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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-43549
EXTENDICARE HEALTH SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
DELAWARE 8051 98-0066268
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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111 WEST MICHIGAN STREET
MILWAUKEE, WI 53203-2903
(Address of Principal Executive Offices and Zip Code)
(414) 908-8000
(Registrant's telephone number, including area code)
SEE TABLE OF ADDITIONAL REGISTRANTS
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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 the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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EXTENDICARE HEALTH SERVICES, INC.
INDEX
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PART I. FINANCIAL INFORMATION PAGE
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Item 1 Condensed Financial Statements: 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1999 and 1998
Consolidated Balance Sheets September 30, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Change in Securities 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in Thousands)
(Unaudited)
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THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1999 30, 1998 30, 1999 30, 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Nursing and assisted living centers $ 239,262 $ 247,333 $ 701,272 $ 739,650
Medical supplies and outpatient therapy 10,834 40,455 35,220 127,887
Other 2,370 2,162 6,646 5,919
--------- --------- --------- ---------
252,466 289,950 743,138 873,456
COSTS AND EXPENSES:
Operating 208,772 239,747 632,820 724,756
General and administrative 11,120 11,288 31,989 34,786
Lease costs 4,968 4,277 14,768 11,709
Depreciation and amortization 13,067 13,728 38,543 41,186
Interest expense 13,742 15,163 38,749 46,217
Interest income (159) (115) (977) (1,066)
(Gain) loss on disposal of assets and other items 1,750 (94,537) 1,474 (94,537)
--------- --------- --------- ---------
(Loss) earnings before provision for income taxes (794) 100,399 (14,228) 110,405
PROVISION FOR INCOME TAXES 859 74,279 (3,505) 79,534
--------- --------- ---------- ---------
(Loss) earnings before minority interests and
extraordinary item (1,653) 26,120 (10,723) 30,871
MINORITY INTERESTS 47 (217) 68 (760)
--------- --------- --------- ---------
(Loss) earnings before extraordinary item (1,606) 25,903 (10,655) 30,111
EXTRAORDINARY LOSS ON EARLY
RETIREMENT OF DEBT, NET OF INCOME
TAXES OF -0- AND $1,053 IN 1999 AND
1998, RESPECTIVELY - (1,660) - (1,660)
-------- --------- --------- ---------
Net (loss) earnings $ (1,606) $ 24,243 $ 10,655) $ 28,451
======== ========= ========= =========
PER COMMON SHARE:
(Loss) earnings before extraordinary item $ (1) $ 28 $ (11) $ 32
Extraordinary item - (2) - (2)
-------- --------- --------- ---------
Net (loss) earnings per common share $ (1) $ 26 $ (11) $ 30
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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EXTENDICARE HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Dollars in Thousands)
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ASSETS SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(UNAUDITED)
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CURRENT ASSETS:
Cash and cash equivalents $ 1,384 $ 1,084
Accounts receivable, less
allowances of $25,922 and $25,899, respectively 168,630 188,100
Inventories, supplies and prepaid expenses 10,987 10,803
Income taxes receivable 6,933 3,321
Deferred state income taxes 5,834 4,128
Debt service trust funds 245 202
Due from shareholder -
Deferred federal income taxes 22,611 21,294
----------- -----------
Total current assets 216,624 228,932
PROPERTY AND EQUIPMENT, NET 676,938 700,141
GOODWILL, NET 139,288 142,349
IDENTIFIABLE INTANGIBLE ASSETS, NET 8,654 9,621
OTHER ASSETS 44,690 54,434
----------- -----------
$ 1,086,194 $ 1,135,477
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued liabilities and due to shareholder $ 155,321 $ 190,808
Current maturities of long-term debt 27,596 20,647
----------- -----------
Total current liabilities 182,917 211,455
LONG-TERM DEBT 524,256 527,101
OTHER LONG-TERM LIABILITIES 7,597 13,410
DUE TO SHAREHOLDER AND AFFILIATES
Deferred federal income taxes and other 61,797 60,150
DEFERRED STATE INCOME TAXES 11,460 10,801
MINORITY INTERESTS 812 931
SHAREHOLDER'S EQUITY:
Common stock, $1 par value, 1,000 shares authorized,
947 shares issued and outstanding 1 1
Additional paid-in capital 208,787 209,787
Accumulated other comprehensive (loss) income (3,432) 187
Retained earnings 91,999 102,654
----------- -----------
Total shareholder's equity 297,355 311,629
----------- -----------
$ 1,086,194 $ 1,135,477
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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EXTENDICARE HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in Thousands)
(Unaudited)
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NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
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OPERATING ACTIVITIES:
Net (loss) earnings $ (10,655) $ 28,451
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization 40,120 43,316
Provision for uncollectible accounts receivable 9,809 8,368
Loss (gain) on disposal of assets 1,092 (24,916)
Deferred income taxes 1,697 (8,686)
Minority interests (68) 760
Extraordinary loss on early retirement of debt -- 1,660
Changes in assets and liabilities:
Accounts receivable 9,392 (26,343)
Inventories, supplies and prepaid expenses (258) (3,410)
Debt service trust funds (42) 61
Bank indebtedness 4,793 5,849
Accounts payable and accrued liabilities (11,461) 23,392
Income taxes payable/receivable (3,612) 5,609
Other long-term liabilities (12,779) 1,705
--------- ---------
Cash (used for) provided from operating activities 28,028 55,816
INVESTING ACTIVITIES:
Payments for acquisitions -- (8,026)
Payments for purchase of property and equipment (17,912) (46,339)
Proceeds from sale of property and equipment 8,959 7,071
Proceeds from sale of pharmacy operations -- 232,781
Income taxes paid on sale of pharmacy operations (25,000) --
Changes in other non-current assets 2,172 (7,918)
--------- ---------
Cash (used for) provided from investing activities (31,781) 177,569
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 50,000 40,180
Payments of long-term debt (45,896) (232,703)
Distribution of minority interests' earnings (51) (322)
--------- ---------
Cash provided from (used for) financing activities 4,053 (192,845)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 300 40,540
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 1,084 1,418
--------- ---------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 1,384 $ 41,958
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying financial statements reflect the operations of Extendicare
Health Services, Inc. ("Extendicare" or the "Company"). Extendicare, a Delaware
corporation is a wholly owned subsidiary of Extendicare Inc.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company and
its majority-owned subsidiaries. All transactions between Extendicare and its
majority-owned subsidiaries have been eliminated.
