |
|
|
|
|
|
|
|
|
|
|
|
(37,590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
27,712 |
|
|
|
(11,026 |
) |
|
|
1,137 |
|
|
|
(37,590 |
) |
|
|
(19,767 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes and
discontinued operations
|
|
|
21,376 |
|
|
|
35,779 |
|
|
|
(7,994 |
) |
|
|
(28,305 |
) |
|
|
20,856 |
|
Benefit from income taxes
|
|
|
(590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before discontinued operations
|
|
|
21,966 |
|
|
|
35,779 |
|
|
|
(7,994 |
) |
|
|
(28,305 |
) |
|
|
21,446 |
|
Discontinued operations, net of taxes of $(80)
|
|
|
|
|
|
|
520 |
|
|
|
|
|
|
|
|
|
|
|
520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
21,966 |
|
|
$ |
36,299 |
|
|
$ |
(7,994 |
) |
|
$ |
(28,305 |
) |
|
$ |
21,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
Note 6. Long-term
Debt (Continued)
Condensed consolidating statements of income for the three
months ended September 30, 2004 for Beverly Enterprises,
Inc. (parent only), the combined Guarantor Subsidiaries and the
combined Non-Guarantor Subsidiaries are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- | |
|
|
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
|
|
|
Parent | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
1,728 |
|
|
$ |
523,324 |
|
|
$ |
13,811 |
|
|
$ |
(14,021 |
) |
|
$ |
524,842 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and related
|
|
|
14,100 |
|
|
|
297,750 |
|
|
|
|
|
|
|
|
|
|
|
311,850 |
|
|
Provision for insurance and related items
|
|
|
2,408 |
|
|
|
27,182 |
|
|
|
12,428 |
|
|
|
(12,428 |
) |
|
|
29,590 |
|
|
Other operating and administrative
|
|
|
7,728 |
|
|
|
127,483 |
|
|
|
(235 |
) |
|
|
(14 |
) |
|
|
134,962 |
|
|
Overhead allocation
|
|
|
(20,189 |
) |
|
|
20,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,617 |
|
|
|
14,007 |
|
|
|
|
|
|
|
|
|
|
|
15,624 |
|
|
Asset impairments, workforce reductions and other unusual items
|
|
|
1,488 |
|
|
|
(1,961 |
) |
|
|
|
|
|
|
|
|
|
|
(473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
7,152 |
|
|
|
484,650 |
|
|
|
12,193 |
|
|
|
(12,442 |
) |
|
|
491,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other income (expenses)
|
|
|
(5,424 |
) |
|
|
38,674 |
|
|
|
1,618 |
|
|
|
(1,579 |
) |
|
|
33,289 |
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(12,183 |
) |
|
|
|
|
|
|
1,094 |
|
|
|
(11,089 |
) |
|
Costs related to the early extinguishment of debt
|
|
|
(176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176 |
) |
|
Interest income
|
|
|
527 |
|
|
|
458 |
|
|
|
1,355 |
|
|
|
(1,094 |
) |
|
|
1,246 |
|
|
Net gains on dispositions
|
|
|
|
|
|
|
582 |
|
|
|
|
|
|
|
|
|
|
|
582 |
|
|
Equity in income of affiliates
|
|
|
30,009 |
|
|
|
|
|
|
|
|
|
|
|
(30,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
30,360 |
|
|
|
(11,143 |
) |
|
|
1,355 |
|
|
|
(30,009 |
) |
|
|
(9,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes and
discontinued operations
|
|
|
24,936 |
|
|
|
27,531 |
|
|
|
2,973 |
|
|
|
(31,588 |
) |
|
|
23,852 |
|
Provision for income taxes
|
|
|
536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before discontinued operations
|
|
|
24,400 |
|
|
|
27,531 |
|
|
|
2,973 |
|
|
|
(31,588 |
) |
|
|
23,316 |
|
Discontinued operations, net of taxes of $(59)
|
|
|
|
|
|
|
1,084 |
|
|
|
|
|
|
|
|
|
|
|
1,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
24,400 |
|
|
$ |
28,615 |
|
|
$ |
2,973 |
|
|
$ |
(31,588 |
) |
|
$ |
24,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
Note 6. Long-term
Debt (Continued)
Condensed consolidating statements of income for the nine months
ended September 30, 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
|
|
$ |
663 |
|
|
$ |
1,760,892 |
|
|
$ |
21,129 |
|
|
$ |
(21,129 |
) |
|
$ |
1,761,555 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and related
|
|
|
55,298 |
|
|
|
915,918 |
|
|
|
|
|
|
|
|
|
|
|
971,216 |
|
|
Provision for insurance and related items
|
|
|
4,215 |
|
|
|
93,201 |
|
|
|
34,151 |
|
|
|
(34,151 |
) |
|
|
97,416 |
|
|
Other operating and administrative
|
|
|
22,300 |
|
|
|
473,673 |
|
|
|
500 |
|
|
|
(967 |
) |
|
|
495,506 |
|
|
Overhead allocation
|
|
|
(63,177 |
) |
|
|
63,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,662 |
|
|
|
48,959 |
|
|
|
|
|
|
|
|
|
|
|
53,621 |
|
|
Asset impairments, workforce reductions and other unusual items
|
|
|
|
|
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
23,298 |
|
|
|
1,595,407 |
|
|
|
34,651 |
|
|
|
(35,118 |
) |
|
|
1,618,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other income (expenses)
|
|
|
(22,635 |
) |
|
|
165,485 |
|
|
|
(13,522 |
) |
|
|
13,989 |
|
|
|
143,317 |
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(34,278 |
) |
|
|
(532 |
) |
|
|
2,759 |
|
|
|
(32,051 |
) |
|
Costs related to the sales process of the Company
|
|
|
(36,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,566 |
) |
|
Interest income
|
|
|
4,240 |
|
|
|
406 |
|
|
|
4,547 |
|
|
|
(2,759 |
) |
|
|
6,434 |
|
|
Net gains on dispositions
|
|
|
|
|
|
|
667 |
|
|
|
|
|
|
|
|
|
|
|
667 |
|
|
Equity in income of affiliates
|
|
|
140,390 |
|
|
|
|
|
|
|
|
|
|
|
(140,390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
108,064 |
|
|
|
(33,205 |
) |
|
|
4,015 |
|
|
|
(140,390 |
) |
|
|
(61,516 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes and
discontinued operations
|
|
|
85,429 |
|
|
|
132,280 |
|
|
|
(9,507 |
) |
|
|
(126,401 |
) |
|
|
81,801 |
|
Provision for income taxes
|
|
|
2,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before discontinued operations
|
|
|
82,741 |
|
|
|
132,280 |
|
|
|
(9,507 |
) |
|
|
(126,401 |
) |
|
|
79,113 |
|
Discontinued operations, net of taxes of $(1,438)
|
|
|
|
|
|
|
3,628 |
|
|
|
|
|
|
|
|
|
|
|
3,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
82,741 |
|
|
$ |
135,908 |
|
|
$ |
(9,507 |
) |
|
$ |
(126,401 |
) |
|
$ |
82,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
Note 6. Long-term
Debt (Continued)
Condensed consolidating statements of income for the nine months
ended September 30, 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
|
|
$ |
2,907 |
|
|
$ |
1,534,099 |
|
|
$ |
57,011 |
|
|
$ |
(57,221 |
) |
|
$ |
1,536,796 |
|
Cash and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and related
|
|
|
33,847 |
|
|
|
855,346 |
|
|
|
|
|
|
|
|
|
|
|
889,193 |
|
|
Provision for insurance and related items
|
|
|
7,203 |
|
|
|
87,022 |
|
|
|
53,990 |
|
|
|
(53,990 |
) |
|
|
94,225 |
|
|
Other operating and administrative
|
|
|
19,805 |
|
|
|
382,480 |
|
|
|
(235 |
) |
|
|
(14 |
) |
|
|
402,036 |
|
|
Overhead allocation
|
|
|
(60,962 |
) |
|
|
60,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,018 |
