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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
DELAWARE
(State or other Jurisdiction of
Incorporation or Organization)
111 WEST MICHIGAN STREET
MILWAUKEE, WI
(Address of Principal Executive Offices)
98-0066268
(I.R.S. Employer
Identification Number)
53203
(Zip Code)
(414) 908-8000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. X
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 12
ITEM 3. LEGAL PROCEEDINGS........................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 13
ITEM 6. SELECTED FINANCIAL DATA..................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS FROM OPERATION.................................. 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK... 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 47
ITEM 11. EXECUTIVE COMPENSATION...................................... 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 54
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ITEM 1. BUSINESS
Extendicare Health Services, Inc (the "Company") is an indirect wholly
owned subsidiary of
Extendicare Inc. ("Extendicare"). The Company was incorporated in Delaware in
1984.
The Company is one of the largest providers of long-term care and related
medical specialty services in the United States. Through its geographically
clustered facilities, the Company offers a continuum of healthcare services,
including skilled nursing care, assisted living and related medical specialty
services, such as subacute care and rehabilitative therapy, and medical
equipment, supplies and services. The Company is one of the top ten operators of
long-term care facilities in the United States in terms of both number of beds
and revenues, with 192 skilled nursing facilities (20,143 beds) and 45 assisted
living and retirement facilities (1,912 units) located in 14 states. On December
31, 1999, the Company owned approximately 85% of its facilities, enhancing its
credit quality and financial flexibility.
The Company is subject to certain of the informational requirements of the
Securities Exchange Act of 1934 due to its public offering of 9.35% Senior
Subordinated Notes Due 2007, which have been registered under the Securities Act
of 1933, as amended.
INDUSTRY OVERVIEW
Long-term care providers serve the fastest growing segments of the
population, being the elderly and persons 65 years of age and over. Nearly 13%
of the nation's 1998 population is aged 65 of older. In 1990, it was estimated
that 5% of all persons aged 65 and over were living in a nursing facility. In
1998, approximately 1.5 million people resided in nursing facilities, which was
5.8% of the 65 and over population. That percentage is expected to increase to
8.4% by 2050 when the population aged 65 or older is expected to be 20% of the
total population in the United States.
The long-term care and post-acute care industries include rehabilitation
hospitals and facilities, skilled nursing facilities, assisted living
facilities, intermediate care facilities, and home health services. Most of
these segments are experiencing rapid growth. For example, the number of
rehabilitation hospitals grew 152% from 1986 to 1996. While the number of
freestanding nursing facilities has remained flat over the last ten years
(17,100 in 1986 vs. 17,400 in 1996), hospital-based skilled nursing facilities
have increased 103% over the same time period (1,145 to 2,328 facilities).
A variety of new assisted living facilities have been built over the past
decade and given their alternative forms it is difficult to quantify both the
growth and current number of assisted living facilities in the United States.
Current estimates indicate that as of 1998 there are over 11,500 facilities
offering services to the elderly resident group, personal assistance, 24 hour
oversight, housekeeping and meal services.
According to industry sources, long-term care spending (defined as nursing
facility plus home care expenditures) was estimated at approximately $115.1
billion in 1998, or approximately 11% of total national health expenditures,
with nursing facilities accounting for $83 billion of this total. As home
healthcare and subacute care services become more accepted and demographics
shift toward an aging population with increased long-term care needs, it is
estimated that long-term care expenditures will grow to $250 billion by the year
2005, representing 14% of total national health expenditures.
GROWTH AND OPPORTUNITIES IN THE MARKETPLACE
In addition to an aging population, the long-term care industry is changing
as a result of several fundamental factors which the Company believes that it is
well positioned to capitalize on, including the following:
SUPPLY/DEMAND IMBALANCE
Acquisition and construction of additional skilled nursing facilities are
subject to certain restrictions on supply including government-legislated
moratoriums on new capacity or licensing restrictions limiting the growth of
services. Such restrictions on supply, coupled with an aging population, are
causing a decline in the
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availability of long-term beds per person 85 years of age or older.
Additionally, advances in medical technology are enabling the treatment of
certain medical conditions outside the hospital setting. As a result, patients
requiring a higher degree of monitoring, more intensive and specialized medical
care, 24-hour per day nursing, and a comprehensive array of rehabilitative
therapies are increasing, resulting in a need for long-term care. The Company
believes that such specialty care can be provided at a significantly lower cost
than in traditional acute care and rehabilitation hospitals.
COST CONTAINMENT PRESSURES
As the number of people over age 65 continues to grow and as advances in
medicine and technology continue to increase life expectancies, healthcare costs
are expected to rise faster than the availability of resources from
government-sponsored healthcare programs. In response to such rising costs,
governmental and private pay sources in the United States have adopted cost
containment measures that encourage reduced lengths of stay in acute care
hospitals. As a result, average acute care hospital stays have been shortened,
and many patients are discharged despite a continuing need for nursing or
specialty healthcare services. This trend has increased demand for long-term
care, home healthcare, outpatient facilities, hospices and assisted living
facilities. In addition, long-term care companies with an integrated network and
a broad range of services will be in a good position to contract with managed
care companies and other payers. Furthermore, given the recent changes in the
reimbursement to long-term care companies (i.e., implementation of the Medicare
Prospective Payment System ("PPS") for skilled nursing and tightened
reimbursement levels as a result of increased managed care penetration),
information systems to understand clinical and financial data will be critical
for managed care contracting and internal cost management.
CHANGING FAMILY DYNAMICS
As a result of the growing number of two-income families, immediate family
has become a less dependable source of care-giving for the elderly. Women, who
under more traditional roles were viewed as the primary caretakers of the
family, have moved back into the workforce in increasing numbers as evidenced
through their labor participation rates increasing from 38% in 1963 to 59% in
1998. At the same time, two-income families are better able to provide financial
support for elderly parents to receive the care they need in a nursing or
assisted living facility. The parent support ratio, being the ratio of
individuals over 85 to those over 50 to 64 years of age, has increased from 3:1
in 1950 to 10:1 in 1998 and is expected to reach 29:1 by the year 2050. The
expected jump is partly due to the fact that by 1990, approximately 26% of the
baby boom generation were childless.
CHALLENGES FACING THE INDUSTRY
Despite the opportunities in the marketplace, the industry has faced a
number of challenges over the past year and, as a result several major operators
have filed for bankruptcy protection under Chapter 11. These companies include
Integrated Health Services, Inc. (1998 -- 33,200 beds), Mariner Post-Acute
Network, Inc. (1998 -- 47,700 beds), Sun Health Group, Inc.
(1998 -- approximately 40,000 beds), Vencor, Inc. (1998 -- 43,341 beds) with a
number of other smaller companies also filing for bankruptcy protection or
taking steps to restructure with their lenders. The combination of factors which
have lead to the difficulties facing the industry include the implementation of
PPS, inadequate funding levels in certain states or resident classifications in
both the Medicaid and Medicare programs, fee pressures and slow payment
practices exerted by health maintenance organizations ("HMOs") and preferred
provider organizations ("PPOs"), increased litigation settlements and insurance
costs for general and professional liability claims, increased costs incurred as
a result of increased regulatory requirements, the loss of margins earned within
the therapy and other ancillary service business, increased wages and/or
premiums paid to temporary agencies for professional nursing staff due to a
national shortfall, increased wages for nursing assistants and domestic staff
due to robust economy and general low unemployment, and increased competition in
the marketplace for admissions from home care, assisted living facilities and
hospitals.
To counter the difficult environment, the Company and other industry
leaders are actively lobbying through associations on both a federal and state
level, and through regulatory and funding bodies, to ensure
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that the current difficulties are understood and positive steps are taken to
address the problems. The amendments announced in the Balanced Budget Refinement
Act of November, 1999 is an example of the positive results achieved through our
associations. Similar actions are currently being taken to reduce the litigious
environment in certain states.
BUSINESS STRATEGY AND STRENGTHS
Due to the challenges, the Company has undertaken a number of steps over
the past year to address the changes in the environment. Below is a recap of
those action plans and plan strategies for 2000:
DISPOSITION OF NON-CORE BUSINESS OPERATIONS AND UNDER-PERFORMING ASSETS
In 1998, the Company disposed of its pharmacy operation and in 1999
disposed of its home health operation and closed down the contracted therapy
business operation. In addition, in 1999 the Company disposed of nine nursing
homes, and closed or took action to close down another four facilities.
The review is ongoing and currently there are another 40 facilities which
no longer meet the Company's criteria for financial or operational performance
and therefore, have been identified to potential purchasers for divestiture.
REDUCTION OF GENERAL ADMINISTRATIVE COSTS
As a direct result of the divestitures of the operations and facilities
identified above, the Company undertook steps to reduce general and
administrative costs. A firm of consultants was engaged to assist in the
downscaling of head office departments and major projects were undertaken to
improve the computer based technology throughout the organization. As a result,
general and administrative costs are expected to decline approximately 5% in
2000 as compared to 1999. A continual re-evaluation of all administrative areas
will continue in 2000 with a focus on regional management of the Company's
operations.
CASH FLOW MANAGEMENT AND DEBT REDUCTION
The Company instituted a number of targets for the reduction of accounts
receivable and improvement on days sales outstanding on accounts receivable.
These targets were achieved in 1999 with a reduction of both accounts receivable
on a same facility basis, and reduction on days sales outstanding. New targets
have been established for 2000.
Proceeds from divestitures have been used to pay down the Company's debt.
Since the acquisition of Arbor Health Care Company ("Arbor") in 1997, the
Company has reduced its debt to equity coverage from 2.5:1 to 2.2:1 through the
pay-down of $209 million of debt.
OWNERSHIP OF ASSETS
Unlike a number of other long-term care providers, the Company owns rather
than leases a majority of its properties. This operating philosophy can be seen
through the list of facilities identified on "Item 2. Properties." The Company
believes ownership of such properties increases the Company's flexibility in
utilizing facilities, constructing additions for ancillary services such as
subacute care or rehabilitative therapy and adding assisted living and
retirement facilities adjacent to nursing facilities. In addition, ownership of
facilities enables the Company to control costs without regard to escalating
lease payments.
FUTURE LONG-TERM STRATEGY
Moving forward into 2000, the Company will continue with many of the same
action plans as outlined above. And though opportunities for growth will be
restrained to new management contracts over the next year, the Company's plans
to continue to grow through a strategy based on its ongoing commitment to the
provision of high-quality healthcare services while positioning itself to take
advantage of the changing healthcare environment. The Company will seek out
opportunities for alternative management services and consulting contracts with
other providers in the industry.