The financial information presented as of any date other than December 31 has
been prepared from the books and records without audit. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and the
footnotes required by generally accepted accounting principles for complete
statements. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
financial statements, have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1998 contained in the Company's Annual Report in Form 10-K.
RECLASSIFICATIONS
The Corporation has reclassified certain 1998 line items within revenue to
conform to the 1999 presentation. Under the new Prospective Payment System
("PPS"), Medicare ancillary services provided to the Corporation's residents are
now combined with routine care revenue as part of the per diem rate for nursing
residents. As a result, the Corporation has reclassified the prior year medical
specialty revenue provided to affiliated residents to nursing and assisted
living centers revenue. Medical supplies and outpatient therapy revenue includes
revenue to non-affiliated residents and individuals in their own homes, and for
1998 includes revenue from pharmacy services provided to non-affiliated
residents.
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2- RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133's effective date was delayed
one year under recently issued SFAS 137. Thus, the effective date for SFAS 133
is for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS
No. 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is not expected to significantly impact the
Company's reporting and disclosures.
3- COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
The Company as of September 30, 1999 had capital expenditure purchase
commitments outstanding of approximately $4,869.
LITIGATION
The Company periodically is a defendant in actions brought against it in
connection with its operations. Management believes, on the basis of information
furnished by legal counsel, that none of these actions will have a material
effect on the financial position or results of operations of the Company.
YEAR 2000 UNCERTAINTY
The Year 2000 Uncertainty arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Uncertainty may be experienced on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
effect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Uncertainty affecting
the Company, including those related to the efforts of customers, suppliers, or
other third-parties will be fully resolved.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company is one of the largest providers of long-term care and related
services in the United States. The Company operated 198 nursing (20,920
operational beds) and 45 assisted living and retirement facilities (1,912 units)
at September 30, 1999. The Company's facilities are located in 14 states.
The Company's revenues are derived through the provision of healthcare services
in its network of facilities, including long-term care services such as skilled
nursing care, assisted living care and related support services and medical
specialty services such as subacute care and rehabilitative therapy, and medical
equipment, supplies and services. As a result of the Medicare Prospective
Payment System ("PPS"), the Company has reclassified its revenue components.
Nursing and assisted living centers revenue are derived from the provision of
routine and ancillary services for the Company's residents. Medical supplies and
outpatient therapy revenues are derived from providing medical supplies and
outpatient therapy services to non-affiliated residents and individuals in their
own home.
The Company derives its revenue from Medicare, Medicaid and private pay sources.
The following table sets forth the Company's private pay, Medicare and Medicaid
sources of revenue by percentage of total revenue:
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Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
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Private Pay 36% 35% 36% 35%
Medicare 22% 27% 23% 28%
Medicaid 42% 38% 41% 37%
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Private Pay. The Company classifies payments from individuals who pay directly
for services without governmental assistance as private pay revenue. The
private-pay classification also includes revenues from commercial insurers,
health maintenance organizations ("HMOs"), preferred provider organizations
("PPOs") and other charge-based payment sources as well as revenue from HMO
Medicare risk plans. Blue Cross and Veterans' Administration payments are
included in private pay and are made pursuant to renewable contracts with these
payors.
Medicare. Medicare is a health insurance program funded and administered by the
federal government primarily for individuals entitled to Social Security who are
age 65 or older. Medicare covers the first 20 days of stay in a skilled nursing
facility ("SNF") in full, and the next 80 days above a daily coinsurance amount,
after the individual has qualified by a three-day hospital stay. The Medicare
program consists of two parts: Medicare Part A and Medicare Part B. Medicare
Part A covers inpatient services for hospitals, nursing facilities, and certain
other healthcare providers, and patients requiring daily professional skilled
nursing and other rehabilitative care. Medicare Part B covers services for
suppliers of certain medical items, outpatient services, and doctor's services.
The Balanced Budget Act of 1997 (the "Balanced Budget Act"), signed into law on
August 5, 1997, makes numerous changes to the Medicare and Medicaid programs
which affect the Company. With respect to the Medicare program, the new law
established a Prospective Payment System ("PPS") for SNF services. Under the
PPS, long-term care providers are reimbursed for Medicare Part A services based
on federally established per diem rates for 44 various categories of care
associated with the medical complexities and needs of the patients. The
patient's payment category dictates the amount that the provider will receive to
care for the patient on a daily basis. This new legislation became effective for
cost report periods commencing July 1, 1998 and after. For the Company, this new
system became effective for three facilities during 1998. The remainder of the
Company's facilities became PPS funded as of January 1, 1999. Under certain
criteria, a three-year phase-in to the PPS is effective. This change will reward
efficient providers and penalize those that are inefficient.
Prior to the implementation of the new Medicare PPS the Company was reimbursed
under the Medicare program for its direct costs plus an allocation of indirect
costs up to a regional limit. The costs of care for Medicare patients receiving
specialty medical services often exceeded the regional reimbursement limits. The
Company in such cases filed for routine cost limit ("RCL") exceptions in an
attempt to recover such additional costs. There can be no assurance that the
Company will be able to recover such excess costs under pending or future
exception requests. In addition, on-going efforts by third-party payors to
contain healthcare costs by limiting reimbursement rates, increasing case
management reviews and negotiating reduced contract pricing could affect the
Company's future revenues and profitability.