|
|
|
40,845 |
|
|
|
|
|
|
|
|
|
|
|
45,863 |
|
|
Asset impairments, workforce reductions and other unusual items
|
|
|
97 |
|
|
|
1,025 |
|
|
|
|
|
|
|
|
|
|
|
1,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
5,008 |
|
|
|
1,427,680 |
|
|
|
53,755 |
|
|
|
(54,004 |
) |
|
|
1,432,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other income (expenses)
|
|
|
(2,101 |
) |
|
|
106,419 |
|
|
|
3,256 |
|
|
|
(3,217 |
) |
|
|
104,357 |
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(38,399 |
) |
|
|
|
|
|
|
3,434 |
|
|
|
(34,965 |
) |
|
Costs related to the early extinguishment of debt
|
|
|
(40,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,430 |
) |
|
Interest income
|
|
|
1,755 |
|
|
|
1,732 |
|
|
|
4,037 |
|
|
|
(3,434 |
) |
|
|
4,090 |
|
|
Net gains on dispositions
|
|
|
|
|
|
|
614 |
|
|
|
|
|
|
|
|
|
|
|
614 |
|
|
Equity in income of affiliates
|
|
|
65,730 |
|
|
|
|
|
|
|
|
|
|
|
(65,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
27,055 |
|
|
|
(36,053 |
) |
|
|
4,037 |
|
|
|
(65,730 |
) |
|
|
(70,691 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes and
discontinued operations
|
|
|
24,954 |
|
|
|
70,366 |
|
|
|
7,293 |
|
|
|
(68,947 |
) |
|
|
33,666 |
|
Provision for income taxes
|
|
|
3,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before discontinued operations
|
|
|
21,916 |
|
|
|
70,366 |
|
|
|
7,293 |
|
|
|
(68,947 |
) |
|
|
30,628 |
|
Discontinued operations, net of taxes of $286
|
|
|
|
|
|
|
(8,712 |
) |
|
|
|
|
|
|
|
|
|
|
(8,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
21,916 |
|
|
$ |
61,654 |
|
|
$ |
7,293 |
|
|
$ |
(68,947 |
) |
|
$ |
21,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
Note 6. Long-term
Debt (Continued)
Condensed consolidating statements of cash flows for the nine
months ended September 30, 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:
|
|
$ |
30,529 |
|
|
$ |
65,444 |
|
|
$ |
(24,869 |
) |
|
$ |
71,104 |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(5,306 |
) |
|
|
(62,888 |
) |
|
|
|
|
|
|
(68,194 |
) |
|
Proceeds from dispositions of facilities and other assets, net
|
|
|
|
|
|
|
14,158 |
|
|
|
|
|
|
|
14,158 |
|
|
Collections on notes receivable
|
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
63 |
|
|
Proceeds from (payments for) designated funds, net
|
|
|
(740 |
) |
|
|
555 |
|
|
|
|
|
|
|
(185 |
) |
|
Other, net
|
|
|
(2,343 |
) |
|
|
(4,029 |
) |
|
|
(37 |
) |
|
|
(6,409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(8,389 |
) |
|
|
(52,141 |
) |
|
|
(37 |
) |
|
|
(60,567 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of new debt
|
|
|
|
|
|
|
5,200 |
|
|
|
|
|
|
|
5,200 |
|
|
Repayments of long-term debt
|
|
|
(1,013 |
) |
|
|
(17,668 |
) |
|
|
|
|
|
|
(18,681 |
) |
|
Proceeds from exercise of stock options
|
|
|
5,428 |
|
|
|
|
|
|
|
|
|
|
|
5,428 |
|
|
Deferred financing costs paid
|
|
|
(160 |
) |
|
|
(104 |
) |
|
|
(42 |
) |
|
|
(306 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
4,255 |
|
|
|
(12,572 |
) |
|
|
(42 |
) |
|
|
(8,359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
26,395 |
|
|
|
731 |
|
|
|
(24,948 |
) |
|
|
2,178 |
|
Cash and cash equivalents at beginning of period
|
|
|
142,515 |
|
|
|
5,237 |
|
|
|
67,913 |
|
|
|
215,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
168,910 |
|
|
$ |
5,968 |
|
|
$ |
42,965 |
|
|
$ |
217,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
Note 6. Long-term
Debt (Continued)
Condensed consolidating statements of cash flows for the nine
months ended September 30, 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:
|
|
$ |
(72,473 |
) |
|
$ |
84,115 |
|
|
$ |
26,078 |
|
|
$ |
37,720 |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(3,912 |
) |
|
|
(34,052 |
) |
|
|
|
|
|
|
(37,964 |
) |
|
Payments for acquisitions, net of cash acquired
|
|
|
|
|
|
|
(71,479 |
) |
|
|
|
|
|
|
(71,479 |
) |
|
Proceeds from dispositions of facilities and other assets, net
|
|
|
1,324 |
|
|
|
21,022 |
|
|
|
|
|
|
|
22,346 |
|
|
Collections on notes receivable
|
|
|
|
|
|
|
32,268 |
|
|
|
|
|
|
|
32,268 |
|
|
Payments for designated funds, net
|
|
|
(230 |
) |
|
|
(728 |
) |
|
|
|
|
|
|
(958 |
) |
|
Proceeds from Beverly Funding Corporation investment
|
|
|
28,956 |
|
|
|
|
|
|
|
|
|
|
|
28,956 |
|
|
Other, net
|
|
|
(10,446 |
) |
|
|
(13,870 |
) |
|
|
|
|
|
|
(24,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities
|
|
|
15,692 |
|
|
|
(66,839 |
) |
|
|
|
|
|
|
(51,147 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
211,384 |
|
|
|
|
|
|
|
|
|
|
|
211,384 |
|
|
Repayments of long-term debt
|
|
|
(191,623 |
) |
|
|
(15,856 |
) |
|
|
|
|
|
|
(207,479 |
) |
|
Proceeds from exercise of stock options
|
|
|
1,399 |
|
|
|
|
|
|
|
|
|
|
|
1,399 |
|
|
Deferred financing and other costs
|
|
|
(43,281 |
) |
|
|
|
|
|
|
(51 |
) |
|
|
(43,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(22,121 |
) |
|
|
(15,856 |
) |
|
|
(51 |
) |
|
|
(38,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(78,902 |
) |
|
|
1,420 |
|
|
|
26,027 |
|
|
|
(51,455 |
) |
Cash and cash equivalents at beginning of period
|
|
|
223,575 |
|
|
|
5,351 |
|
|
|
29,889 |
|
|
|
258,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
144,673 |
|
|
$ |
6,771 |
|
|
$ |
55,916 |
|
|
$ |
207,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. Income Taxes
The provisions for income taxes from continuing operations of
$2.7 million and $3.0 million for the nine months
ended September 30, 2005 and 2004, respectively, primarily
relate to state income taxes estimated to be due in
separate return filing states where we conduct
business, as well as federal alternative minimum tax
(AMT) in 2005. During the third quarter of 2005, we
recorded a benefit from income taxes in continuing operations
primarily due to a less than expected 2004 state tax liability
and a related reduction in our estimated 2005 state tax
liability. We recorded a tax benefit in discontinued operations
of $1.4 million for the nine months ended
September 30, 2005, primarily 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 has
22
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
|
|
Note 7. |
Income Taxes (Continued) |
decreased $41.7 million primarily due to the reversal of
temporary differences and the utilization of net operating loss
carryforwards and general business credits to offset taxable
income during the year. For the nine months ended
September 30, 2004, the valuation allowance decreased
$19.5 million primarily due to the reversal of temporary
differences, partially offset by increases in net operating loss
carryforwards.