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The Company geographically clusters its long-term care facilities and
services in order to offer its customers a broad range of long-term care,
ancillary services, and improve operating efficiencies. Therefore future
expansion of its nursing facility operations will be through the selective
acquisition and construction of nursing facilities in areas which are in close
proximity to its existing facilities, where (i) management is already in place
and has expertise relating to the regulatory and reimbursement environments,
(ii) it can participate as an active member of the nursing facility association
in the state, and (iii) its reputation is established. In establishing new state
or regional clusters, the Company considers local demographic, regulatory and
reimbursement environments of a particular state or region. As a result of
Certificate of Need ("CON") licensing restrictions, growth of nursing facilities
is expected to be primarily through acquisition.
The Company's long-term plans also involve the active development and
acquisition of assisted living and retirement facilities. Due to the rapidly
increasing segment of the U.S. population seeking assisted living and retirement
housing accommodations, and the relative immaturity of the assisted living
market in the United States, the Company expects strong demand for these
services in the foreseeable future. The Company generally locates its assisted
living and retirement facilities adjacent or in close proximity to its nursing
facilities, enabling the Company to utilize existing land, personnel, management
and marketing systems, as well as to take advantage of its established
reputation. Assisted living facilities allow the Company to serve its
communities better by providing a continuum of service that meets a wider
variety of needs. In addition, assisted living and retirement facilities
generate revenues with a significantly higher private pay component than
revenues from nursing facilities, thereby improving operating margins.
The Company intends to maintain its geographic focus on smaller urban
communities. The Company believes that it has established a reputation as a
community-oriented long-term care provider and has developed experience in
serving and marketing to smaller urban communities. The Company also believes
that operating in such community's results in a more stable workforce.
OPERATIONS
NURSING CARE
Nursing facilities provide a broad range of long-term geriatric, subacute
care and rehabilitative therapy services, including skilled nursing care and
therapy services, to persons who do not require the more extensive and
specialized services of a hospital. The nursing facilities employ registered
nurses, licensed practical nurses, therapists, certified nursing assistants and
qualified healthcare aides who provide care as prescribed by each resident's
attending physician and a full range of personal support. All nursing facilities
provide daily dietary services, social services and recreational activities, as
well as basic services such as housekeeping and laundry. As of December 31,
1999, the Company operated 192 nursing facilities with 20,143 licensed beds.
ASSISTED LIVING AND RETIREMENT FACILITIES
In its assisted living facilities, the Company provides residential
accommodations, activities, meals, security, housekeeping, and assistance in the
activities of daily living to seniors who require some help, but not the level
of nursing care provided in a nursing facility. The Company's retirement
communities provide activities, security, special amenities, comfortable
apartments, housekeeping services and meals. An assisted living facility
enhances the value of an existing nursing facility in those situations where the
two facilities operate side by side, and allows the Company to better serve the
communities in which it operates by providing a broader continuum of service.
All of the Company's assisted living facilities are within close proximity to
its nursing facilities. As of December 31, 1999, the Company operated 45
assisted living and retirement facilities with resident capacity of 1,912 units.
MANAGEMENT SERVICES
The Company also applies its operating expertise through the management of
nursing and assisted living facilities for others. The Company employs a number
of professionals who have considerable knowledge and expertise in both the
operational and administration aspects of the long-term care industry. On a
regional level, the Company can offer consultants in the areas of nursing,
dietary, laundry and housekeeping to long-term
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care operators under a consulting or full management services basis. Equally,
through its head office support group, the Company can provide professionals to
assist operators in the areas of cost reimbursement, information technology, and
accounting services. At December 31, 1999, there were six nursing facilities and
five assisted living facilities under full management contract with capacity to
serve 734 residents.
GROUP PURCHASING
UHF Purchasing Group provides purchasing services for over 2,395 nursing
facilities in 39 states, in addition to the facilities owned and managed by the
Company. In addition, UHF Purchasing Group administers two separate food
purchasing programs for two major long-term care groups which operate 465
long-term care facilities. The purchasing group offers substantial cost
reductions for its members through the contractual volume-based arrangements
made with a variety of industry suppliers for food, supplies and capital
equipment.
REHABILITATIVE THERAPY SERVICES
The Company provides rehabilitative therapy services on an inpatient and
outpatient basis. The United States health care system is applying pressure on
acute and managed care providers to discharge patients more rapidly to less
intensive and low-cost care environments. The strong interdisciplinary approach
to patient services, in conjunction with the support services that the patient
and family receive, are important in optimizing clinical outcomes and level of
satisfaction. In response to this market trend, all of the Company's nursing
facilities have expanded their ability to provide patient-centered
outcome-oriented subacute and rehabilitative care involving physical,
occupational or speech-language therapy through employed therapists.
At many of the facilities, the Company provides rehabilitative therapy
services on an inpatient and outpatient basis to clients who require physical,
occupational, or speech-language therapy. At December 31, 1999, the Company's
nursing facilities operated 102 expanded therapy units, offering 1,500 to 5,000
square feet of therapy space.
As of December 31, 1999 the Company operated under the Prostep operating
name, 28 clinics to outpatients requiring physical, occupational, or
speech-language therapy in five states. Subsequent to December 31, 1999, the
Company sold all seven of the clinics located in the State of Florida.
OTHER
Under the former UPC Health Network division, the Company operated an
institutional pharmacy services business, providing pharmacy supplies and
services to both the Company's and other non-affiliated residents, and operated
a home health and contracted therapy operation. In September 1998, the Company
sold its institutional pharmacy operations to Omnicare, Inc. and subsequently
entered into a preferred provider agreement with Omnicare to provide the Company
with high-quality and cost-efficient pharmacy services. In November 1999, the
Company sold its home health operation and prior to this closed the contracted
therapy operation.
SOURCES OF REVENUE
The Company derives its revenue from Medicare, Medicaid and private pay
sources. During 1999 the Company derived approximately 21%, 42% and 37% of its
revenue from these sources, respectively.
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, HMOs, PPOs, and
other charge-based payment sources as well as revenue from HMO Medicare risk
plans. Blue Cross and Veteran's Administration payments are included in private
pay and are made pursuant to renewable contracts with these payers.
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MEDICARE
Medicare is a health insurance program funded and administered by the
federal government primarily for individuals entitled to Social Security who are
ages 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.
For 1999, Medicare Part A and Part B payments were received by the Company
through essentially two Medicare payment models being PPS, subject to the
phase-in provisions from the previous cost-based reimbursement model, and the
Medicare Risk HMO model.
The Balanced Budget Act of 1997 (the "Balanced Budget Act"), signed into
law on August 5, 1997, made numerous changes to the Medicare and Medicaid
programs which affect the Company. With respect to the Medicare program, the new
law requires the establishment of PPS rates 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 ("RUGs")
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 thereafter. The PPS system
replaces a former cost-based model, whereby nursing facilities received interim
payments for each facility's expected reimbursable costs which could be subject
to adjustment based upon the submission of a year-end cost report. For the
Company, this new system became effective for three facilities in 1998 with the
remainder being subject to PPS as of January 1, 1999. The PPS per diem rates,
under certain criteria, are to be phased into effect over a three year period,
whereby facilities in excess of the established rates will be moved downward to
the lower PPS rate.
Through the Medicare Risk HMO model, the Company provides services to
Medicare Risk HMO enrollees at a predetermined negotiated rate. The Company
contracts directly with the HMO participating in the program to provide services
to its enrollees. The HMO solicits its enrollees from the general Medicare
eligible beneficiary population. The Medicare beneficiary forfeits his/her
traditional Medicare benefits to participate in the Medicare Risk HMO plan.
Funds received by the Company under Medicare pre-PPS 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.
MEDICAID
Medicaid is a state-administered program financed by state funds and
matching federal funds. The program provides for 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 similar to the pre-PPS Medicare program
where 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.
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QUALITY OF CARE
The focus of the Company's commitment to excellence is its belief in
treating residents with dignity and respect through the implementation of
rigorous standards that management and others constantly assess and update. At a
regional level, the Area Directors of Care Management lead a department which is
primarily responsible for establishing care and service standards, policies and
procedures, auditing care and service delivery systems, and providing direction
and training for all levels of the staff within the nursing facilities and
assisted living facilities. The Area Directors of Care Management are
responsible for developing programs and standards for all professional
disciplines and services provided to users of the Company's services, including
nursing, dietary, social services, activities, ethical practices, mental health
services, behavior management, quality validation and continuous quality
improvement. Training of employees at all levels is an integral part of the
Company's on-going efforts to improve and maintain its quality. Each new nursing
facility administrator or director of nursing is required to attend a week of
Company-provided training to ensure that he or she has an understanding of all
aspects of nursing facility operations, including clinical, management and
business operations. The Company conducts additional training for these
individuals and all other staff on a regional or local basis.
MARKETING
Most of the Company's long-term care facilities are located in smaller
urban communities. The Company focuses its marketing efforts predominantly at
the local level. The Company believes that the selection of a long-term care
facility is strongly influenced by word-of-mouth and referrals from physicians,
hospital discharge planners, community leaders, neighbors and family members.
The administrator of each long-term care facility is therefore a key element of
the Company's marketing strategy. Each administrator is responsible for
developing relationships with potential referral sources. Administrators are
supported through a regional team of marketing personnel, which establish the
overall marketing strategy, develop relationships with HMO and PPO
organizations, and provide marketing direction with training and community
specific promotional materials.
GOVERNMENT REGULATION
The provision of institutional care through nursing facilities is subject
to regulation by various federal, state and local governmental authorities in
the United States. There can be no assurance that such authorities will not
impose additional restrictions on the Company's activities that might adversely
affect the Company's business.
GENERAL REGULATORY REQUIREMENTS
Nursing facilities, assisted living facilities, and other healthcare
businesses are subject to annual licensure and other regulatory requirements of
state and local authorities. In addition, in order for a nursing facility to be
approved for payment under the Medicare and Medicaid reimbursement programs, it
must meet the participation requirements of the Social Security Act and the
regulations thereunder. The regulatory requirements for nursing facility
licensure and participation in Medicare and Medicaid generally prescribe
standards relating to provision of services, resident rights, physical
environment and administration. Nursing and assisted living facilities are
generally subject to unannounced annual inspections by state or local
authorities for purposes of re-licensure and nursing facilities for purposes of
re-certification under Medicare and Medicaid.
OBRA-1987
The Omnibus Budget Reconciliation Act was passed in 1987 by the United
States Congress and included extensive revisions to the Medicare and Medicaid
statutory requirements for nursing facilities. These provisions prescribe an
outcome-oriented approach to the provision of services and require that each
resident receive the necessary care and services to attain or maintain the
highest practicable physical, mental and
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psychosocial well-being in accordance with the resident's individualized
assessment and plan of care. The rules also established requirements for survey,
certification and enforcement procedures.