Medicaid. Medicaid is a state-administered program financed by state funds and
matching federal funds. The program provides for
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medical assistance to the indigent and certain other eligible persons. Medicaid
reimbursement formulas are established by each state with the approval of the
federal government in accordance with federal guidelines. All of the states in
which the Company operates currently use cost-based reimbursement systems which
generally may be categorized as prospective or retrospective in nature. Under a
prospective system, per diem rates are established based upon the historical
cost of providing services during a prior year, adjusted to reflect factors such
as inflation and any additional services which are required to be performed.
Many of the prospective payment systems under which the Company operates contain
an acuity measurement system which adjusts rates based on the care needs of the
patient. Retrospective systems operate much like the Medicare program. Nursing
facilities are paid on an interim basis for services provided, subject to
adjustments based on allowable costs, which are generally submitted on an annual
basis. Additional payment to a nursing facility by the state or repayment from a
nursing facility to the state can result from the submission of cost reports and
their ultimate settlement. The majority of the states in which the Company
operates nursing facilities use prospective systems.
The Balanced Budget Act repealed the federal payment standard (known as the
Boren Amendment), which required state Medicaid programs to pay rates that were
reasonable and adequate to meet the costs which must be incurred by efficiently
and economically operated nursing facilities. As a result, for Medicaid services
provided on or after October 1, 1997, states have considerable flexibility in
establishing payment rates. The Company is not able to predict whether any
states will adopt changes in their Medicaid reimbursement systems, or, if
adopted and implemented, what effect such initiatives would have on the Company.
Nevertheless, there can be no assurance that such changes in Medicaid
reimbursement to nursing facilities will not have an adverse effect on the
Company. The Balanced Budget Act also allows states to mandate enrollment in
managed care systems without seeking approval from the Secretary of Health and
Human Services for waivers from certain Medicaid requirements as long as certain
standards are met. Although historically these managed care programs have
exempted institutional care, no assurance can be given that these waiver
projects ultimately will not change the reimbursement system for long-term care
facilities from fee-for-service to managed care negotiated or capitated rates or
otherwise affect the levels of payment to the Company.
Funds received by the Company under Medicare and Medicaid are subject to audit
with respect to proper application of various payment formulas. Such audits can
result in retroactive adjustments to revenue. The Company believes that the
payment formulas applicable to it have been properly applied and that any future
adjustments will not have a material impact on its operations.
The following is a summary of significant events in 1999 and 1998.
ACQUISITIONS
During 1998, the Company acquired five nursing facilities (456 operational beds)
and one assisted living facility (88 units) for $19.1 million, including the
assumption of $2.7 million of debt and the assets of four medical specialty
services related businesses for $3.5 million. The Company also added one nursing
facility (76 beds) through an operating lease in 1998.
CONSTRUCTION
The Company completed construction of two nursing facilities (240 operational
beds), one nursing facility addition (19 operational beds) and two assisted
living facilities (99 units) during the first nine months of 1999.
The Company completed construction of four nursing facilities (384 operational
beds), one nursing facility addition (47 operational beds), five assisted living
facilities (244 units) and two therapy additions during 1998.
DIVESTITURES
The Company sold two nursing facilities (150 operational beds) for $4.8 million
on September 30, 1999 and one nursing facility (248 operational beds) for $4.3
million on June 30, 1999. The sales resulted in pretax gains of $0.3 million.
The Company applied the net after-tax proceeds to reduce $3.1 million of debt in
July 1999 and $4.6 million of debt in October 1999.
In 1998, the Company sold its institutional pharmacy business to Omnicare, Inc.
for proceeds of $258.0 million. The sale resulted in a pre-tax gain of $97.8
million and related income tax expense of $72.6 million. Goodwill and other
intangible assets were reduced by $90 million as part of the sale. The Company
applied the after-tax net proceeds of the sale to reduce $165 million of debt.
In connection with the debt reduction, related deferred financing costs of $2.7
million, or $1.7 million after-tax, were written off and classified as an
extraordinary item.
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The divestiture followed a 1997 management decision that the pharmacy operations
were non-strategic assets. The transaction realized the value of the Company's
pharmacy operations, reduced its debt-to-equity ratio and significantly lowered
interest expense.
RESULTS OF OPERATIONS
The following table sets forth details of revenues and earnings as a percentage
of total revenues:
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THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
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1999 1998 1999 1998
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Revenues
Nursing and assisted living 94.8 85.3 94.4 84.7
Medical supplies and outpatient therapy 4.3 14.0 4.7 14.6
Other 0.9 0.7 0.9 0.7
------- ------- ------- -------
100.0 100.0 100.0 100.0
Operating and general and administrative costs 87.1 86.6 89.4 87.0
Lease, depreciation and amortization 7.1 6.2 7.2 6.0
Interest, net 5.4 5.2 5.1 5.2
(Loss) gain on sale of assets and items 0.7 (32.6) 0.2 (10.8)
------- ------- ------- -------
(Loss) earnings before taxes (0.3) 34.6 (1.9) 12.6
(Benefit) provision for income taxes 0.3 25.6 (0.5) 9.1
------- ------- ------- -------
(Loss) earnings before minority interests and
extraordinary item (0.6) 9.0 (1.4) 3.4
Extraordinary item -- (0.6) -- (0.2)
------- ------- ------- -------
Net (loss) earnings (0.6) 8.4 (1.4) 3.2
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenues in the three months ended September 30, 1999 were $252.4 million,
representing a decrease of $37.5 million (12.9%) from $289.9 million in the
three months ended September 30, 1998. The decrease in revenues of $37.5 million
included decreases in nursing and assisted living centers revenues of $8.1
million, medical supplies and outpatient therapy revenues of $29.6 million,
partially offset by an increase in other revenues of $0.2 million.
The decrease in nursing and assisted living centers revenues of $8.1 million
included an increase of $6.4 million from the opening of newly constructed
facilities, the acquisition of one facility effective January 31, 1998, one
facility effective April 1, 1998, and four facilities effective November 1,
1998, partially offset by a facility sold June 30,1999 and a facility closure.