In the ordinary course of business, our income tax returns are
examined by various taxing authorities, including the Internal
Revenue Service (the IRS). The IRS is currently
examining our income tax returns for the 2000 through 2002 tax
years. We cannot predict the ultimate outcome of this
examination; however, we believe adequate provision has been
made for any adjustments that may result from the IRS
examination.
Note 8. Stockholders
Equity
During the nine months ended September 30, 2005, we issued
approximately 741,000 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
nine months ended September 30, 2005. 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.
For purposes of pro forma disclosures under Statement of
Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure
(SFAS No. 148), 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 assuming we accounted
for our stock option grants using the fair value method (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Reported net
income(1)
|
|
$ |
21,966 |
|
|
$ |
24,400 |
|
|
$ |
82,741 |
|
|
$ |
21,916 |
|
Stock option compensation expense
|
|
|
818 |
|
|
|
1,025 |
|
|
|
2,901 |
|
|
|
4,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
21,148 |
|
|
$ |
23,375 |
|
|
$ |
79,840 |
|
|
$ |
17,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported basic net income per share
|
|
$ |
0.20 |
|
|
$ |
0.23 |
|
|
$ |
0.76 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic net income per share
|
|
$ |
0.19 |
|
|
$ |
0.22 |
|
|
$ |
0.73 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported diluted net income per share
|
|
$ |
0.18 |
|
|
$ |
0.20 |
|
|
$ |
0.67 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted net income per share
|
|
$ |
0.17 |
|
|
$ |
0.19 |
|
|
$ |
0.65 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes total charges to our condensed consolidated statements
of income related to restricted stock grants for the three-month
periods ended September 30, 2005 and 2004 of approximately
$1.8 million and $1.1 million, respectively, and for
the nine-month periods ended September 30, 2005 and 2004 of
approximately $5.0 million and $2.7 million,
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, when
effective, will eliminate 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,
23
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
|
|
Note 8. |
Stockholders Equity (Continued) |
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 provides further clarification
on the implementation of SFAS No. 123R and provides
alternative phase-in methods. The SEC announced in the second
quarter of 2005 that it is extending the phase-in period for
expensing of stock-based awards, 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 and, based on the current estimated
value of unvested stock options, we expect wages and related
expenses to increase approximately $500,000 in 2006.
Note 9. Contingencies and
Legal Proceedings
We are contingently liable for approximately $11.3 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 $51.1 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 a liability of approximately
$578,000, included in Other accrued liabilities on
the condensed consolidated balance sheets, representing the
estimated fair value of guarantees.
As previously reported in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2004, on
January 26, 2005, a putative class action complaint brought
on behalf of all shareholders of the Company was filed against
the Company and each of its directors in the Delaware Chancery
Court in New Castle County. The complaint, captioned Chaya
Perlstein v. William R. Floyd, et. al., Civil Action
No. CA1050-N, asserted a claim for breach of fiduciary duty
in connection with our response to an unsolicited expression of
interest by a group of investors that collectively had purchased
8.1% of our common stock on the open market prior to
January 24, 2005. A second, substantially identical,
putative class action complaint was filed in the same court on
February 1, 2005, bearing the caption Robert Strougo v.
Beverly Enterprises, Inc., et. al., Civil Action
No. CA1067-N. On February 23, 2005, the Delaware
Chancery Court consolidated these cases under the caption In
re Beverly Shareholders Litigation, Civil Action
No. CA1050-N, and designated the Floyd complaint as
operative. The Company moved to dismiss the consolidated action
on May 9, 2005. On July 13, 2005, the plaintiffs
requested a voluntary dismissal of the consolidated action. The
court granted the request and dismissed the consolidated action
with prejudice on July 14, 2005.
As previously reported in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2004, on
October 31, 2002, a shareholder derivative action entitled
Paul Dunne and Helene Dunne, derivatively on behalf of
nominal defendant Beverly Enterprises, Inc. v. Beryl F. Anthony,
Jr., et. al. was filed in the Circuit Court of Sebastian
County, Arkansas, Fort Smith Division
(No. CIV-2002-1241). This case was purportedly brought
derivatively on our behalf against various current and former
officers and directors. The complaint alleges causes of action
for breach of fiduciary duty against the defendants based on:
(1) allegations that defendants failed to establish and
maintain adequate accounting controls such that we failed to
record adequate reserves for general and professional liability
costs; and (2) allegations that certain defendants sold
Company stock while purportedly in possession of material
non-public information. On May 16, 2003, two additional
derivative complaints (Holcombe v. Floyd, et. al. and Flowers
v. Floyd, et. al.) were filed and
24
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005
(Unaudited)
|
|
Note 9. |
Contingencies and Legal
Proceedings (Continued) |
subsequently transferred to the Circuit Court of Sebastian
County, Arkansas, Fort Smith Division and consolidated with
the Dunne action as Holcomb v. Beverly Enterprises, Inc.
The Dunnes were subsequently dismissed as plaintiffs. On
November 19, 2004, Beverly moved to dismiss these actions
on the grounds that the plaintiffs failed to make a pre-suit
demand upon Beverlys Board of Directors and did not show
that the failure to make such demand was excused as futile. The
other defendants also moved to dismiss the actions for failure
to state a claim upon which relief can be granted. Plaintiffs
have opposed both motions. On June 23, 2005, the court
dismissed the actions with prejudice on the grounds that the
plaintiffs failed to make the requisite demand on the board of
directors.