The Health Care Financing Administration of the Department of Health and
Human Services ("HCFA") promulgated regulations in 1995 to implement survey,
certification and enforcement procedures. The survey process is intended to
review the actual provision of care and services, with an emphasis on resident
outcomes to determine whether the care provided meets the assessed needs of the
individual residents. Surveys are generally conducted on an unannounced annual
basis by state survey agencies. Remedies are assessed for deficiencies based
upon the scope and severity of the cited deficiencies. The regulations specify
that the remedies are intended to motivate facilities to return to compliance
and to facilitate the removal of chronically poor performing facilities from the
program. Remedies range from directed plans of correction, directed in-service
training and state monitoring for minor deficiencies; denial of Medicare or
Medicaid reimbursement for existing residents or new admissions and civil money
penalties up to $3,000 per day for deficiencies that do not constitute immediate
jeopardy to resident health and safety; and appointment of temporary management,
termination from the program and civil money penalties of up to $10,000 for one
or more deficiencies that constitute immediate jeopardy to resident health or
safety. The regulations allow state survey agencies to identify alternative
remedies that must be approved by HCFA prior to implementation.
Effective with the implementation of the 1995 regulation, HCFA created a
new concept that allows facilities with acceptable regulatory histories to have
an opportunity to correct their deficiencies by a "date certain" and not impose
sanctions unless they do not return to compliance. Facilities with deficiencies
constituting immediate jeopardy to resident health and safety and those that are
classified as poor performing facilities are not given an opportunity to correct
their deficiencies prior to the assessment of remedies. From time to time, the
Company receives notices from federal and state regulatory agencies relating to
alleged deficiencies for failure to comply with all components of the
regulations. While the Company does not always agree with the positions taken by
the agencies, the Company reviews such notices and takes corrective action when
appropriate. Due to the fact that the new regulatory process provides the
Company with limited appeal rights, many alleged deficiencies are not challenged
even if the Company is not in agreement with the allegation. The industry as a
whole has raised with HCFA its serious concern that the new survey,
certification and enforcement process does not appropriately measure performance
against applicable requirements and that the process is being applied
inconsistently among survey sites. Fundamental to the concern is the change in
how surveyors perceive a deficient practice. Prior to July 1995, a deficiency
would be identified only if a pattern of less than acceptable performance was
observed. Under the present regulation, any lack of perfection produces an
alleged deficiency.
The July 1995 regulation mandates that facilities which are not in
substantial compliance and do not correct deficiencies within a certain time
frame must be terminated from the Medicare and/or Medicaid programs. Generally,
the facility has no more than six months from deficiency identification to
correct the deficiency, but shorter time frames apply when immediate jeopardy to
the health or safety of the residents is alleged by the survey agency. While the
Company endeavors to comply with all applicable regulatory requirements, from
time to time certain of the Company's nursing facilities have been subject to
various sanctions and penalties as a result of deficiencies alleged by HCFA or
state survey agencies. In 1998, the Company operated one facility in Maryland,
which lost its certification under the Medicare and Medicaid systems and
subsequently ceased its operations. There can be no assurance that the Company
will not be subject to similar sanctions and penalties in the future.
All of the Company's current operating nursing facilities surveyed to date
under the new regulation have been found to be in substantial compliance at the
initial or follow up survey visit. Two nursing homes, which were found to be
deficient have been subsequently closed or sold by the Company. The Company
believes that this performance is comparable to the performance of other similar
multi-facility corporations. The Company expects that those of its facilities
not in substantial compliance will ultimately achieve this objective. The
Company is unable to predict its compliance outcome in the future and could be
adversely affected if a substantial portion of its facilities were determined
not to be in compliance with applicable regulations. The Company believes that
it has appropriate systems and mechanisms in place to monitor care and service
delivery.
8
<PAGE> 11
RESTRICTIONS ON ACQUISITIONS AND CONSTRUCTION
Acquisition and construction of additional nursing facilities are subject
to state regulation. All of the states in which the Company currently operates
(other than Idaho) have adopted CONs and other laws to regulate expansion, which
generally require that a state agency approve certain acquisitions or physical
plant changes and determine that a need exists prior to the addition of beds or
services, the implementation of the physical plant changes or the occurrence of
certain capital expenditures. Certain states have also passed legislation,
enacted rules and regulations and adopted policies that prohibit, restrict or
delay the issuance of CONs. In addition, in most states the reduction of beds or
the closure of a facility requires the approval of the appropriate state
regulatory agency and, if the Company were to determine to reduce beds or close
a facility, the Company could be adversely affected by a failure to obtain or a
delay in obtaining such approval. To the extent that CON or other similar
approvals are required for expansion of the Company's operations, either through
facility acquisitions, construction of new facilities or additions to existing
facilities, or expansion or provision of new services or other changes, the
Company's expansion proposals could be adversely affected by the inability to
obtain the necessary approvals, changes in the standards applicable to such
approvals and possible delays and expenses associated with obtaining such
approvals.
Acquisition, construction and operation of assisted living facilities is
less stringent than nursing facilities, and in the absence of no uniform federal
regulations, states are free to develop their own regulations. However, while
only 24 states use the term assisted living to describe the category of
licensure, virtually every state has a licensure category and some form of
regulation which may apply to the assisted living provider. If the assisted
living provider supplies services that meet the definition of a licensed level
of care in the state, the provider must be licensed. Licensure regulations can
apply to admission and discharge criteria, and the variety and type of services
provided. Many states require the submission of building plans and approval from
the state being required prior to construction, however the approval process is
different from the CON procedure, being more of a clearance process than demand
formula. And in terms of construction and design, assisted living facilities
must meet a stringent set of building regulations including the Life Safety Code
(NFPA101). Inspections of assisted living facilities are conducted by state
regulators on a periodic basis similar to nursing facilities.
REGULATION OF CERTAIN TRANSACTIONS
Federal law provides for exclusion of practitioners, providers and related
persons from participation in most Federal healthcare programs, including the
Medicare and Medicaid programs, if the individual or entity has been convicted
of a criminal offense related to the delivery of an item or service under these
programs or if the individual or entity has been convicted, under state or
Federal law, of a criminal offense relating to neglect or abuse of residents in
connection with the delivery of a healthcare item or service. Other individuals
or entities may be, but are not required to be, excluded from such programs
under certain circumstances, including but not limited to the following:
conviction related to fraud; conviction relating to obstruction of an
investigation; conviction relating to a controlled substance; licensure
revocation or suspension; exclusion or suspension from state or Federal
healthcare programs; filing claims for excessive charges or unnecessary services
or failure to furnish medically necessary services; and ownership or control by
an individual who has been excluded from the Medicaid and/or Medicare programs,
against whom a civil monetary penalty related to the Medicaid and/or Medicare
programs has been assessed, or who has been convicted of the crimes described in
this paragraph. The illegal remuneration provisions of the Social Security Act
make it a felony to solicit, receive, offer to pay or pay any kickback, bribe or
rebate in return for referring a resident for any item or service, or in return
for purchasing, leasing, ordering or arranging for any good, facility, service
or item, for which payment may be made under the federal healthcare programs. A
violation of the illegal remuneration statute may result in the imposition of
criminal penalties, including imprisonment for up to five years, the imposition
of a fine of up to $25,000 or both. A civil action to exclude a provider from
the Medicaid and/or Medicare programs may also be brought. The recently enacted
Balanced Budget Act also includes numerous health fraud provisions, including:
new exclusion authority for the transfer of ownership or control interest in an
entity to an immediate family or household member in anticipation of, or
following, a conviction, assessment, or exclusion; increased mandatory exclusion
periods for multiple health fraud convictions, including permanent exclusion for
the conviction of three health care-related crimes; authority for the
9
<PAGE> 12
Secretary to refuse to enter into Medicare agreements with convicted felons; new
civil money penalties for contracting with an excluded provider or violating the
federal anti-kickback statute; new surety bond and information disclosure
requirements for certain providers and suppliers; and an expansion of the
mandatory and permissive exclusions added by the Health Insurance Portability
and Accountability Act of 1996 to any Federal health care program (other than
the Federal Employees Health Benefits Program). There are also other civil and
criminal statutes applicable to the long-term care industry, such as those
governing false claims. The Company has contractual relationships with some
healthcare providers. Some states in which the Company operates also have laws
that govern financial arrangements between healthcare providers. The Company
believes that it is in compliance and that its practices are not in violation of
the foregoing statutes or regulations. The Company cannot reasonably predict
whether enforcement activities will increase at the Federal or state level or
the effect of any such increase on its business.
In 1995, a major anti-fraud demonstration project, "Operation Restore
Trust" ("ORT") was announced by the Office of the Inspector General ("OIG"). A
primary purpose for the project is to scrutinize the activities of healthcare
providers who are reimbursed under the Medicare and Medicaid programs. Initial
investigation efforts have focused on skilled nursing facilities, home health
and hospice agencies, and durable medical equipment suppliers in Texas, Florida,
New York, Illinois and California. In May 1997, HHS announced that ORT would be
expanded during the next two years to include 12 additional states (Arizona,
Colorado, Georgia, Louisiana, Massachusetts, Missouri, New Jersey, Ohio,
Pennsylvania, Tennessee, Virginia and Washington), as well as several other
types of healthcare services. Over the longer term, ORT enforcement actions
could include criminal prosecutions, suit for civil penalties, and/or Medicare,
Medicaid or Federal healthcare program exclusions. Prior to the November, 1997
acquisition of Arbor, one of its subsidiary's facilities was charged for therapy
services, which were inadequately documented. Following this investigation,
Arbor adopted measures to strengthen its documentation relating to reimbursable
services. While the Company does not believe that it is the target of any such
investigation under ORT, there can be no assurance that substantial amounts will
not be expended by the Company to cooperate with any such investigation or to
defend allegations arising therefrom. If it were found that any of the Company's
practices failed to comply with the anti-fraud provisions, the Company could be
materially adversely affected.
CROSS DISQUALIFICATION AND DELICENSURE
In certain circumstances, conviction of abusive or fraudulent behavior with
respect to one facility may subject other facilities under common control or
ownership to disqualification from participation in Medicaid or Medicare
programs. Executive Order 12549 prohibits any corporation or facility from
participating in Federal contracts if it or its "principals" have been debarred,
suspended or are ineligible, or have been voluntarily excluded, from
participation in Federal contracts. A principal has been defined as an officer,
director, owner, partner, key employee or other person with primary management
or supervisory responsibilities. In addition, some state regulations provide
that all facilities under common control or ownership licensed within a state
are subject to de-licensure if any one or more of such facilities are
de-licensed.
ENVIRONMENTAL LAWS AND REGULATIONS
Certain Federal and state laws govern the handling and disposal of medical,
infectious and hazardous waste. Failure to comply with those laws or the
regulations promulgated thereunder could subject an entity covered by these laws
to fines, criminal penalties and other enforcement actions. The Company has
developed policies with respect to the handling and disposal of medical,
infectious and hazardous waste to assure compliance by each of its facilities
with those laws and regulations. The Company believes that it is in material
compliance with applicable laws and regulations governing these requirements.
Federal regulations promulgated by the Occupational Safety and Health
Administration impose additional requirements on the Company with regard to
protecting employees from exposure to blood borne pathogens. The Company
believes that it has policies and procedures in place to preclude actions by
this regulatory body.