Revenues from facilities which the Company operated during each of 1999 and 1998
("same-facility") decreased $14.5 million when comparing periods. Same-facility
revenues decreased between periods due to the effects of PPS and lower
occupancy. Under PPS, the rate received for Medicare Part A services is lower
than what was received under the former cost-reimbursement system. Same-facility
occupancy, defined as patient days for nursing facilities and units occupied for
assisted living facilities, declined 3.2%. Average percentage occupancy for
same-facilities, based on beds/units in operation, was 86.1% in the third
quarter of 1999 compared with 87.6% in the comparable period of 1998.
The decrease in medical supplies and outpatient therapy revenues of $29.6
million (73.2%) included $28.7 million from divestitures during 1998 and 1999
(primarily pharmacy operations of $26.9 million), net of acquisitions. The
remaining decrease of $0.9 million is primarily due to the discontinuation of
the contracted services operations.
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
Operating and general and administrative costs decreased $31.1 million or 12.4%
between periods. The decrease included decreases in costs relating to
divestitures and closed operations, net of acquisitions and newly constructed
facilities, of approximately $14.8 million. The remaining decrease in operating
and general and administrative costs of $16.3 million included decreased costs
of $26.4 million, primarily due to decreased therapy activity as a result of
PPS, and the staffing of internal therapist at the nursing facilities rather
than contracting for the services. This is also partially offset by an increase
in wage-related costs of $10.1 million. The increase in wage-related costs
included an increase of $10.0 million due to staffing of internal therapists at
the nursing facilities and to attract
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and retain qualified personnel, and an increase in workers' compensation costs
of $0.1 million due to a higher wage base.
LEASE COSTS, DEPRECIATION AND AMORTIZATION
Total lease costs and depreciation and amortization remained constant when
comparing 1999 to 1998. Lease costs increased $0.7 million due to the new
corporate office facility and upgrade of the computer system, offset by a
decrease in amortization expense of $0.3 million and depreciation expense of
$0.4 million primarily due to the sale of the pharmacy operation and related
goodwill.
INTEREST
Net interest expense decreased $1.5 million to $13.6 million in the three months
ended September 30, 1999 compared with $15.0 million in the comparable period in
1998. The decrease is due to a decrease in the average debt level to $569.1
million during the third quarter of 1999 compared to $659.4 million during the
third quarter of 1998 resulting from the Company's use of pharmacy sale proceeds
to paydown debt. This was partially offset by an increase in the weighted
average interest rate of all long-term debt to approximately 9.66% during the
third quarter of 1999 compared to approximately 9.20% during the third quarter
of 1998.
Net interest expense was also affected by more favorable investment earnings in
the third quarter of 1999 compared to the third quarter of 1998.
(GAIN) LOSS ON DISPOSAL OF ASSETS AND OTHER ITEMS
The Company sold two nursing facilities on September 30, 1999 for $4.8 million
resulting in a loss on sale of $0.3 million before taxes. In addition, the
Company recorded $1.4 million in costs related to the planned shut down of two
nursing facilities. In 1998 the company sold its pharmacy operations for $258.0
million resulting in a gain on sale of $97.8 million before taxes and recorded
$3.3 million in severance cost related to certain staff reductions.
START-UP COSTS
The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in the third quarter of 1999 of $0.7 million compared to
$2.4 million in the third quarter of 1998.
INCOME TAXES
Income taxes in the three months ended September 30, 1999 decreased to a $0.9
million tax provision from a $74.3 million provision for income taxes in the
comparable period in 1998 primarily as a result of the sale of the pharmacy
operations in 1998.
EXTRAORDINARY ITEM
The extraordinary loss in the third quarter of 1998 of $1.7 million relates to
the write off of deferred financing costs in connection with debt reduction upon
the sale of the pharmacy operations.
NET (LOSS) EARNINGS
The net loss in the three months ended September 30, 1999 was $1.6 million,
compared to net earnings of $24.2 million in the comparable period in 1998. Net
loss prior to gain on sale of assets and other items and extraordinary items
were $0.5 million for the three months ended September 30,1999 compared to $3.0
million in the comparable period in 1998, a decrease of $2.9 million.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
Revenues in the nine months ended September 30, 1999 were $743.1 million,
representing a decrease of $130.4 million (14.9%) from $873.5 million in the
nine months ended September 30, 1998. The decrease in revenues of $130.4 million
included decreases in nursing and assisted living centers revenues of $38.4
million, medical supplies and outpatient therapy revenues of $92.7 million,
partially offset by an increase in other revenues of $0.7 million.
The decrease in nursing and assisted living centers revenues of $38.4 million
included an increase of $16.4 million from the opening of newly constructed
facilities, the acquisition of one facility effective January 31, 1998, one
facility effective April 1, 1998, and four
11
<PAGE> 12
facilities effective November 1, 1998, partially offset by a facility sold June
30, 1999 and a facility closure. Revenues from facilities, which the Company
operated during each of 1999 and 1998 ("same-facility"), decreased $54.8 million
when comparing periods. Same-facility revenues decreased between periods due to
the effects of PPS and lower occupancy. Under PPS, the rate received for
Medicare Part A services is lower than what was received under the former
cost-reimbursement system. Same-facility occupancy, defined as patient days for
nursing facilities and units occupied for assisted living facilities, declined
2.0%. Average percentage occupancy for same-facilities, based on beds/units in
operation, was 86.1% in the first nine months of 1999 compared with 87.4% in the
comparable period of 1998.
The decrease in medical supplies and outpatient therapy revenues of $92.7
million (72.5%) included $90.7 million from divestitures during 1998 and 1999
(primarily pharmacy operations of $88.9 million), net of acquisitions. The
remaining decrease of $2.0 million is primarily due to the discontinuation of
the contracted services operations.