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. 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. In addition, we are subject to audits by various
governmental agencies. We do not believe that the ultimate
resolution of such 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. |
25
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 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 September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ |
513,267 |
|
|
$ |
39,864 |
|
|
$ |
28,876 |
|
|
$ |
1,935 |
|
|
$ |
583,942 |
|
|
$ |
393 |
|
|
Intercompany revenues
|
|
|
59 |
|
|
|
40,987 |
|
|
|
|
|
|
|
1,772 |
|
|
|
42,818 |
|
|
|
|
|
|
Interest income
|
|
|
87 |
|
|
|
5 |
|
|
|
|
|
|
|
2,315 |
|
|
|
2,407 |
|
|
|
|
|
|
Interest expense
|
|
|
1,329 |
|
|
|
|
|
|
|
|
|
|
|
9,375 |
|
|
|
10,704 |
|
|
|
|
|
|
Depreciation and amortization
|
|
|
16,922 |
|
|
|
260 |
|
|
|
258 |
|
|
|
1,915 |
|
|
|
19,355 |
|
|
|
6 |
|
|
Pre-tax income (loss)
|
|
|
36,680 |
|
|
|
13,785 |
|
|
|
4,867 |
|
|
|
(34,476 |
) |
|
|
20,856 |
|
|
|
440 |
|
|
Goodwill
|
|
|
44,170 |
|
|
|
|
|
|
|
77,920 |
|
|
|
|
|
|
|
122,090 |
|
|
|
|
|
|
Total assets
|
|
|
905,551 |
|
|
|
36,163 |
|
|
|
104,862 |
|
|
|
360,987 |
|
|
|
1,407,563 |
|
|
|
3,984 |
|
|
Capital expenditures
|
|
|
20,758 |
|
|
|
46 |
|
|
|
138 |
|
|
|
1,280 |
|
|
|
22,222 |
|
|
|
792 |
|
Three months ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ |
472,962 |
|
|
$ |
31,975 |
|
|
$ |
19,062 |
|
|
$ |
843 |
|
|
$ |
524,842 |
|
|
$ |
16,489 |
|
|
Intercompany revenues
|
|
|
|
|
|
|
36,946 |
|
|
|
|
|
|
|
849 |
|
|
|
37,795 |
|
|
|
|
|
|
Interest income
|
|
|
458 |
|
|
|
8 |
|
|
|
|
|
|
|
780 |
|
|
|
1,246 |
|
|
|
(7 |
) |
|
Interest expense
|
|
|
1,756 |
|
|
|
|
|
|
|
|
|
|
|
9,333 |
|
|
|
11,089 |
|
|
|
34 |
|
|
Depreciation and amortization
|
|
|
13,212 |
|
|
|
231 |
|
|
|
217 |
|
|
|
1,964 |
|
|
|
15,624 |
|
|
|
323 |
|
|
Pre-tax income (loss)
|
|
|
28,093 |
|
|
|
9,697 |
|
|
|
2,863 |
|
|
|
(16,801 |
) |
|
|
23,852 |
|
|
|
1,025 |
|
|
Goodwill
|
|
|
44,159 |
|
|
|
|
|
|
|
79,714 |
|
|
|
|
|
|
|
123,873 |
|
|
|
594 |
|
|
Total assets
|
|
|
845,409 |
|
|
|
31,079 |
|
|
|
97,658 |
|
|
|
337,897 |
|
|
|
1,312,043 |
|
|
|
22,629 |
|
|
Capital expenditures
|
|
|
14,446 |
|
|
|
255 |
|
|
|
287 |
|
|
|
717 |
|
|
|
15,705 |
|
|
|
346 |
|
Nine months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ |
1,564,351 |
|
|
$ |
113,068 |
|
|
$ |
79,225 |
|
|
$ |
4,911 |
|
|
|
1,761,555 |
|
|
$ |
11,489 |
|
|
Intercompany revenues
|
|
|
212 |
|
|
|
122,455 |
|
|
|
|
|
|
|
3,742 |
|
|
|
126,409 |
|
|
|
|
|
|
Interest income
|
|
|
255 |
|
|
|
15 |
|
|
|
57 |
|
|
|
6,107 |
|
|
|
6,434 |
|
|
|
4 |
|
|
Interest expense
|
|
|
4,223 |
|
|
|
1 |
|
|
|
|
|
|
|
27,827 |
|
|
|
32,051 |
|
|
|
40 |
|
|
Depreciation and amortization
|
|
|
46,420 |
|
|
|
773 |
|
|
|
707 |
|
|
|
5,721 |
|
|
|
53,621 |
|
|
|
352 |
|
|
Pre-tax income (loss)
|
|
|
125,093 |
|
|
|
43,865 |
|
|
|
9,419 |
|
|
|
(96,576 |
) |
|
|
81,801 |
|
|
|
2,190 |
|
|
Goodwill
|
|
|
44,170 |
|
|
|
|
|
|
|
77,920 |
|
|
|
|
|
|
|
122,090 |
|
|
|
|
|
|
Total assets
|
|
|
905,551 |
|
|
|
36,163 |
|
|
|
104,862 |
|
|
|
360,987 |
|
|
|
1,407,563 |
|
|
|
3,984 |
|
|
Capital expenditures
|
|
|
59,334 |
|
|
|
500 |
|
|
|
798 |
|
|
|
5,800 |
|
|
|
66,432 |
|
|
|
1,762 |
|
Nine months ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ |
1,401,546 |
|
|
$ |
89,023 |
|
|
$ |
42,214 |
|
|
$ |
4,013 |
|
|
$ |
1,536,796 |
|
|
$ |
75,470 |
|
|
Intercompany revenues
|
|
|
|
|
|
|
112,228 |
|
|
|
|
|
|
|
2,254 |
|
|
|
114,482 |
|
|
|
|
|
|
Interest income
|
|
|
1,720 |
|
|
|
13 |
|
|
|
1 |
|
|
|
2,356 |
|
|
|
4,090 |
|
|
|
19 |
|
|
Interest expense
|
|
|
5,931 |
|
|
|
1 |
|
|
|
|
|
|
|
29,033 |
|
|
|
34,965 |
|
|
|
281 |
|
|
Depreciation and amortization
|
|
|
38,770 |
|
|
|
650 |
|
|
|
427 |
|
|
|
6,016 |
|
|
|
45,863 |
|
|
|
1,793 |
|
|
Pre-tax income (loss)
|
|
|
75,017 |
|
|
|
34,530 |
|
|
|
6,439 |
|
|
|
(82,320 |
) |
|
|
33,666 |
|
|
|
(8,426 |
) |
|
Goodwill
|
|
|
44,159 |
|
|
|
|
|
|
|
79,714 |
|
|
|
|
|
|
|
123,873 |
|
|
|
594 |
|
|
Total assets
|
|
|
845,409 |
|
|
|
31,079 |
|
|
|
97,658 |
|
|
|
337,897 |
|
|
|
1,312,043 |
|
|
|
22,629 |
|
|
Capital expenditures
|
|
|
31,585 |
|
|
|
742 |
|
|
|
418 |
|
|
|
3,946 |
|
|
|
36,691 |
|
|
|
1,273 |
|
|
|
(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 a special pre-tax charge of
$504,000 and a pre-tax credit of $473,000 for the three months
ended September 30, 2005 and 2004, respectively, and
special pre-tax charges totaling $479,000 and $1.1 million
for the nine months ended September 30, 2005 and 2004,
respectively for asset impairments, workforce reductions and
other unusual items, as well as $11.5 million and
$36.6 million for the three-month and nine-month periods
ending September 30, 2005, respectively, 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 losses on sales and exit
costs of $311,000 for the three months ended September 30,
2005, and net gains on sales, exit costs, asset impairments and
other unusual items of $812,000 for the three months ended
September 30, 2004. Pre-tax income (loss) includes net
gains on sales and exit costs of $1.8 million for the nine
months ended September 30, 2005, and net losses on sales,
exit costs, asset impairments and other unusual items of
$3.4 million for the nine months ended September 30,
2004. |
26
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Beverly Enterprises, Inc.
We have reviewed the condensed consolidated balance sheet of
Beverly Enterprises, Inc. as of September 30, 2005, and the
related condensed consolidated statements of income for the
three-month and nine-month periods ended September 30, 2005
and 2004, and the condensed consolidated statements of cash
flows for the nine-month periods ended September 30, 2005
and 2004 (Form 10-Q). These financial
statements are the responsibility of the Companys
management.