10
<PAGE> 13
COMPETITION
The long-term care industry in the United States is highly competitive with
companies offering a variety of similar services. The Company faces competition
locally and regionally from other healthcare providers, including for-profit and
not-for-profit organizations, home health agencies, medical supplies and
services agencies, and rehabilitative therapy providers. Significant competitive
factors affecting the placement of residents in nursing and assisted living
facilities include quality of care, services offered, reputation, physical
appearance, location and, in the case of private-pay residents, cost of the
services. The Company focuses on word-of-mouth reputation and referrals from
each community's medical and healthcare professionals. There can be no assurance
that the Company will not encounter increased competition, which could adversely
affect its business, results of operations or financial condition.
Assisted living facilities can be constructed in certain states without any
CON being approved by the state. The newer built assisted living facilities can
attract an element of the former private pay nursing facility admissions, which
require a lessor degree of care. Since there is little price competition with
respect to Medicaid and Medicare residents, a facility's competitive position in
the marketplace is attributable to its reputation for quality of services and
staff, the range of services offered and location. The Company's medical
services and supplies operation and its group purchasing operation compete with
other similar operations ranging from small local operators to companies which
are national in scope and distribution capability.
The Company also competes with other providers in the acquisition and
development of additional facilities. Other competitors may accept a lower rate
of return and therefore, present significant price competition. Also, tax-exempt
not-for-profit organizations may finance acquisitions and capital expenditures
on a tax-exempt basis or receive charitable contributions unavailable to the
Company.
LIABILITY, INSURANCE AND LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in actions against them
from time to time in connection with their operations and due to the nature of
its business. The Company currently maintains insurance policies, including
comprehensive general and professional liability, property coverage, workers'
compensation and employer's liability insurance, in amounts and with such
coverage and deductibles as it deems appropriate, based on the nature and risks
of its business, historical experience and industry standards. The Company is
not liable for malpractice claims made against non-employees of the Company,
including attending physicians at its own facilities and employees of facilities
managed by the Company. There can be no assurance; however, that claims will not
arise which are in excess of the Company's insurance coverage or are not covered
by the Company's insurance coverage. A successful claim against the Company not
covered by, or in excess of, the Company's insurance could have a material
adverse effect on the Company's financial condition and results of operations.
Claims against the Company, regardless of their merit or eventual outcome, would
require management to devote time to matters unrelated to the operation of the
Company's business and, due to publicity, may also have a material adverse
effect on the Company's ability to attract residents or expand its business. In
addition, the Company's insurance policies must be renewed annually and there
can be no assurance that the Company will be able to continue to obtain
liability insurance coverage in the future or, if available, that such coverage
will be available on acceptable terms.
EMPLOYEES
As of December 31, 1999, the Company employed approximately 23,000 people,
including approximately 5,200 registered and licensed practical nurses, 9,200
nursing assistants, 1,700 therapists, 5,500 dietary, domestic, maintenance and
other staff, and 1,260 administrative employees who work at corporate offices
and facilities. There are approximately 48 collective bargaining agreements (20
of which expire within 12 months of March 31, 2000) among eight unions covering
approximately 3,600 employees. The Company believes that its relationship with
its employees is good.
11
<PAGE> 14
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under Items 1-7a contain certain
forward-looking statements concerning the Company's operations, economic
performance and financial condition, including, among other things, the
Company's business strategy. These statements are based on the Company's
expectations and are subject to various risks and uncertainties. Actual results
could differ materially from those anticipated due to a number of factors,
including those identified under Item 1 and elsewhere in this document. All
forward-looking statements contained in this report are based upon information
available at the time the statement is made and the Company assumes no
obligation to update any forward-looking statement.
ITEM 2. PROPERTIES
At December 31, 1999, the Company operated 237 long-term care facilities,
with capacity to serve 22,055 residents in 14 states. Of such facilities, 193
were owned, 33 were leased, 11 were managed, and 26 of the leased properties had
purchase options and/or rights of first refusal. The following table lists by
state, the nursing, assisted living and retirement facilities owned, leased or
managed by the Company at December 31, 1999:
<TABLE>
<CAPTION>
OWNED LEASED(1) MANAGED TOTAL
--------------------- --------------------- --------------------- ---------------------
RESIDENT RESIDENT RESIDENT RESIDENT
FACILITIES CAPACITY FACILITIES CAPACITY FACILITIES CAPACITY FACILITIES CAPACITY
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Florida...................... 32 3,423 -- -- -- -- 32 3,423
Ohio......................... 21 2,178 10 1,142 1 70 32 3,390
Pennsylvania................. 21 2,205 -- -- 10 664 31 2,869
Wisconsin.................... 35 2,772 -- -- -- -- 35 2,772
Indiana...................... 16 1,501 4 462 -- -- 20 1,963
Washington................... 19 1,558 4 371 -- -- 23 1,929
Kentucky..................... 19 1,550 -- -- -- -- 19 1,550
Texas........................ 6 586 13 957 -- -- 19 1,543
Minnesota.................... 11 1,397 -- -- -- -- 11 1,397
Oregon....................... 5 331 2 135 -- -- 7 466
Arkansas..................... 4 281 -- -- -- -- 4 281
Idaho........................ 2 232 -- -- -- -- 2 232
Delaware..................... 1 120 -- -- -- -- 1 120
West Virginia................ 1 120 -- -- -- -- 1 120
--- ------ -- ----- -- --- --- ------
Total........................ 193 18,254 33 3,067 11 734 237 22,055
=== ====== == ===== == === === ======
Nursing...................... 154 16,553 32 3,001 6 589 192 20,143
--- ------ -- ----- -- --- --- ------
Assisted Living.............. 39 1,701 1 66 5 145 45 1,912
--- ------ -- ----- -- --- --- ------
</TABLE>
- ---------------
(1) The average remaining life of the leases, including renewal options
exercisable solely by the Company is six years.
(2) In addition, the Company operates 28 rehabilitative clinics which are
located in Wisconsin (11), Texas (1), Ohio (1), Pennsylvania (8), and
Florida (7). Subsequent to December 31st, the Company sold all Florida
locations.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in actions brought against
them from time to time in connection with their operations as the business
entails an inherent risk of liability. In recent years, participants in the
long-term care industry have become subject to an increasing number of lawsuits
arising from operations. While it is not possible to estimate the final outcome
of the various proceedings at this time, such actions are generally resolved
within the amounts provided within the accounts.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Not applicable
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data derived from the
consolidated financial statements of the Company as audited by KPMG LLP,
independent certified public accountants (together with the notes thereto and
the accountants' report thereon, the "Consolidated Financial Statements"). The
following information should be read in conjunction with the "Consolidated
Financial Statements" included at Item 8 and "Management's Discussion and
Analysis of Financial Condition & Results of Operation" included at Item 7 of
this document.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues (note 1):
Nursing and assisted living centers...................... $ 916,195 $ 990,066 $ 796,006 $728,467 $660,712
Medical supplies and outpatient therapy.................. 43,068 141,131 113,206 89,888 79,767
Other.................................................... 8,322 9,238 6,949 5,992 6,649
---------- ---------- ---------- -------- --------
967,585 1,140,435 916,161 824,347 747,128
Costs and expenses:
Operating................................................ 842,216 953,639 747,016 677,159 626,405
General and administrative............................... 45,524 45,432 40,510 33,262 28,672
Lease costs.............................................. 18,806 15,895 10,213 8,756 9,005
Depreciation and amortization............................ 52,005 53,723 35,290 29,703 25,872
Interest, net............................................ 51,267 55,831 24,002 18,477 14,776
Loss on impairment of long-lived assets.................. 38,173 -- -- -- --
Loss (gain) on disposal of assets and other items........ 42,774 (93,337) -- -- --
---------- ---------- ---------- -------- --------
1,090,765 1,031,183 857,031 767,357 704,730
---------- ---------- ---------- -------- --------
(Loss) earnings before provision for income taxes.......... $ (123,180) $ 109,252 $ 59,130 $ 56,990 $ 42,398
Net (loss) earnings........................................ $ (70,457) $ 27,264 $ 25,763 $ 34,008 $ 25,521
(Loss) earnings per share.................................. $ (74) $ 29 $ 27 $ 36 $ 27
Dividends per share........................................ $ -- $ -- $ 1.73 -- --
Weighted average shares outstanding........................ 947 947 947 947 947
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................................ $ 59,778 $ 17,477 $ 95,184 $ 60,492 $ 38,555
Total assets............................................... 974,448 1,135,477 1,229,249 591,851 525,634
Long-term debt............................................. 508,450 527,101 683,282 222,954 196,769
Shareholder's equity....................................... 237,895 311,629 281,772 201,521 167,513
OTHER DATA:
Expenditures for acquisitions.............................. $ -- $ 18,857 $ 372,582 $ 23,850 $ 13,144
Property and equipment capital expenditures................ $ 25,330 $ 59,120 $ 57,686 $ 53,581 $ 56,469
OPERATING DATA:
Number of facilities (end of period)(2)
Nursing.................................................. 192 203 194 155 152
Assisted living and retirement........................... 45 43 38 31 22
Resident capacity (end of period)(2)
Nursing (beds)........................................... 20,143 21,718 20,971 16,644 16,551
Assisted living and retirement (units)................... 1,912 1,818 1,488 1,140 874
Average occupancy rate(3)
Nursing.................................................. 86% 87% 88% 89% 89%
Assisted living and retirement(4)........................ 81 78 83 86 88
Payer source as a percentage of total Revenue
Private pay.............................................. 37% 35% 33% 32% 33%
Medicare................................................. 21 28 30 30 26
Medicaid................................................. 42 37 37 38 41
</TABLE>
- ---------------
(1) Revenues have been restated for consistency to reflect therapy services
within nursing facilities.
(2) Includes managed facilities.
(3) Based upon licensed beds for nursing facilities and units for assisted
living and retirement facilities.
(4) Reflects occupancy rate for assisted living and retirement facilities
following one year of operation as a Company facility.
13
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION &
RESULTS OF OPERATION
The Company is one of the largest providers of long-term care and related
services in the United States. The Company operated 192 nursing (20,143
operational beds) and 45 assisted living and retirement facilities (1,912 units)
at December 31, 1999. The Company's facilities are located in 14 states.
SIGNIFICANT EVENTS IN 1999 AND 1998
The following is a summary of significant events in 1999 and 1998.
LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS
The Company completed an evaluation of the financial impact of increased
costs resulting from changes in legislation, increased regulatory scrutiny,
changes in the insurance market, and the implementation of the new Medicare PPS
offset in part by the November, 1999 BBRA legislation. As a result, a non-cash
pre-tax provision of $38.2 million for assets impairments was made in the fourth
quarter of 1999.