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
Operating and general and administrative costs decreased $94.7 million or 12.5%
between periods. The decrease included decreases in costs relating to
divestitures and closed operations, net of acquisitions and newly constructed
facilities, of approximately $50.1 million. The remaining decrease in operating
and general and administrative costs of $44.6 million (6.7%) included decreased
costs of $59.6 million, primarily due to decreased therapy activity as a result
of PPS, and the staffing of internal therapists at the nursing facilities rather
than contracting for the services. This is also partially offset by an increase
in wage-related costs of $15.0 million. The increase in wage-related costs
included an increase of $15.2 million due to staffing of internal therapists at
the nursing facilities and to attract and retain qualified personnel, offset by
a decrease in workers' compensation costs of $0.2 million due to more favorable
actuarial adjustments for prior years in 1999 compared to 1998.
LEASE COSTS, DEPRECIATION AND AMORTIZATION
Total lease costs and depreciation and amortization increased $0.4 million when
comparing 1999 to 1998. Lease costs increased $3.0 million due to the new
corporate office facility and upgrade of the computer system, offset by
decreases in amortization expense of $1.9 million and depreciation expense of
$0.7 million primarily due to the sale of the pharmacy operation and related
goodwill.
INTEREST
Net interest expense decreased $7.4 million to $37.8 million in the nine months
ended September 30, 1999 compared with $45.2 million in the comparable period in
1998. The decrease was primarily due to a decrease in the average debt level to
$580.3 million during the first nine months of 1999 compared to $699.4 million
during the first nine months of 1998 resulting from the company's use of
pharmacy sale proceeds to paydown debt. This was partially offset by an increase
in the weighted average interest rate of all long-term debt to approximately
8.90% during the first nine months of 1999 compared to approximately 8.81%
during the first nine months of 1998.
Net interest expense was also affected by less favorable investment earnings in
the first nine months 1999 compared to the first nine months of 1998.
(GAIN) LOSS ON DISPOSAL OF ASSETS AND OTHER ITEMS
The Company sold three nursing facilities during the first nine months of 1999
for $9.1 million resulting in a net gain of $0.3 million before income taxes. In
addition, the company recorded $1.4 million in costs related to the planned
shutdown of two nursing facilities and $0.4 million in severance costs related
to certain staff reductions.
START-UP COSTS
The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in the first nine months of 1999 of $3.3 million compared
to $5.7 million in the first nine months of 1998. The $2.4 million decrease when
comparing periods was due to the timing of facility openings in 1999 versus
1998.
INCOME TAXES
Income taxes in the nine months ended September 30, 1999 decreased to a $3.5
million tax benefit from a $79.5 million provision for
12
<PAGE> 13
income taxes in the comparable period in 1998 as a result of the sale of the
pharmacy operations in 1998 and decreased earnings in 1999.
EXTRAORDINARY ITEM
The extraordinary loss in the nine months ended September 30, 1998 of $1.7
million relates to the write off of deferred financing costs in connection with
the debt reduction upon the sale of the pharmacy operations in 1998.
NET (LOSS) EARNINGS
The net loss in the nine months ended September 30, 1999 was $10.7 million
compared to net earnings of $28.5 million in the comparable period in 1998. The
net loss prior to gain on sale of assets and other items, and extraordinary
items was $9.7 million for the nine months ended September 30, 1999 compared to
net earnings of $7.2 million in the comparable period in 1998, a decrease of
$16.9 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $1.4 million at September 30, 1999
and $1.1 million at December 31, 1998.
Cash flow generated from operations before working capital changes was $42.0
million for the nine months ended September 30, 1999 compared with $49.0 in the
comparable period of 1998. The decrease in cash flow from operations before
working capital changes is the result of a decline in operating earnings.
The Company experienced an increase in working capital since December 31, 1998,
excluding cash and borrowings included in current liabilities, of $27.6 million.
The increase in working capital resulted from a decrease in taxes payable of
$38.6 million and an $8.3 million decrease in accounts payable and accrued
liabilities, a $0.2 million increase in inventories, supplies and prepaid,
partially offset by a decrease in accounts receivable of $19.5 million. Taxes
payable included a payment of $25.0 million related to the sale of the pharmacy
operation and a tax benefit of $8.2 million. Accounts receivable at September
30, 1999, were $168.6 million compared with $188.1 million at December 31, 1998,
representing a decrease of $19.5 million. The reduction in accounts receivable
included a decrease within the nursing operations of $10.8 million, a decline
within the Company's medical supplies and outpatient therapy operations of $7.3
million and a decline in prior policy year workers' compensation receivables of
$1.4 million due to collections. Billed patient care and other receivables
decreased $26.0 million while third-party payor settlement receivables increased
$15.2 million within the nursing operations. The decrease in billed patient care
receivables of $26.0 million included a decrease of $2.8 million due to a
decline in Medicare revenues as a result of changes in the Federal reimbursement
policies, and a decrease of $1.2 million as a result of the sale of a nursing
facility on June 30, 1999. The remaining decrease in billed patient care
receivables of $22.0 million was due to the timing of the receipt of remittances
between periods. The increase in settlement receivables of $15.2 million between
periods included $4.0 million due to favorable Medicare rate accrual adjustments
resulting from 1995 cost reimbursement findings, $2.7 million for anticipated
Medicare reimbursement for uncollectible coinsurance amounts, $0.9 million as a
result of the appeal of Medicare medical review findings, $5.4 million as a
result of Medicare cost report settlements and $2.2 million from Medicaid rate
increases in Pennsylvania. The decrease in medical supplies and outpatient
therapy receivables of $7.3 million between periods is primarily due to
decreased therapy operations as a result of PPS and the discontinuation of the
contracted services operations.
Property and equipment decreased $23.2 million from December 31, 1998 to a total
of $676.9 million at September 30, 1999. The decrease was the result of
depreciation expense of $33.6 million and asset disposals of $8.4 million offset
by, capital expenditures and asset transfers of $18.8 million. Property and
equipment capital expenditures during 1999 included approximately $4.8 million
related to the construction of new facilities and bed additions to existing
facilities.