We conducted our review in accordance with the 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 the 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 review, we are not aware of any material
modifications that should be made to the 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 the 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
November 1, 2005
27
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. Our Board of Directors unanimously
rejected the Formation Capital Consortiums proposal, and
on March 22, 2005, we announced that our Board of Directors
had unanimously voted to conduct an auction process, to be
overseen by the independent members of the Board, to maximize
value for all of our stockholders as soon as practicable through
a sale of BEI.
On April 11, 2005, we entered into a Settlement Agreement
with the Formation Capital Consortium and Mr. Whitman under
which, among other things, they 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. Concurrently, we agreed to allow the Formation
Capital Consortium to participate in our on-going sales process
on the same basis as all other potential buyers.
On August 16, 2005, following two rounds of due diligence
and bidding by potential buyers, we entered into an Agreement
and Plan of Merger (the Merger Agreement) with North
American Senior Care, Inc. (NASC), NASC Acquisition
Corp., a wholly-owned subsidiary of NASC (Merger
Sub), and SBEV Property Holdings LLC, which provides that
Merger Sub will be merged with and into the Company (the
Merger) and the holders of outstanding shares of our
common stock would receive cash consideration of $12.80 per
share.
On August 19, 2005, we announced that we had received a
proposal from the Formation Capital Consortium to acquire,
subject to certain conditions, all of the outstanding shares of
our common stock for $12.90 per share in cash. On
August 23, 2005, we entered into a First Amendment to the
Merger Agreement with NASC, pursuant to which NASC agreed to
increase the merger consideration to $13.00 per share of our
outstanding common stock. On September 22, 2005, we entered
into a Second Amendment to the Merger Agreement with NASC which,
among other things, granted NASC an extension of time to deliver
debt commitment letters and a solvency opinion. In exchange for
the extension of time, NASC paid BEI an additional
$3.0 million good faith deposit, which increased the total
initial good faith deposit to $10.0 million.
28
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS (Continued)
In addition, NASC is obligated to deliver the full
$60.0 million good faith deposit on an unconditional basis
and to provide an unconditional $350.0 million equity
commitment by November 18, 2005. NASC delivered the debt
commitment letters and the solvency opinion on October 21,
2005.
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 Formation
Capital Consortiums indication of interest, the proxy
contest and the sales process, including legal fees, investment
banking advisory fees and other related costs. During the first
quarter of 2005, we engaged two investment banking firms to
assist us in evaluating proposals, both solicited and
unsolicited, to acquire us or any of our assets or businesses.
Under the terms of the engagements we are required to pay fees
to the two firms whether or not we are sold. In the case of a
sale, the fees are a percentage of the consideration received in
connection with our sale, with the percentage of compensation
increasing with an increase in the sales value. If there is no
sale, the firms each receive a flat fee. As a result, we
recorded a liability of $19.8 million, of which
$4.5 million has been paid as of September 30, 2005,
with the remaining liability included in Other accrued
liabilities on the September 30, 2005 condensed
consolidated balance sheet. We have also incurred other costs
related to the sales process and have recorded additional
expenses of $16.8 million, of which $13.6 million has
been paid and $3.2 million remains accrued at
September 30, 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 additional
advisory fees, legal fees and other expenses.
Despite the Formation Capital Consortiums indication of
interest and subsequent sales process, our business unit
operating and financial trends continue to be positive. Our 2005
third quarter included revenue growth of nearly 11% with
improvements in operating margins, compared to the year-earlier
period. We continue to be dedicated to providing quality of
care, executing the specific initiatives we have developed to
achieve profitable growth in our business segments and improving
our financial position.
Our three principal business segments performed ahead of 2004
third-quarter results. On a continuing operations basis, our
Nursing Facilities revenue increased 8.5% and pre-tax income
increased $8.6 million, including $2.9 million due to
favorable rate increases in California. Aegis revenues from
third-party customers rose 25%, compared with the 2004 third
quarter, reflecting increased business with existing clients and
the addition of customers. AseraCare revenues were up 51%,
primarily due to a 46% increase in average daily census and the
openings of 17 new hospice locations and five new home
health agencies.
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 for the
three months ended September 30, 2005, increased 23% from
the same period in 2004, excluding $11.5 million of costs
related to the sales process discussed above and
$2.9 million of a retroactive Medicaid rate adjustment in
California for the 2005 third quarter, as well as, $176,000 of
costs related to early extinguishments of debt in the 2004 third
quarter.
Critical Accounting Policy Update
|
|
|
General and Professional Liabilities |
Our long-term other liabilities and deferred items decreased
$56.2 million from December 31, 2004, and our cash
flows for the nine months ended September 30, 2005
decreased $49.5 million, primarily due to payments for
patient claims settlements. Our provision for liabilities that
may arise out of patient care and related services is 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
29
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS (Continued)
recent trends of claims, settlements and other relevant data. As
part of this valuation, patient care liabilities are discounted
at our incremental borrowing rate of 8.5%, using actuarially
determined claims payment timing patterns. Our next actuarial
study will be completed in late 2005 using data through
September 30, 2005. Between each independent actuarial
evaluation, the trends with respect to claims and settlements
made and other relevant data will change. As a result, there is
a reasonable possibility that our liabilities for patient care
and related services, as determined by us and our actuaries, may
be adjusted by a material amount in the near term. We cannot
currently predict the impact, if any, of our current data trends
on the actuarial study to be completed later this year.
Operating Results
Results of operations for the three-month and nine-month periods
ended September 30, 2005 and 2004, reflect asset
dispositions during 2005 and 2004, as discontinued operations.
The following discussions reflect this reclassification and
include the 22 California facilities as held and used (see
Item 1. Note 5).
|
|
|
Results of Operations Continuing
Operations |
Third Quarter 2005 Compared to Third Quarter 2004. We
reported pre-tax income from continuing operations of
$20.9 million for the three months ended September 30,
2005, compared to a pre-tax income of $23.9 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 38%, for the three months ended
September 30, 2005, compared to the same period in 2004.
Pre-tax income from continuing operations for the third quarter
of 2005 included the following special pre-tax charges:
|
|
|
|
|
$11.5 million for costs related to the sales process (see
Item 1. Note 4). These costs primarily
include legal fees, investment banking advisory fees and other
related costs; and |
|
|
|
$400,000 for certain retention and severance agreements. |
Nine Months 2005 Compared to Nine Months 2004. We
reported an increase in pre-tax income from continuing
operations to $81.8 million for the nine months ended
September 30, 2005, compared to $33.7 million for the
same period in 2004. The year-over-year 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 58% for the nine months ended September 30,
2005, compared to the same period in 2004.