Statements of Financial Accounting Standards ("SFAS") No. 121 requires
impairment losses to be recognized for long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows are not
sufficient to recover the asset's carrying amounts. The impairment loss is
measured by comparing the fair value of the asset to its carrying amount. SFAS
No. 121 also requires that long lived assets held for disposal be carried at the
lower of carrying value or fair value less costs to sell, once management has
committed the organization to a plan of disposal. Accordingly, management has
estimated the future cash flows by each facility and reduced the carrying value
to its estimated fair value, based upon its best estimate of what such facility,
or similar facilities in that state, would sell for in the open market.
Management believes it has the knowledge to make such estimates of open market
sales prices based upon recent sales in the marketplace. The aggregate provision
required under SFAS No. 121 amounted to $38.2 million.
LOSS (GAIN) ON DISPOSAL OF ASSETS AND OTHER ITEMS
The Company sold six nursing facilities (763 operational beds) for $40.5
million on December 30, 1999; 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 an aggregate
pretax loss of $35.4 million. In addition, on November 30, 1999 the Company sold
its home health operation for $12.7 million resulting in a pretax loss $1.6
million. The Company applied the net after-tax proceeds from these dispositions
of $44.8 million to reduce debt in the following periods: $3.1 million in July;
$4.6 million in October; $10.0 million in November and $27.1 million in
December.
In 1998, the Company sold its institutional pharmacy business to Omnicare,
Inc. for proceeds of $258.0 million. The divestiture followed a 1997 management
decision that the pharmacy operations were non-strategic assets and the
divestiture would reduce the Company's debt-to-equity ratio and significantly
lower interest expense. 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
$0.6 million, or $0.3 million after tax were written off and classified as an
extraordinary item. Similarly in 1998, $2.7 million, or $1.7 million after-tax,
were written off and classified as an extraordinary item.
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.
14
<PAGE> 17
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 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.
RESULTS FROM OPERATION
The following table sets forth details of revenues and earnings as a
percentage of total revenues:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
DECEMBER 31
-------------
1999 1998
---- ----
<S> <C> <C>
Revenues
Nursing and assisted living centers....................... 94.7 86.8
Medical supplies and outpatient therapy................... 4.5 12.3
Other..................................................... 0.8 0.9
----- -----
100.0 100.0
Operating and general and administrative costs.............. 91.8 87.6
Lease, depreciation and amortization........................ 7.3 6.1
Interest, net............................................... 5.3 4.9
Loss on impairment of long-lived assets..................... 3.9 --
Loss (gain) on disposal of assets and other items........... 4.4 (8.2)
----- -----
(Loss) earnings before taxes................................ (12.7) 9.6
(Benefit) provision for income taxes........................ (5.5) 7.1
----- -----
(Loss) earnings before minority interests and extraordinary
item...................................................... (7.2) 2.5
Extraordinary item.......................................... (0.0) (0.1)
----- -----
Net (loss) earnings....................................... (7.2) 2.4
===== =====
</TABLE>
REVENUES
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 and other specialized medical services
such as subacute care, rehabilitative therapy and, prior to November, 1999, the
provision of medical equipment, supplies and services. Nursing and assisted
living center revenues 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 outpatients 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:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
DECEMBER 31
-------------
1999 1998
---- ----
<S> <C> <C>
Private Pay................................................. 37% 35%
Medicare.................................................... 21% 28%
Medicaid.................................................... 42% 37%
</TABLE>
15
<PAGE> 18
In 1999, the level of private pay residents increased, whereas Medicare
admissions declined, which occurred primarily in the first quarter of 1999 and
was caused due to the uncertainty of types of admissions being placed under the
new PPS system and a decrease in discharges from hospitals.
All of the Company's facilities were on the PPS system effective January 1,
1999, most of which were subject to the three-year phase-in provisions. On
November 16, 1999, Congress and the President reached agreement on a package of
Medicare program revisions that restored some of the long-term care industry
funding that had been eliminated or excluded by the Balanced Budget Act. The
BBRA, signed into law on November 29, 1999, made numerous revisions over the
next three years to both Medicare Part A and Part B which affect the Company.
The Part A revisions included a 20% increase in the revenue value for the
Federal component of the blended rate (homes subject to the full Federal rate)
for 15 of the 44 RUGs categories. The increase is effective for six months,
April 1, through September 30, 2000. The BBRA also identified that there is
potential for this increase to extend beyond the September 30, 2000 as the
legislation requires the relief to continue if HCFA does not make adjustment to
the RUGs to recognize the costs associated with non-therapy ancillary services.
In addition, the revenue values for the Federal component of the blended rate
for all of the RUGs will be increased by 4% with an effective date of October 1,
2000 through September 30, 2002. The 4% is in addition to the PPS annual
inflation update of the HCFA market basket minus 1 point. Also, effective
January 1, 2000, facilities receiving a phase-in PPS rate will be given the
option of moving to the full Federal PPS rate. The Company has identified 18
facilities that will benefit from the full Federal PPS rate and has filed the
necessary applications for this to occur. Certain other Part A changes, of
lesser significance to the Company, are included in the BBRA. The Part B
revision is the placement of a two year moratorium on the $1,500 cap on speech
and physical therapy and the $1,500 cap on occupational therapy. The moratorium
is effective on January 1, 2000 and applies to home health, therapy clinics, and
nursing homes. The Company is evaluating the financial impacts of the BBRA on
the organization and anticipates a favorable revenue impact.
Average occupancy in nursing facilities for 1999 and 1998 was 85.9% and
87.3%, respectively; and for assisted living facilities, 79.4% and 73.3%,
respectively. The lower occupancy for assisted living facilities is due to the
start-up of a number of facilities over the past two years.
Medical supplies and outpatient therapy revenue decreased $98.0 million
resulting from the disposal of operations in 1998 and 1999. Revenue from therapy
operations declined $7.7 million due to dispositions and lower business volumes.
During 1998, the Company discontinued its external respiratory rehabilitative
therapy services operation and disposed of its hospice operations, resulting in
a $5.2 million decline in revenue. Below is a summary:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
DECEMBER 31
-------------
1999 1998
---- ----
<S> <C> <C>
Medical supplies and outpatient therapy revenue
Medical supplies and services (sold November, 1999)....... 33.2 34.5
Therapy................................................... 9.9 17.6
Pharmacy (sold September, 1998)........................... -- 89.0
---- -----
43.1 141.1
==== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
REVENUES
Revenues in the year ended December 31, 1999 were $967.6 million,
representing a decrease of $172.8 million (15.2%) from $1,140.4 million in the
year ended December 31, 1998. The decrease in revenues of $172.8 million
included reductions in nursing and assisted living centers revenues of $73.9
million, medical supplies and outpatient therapy revenues of $98.0 million and
other revenues of $0.9 million.
The decrease in nursing and assisted living centers revenues of $73.9
million included an increase of $9.4 million from the opening of newly
constructed facilities, and acquisitions, net of divestitures. Revenues
16
<PAGE> 19
decreased $27.4 million due to a provision recorded for Medicare receivables,
related to cost reports filed from 1995 to 1998 which are in dispute with
Medicare intermediaries, or under or proceeding to appeal through the Provider
Reimbursement Review Board ("PRRB"). While the Company remains confident that it
will prevail with respect to these items in dispute, it has nonetheless booked a
provision. Excluding this provision, revenues from facilities which the Company
operated during each of 1999 and 1998 ("same-facility"), decreased $55.9 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. In 1998 the average rate for Medicare Part A services
was approximately $370.00 per patient day compared with the average 1999 rate of
$323.00 per patient day. The average number of Medicare patients served in 1999
was 691,600. Therefore the decline in the average Medicare Part A rate resulted
in a decrease in revenue of approximately $32.5 million. Average percentage
occupancy for same-facilities, based on beds/units in operation, was 86.3% in
1999 compared with 87.4% in 1998.
The decrease in medical supplies and outpatient therapy revenues of $98.0
million (69.5%) included $97.6 million from divestitures during 1998 and 1999
(primarily pharmacy operations of $89.0 million), net of acquisitions. The
remaining decrease of $0.4 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 $111.3 million or
11.1% between years. The decrease included decreases in costs relating to
divestitures and closed operations, net of acquisitions and newly constructed
facilities, of approximately $50.6 million. This included an increase in
insurance expense and liability costs of $4.5 million. The remaining reduction
in operating and general and administrative costs of $60.7 million (7.6%)
included decreased costs of $86.4 million, primarily due to decreased therapy
activity as a result of PPS, the reduction in contracting of therapists, and a
decrease in travel and meeting costs of $2.3 million due to travel restrictions
as a result of cost reduction efforts. These decreases were partially offset by
an increase in wage-related costs of $20.3 million and an increase in insurance
expense and liability costs of $7.7 million. The increase in wage-related costs
included increases of $25.8 million due to staffing of internal therapists at
the nursing facilities and incentives to attract and retain qualified personnel.
These increases were partially offset by a decrease in workers' compensation
costs of $5.5 million due to more favorable actuarial adjustments for prior
years in 1999 compared to 1998. Insurance and liability claim costs increased
$7.7 million due to first-time liability deductibles and increased premiums due
to claim experience.
LEASE COSTS, DEPRECIATION AND AMORTIZATION
Total lease costs and depreciation and amortization increased $1.2 million
when comparing 1999 to 1998. Lease costs increased $2.9 million due to the new
corporate office facility ($1.5 million) and increased equipment under lease
through a favorable contract negotiated at the end of 1998. The lease cost
increase was offset by a $1.7 overall decrease in depreciation and amortization
expense primarily due to the sale of the pharmacy operation and related
goodwill.
INTEREST
Net interest expense decreased $4.5 million to $51.3 million in the twelve
months ended December 31, 1999 compared with $55.8 million in the comparable
period in 1998. The decrease was primarily due to a decrease in the average debt
level to $575.5 million during 1999 compared to $658.4 million during 1998
resulting from the Company's use of pharmacy sale and various 1999 divestiture
proceeds to pay-down debt. This was partially offset by an increase in the
weighted average interest rate of all long-term debt to approximately 8.91%
during 1999 compared to approximately 8.80% during 1998. Net interest expense
was also affected by less favorable investment earnings and fewer investments in
1999 compared to 1998.
17
<PAGE> 20
LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS
The Company completed an evaluation of the financial impact of increased
costs resulting from changes in legislation, increased regulatory scrutiny,
changes in the insurance market, and the implementation of the new Medicare PPS
offset in part by the December, 1999 BBRA legislation. As a result, a non-cash
pre-tax provision of $38.2 million for assets impairments was made in the fourth
quarter of 1999, in accordance with SFAS No. 121.
LOSS (GAIN) ON DISPOSAL OF ASSETS AND OTHER ITEMS
The Company sold six nursing facilities (763 operational beds) for $40.5
million on December 30, 1999 resulting in a loss of $35.9 million before taxes;
two nursing facilities (150 operational beds) for $4.8 million on September 30,
1999 resulting in a loss of $0.3 million; and one nursing facility (248
operational beds) for $4.3 million on June 30, 1999 resulting in a gain of $0.8
million. The sales resulted in a pretax loss of $35.4 million. In addition, on
November 30, 1999 the Company sold its home health operation for $12.7 million
resulting in a loss of $1.6 million before taxes.