Total borrowings, including bank indebtedness and both current and long-term
maturities of debt, totaled $556.6 million at September 30, 1999 for an increase
of $8.9 million from December 31, 1998. The increase was attributable to
increased borrowings on the Revolving Credit Facility due to the payment of
taxes associated with the sale of the pharmacy operations, deferred compensation
payments and as a result of the growth in property and equipment due to capital
expenditures. The weighted average interest rate of all long-term debt was 8.40%
at September 30, 1999 and such debt had maturities ranging from 1999 to 2015.
During the second quarter of 1999, the Company amended its Senior Credit
Facility. The amendments to the Credit Facility included revisions to the
financial covenants to reflect the financial impact of PPS and included
increased interest rates. Following the
13
<PAGE> 14
amendment, the applicable interest rate margins in the pricing matrix pertaining
to the Company's Revolving Credit Facility and Tranche A Term Loan range from
0.75% to 2.75% for Eurodollar loans and 0.50% to 2.00% for base rate loans. The
applicable margin for the Tranche B Term Loan is 3.00% for Eurodollar loans and
a range of 1.25% to 2.75% for base rate loans. As of September 30, 1999, the
applicable margin under the Revolving Credit Facility and Tranche A Term Loan
were 2.75% for Eurodollar loans and 2.00% for base rate loans, and the
applicable margin under the Tranche B Term Loan was 3.00% for Eurodolllar loans
and 2.75% for base rate loans.
The Company had a $200 million Revolving Credit Facility at September 30, 1999.
Borrowing availability under this line of credit totaled $40.5 million at
September 30, 1999 (net of letters of credit in the amount of $35.5 million and
a $25.0 million undrawn availability requirement per the amendment to the Senior
Credit Facility). The undrawn availability requirement is effective until the
Company's Total Leverage Ratio (as defined in the Senior Credit Facility
Agreement) does not exceed 6.0 to 1.0.
The principal source of liquidity for the Company is cash flow from operations
and approximately $40.5 million in additional borrowing availability under the
Revolving Credit Facility. The Company contemplates incurring capital
expenditures (excluding any acquisitions) of approximately $6.9 million during
the last three months of 1999. The Company completed its current construction
program in June 1999, and does not plan on any further related expenditures this
year. The Company believes that internally generated cash flow, together with
borrowings under the Revolving Credit Facility, will be sufficient to meet the
Company's current operational cash requirements to fund its capital expenditure
program and to meet current debt obligations.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 problem arises from the potential inability of information systems
and other computer-based technology to recognize the process data-sensitive
information for dates after December 31, 1999. The Year 2000 issue presents
potential problems not only for the Company's computer hardware and software but
also for devices that have embedded technology (including building
infrastructure and medical devices utilized in the Company's facilities) and
issues relating to third parties with which the Company has material
relationship.
The Company derives a substantial portion of its revenues from government
programs. According to a published report on Year 2000 readiness, the Health
Care Financing Administration is confident that all Medicare claims processes
will be ready to function by January 1, 2000.
The Company has contacted each intermediary and has received confirmation from
such intermediaries that they are Year 2000 compliant and have taken all
necessary measures to ensure appropriate continuing payments for services
rendered to all government-insured patients.
In 1998, the Company initiated a program to identify and resolve its Year 2000
issues. The program followed a standard methodology for Year 2000 compliance and
includes the following phases:
I. planning and awareness of the Company's Year 2000 program, where
compliance is defined, the complexity and depth of the Year 2000
problem is communicated and the business impact of non-compliance is
identified;
II. taking inventory to identify all systems, catalog electronic partners
and interfaces, ascertain those systems that will be affected by the
Year 2000 date and assess technical risks associated with each system;
III. completion of a detailed assessment of the compliance of the essential
systems that will be remediated, which includes business risks, a
determination to repair, replace, or retire each system, and develop
detailed plans, schedules and costs for the correction cycle
(including an assessment of critical suppliers, customers, and other
third parties); and
IV. correction of non-compliant systems and equipment - which includes
resolution, resource allocation, testing and deployment.
The Company has completed its inventory and assessment of its information
technology ("IT") systems and equipment. The inventory of non-IT systems and
equipment (embedded technology) has been completed. The Year 2000 risks
identified were:
I. any technology within the Company's facilities that could pose a threat
to overall patient health and safety (including but not limited to:
telephone, nurse call, elevator or fire control systems; and clinical
equipment such as ventilators and infusion pumps); and
II. external systems not within the control of the Company such as
governmental agencies, investment management companies, and other
financial intermediaries, could pose a significant risk to the cash
management and health of the Company.
14
<PAGE> 15
The Company has:
I. completed an upgrade of corporate servers to Year 2000 compliant
systems in the third quarter of 1998;
II. remediated, tested and deployed the Fixed assets, Budget, Accounts
Receivable, Accounts payable, and General ledger systems;
III. contacted key vendors regarding their Year 2000 compliance status;
IV. acquired and tested the necessary software updated for the Minimum Data
Set system. Rollout and implementation will be completed by the end of
November, 1999;
V. update or replaced all personal computers at the corporate office in
the United States;
VI. assessed compliance of embedded systems within the facilities to ensure
our patients' continued health and safety;
VII. contacted key suppliers and payers to gain assurance that they will be
Year 2000 compliant. Most key suppliers and payers who have responded
to inquiries have indicated that they expect to be Year 2000 compliant
in a timely fashion. As a contingency, the Company maintains a broad
base of vendors. The Company does not believe it is at significant risk
with respect to any individual vendor or supplier who may be
non-compliant; and
VIII. tested the contingency plans on September 8 and September 9, 1999. The
"fire drill" was run to focus on the operations of the corporate
center. The exercise was successful with participating facilities and
regional offices receiving a passing grade.