Pre-tax income from continuing operations for 2005 included the
following special pre-tax charges:
|
|
|
|
|
$36.6 million for costs related to the sales process, of
which $18.1 million has been paid and $18.5 million
remains accrued as of September 30, 2005 (see
Item 1. Note 4). These costs include
legal, investment banking advisory fees and other related costs;
and |
|
|
|
$400,000 for certain retention and severance agreements. |
Pre-tax income from continuing operations for 2004 included the
following special pre-tax charges (adjustments):
|
|
|
|
|
$40.4 million for costs related to the early extinguishment
of debt. During the second quarter of 2004, we issued
$215.0 million of
77/8%
senior subordinated notes. The proceeds from the senior
subordinated |
30
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS (Continued)
|
|
|
|
|
notes, together with cash on hand, were used to purchase
$190.6 million of our
95/8%
senior notes and to pay related fees and expenses. In
conjunction with these transactions, we paid a prepayment
premium of $36.1 million and wrote off $3.7 million of
related deferred financing costs. We also paid $681,000 in
tender fees related to the cash tender offer on the
95/8%
senior notes; |
|
|
|
$2.9 million for asset impairments, primarily related to
two nursing facilities; |
|
|
|
$443,000 for workforce reduction charges, less $346,000 in
related credits, primarily due to the cancellation of restricted
stock. The $443,000 for workforce reductions primarily related
to 35 associates who were notified in 2004 that their positions
would be eliminated and included $401,000 of cash expenses paid
during the year ended December 31, 2004; |
|
|
|
$1.3 million reversal of a previously recorded charge as a
result of an impaired foreign investment being sold above its
carrying value; |
|
|
|
$375,000 adjustment to our Florida disposition costs as a result
of collecting a note receivable, received as partial payment for
that transaction, above the carrying value; and |
|
|
|
$161,000 adjustment to certain retention and severance
agreements. |
Revenues from external customers by operating segment for the
three months and nine months ended September 30 (in
thousands) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Three Months | |
|
Nine Months | |
|
Ended | |
|
Ended | |
|
|
Ended | |
|
Ended | |
|
September 30, | |
|
September 30, | |
|
|
September 30, | |
|
September 30, | |
|
2005 vs. 2004 | |
|
2005 vs. 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Nursing Facilities
|
|
$ |
513,267 |
|
|
$ |
472,962 |
|
|
$ |
1,564,351 |
|
|
$ |
1,401,546 |
|
|
$ |
40,305 |
|
|
|
8.5 |
% |
|
$ |
162,805 |
|
|
|
11.6 |
% |
Aegis
|
|
|
39,864 |
|
|
|
31,975 |
|
|
|
113,068 |
|
|
|
89,023 |
|
|
|
7,889 |
|
|
|
24.7 |
% |
|
|
24,045 |
|
|
|
27.0 |
% |
AseraCare
|
|
|
28,876 |
|
|
|
19,062 |
|
|
|
79,225 |
|
|
|
42,214 |
|
|
|
9,814 |
|
|
|
51.5 |
% |
|
|
37,011 |
|
|
|
87.7 |
% |
Other
|
|
|
1,935 |
|
|
|
843 |
|
|
|
4,911 |
|
|
|
4,013 |
|
|
|
1,092 |
|
|
|
129.5 |
% |
|
|
898 |
|
|
|
22.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
583,942 |
|
|
$ |
524,842 |
|
|
$ |
1,761,555 |
|
|
$ |
1,536,796 |
|
|
$ |
59,100 |
|
|
|
11.3 |
% |
|
$ |
224,759 |
|
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2005 Compared to Third Quarter 2004.
Approximately 88% and 90% of our revenues for the three
months ended September 30, 2005 and 2004, respectively,
were derived from services provided by our Nursing Facilities
segment. The increase in total revenues of $59.1 million
for the three months ended September 30, 2005, as compared
to the same period in 2004, is primarily due to the following,
by operating segment:
|
|
|
|
|
an increase of $23.9 million, $4.2 million and
$2.6 million due to increases in Medicaid, Medicare and
private payment rates, respectively; |
|
|
|
an increase of $7.4 million due to a positive shift in our
patient mix; and |
|
|
|
an increase of $400,000 due to an increase in census; |
31
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS (Continued)
|
|
|
|
|
an increase of $7.9 million from growth in Aegis
external therapy business, including a 4% growth in average
revenue per contract and an increase in new customers; |
|
|
|
|
|
an increase of $9.8 million, including $3.6 million
due to the openings of 17 new hospice locations and
$6.2 million from the remaining operations. |
Nine Months 2005 Compared to Nine Months 2004.
Approximately 89% and 91% of our revenues for the nine
months ended September 30, 2005 and 2004, respectively,
were derived from services provided by our Nursing Facilities
segment. The increase in total revenues of $224.8 million
for the nine months ended September 30, 2005, as compared
to the same period in 2004, is primarily due to the following,
by operating segment:
|
|
|
|
|
an increase of $54.9 million, primarily due to retroactive
Medicaid rate adjustments in Indiana, Pennsylvania and
California; |
|
|
|
an increase of $65.5 million, $17.9 million and
$9.8 million due to increases in Medicaid, Medicare and
private payment rates, respectively; |
|
|
|
an increase of $17.1 million due to a positive shift in our
patient mix; |
|
|
|
an increase of $5.9 million in Medicare Part B
revenues, primarily due to increased therapy-related services;
partially offset by |
|
|
|
a decrease of $4.9 million due to one less calendar day
during 2005, as compared to the same period in 2004; and |
|
|
|
a decrease of $3.5 million due to a decline in census; |
|
|
|
|
|
an increase of $24.0 million from growth in Aegis
external therapy business, including a 4% growth in average
revenue per contract and an increase in new customers; |
|
|
|
|
|
an increase of $18.1 million due to the Hospice USA
acquisition; and |
|
|
|
an increase of $18.9 million, including $7.2 million
due to the openings of new hospice locations and
$11.7 million from the remaining operations. |
32
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS (Continued)
The following table details costs and expenses, excluding
special pre-tax charges (adjustments), for the three months and
nine months ended September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Three Months | |
|
Nine Months | |
|
Ended | |
|
Ended | |
|
|
Ended | |
|
Ended | |
|
September 30, | |
|
September 30, | |
|
|
September 30, | |
|
September 30, | |
|
2005 vs. 2004 | |
|
2005 vs. 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Wages and related
|
|
$ |
331,126 |
|
|
$ |
311,850 |
|
|
$ |
971,216 |
|
|
$ |
889,193 |
|
|
$ |
19,276 |
|
|
|
6.2 |
% |
|
$ |
82,023 |
|
|
|
9.2 |
% |
Provision for insurance
and related items
|
|
|
35,807 |
|
|
|
29,590 |
|
|
|
97,416 |
|
|
|
94,225 |
|
|
|
6,217 |
|
|
|
21.0 |
% |
|
|
3,191 |
|
|
|
3.4 |
% |
Other operating and
administrative
|
|
|
156,527 |
|
|
|
134,962 |
|
|
|
495,506 |
|
|
|
402,036 |
|
|
|
21,565 |
|
|
|
16.0 |
% |
|
|
93,470 |
|
|
|
23.2 |
% |
Depreciation and
amortization
|
|
|
19,355 |
|
|
|
15,624 |
|
|
|
53,621 |
|
|
|
45,863 |
|
|
|
3,731 |
|
|
|
23.9 |
% |
|
|
7,758 |
|
|
|
16.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses excluding special pre-tax charges
(adjustments)
|
|
$ |
542,815 |
|
|
$ |
492,026 |
|
|
$ |
1,617,759 |
|
|
$ |
1,431,317 |
|
|
$ |
50,789 |
|
|
|
10.3 |
% |
|
$ |
186,442 |
|
|
|
13.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2005 Compared to Third Quarter 2004.