The Company's sale of its home health operation, the closure of therapy
business and focus on the nursing and assisted living operations resulted in a
number of assets to be identified for disposition and reduction of personnel. A
$3.2 million provision was made in September and December, 1999 for the closure
of two facilities (221 operational beds), and the two other facilities (135
operational beds) for which notice has been given not to renew the operating
leases upon their maturities in June, 2000 and September, 2000. A further $2.6
million was provided for non-core asset sales and severance costs of
non-essential personnel.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION AND RENT ("EBITDAR")
EBITDAR for the year declined to $79.8 million in 1999 from $141.3 million
in 1998 and represented 8.2% and 12.4%, respectively, of revenue. While the
Company succeeded in reducing costs in excess of reductions in Medicare PPS
rates, declines in EBITDAR were realized primarily due to the $27.4 million
provision for Medicare retroactive receivables, loss of earnings from asset
dispositions in 1999 and 1998, lower occupancy and increased insurance costs.
START-UP COSTS
The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in 1999 of $4.1 million compared to $7.2 million in 1998.
The $3.1 million decrease when comparing periods was due to the timing of
facility openings in 1999 versus 1998.
INCOME TAXES
Income taxes in the year ended December 31, 1999 decreased to a $52.8
million tax benefit from a $79.7 million provision in the comparable period in
1998. The 1999 taxes included a recovery of previous year's taxes of $29.0
million resulting from the loss on disposal of assets in a share transaction.
The 1998 provision included $72.6 million related to the gain from the sale of
the pharmacy operations.
EXTRAORDINARY ITEM
The extraordinary loss in the fourth quarter of 1999 of $0.3 million
relates to the write off of deferred financing costs in connection with debt
reduction upon the sale of the nursing centers and home health operations. The
extraordinary loss in the year ended December 31, 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 year ended December 31, 1999 was $70.5 million compared
to net earnings of $27.3 million in the comparable period in 1998. The net loss
prior to loss on impairment of assets, gain on sale
18
<PAGE> 21
of assets and other items, and extraordinary items was $27.5 million for the
year ended December 31, 1999 compared to net earnings of $6.4 million in the
comparable period in 1998, a decrease of $33.9 million.
FISCAL YEAR 1998 COMPARED WITH 1997
REVENUE
Revenues in 1998 were $1,140.4 million, representing an increase of $224.2
million (24.5%) from $916.2 million in 1997. The increase in revenues of $224.2
million included increases in nursing and assisted living revenues of $194.0
million, medical supplies and outpatient therapy revenues of $27.9 million and
other revenues of $2.3 million.
The increase in nursing and assisted living revenues of $194.0 million
included an increase of $223.3 million from the opening of newly constructed
facilities, the acquisition of facilities in 1998 and 1997, partially offset by
a divestiture. Revenues from facilities operated in both 1998 and 1997
("same-facility") decreased $29.3 million when comparing periods due to a number
of factors. Restoration therapy revenue decreased $37.2 million including
approximately $13.7 million due to a 7.9% decline in Medicare occupancy, $2.7
million due to a 10% decline in Medicare Part B rates and approximately $20.8
million due to conversion to salary equivalency. Pharmacy revenues decreased
$3.8 million primarily due to the reclassification of the overhead component
costs, which consisted of eliminating overhead on pharmacy, which should be
partially recovered through the routine cost limits. Routine revenues increased
$11.7 million due to rate increases; partially offset by lower occupancy and a
$7.1 million decline in prior years' estimated settlement adjustments.
Same-facility occupancies, defined as patient days for nursing facilities and
units occupied for assisted living facilities, declined 1.4%. Average percentage
occupancy for same-facilities, based on beds/units in operation, was 87.5% in
1998 compared with 88.2% in 1997.
The increase in medical supplies and outpatient therapy revenues of $27.9
million (24.7%) included $23.0 million from acquisitions during 1998 and 1997,
net of divestitures (primarily the pharmacy operations). The remaining increase
of $4.9 million is due to a number of factors. Home health revenues increased
$4.4 million due to volume and price increases, while a reduction in oxygen
rates by 25% resulted in a decrease in revenues of $1.7 million. The remaining
increase of $2.2 million is primarily due to growth in contracted services and
outpatient operations.
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
Operating and general and administrative costs increased $211.5 million or
26.9% between periods. The increase included increases in costs relating to
acquisitions and newly constructed facilities, net of divestitures, of
approximately $215.9 million in 1998. The remaining decrease in operating and
general and administrative costs of $4.4 million (0.6%) included decreased costs
of $48.4 million, primarily due to decreased therapy activity and the conversion
to salary equivalency, partially offset by an increase in wage-related costs of
$44.0 million. The increase in wage-related costs included an increase of $40.8
million to attract and retain qualified personnel and an increase in workers'
compensation costs of $3.2 million due to more favorable actuarial adjustments
for prior years in 1997 compared to 1998.
LEASE COSTS, DEPRECIATION AND AMORTIZATION
Total lease costs and depreciation and amortization increased $24.1 million
(34.6%) to $69.6 million in 1998 compared with 1997. The increase includes $20.6
million as a result of the Arbor acquisition. The remaining increase is
principally due to the overall increase in the number of facilities operated by
the Company and the construction of additions to the Company's facilities.
GAIN ON SALE OF PHARMACY OPERATIONS AND OTHER ITEMS
The Company sold its pharmacy operations on September 16, 1998 for $258.0
million resulting in a gain on sale of $97.8 million before taxes. In addition,
the Company recorded $3.3 million in severance costs
19
<PAGE> 22
related to certain staff reductions and $1.2 million related to a reserve for
loss on closure of a nursing operation in Maryland.
INTEREST
Net interest expense increased $31.8 million to $55.8 million in 1998
compared with $24.0 million in 1997. The increase is due to the effect of an
increase in the average debt level to $658.4 million during 1998 from $327.9
million during 1997 resulting from the Company's acquisitions and capital
expenditures and an increase in the weighted average interest rate of all
long-term debt to approximately 7.98% in 1998 compared to approximately 7.33% in
1997. Net interest expense was also affected by more favorable investment
earnings in 1998 compared to 1997.
START-UP COSTS
The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in 1998 of $7.2 million compared to $2.6 million in 1997.
The $4.6 million increase when comparing periods was due to the timing of
facility openings in 1998 versus 1997.
INCOME TAXES
Income taxes in 1998 increased to $79.7 million from $22.3 million in 1997
as a result of the sale of the pharmacy operations, the tax for which totaled
$72.6 million. The Company's effective tax rates were 72.9% in 1998 and 37.8% in
1997. The increase in the Company's effective tax rate between periods was
primarily due to non-deductible goodwill associated with the sale of the
pharmacy operations and amortization expense resulting from the Arbor
acquisition.
EXTRAORDINARY ITEMS
The extraordinary loss in 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. The extraordinary loss in 1997 of $10.2 million
resulted from the expensing of unamortized debt issuance costs and debt
prepayment penalties in connection with the refinancing of the Company's debt.
NET EARNINGS
Net earnings in 1998 were $27.3 million compared to $25.8 million in 1997.
Net earnings prior to the gain on sale of operations and other unusual items,
and the extraordinary item were $6.4 million for 1998, a decrease of $29.6
million over net earnings of $36.0 million prior to the extraordinary item in
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $2.9 million at December 31,
1999 and $1.1 million at December 31, 1998. Cash flow generated from operations
before working capital changes was $62.3 million for the year ended December 31,
1999 compared with $68.2 in the comparable period of 1998. The decline in cash
flow from operations is the result of a decrease in operating earnings.
Overall cash from operating activities was $18.6 million in 1999 as
compared to $49.7 million in 1998. The Company experienced an increase in
working capital since December 31, 1998, excluding cash and borrowings included
in current liabilities, of $47.4 million. The increase in working capital
resulted from a decrease in taxes payable of $67.3 million, a $24.7 million
decrease in accounts payable and accrued liabilities, a $1.0 million decrease in
amounts due to shareholder and a $1.7 million increase in current trust funds,
partially offset by a decrease in inventories, supplies and prepaid of $1.9
million, an increase in liability costs and insurance due to affiliates of $5.7
million and a decrease in accounts receivable of $39.7 million. The change in
taxes payable resulted from a payment of $25.0 million related to the sale of
the pharmacy operation and a tax benefit of $38.5 million.
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<PAGE> 23
Accounts receivable at December 31, 1999, were $148.3 million compared with
$188.1 million at December 31, 1998, representing a decrease of $39.8 million.
The reduction in accounts receivable included a $27.3 million decrease within
the nursing operations, a decline of $10.4 million within the medical supplies
and outpatient therapy operations, and a decline of $2.1 million in prior policy
year workers' compensation receivables due to collections. Billed patient care
and other receivables decreased $27.2 million and third-party payer settlement
receivables decreased $0.1 million within the nursing operations. The decrease
in billed patient care receivables of $27.2 million included a decrease of $0.7
million due to changes in the Federal reimbursement policies, and a decrease of
$2.9 million due to the sale or closure of nursing facilities and $23.6 million
due to the PPS and an improvement in collection efforts by the company between
periods. The decrease in settlement receivables of $0.1 million between periods
included an increase of $5.3 million due to favorable Medicare rate accrual
adjustments resulting from 1995 cost reimbursement findings, $3.5 million for
anticipated Medicare reimbursement for uncollectible coinsurance amounts, $0.9
million as a result of the appeal of Medicare medical review findings, $11.5
million as a result of Medicare cost report settlements, $2.9 million from
Medicaid rate increases in Pennsylvania, and other net decreases of $1.3
million. In addition, settlement receivables decreased $22.9 million due to the
reclassification of receivables not anticipated to be collected within one year
to long-term receivables. The decrease in medical supplies and outpatient
therapy receivables of $10.4 million between periods is due to decreased therapy
operations and the discontinuation of the contracted services operations for a
net decrease of $6.8 million, and a reduction in home health accounts
receivables of $3.4 million resulting from the sale of this business in
November, 1999.
Property and equipment decreased $89.8 million from December 31, 1998 to a
total of $610.3 million at December 31, 1999. The decrease was the result of
depreciation expense of $45.7 million and asset disposals of $58.7 million,
asset write-downs of $11.9 million offset by, capital expenditures and asset
transfers of $26.5 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 $536.1 million at December 31, 1999 for a
decrease of $11.6 million from December 31, 1998. The decrease was attributable
to early retirement of debt resulting from the utilization of net proceeds from
divestitures in 1999 totaling $44.8 million, partially offset by additional
draw-downs on the Revolving Credit Facility. The weighted average interest rate
of all long-term debt was 8.59% at December 31, 1999 and such debt had
maturities ranging from 2000 to 2014.