Activities have also included the introduction of a new payroll system and the
installation of approximately 1,000 new personal computer workstations in the
facilities. While these activities will resolve Year 2000 problems related to
theses systems, they have been planned for some time and are not considered to
be directly related to Year 2000 readiness.
The Company is Year 2000 compliant for all its essential systems and equipment,
with the exception of the payroll system, which is being outsourced. Compliance
for this is planned by January 1, 2000, although there can be no assurance that
it will be achieved by by such date.
The Company currently estimates that its aggregate costs directly related to
Year 2000 compliance efforts will be approximately $600,000 for corporate
applications and approximately $1,400,000 for all of the Company's facilities,
of which approximately $850,000 has been spent through September 30, 1999. The
Company's Year 2000 efforts are ongoing and its overall plan and cost
estimations will continue to evolve, as new information becomes available. All
costs, except long-lived assets, are expensed as incurred.
The ultimate impact of the Year 2000 issue depends not only on the Company's
actions to mitigate problems, but also on how the issue is addressed by third
parties with which the Company has a material relationship. Risks for the
Company could include the inability to receive reimbursement from government
agencies (directly or through intermediaries). In addition, uncertainties exist
as to the Company's ability to detect all Year 2000 problems and to resolve all
identified issues in a timely manner. The Company is unable to quantify the
potential effect on its operations, liquidity and financial position should any
of these events occur. While the Company expects to resolve all Year 2000 risks
without a material adverse impact on its results of operations and financial
position, there can be no assurance as to its ultimate success.
The Company's has developed contingency plans for the Company's Year
2000-related issues, which include, but are not limited to, identification of
alternate suppliers, technologies and manual systems. A test of contingency
plans was conducted with success in September, 1999.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, and other information provided by the
Company from time to time, contains certain "forward-looking" statements as that
term is defined by the Private Securities Litigation Reform Act of 1995. All
statements regarding the Company's expected future financial position, results
of operations, cash flows, continued performance improvements, ability to
service its debt obligations, finance growth opportunities, respond to changes
in government regulations, and similar statements including, without limitation,
those containing words such as "believes," "anticipates," "expects," "intends,"
"estimates," "plans," and other similar expressions are forward-looking
statements. Forward-looking statements involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
differ materially from those projected or contemplated in the forward-looking
statements as a result of, but not limited to, the following factors: national
and local economic conditions, the effect of government regulation and changes
in regulations governing the healthcare industry, including the Company's
compliance
15
<PAGE> 16
with such regulations; changes in Medicare and Medicaid payment levels;
liabilities and other claims asserted against the Company; the ability to
attract and retain qualified personnel; the availability and terms of capital to
fund acquisitions; the competitive environment in which the Company operates;
demographic changes; the ability to timely locate and correct all relevant
computer codes prior the year 2000; and the availability and cost of labor and
materials. Given these risks and uncertainties, the Company can give no
assurances that these forward-looking statements will, in fact, transpire and,
therefore, cautions investors not to place undue reliance on them.
16
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
QUALITATIVE DISCLOSURES
OBJECTIVES AND CONTEXT
The Company uses variable-rate debt to finance its operations. In particular, a
portion of the Company's long-term debt obligation is based upon floating LIBOR
rates. These debt obligations expose the Company to variability in interest
payments due to changes in interest rates. If interest rates increase, interest
expense increases. Conversely, if interest rates decrease, interest expense also
decreases.
Management believes that in the current interest rate environment that it is
prudent to limit the variability of a portion of its interest payments. It is
the Company's objective to hedge between 50 to 80 percent.
Furthermore, the Company also holds stock and stock warrants obtained in
connection with the 1998 sale of the Company's pharmacy operations. In effect,
these holdings can be considered contingent purchase price whose value, if any,
may not be realized for several years. These stock and warrant holdings are
subject to various trading and exercise limitations and will be held until such
time that management believes the market opportunity is appropriate to trade or
exercise such holdings.
STRATEGIES
To meet these objectives, management enters into various types of derivative
instruments to manage fluctuations in cash flows resulting from interest rate
risk. These instruments consist of interest rate swaps. The interest rate swaps
change the variable rate cash-flow exposure on the long-term interest payments
to fixed-rate cash flows by entering into receive-variable, pay-fixed interest
rate swaps. Under the interest rate swaps, the Company receives variable
interest rate payments and makes fixed interest rate payments, thereby creating
fixed-rate long-term debt.
With respect to the stock and warrant holdings, management monitors the market
to adequately determine the appropriate market timing to act in order to
maximize the value of these instruments. With the exception of the above
holdings, the Company does not enter into derivative instruments for any purpose
other than cash flow hedging purposes. That is, the Company does not speculate
using derivative instruments and does not engage in trading activity of any
kind.
RISK MANAGEMENT POLICIES
The Company assesses interest rate cash flow risk by continually identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities.
17
<PAGE> 18
QUANTITATIVE DISCLOSURES
The Company is a party to several interest rate swap agreements to reduce the
impact of changes in interest rates on certain of its floating rate long-term
debt. The first agreement, entered into in 1995, effectively changes the
Company's interest rate exposure on $32 million of floating rate Industrial
Development Bonds due in 2014 to a fixed rate of 4.155% through October, 2000.
During 1998, the Company entered into five agreements (each $50 million of
notional value) with three banks which effectively changes the interest rates on
LIBOR based borrowings to fixed rates ranging from 5.53% to 5.78% plus
applicable margins, for periods over three to seven years. The differential
between the fixed rates and the variable rate interest to be paid or received
will be accrued as interest rates change and recognized over the life of the
agreement. The Company may be exposed to credit loss in the event of
non-performance by the banks under the swap agreements but does not anticipate
such non-performance. In May 1999, the Company terminated two agreements (each
$50 million in notional value) reducing our hedging period from seven to five
years. These agreements were disposed of at no cost or material gain to the
Company. In July 1999, the Company terminated one more agreement ($50 million in
notional value) further reducing our hedging period from five years to four
years. This termination resulted in a cash payment to the Company of $0.29
million that will be amortized over the term of the underlying credit agreement
in accordance with generally accepted accounting principles. Management will
continue to monitor our interest rate exposure and adjust hedging levels to
reflect outstanding debt levels.