Excluding special pre-tax charges (adjustments) discussed
above, our total costs and expenses increased $50.8 million
quarter over quarter, primarily due to the following:
|
|
|
|
|
an increase of $10.9 million in state-imposed provider
taxes, primarily associated with changes in state plans,
including a retroactive Medicaid rate adjustment in California,
included in our Nursing Facilities segment; |
|
|
|
an increase of $9.5 million in Aegis wages and related
expenses due to increased staffing associated with the increased
volume of new contracts. This includes a $560,000, or 12%,
increase in Aegis contract therapy costs; |
|
|
|
an increase of $6.2 million in our provision for insurance
and related items, related to the discounting impact of the
acceleration of certain patient care liability settlement
payments; |
|
|
|
an increase of $4.6 million in AseraCare wages and related
expenses primarily due to openings of new hospice and home
health locations; |
|
|
|
an increase in depreciation and amortization expense, primarily
due to an increase in capital expenditures in our Nursing
Facilities segment and incremental depreciation and amortization
related to our facilities in California which had been
previously held for sale; |
|
|
|
an increase of $2.3 million in contracted services; and |
|
|
|
an increase of $700,000 in Nursing Facilities wages and related
expenses primarily due to a 3% increase in the weighted average
wage rate, substantially offset by a decrease in employee
benefit plan expenses. |
Nine Months 2005 Compared to Nine Months 2004. Excluding
special pre-tax charges (adjustments) discussed above, our total
costs and expenses increased $186.4 million, primarily due
to the following:
|
|
|
|
|
an increase of $68.3 million in state-imposed provider
taxes, primarily associated with Medicaid rate adjustments in
Indiana, Pennsylvania and California, included in our Nursing
Facilities segment; |
33
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS (Continued)
|
|
|
|
|
an increase of $28.4 million in Aegis wages and related
expenses due to increased staffing associated with the higher
volume of new contracts. This increase includes a
$3.9 million, or 32%, increase in Aegis contract therapy
cost; |
|
|
|
an increase of $14.8 million in Nursing Facilities wages
and related expenses, primarily due to a 3.8 % increase in the
weighted average wage rate, partially offset by a decrease in
employee benefit plan expenses; |
|
|
|
an increase of $26.4 million due to the Hospice USA
acquisition and the opening of 17 new hospice locations and five
home health centers; |
|
|
|
an increase of $8.0 million in contracted services; |
|
|
|
an increase in depreciation and amortization expense, primarily
due to an increase in capital expenditures in our Nursing
Facilities segment and incremental depreciation and amortization
related to our facilities in California which had previously
been held for sale; |
|
|
|
A $3.2 million increase in our provision for insurance and
related items, primarily related to the discounting impact of
the acceleration of certain patient care liability settlement
payments. |
|
|
|
Other Income and Expenses, Net |
Other income and expenses for the three months and nine months
ended September 30 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
|
|
|
Ended | |
|
Ended | |
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
September 30, | |
|
September 30, | |
|
|
September 30, | |
|
September 30, | |
|
2005 vs. 2004 | |
|
2005 vs. 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$ |
(10,704 |
) |
|
$ |
(11,089 |
) |
|
$ |
(32,051 |
) |
|
$ |
(34,965 |
) |
|
$ |
385 |
|
|
|
(3.5 |
)% |
|
$ |
2,914 |
|
|
|
(8.3 |
)% |
Costs related to early extinguishment of debt(1)
|
|
|
|
|
|
|
(176 |
) |
|
|
|
|
|
|
(40,430 |
) |
|
|
176 |
|
|
|
|
|
|
|
40,430 |
|
|
|
|
|
Costs related to the sales process of the Company(1)
|
|
|
(11,514 |
) |
|
|
|
|
|
|
(36,566 |
) |
|
|
|
|
|
|
(11,514 |
) |
|
|
|
|
|
|
(36,566 |
) |
|
|
|
|
Interest income
|
|
|
2,407 |
|
|
|
1,246 |
|
|
|
6,434 |
|
|
|
4,090 |
|
|
|
1,161 |
|
|
|
93.2 |
% |
|
|
2,344 |
|
|
|
57.3 |
% |
Net gains on dispositions
|
|
|
44 |
|
|
|
582 |
|
|
|
667 |
|
|
|
614 |
|
|
|
(538 |
) |
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
$ |
(19,767 |
) |
|
$ |
(9,437 |
) |
|
$ |
(61,516 |
) |
|
$ |
(70,691 |
) |
|
$ |
(10,330 |
) |
|
|
109.5 |
% |
|
$ |
9,175 |
|
|
|
(13.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
See Results of Operations Continuing Operations
for a discussion of these special pre-tax charges. |
Interest expense decreased 3% and 8% for the three and
nine-month periods ended September 30, 2005, as compared to
the same periods in 2004, respectively, primarily due to the
June 2004 refinancing of our
95/8%
senior notes and the reduction of debt through the use of
proceeds from sales of facilities.
|
|
|
Results of Operations Discontinued
Operations |
The results of operations of facilities, clinics and other
assets disposed of in the three-month and nine-month periods
ended September 30, 2005, 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 to these
transactions.
34
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS (Continued)
A summary of discontinued operations by operating segment, is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Nursing | |
|
|
|
Home | |
|
|
|
Nursing | |
|
|
|
Home | |
|
|
|
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Three Months Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
393 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
393 |
|
|
$ |
12,926 |
|
|
$ |
3,563 |
|
|
$ |
|
|
|
$ |
16,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)(1)
|
|
$ |
733 |
|
|
$ |
4 |
|
|
$ |
14 |
|
|
$ |
751 |
|
|
$ |
(31 |
) |
|
$ |
211 |
|
|
$ |
33 |
|
|
$ |
213 |
|
Gain (loss) on sales and exit costs
|
|
|
(311 |
) |
|
|
|
|
|
|
|
|
|
|
(311 |
) |
|
|
228 |
|
|
|
(24 |
) |
|
|
366 |
|
|
|
570 |
|
Impairments and other unusual items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
$ |
422 |
|
|
$ |
4 |
|
|
$ |
14 |
|
|
|
440 |
|
|
$ |
439 |
|
|
$ |
187 |
|
|
$ |
399 |
|
|
|
1,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit from state income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes net interest expense of $41,000 for 2004, as well as
depreciation and amortization expense of $6,000 and $323,000 for
2005 and 2004, respectively. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Nursing | |
|
|
|
Home | |
|
|
|
Nursing | |
|
|
|
Home | |
|
|
|
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
Facilities | |
|
Matrix | |
|
Care | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Nine Months Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
8,943 |
|
|
$ |
2,546 |
|
|
$ |
|
|
|
$ |
11,489 |
|
|
$ |
64,856 |
|
|
$ |
10,466 |
|
|
$ |
148 |
|
|
$ |
75,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)(1)
|
|
$ |
129 |
|
|
$ |
456 |
|
|
$ |
(220 |
) |
|
$ |
365 |
|
|
$ |
(5,898 |
) |
|
$ |
859 |
|
|
$ |
1 |
|
|
$ |
(5,038 |
) |
Gain (loss) on sales and exit costs
|
|
|
1,825 |
|
|
|
|
|
|
|
|
|
|
|
1,825 |
|
|
|
(853 |
) |
|
|
(49 |
) |
|
|
369 |
|
|
|
(533 |
) |
Impairments and other unusual items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,855 |
) |
|
|
|
|
|
|
|
|
|
|
(2,855 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss)
|
|
$ |
1,954 |
|
|
$ |
456 |
|
|
$ |
(220 |
) |
|
|
2,190 |
|
|
$ |
(9,606 |
) |
|
$ |
810 |
|
|
$ |
370 |
|
|
|
(8,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) state income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(8,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes net interest expense of $36,000 and $262,000 for 2005
and 2004, respectively, as well as depreciation and amortization
expense of $352,000 and $1.8 million for 2005 and 2004,
respectively. |
35
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS (Continued)
Our provision for income taxes from continuing operations of
$2.7 million for the nine months ended September 30,
2005 primarily relates to state income taxes estimated to be due
in separate return filing states where we conduct
business, as well as federal alternative minimum tax
(AMT). We recorded a tax benefit in discontinued
operations of $1.4 million for the nine months ended
September 30, 2005, primarily related to state tax refunds
in a state where we have ceased operations. The valuation
allowance on our net deferred tax assets decreased by
$41.7 million during the nine months ended
September 30, 2005 to $116.6 million, primarily due to
the reversal of temporary differences and the utilization of net
operating loss carryforwards and general business tax credits to
offset taxable income for the period.