During the second quarter of 1999, the Company amended its Senior Credit
Facility. The terms of the amendments to the Credit Facility included a
provision by which the Company waived its right to $25.0 million of the
Revolving Credit Facility, and increased the applicable interest rate margins to
the pricing matrix pertaining to the Company's Revolving Credit Facility and
Tranche A Term Loan, such that the interest rate would 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 increased to 3.00% for Eurodollar loans and a
range of 1.25% to 2.75% for base rate loans. As of December 31, 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 Eurodollar loans
and 2.75% for base rate loans. On March 16, 2000 the Company negotiated specific
terms in the Credit Facility relating to the accounting of provisions for
Medicare cost report settlements and non-cash provisions for general and
professional liability claims.
At December, 1999 the Company had a $200 million Revolving Credit Facility,
of which the Company waived access to $25 million, pursuant to the terms
negotiated in the second quarter of 1999. Borrowing availability under this line
of credit totaled $18.5 million at December 31, 1999 (net of letters of credit
in the amount of $35.5 million and the $25.0 million undrawn and unavailable
requirement per the amendment to the Senior Credit Facility).
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<PAGE> 24
YEAR 2000 ISSUE
The Year 2000 issue arises from the potential inability of information
systems and other computer-based technology to recognize the process
date-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 has not experienced any significant problems
with regard to the Year 2000 Issue. Although the change in date has occurred, it
is not possible to conclude that all aspects of the Year 2000 issue that may
affect the Company, including those related to customers, suppliers, or other
third parties, have been fully resolved.
The aggregate costs directly related to Year 2000 compliance efforts were
approximately $0.6 million for corporate applications and hardware and $1.4
million for all of the Company's facilities. All costs, except long-lived
assets, were expensed as incurred.
ITEM 7A. 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 due to both the
current divestiture strategy and 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% of total variable-rate debt.
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.
FINANCING STRATEGIES
To meet these objectives, the Company 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.
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<PAGE> 25
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 5.84% 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 1999, the Company terminated three agreements (each $50
million in notional value) reducing its hedging period from seven to four years.
The first two of these agreements were disposed of at no cost or material gain
to the Company. The third termination resulted in a cash payment to the Company
of $0.29 million, which is being amortized over the term of the underlying
credit agreement. Management will continue to monitor the interest rate exposure
and adjust hedging levels to reflect outstanding debt levels. Interest expense
related to such agreements amounted to $0.9 million and $0.5 million for the
years 1999 and 1998 respectively. The component of this amount relating to the
hedges' ineffectiveness was not deemed material.
Since the Company has not adopted SFAS 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 December 31, 1999, AOCI would reflect a
gain of $1.4 million based upon quoted market prices provided by the financial
institutions which are counterparties 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 amounts
reflected in AOCI for 1999 related to stock and warrant holdings equals a loss
of $3.3 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 of December 31, 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.
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
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt
Fixed Rate................. 7,639 2,439 2,121 676 259 207,712 220,846 209,275
Average Interest Rate...... 9.28% 9.30% 9.30% 9.31% 9.31% 9.31% 9.30%
Variable Rate.............. 14,066 16,206 18,344 139,358 85,016 36,318 309,308 290,749
Average Interest Rate...... 7.90% 7.85% 7.78% 7.54% 3.88% 3.88% 6.47%
Interest Rate Swaps
Variable to Fixed.......... 32,000 -- 50,000 50,000 -- -- 132,000 1,405
Average Pay Rate........... 5.28% 5.63% 5.63% 5.53% -- -- 5.52%
Average Receive Rate....... 5.43% 6.11% 6.11% 6.11% -- -- 5.94%
</TABLE>
The above table incorporates only those exposures that exist as of December
31, 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.
23
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Extendicare Health Services, Inc.:
We have audited the accompanying consolidated balance sheets of Extendicare
Health Services, Inc. and subsidiaries (the Company) as of December 31, 1999 and
1998, and the related consolidated statements of net earnings, changes in
shareholder's equity, and cash flows for the years ended December 31, 1999, 1998
and 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Extendicare Health Services, Inc. and subsidiaries at December 31, 1999 and
1998, and the consolidated results of their operations and cash flows for the
years ended December 31, 1999, 1998 and 1997 in conformity with generally
accepted accounting principles.
KPMG LLP
Milwaukee, Wisconsin
March 16, 2000
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<PAGE> 27
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,941 $ 1,084
Accounts receivable, less allowances of $24,949 and
$25,899, respectively.................................. 148,348 188,100
Supplies, inventories and prepaid expenses................ 8,882 10,803
Income taxes receivable................................... -- 3,321
Deferred state income taxes............................... 4,185 4,128
Debt service trust funds.................................. 1,934 202
Due from shareholder:
Federal income taxes receivable........................ 47,813 --
Deferred Federal income taxes.......................... 19,684 21,294
-------- ----------
Total current assets................................... 233,787 228,932
PROPERTY AND EQUIPMENT, NET (Note 6)........................ 610,343 700,141
GOODWILL AND OTHER INTANGIBLE ASSETS (Note 7)............... 87,143 151,970
OTHER ASSETS (Note 8)....................................... 43,175 54,434
-------- ----------
$974,448 $1,135,477
======== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Bank indebtedness (Note 9)................................ $ 5,895 $ --
Current maturities of long-term debt (Note 9)............. 21,705 20,647
Accounts payable.......................................... 32,196 36,642
Accrued liabilities (Note 10)............................. 96,526 116,750
Income taxes payable...................................... 1,174 --
Due to shareholder and affiliates......................... 16,513 37,416
-------- ----------
Total current liabilities.............................. 174,009 211,455
LONG-TERM DEBT (Note 9)..................................... 508,450 527,101
OTHER LONG-TERM LIABILITIES (Note 11)....................... 8,451 13,410
DUE TO SHAREHOLDER AND AFFILIATES:
Deferred Federal income taxes............................. 36,362 56,666
Other..................................................... 3,484 3,484
DEFERRED STATE INCOME TAXES................................. 5,141 10,801
MINORITY INTERESTS.......................................... 656 931
SHAREHOLDER'S EQUITY:
Common stock, $1 par value, 1,000 shares authorized, 947
shares issued and outstanding.......................... 1 1
Additional paid-in capital................................ 208,787 208,787
Accumulated other comprehensive (loss) income............. (3,090) 187
Retained earnings......................................... 32,197 102,654
-------- ----------
Total shareholder's equity............................. 237,895 311,629
-------- ----------
$974,448 $1,135,477
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 28
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF NET EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Nursing and assisted living centers (Note 12)........... $ 916,195 $ 990,066 $796,006
Medical supplies and outpatient therapy................. 43,068 141,131 113,206
Other................................................... 8,322 9,238 6,949
---------- ---------- --------
967,585 1,140,435 916,161
---------- ---------- --------
COSTS AND EXPENSES
Operating............................................... 842,216 953,639 747,016
General and administrative.............................. 45,524 45,432 40,510
Lease costs............................................. 18,806 15,895 10,213
Depreciation and amortization........................... 52,005 53,723 35,290
Interest expense........................................ 52,499 57,955 25,519
Interest income......................................... (1,232) (2,124) (1,517)
Loss on impairment of long-lived assets (Note 4)........ 38,173 -- --
Loss (gain) on disposal of assets and other items (Note
4)................................................... 42,774 (93,337) --
---------- ---------- --------
1,090,765 1,031,183 857,031
---------- ---------- --------
(LOSS) EARNINGS BEFORE INCOME TAXES....................... (123,180) 109,252 59,130
(Benefit) provision for income taxes (Note 16)............ (52,841) 79,680 22,336
---------- ---------- --------
(LOSS) EARNINGS BEFORE MINORITY INTERESTS
AND EXTRAORDINARY ITEM.................................. (70,339) 29,572 36,794
Minority interests........................................ 224 (648) (813)
---------- ---------- --------
(LOSS) EARNINGS BEFORE EXTRAORDINARY ITEM................. (70,115) 28,924 35,981
Extraordinary loss on early retirement of debt (net of
income taxes of $240, $1,053, and $6,465 respectively)
(Note 9)................................................ (342) (1,660) (10,218)
---------- ---------- --------
NET (LOSS) EARNINGS....................................... $ (70,457) $ 27,264 $ 25,763
========== ========== ========
PER COMMON SHARE:
(Loss) earnings before extraordinary item............... $ (74,039) $ 30,543 $ 37,995
Extraordinary item...................................... (361) (1,753) (10,790)
---------- ---------- --------
Net (loss) earnings..................................... $ (74,400) $ 28,790 $ 27,205
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 29
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------- PAID-IN COMPREHENSIVE RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL INCOME EARNINGS EQUITY
------ ------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES DECEMBER 31, 1996...... 947 $ 1 $150,254 $ -- $ 51,266 $201,521
Contribution of assets from
affiliate.................. -- -- 10,836 -- -- 10,836
Contribution of equity from
shareholder................ -- -- 44,600 -- -- 44,600
Income tax benefit from stock
options exercised.......... -- -- 691 -- -- 691
Dividends paid................ -- -- -- -- (1,639) (1,639)
Comprehensive income:
Net earnings............... -- -- -- -- 25,763 25,763
--- --- -------- ------- -------- --------
BALANCES DECEMBER 31, 1997...... 947 1 206,381 -- 75,390 281,772
Contribution of assets from
affiliate.................. -- -- 268 -- -- 268
Contribution of equity from
shareholder................ -- -- 2,000 -- -- 2,000
Income tax benefit from stock
options exercised.......... -- -- 138 -- -- 138
Comprehensive income:
Unrealized gain on
investments, net of
taxes.................... -- -- -- 187 -- 187
Net earnings............... -- -- -- -- 27,264 27,264
--- --- -------- ------- -------- --------
Total comprehensive income.... -- -- -- 187 27,264 27,451
--- --- -------- ------- -------- --------
BALANCES DECEMBER 31, 1998...... 947 1 208,787 187 102,654 311,629
Comprehensive income:
Unrealized loss on
investments, net of
taxes.................... -- -- -- (3,277) -- (3,277)
Net (loss) earnings........ -- -- -- -- (70,457) (70,457)
--- --- -------- ------- -------- --------
Total comprehensive income.... -- -- -- (3,277) (70,457) (73,734)
--- --- -------- ------- -------- --------
BALANCES DECEMBER 31, 1999...... 947 $ 1 $208,787 $(3,090) $ 32,197 $237,895
=== === ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
27
<PAGE> 30
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) earnings........................................ $(70,457) $ 27,264 $ 25,763
Adjustments to reconcile net (loss) earnings to net cash
provided from operating activities:
Depreciation and amortization............................ 54,254 56,385 35,290
Provision for uncollectible accounts receivable.......... 11,905 12,698 8,111
Reserve for settlements with third-party payors.......... 27,400 -- --
Loss (gain) on disposal of assets and other items........ 13,774 (24,034) --
Loss on impairment of long-lived assets.................. 38,173 -- --
Deferred income taxes.................................... (12,848) (6,378) 1,287
Extraordinary loss on early retirement of debt........... 342 1,660 10,218
Minority interests....................................... (224) 648 833
Changes in assets and liabilities:
Accounts receivable...................................... 4,314 (28,181) (30,917)
Supplies, inventories and prepaid expenses............... 111 (3,819) (1,793)
Debt service trust funds................................. 100 291 216
Accounts payable......................................... (4,446) (1,256) (4,229)
Accrued liabilities...................................... (33,263) (1,566) 15,281
Income taxes payable..................................... (1,897) 2,195 624
Current due to shareholder and affiliates................ (8,595) 13,773 (1,267)
-------- --------- ---------
Cash provided from operating activities............... 18,643 49,680 59,417
-------- --------- ---------
INVESTING ACTIVITIES:
Payments for acquisitions................................ -- (18,857) (372,582)
Payments for purchases of property and equipment......... (25,330) (59,120) (57,686)
Proceeds from sales of assets............................ 48,522 238,611 3,300
Income taxes paid on sale of pharmacy operations......... (25,000) (40,997) --
Changes in other non-current assets...................... 1,692 (4,158) (8,806)
-------- --------- ---------
Cash (used for) provided from investing activities.... (116) 115,479 (435,774)
-------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................. 58,051 40,293 857,030
Payments of long-term debt............................... (75,606) (208,816) (515,566)
Other long-term liabilities.............................. (4,959) 1,728 2,738
Bank indebtedness........................................ 5,895 (376) (3,403)
Payments of short-term borrowings........................ -- -- (6,000)
Payments of dividends.................................... -- -- (1,639)
Equity contribution from shareholder..................... -- 2,000 44,600
Distribution of minority interests' earnings............. (51) (322) (200)
-------- --------- ---------
Cash (used for) provided from financing activities.... (16,670) (165,493) 377,560
-------- --------- ---------
Increase (decease) in cash and cash equivalents............ 1,857 (334) 1,203
Cash and cash equivalents, beginning of year............... 1,084 1,418 215
-------- --------- ---------
Cash and cash equivalents, end of year..................... $ 2,941 $ 1,084 $ 1,418
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 31
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS
At December 31, 1999 the Company operated 192 skilled nursing facilities
with capacity for 20,143 beds and 45 assisted living facilities with 1,912
units. Through its nursing centers, the Company provides nursing,
rehabilitative, subacute and other specialized medical services and in the
assisted living facilities the Company provides varying levels of assistance
with daily living activities to residents.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amount 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.