Interest expense for the quarter ended September 30, 1999 includes $ 0.13
million of net expense, resulting in year to date expense of $ 0.92 million. The
component of this amount relating to the hedges' ineffectiveness was not deemed
material.
Since the Company has not adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," changes
in the fair value of interest rate swaps designed to hedge the variability of
cash flows associated with the floating-rate, long-term debt obligations are not
reported in accumulated other comprehensive income (AOCI). In addition, the
Financial Accounting Standards Board has voted to delay the effective date of
this statement to June 15, 2000. If this statement were adopted as of September
30, 1999, AOCI would reflect a gain of $42 based upon quoted market prices
provided by the financial institutions which are counterparts to the swaps.
Changes in the fair values of the stock and warrant holdings are reported in
AOCI net of related deferred tax accruals required under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The amount reflected in AOCI for 1999 related to stock and
warrant holdings equals a loss of $3.6 million. The estimated net amount of the
gains or losses that are expected to be reclassified into earnings within the
next twelve months is uncertain due to the uncertainty of stock market
conditions and the interest rate environment. As mentioned above, the Company
has terminated one agreement in the quarter ended September 30, 1999, the
proceeds from which will be amortized into earnings over the term of the credit
agreement.
As of September 30, 1999, the maximum length of time over which the Company is
hedging its exposure to the variability in future cash flows associated with
variable-rate, long-term debt is four years from the inception date of the swap
agreement.
For the quarter ended September 30, 1999, there was a $0.29 million payment to
the Company as a result of the early termination of a hedged debt obligation.
The table below presents principal (or notional) amounts and related weighted
average interest rates by year of maturity for the Company's debt obligations
and interest rate swaps.
<TABLE>
<CAPTION>
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
-------- -------- -------- -------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt
Fixed Rate................... 1,167 4,659 1,750 648 632 209,543 218,399 247,649
Average Interest Rate........ 9.23% 9.23% 9.23% 9.23% 9.23% 9.29% 9.23%
Variable Rate................ 9,132 17,508 20,185 22,861 22,875 240,891 333,452 330,749
Average Interest Rate........ 7.79% 7.77% 7.74% 7.70% 7.65% 7.67% 7.79%
Interest Rate Swaps
Variable to Fixed............ -- 32,000 -- 50,000 50,000 -- 132,000 29
Average Pay Rate............. 5.28% 5.31% 5.63% 5.71% 5.74% -- 5.53%
Average Receive Rate......... 4.96% 5.02% 5.50% 5.50% 5.50% -- 5.30%
</TABLE>
The above table incorporates only those exposures that exist as of September 30,
1999 and does not consider those exposures or positions which could arise after
that date or future interest rate movements. As a result, the information
presented above has limited predictive value. The Company's ultimate results
with respect to interest rate fluctuations will depend upon the exposures that
arise during the period, the Company's hedging strategies at the time and
interest rate movements.
18
<PAGE> 19
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
There are no material pending legal proceedings other than litigation
arising in the ordinary course of business. Management believes, on the
basis of information furnished by legal counsel, that none of these actions
will have a material effect on the financial position results of operations
of the Company.
ITEM 2. Change in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
11.0 Computation of earnings per share for the three months and nine
months ended September 30, 1999
27.0 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
September 30, 1999.
19
<PAGE> 20
EXTENDICARE HEALTH SERVICES, INC.
EXHIBIT INDEX
Exhibit No. Description
11.0 Computation of earnings per share for the three months and nine
months ended September 30, 1999
27.0 Financial Data Schedule
SIGNATURES
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.
EXTENDICARE HEALTH SERVICES, INC.
Date: November 15, 1999
By: /s/ Mark W. Durishan
Mark W. Durishan
Vice President, Chief Financial Officer,
Treasurer and Director (principal
financial officer and principal
accounting officer)
20
<PAGE> 1
EXHIBIT 11.0
EXTENDICARE HEALTH SERVICES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OUTSTANDING)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Earnings $ (1,606) $ 24,243 $(10,655) $ 28,451
Weighted Average Number of
Common Shares Outstanding 947 947 947 947
--------- -------- -------- --------
Net earnings per Common Share $ (1) $ 26 $ (11) $ 30
========= ======== ======== ========
</TABLE>
The Company does not have a complex capital structure and therefore, only has
basic earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDOLIDATED FINANCIAL STATEMENTS OF EXTENDICARE HEALTH SERVICES, INC. FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY (IN
THOUSANDS, EXCEPT NUMBER OF SHARES OUTSTANDING)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,384
<SECURITIES> 0
<RECEIVABLES> 168,630
<ALLOWANCES> 25,922
<INVENTORY> 1,467
<CURRENT-ASSETS> 216,624
<PP&E> 911,147
<DEPRECIATION> 234,209
<TOTAL-ASSETS> 1,086
<CURRENT-LIABILITIES> 182,917
<BONDS> 524,256
0
0
<COMMON> 1
<OTHER-SE> 297,354
<TOTAL-LIABILITY-AND-EQUITY> 1,086,194
<SALES> 0
<TOTAL-REVENUES> 743,138
<CGS> 0
<TOTAL-COSTS> 757,366
<OTHER-EXPENSES> 86,774
<LOSS-PROVISION> 9,809
<INTEREST-EXPENSE> 37,772
<INCOME-PRETAX> (14,228)
<INCOME-TAX> (3,505)
<INCOME-CONTINUING> (10,723)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,655)
<EPS-BASIC> (11)
<EPS-DILUTED> (11)
</TABLE>