In December 2004, the FASB issued SFAS No. 123R which,
when effective, will eliminate 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 provides further clarification
on the implementation of SFAS No. 123R and provides
alternative phase-in methods. The SEC announced in the second
quarter of 2005 that it is extending the phase-in period for
expensing of stock-based awards, 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 and based on the current estimated value
of unvested stock options, we expect wages and related expenses
to increase approximately $500,000 in 2006.
Liquidity and Capital Resources
At September 30, 2005, we had $217.8 million in cash
and cash equivalents and $7.3 million of investments with
maturities between three and six months. We anticipate that
$42.8 million of our 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 September 30, 2005, we
had approximately $12.9 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 September 30, 2005, we had
positive working capital of $191.2 million reflected on our
condensed consolidated balance sheet, a 16% increase from
year-end 2004. At September 30, 2005, we had
$90 million of unused commitments under our revolving
credit facility and $17.7 million of unused commitments
under our letter of credit facility.
36
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS (Continued)
Cash Flows. Our cash flows consisted of the following for
the three-month and nine-month periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net cash provided by (used for):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
35,737 |
|
|
$ |
59,696 |
|
|
$ |
71,104 |
|
|
$ |
37,720 |
|
Investing activities
|
|
|
(24,011 |
) |
|
|
(65,306 |
) |
|
|
(60,567 |
) |
|
|
(51,147 |
) |
Financing activities
|
|
|
(6,471 |
) |
|
|
(3,493 |
) |
|
|
(8,359 |
) |
|
|
(38,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$ |
5,255 |
|
|
$ |
(9,103 |
) |
|
$ |
2,178 |
|
|
$ |
(51,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities, under the direct
method, for the nine months ended September 30, consists of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash received from patients and third-party payors
|
|
$ |
1,727,883 |
|
|
$ |
1,558,311 |
|
Interest received
|
|
|
6,438 |
|
|
|
4,109 |
|
Cash paid to suppliers, employees and others
|
|
|
(1,640,214 |
) |
|
|
(1,487,910 |
) |
Interest paid
|
|
|
(24,834 |
) |
|
|
(30,969 |
) |
Income tax (paid) refunds received
|
|
|
1,831 |
|
|
|
(5,821 |
) |
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
71,104 |
|
|
$ |
37,720 |
|
|
|
|
|
|
|
|
The $71.1 million of net cash provided by operating
activities and $14.2 million of proceeds from dispositions
were primarily used to fund capital expenditures of
$68.2 million and to pay down long-term debt for the nine
months ended September 30, 2005. For the nine months ended
September 30, 2004, net cash provided by operating
activities was affected by an increase in accounts receivable,
principally 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 detriment to cash from
operating activities on our condensed consolidated statement of
cash flows for 2004. Accounts receivable increased during the
nine months ended September 30, 2005, primarily due to the
recording of retroactive receivables from Indiana, Pennsylvania
and California associated with a change in the Medicaid plans in
those states and increased revenues.
Debt transaction. During June 2005, we entered into a
mortgage loan for $5.2 million for the construction of a
nursing facility. This loan bears interest at 30-day LIBOR plus
2.5%, requires monthly principal and interest payments and is
secured by the real property and a security interest in the
personal property of the nursing facility.
Divestitures. During the nine months ended
September 30, 2005, we sold two nursing facilities for
$13.0 million in cash and 10 outpatient clinics for
$4.6 million, including $710,000 cash and $3.8 million
of notes receivable.
Sale of the Company. Our results of operations, financial
condition, cash flows and liquidity will continue to be
adversely impacted by the ongoing sales process. To date we have
incurred various costs as a result of the Formation Capital
Consortiums indication of interest, the proxy contest and
the sales process, including legal fees, investment banking
advisory fees and other related costs. During the nine months
ended
37
BEVERLY ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS (Continued)
September 30, 2005, we recorded $36.6 million of such
costs, of which $18.1 million has been paid and
$18.5 million remains accrued as of September 30,
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 additional advisory fees, legal fees
and other expenses. The amount and impact of these potential
additional expenses cannot be reasonably estimated at this time.
Insurance. Our cash flows for the nine months ended
September 30, 2005 decreased by $49.5 million for
insurance related items, primarily due to payments for patient
claims settlements. Total claim payments for the three months
and nine months ended September 30, 2005, were in excess of
the estimates derived from our last actuarial study. A portion
of this amount relates to an $18.9 million class action
settlement associated with two previously disposed facilities in
the state of Arkansas. This class action settlement amount,
along with certain related patient care claim settlements, were
funded during the third quarter of 2005 and recorded against
previously recorded patient care liability reserves.
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 $8.2 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 September 30,
2006.
Our ability to make payments on, and to refinance, our
indebtedness, as well as to fund planned capital expenditures,
including strategic acquisitions, 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, 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 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.
38
|
|
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 September 30, 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.
39
PART II
BEVERLY ENTERPRISES, INC.
OTHER INFORMATION
September 30, 2005
(Unaudited)
|
|
ITEM 1. |
LEGAL PROCEEDINGS. |
There have been no material developments to the information
presented under Part II. Item 1. Legal
Proceedings in our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2005.
|
|
|
|
|
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 |
|
Certificate of Designations of Series A Junior
Participating Preferred Stock of Beverly Enterprises, Inc. |
|
3 |
.4 |
|
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)) |
|
10 |
.1 |
|
Agreement and Plan of Merger by and among North American Senior
Care, Inc. (incorporated by reference to Exhibit 2.1 to
Beverly Enterprises, Inc.s Current Report on Form 8-K
filed on August 17, 2005) |
|
10 |
.2 |
|
First Amendment to Agreement and Plan of Merger by and among
North American Senior Care, Inc. (incorporated by reference to
Exhibit 2.1 to Beverly Enterprises, Inc.s Current
Report on Form 8-K filed on August 24, 2005) |
|
10 |
.3 |
|
Resolution, dated September 6, 2005, of the Board of
Directors of Beverly Enterprises, Inc., authorizing the Special
Compensation for Mr. John D. Fowler, Jr. (incorporated by
reference to Exhibit 10.1 to Beverly Enterprises,
Inc.s Current Report on Form 8-K filed on
September 7, 2005) |
|
10 |
.4 |
|
Second Amendment to Agreement and Plan of Merger by and among
North American Senior Care, Inc. (incorporated by reference to
Exhibit 2.1 to Beverly Enterprises, Inc.s Current
Report on Form 8-K filed on August 23, 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 |
40
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: November 7, 2005
41