The more significant accounting policies of the Company and its subsidiary
companies are as follows:
a) Principles of Consolidation
The consolidated financial statements include those of the Company and its
subsidiaries and partnerships in which the Company has a controlling interest.
All significant intercompany accounts and transactions with subsidiaries have
been eliminated from the consolidated financial statements.
b) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents for purposes of the
consolidated statements of cash flows.
c) Accounts Receivable
Accounts receivable are recorded at the net realizable value expected to be
received from Federal and state assistance programs, other third-party payors or
from individual patients. Receivables from government agencies represent the
only concentrated group of credit risk for the Company.
Management does not believe there are any credit risks associated with
these government agencies other than possible funding delays. Accounts
receivable other than from government agencies consist of receivables from
various payors that are subject to differing economic conditions and do not
represent any concentrated credit risks to the Company. Furthermore, management
continually monitors and adjusts its allowances associated with these
receivables.
d) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Provisions for depreciation and amortization are computed using
the straight-line method at rates based upon the following estimated useful
lives:
<TABLE>
<S> <C>
Buildings...................... 30 to 40 years
Furniture and equipment........ varying periods not exceeding 15 years
Leasehold improvements......... the shorter of the term of the applicable leases or
the useful life of the improvement
</TABLE>
29
<PAGE> 32
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Maintenance and repairs are charged to expense as incurred. When property
or equipment is retired or disposed, the cost and related accumulated
depreciation and amortization are removed from the accounts and the resulting
gain or loss is included in earnings.
The Company has adopted the Statement of Position ("SOP") 98-1, "Accounting
for Costs of Computer Software Developed or Obtained for Internal Use" and
therefore capitalizes certain costs incurred in connection with developing or
obtaining internal-use software. Approximately $782 and $289 of costs associated
with internal-use software were capitalized during the years ended December 31,
1999 and 1998, respectively, and are being amortized over three years.
e) Goodwill and Other Intangible Assets
Goodwill represents the cost of acquired net assets in excess of their fair
market values. Amortization of goodwill and other intangible assets is computed
using the straight-line method over a period of forty years in connection with
the acquisitions of long-term care facilities. Other intangible assets,
consisting of the costs of acquiring leasehold rights are deferred and amortized
over the term of the lease including renewal options.
f) Long-Lived Assets
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment, goodwill and other intangibles, when there are
indications of potential impairment based on estimates of undiscounted future
cash flows. The amount of any impairment is calculated by comparing the
estimated fair market value, as determined by future cash flows or current
market value, with the carrying value of the related asset. Management considers
such factors as current results, trends and future prospects, in addition to
other economic and regulatory factors, in performing this analysis.
g) Other Assets
Direct loan origination costs are deferred and amortized over the life of
the related debt using the effective interest method.
h) Investments
Debt service trust funds and other investment holdings, which are comprised
of fixed interest securities, equity securities, and liquid money market
investments, are considered to be available-for-sale and accordingly, are
reported at fair value. Fair values are based on quoted market prices. A decline
in the market value of any security below cost that is deemed other than
temporary is charged to earnings, resulting in the establishment of a new cost
basis for the security.
The Company has adopted Statement of Financial Accounting Standard ("SFAS")
No. 130, "Reporting Comprehensive Income," and therefore has reported
comprehensive income, such as unrealized gains and losses, net of related tax
effects, within accumulated other comprehensive income ("AOCI") as a separate
component of shareholder's equity. The cost basis of the debt service trust
funds approximates fair value. The 1999 loss and 1998 gain on the other
investment holdings are reflected in other comprehensive income as ($3,277) and
$187, respectively.
Realized gains and losses for securities classified as available-for-sale
are included in earnings and are derived using the specific identification
method for determining the cost of securities sold. Dividend and interest income
are recognized when earned.
30
<PAGE> 33
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
i) Derivative Financial Instruments
The Company enters into interest rate swap agreements to reduce its
exposure to market risks from changing interest rates. For interest rate swaps,
the differential to be paid or received is accrued and recognized in interest
expense and may change as market interest rates change. If a swap is terminated
prior to its maturity, the gain or loss is recognized over the remaining
original life of the swap if the item hedged remains outstanding, or
immediately, if the item hedged does not remain outstanding. If the swap is not
terminated prior to its maturity, but the underlying hedged item is no longer
outstanding, the interest rate swap is marked to market and any unrealized gain
or loss is recognized immediately.
j) Leases
Leases that substantially transfer all of the benefits and risks of
ownership of property to the Company, or otherwise meet the criteria for
capitalizing a lease under generally accepted accounting principles, are
accounted for as capital leases. An asset is recorded at the time a capital
lease is entered into together with its related long-term obligation to reflect
its purchase and financing. Property and equipment recorded under capital leases
are depreciated on the same basis as previously described. Rental payments under
operating leases are expensed as incurred.
k) Revenues
Nursing center revenue results from the payment for services and products
from Federal and state-funded cost reimbursement programs as well as private pay
residents. Revenues are recorded in the period in which services and products
are provided at established rates less contractual adjustments. Contractual
adjustments include differences between the Company's established billing rates
and amounts estimated by management as reimbursable under various reimbursement
formulas or contracts in effect. Estimation differences between final
settlements and amounts recorded in previous amounts are reported as adjustments
to revenues in the period such settlements are determined.
l) Income Taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
m) Earnings Per Common Share
Earnings per common share are computed based on the weighted average number
of shares outstanding during each period. The Company does not have a complex
capital structure and therefore, only has basic earnings per share.
n) Reclassifications
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
31
<PAGE> 34
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and for Hedging Activities," which is
required to be adopted by the Company in fiscal year 2000. SFAS No. 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
earnings. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value will either be offset against the change in fair value
of hedged assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income ("AOCI") until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not anticipate that the
adoption of SFAS No. 133 will have a significant effect on its consolidated
financial statements.
If this statement were adopted as of December 31, 1999, AOCI would reflect
a gain of $1,405 based upon quoted market prices provided by the financial
institutions which are counterparties to the swaps. Changes in the fair values
of the stock and warrant holdings are reported in AOCI net of related deferred
tax accruals as required under SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities."
4. IMPAIRMENT OF LONG-LIVED ASSETS AND LOSS ON DISPOSAL OF ASSETS
In response to the implementation of Medicare PPS, and increased costs
resulting from changes in legislation, increased regulatory scrutiny and changes
in the insurance marketplace, the Company adjusted its strategic plan to focus
on its core nursing and assisted living center operations and divest itself of
under-performing assets. As a result, the Company identified a number of assets
for disposition and closure, reorganized its therapy operations, reduced its
workforce, and analyzed its business for impairment issues.
Impairment of Long-Lived Assets
The Company records impairment losses recognized for long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets' carrying amounts. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. In addition, once management has committed the organization to
a plan for disposal, assets held for disposal are adjusted to the lower of the
assets' carrying value and its fair value less costs to sell. Accordingly,
management has estimated the future cash flows by each facility and reduced the
carrying value to its estimated fair value, based upon its best estimate of what
such facility or similar facilities in that state would sell for in the open
market. Management believes it has the knowledge to make such estimates of open
market sales prices based upon recent sales in the marketplace. In the fourth
quarter, management determined the aggregate adjustment for impairment of
goodwill, property and equipment was $38,173.
Loss on Disposal of Assets and Other Items
In 1999, the Company sold nine nursing facilities and its home health
operation for $62,313 resulting in a pre-tax loss of $36,978 and made a number
of provisions for the closure of nursing facilities, additional costs related to
the sale of non-core assets, and severance of non-essential personnel to result
in an overall pre-tax loss of $42,774. The Company applied the net after-tax
proceeds from these dispositions to reduce debt by approximately $44,800.
Of the facilities sold, six were through the sale of a subsidiary in the
fourth quarter, which resulted in a pre-tax loss of $35,886 and a current tax
benefit of $29,000 relating to the recovery of prior years taxes. In two
separate transactions, the Company sold three nursing facilities resulting in a
pretax gain of $479. The Company sold its home health operation in the fourth
quarter, which resulted in a loss of $1,571. In addition, the Company made a
provision of $3,156 for the closure of two nursing facilities and two other
nursing
32
<PAGE> 35
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. IMPAIRMENT OF LONG-LIVED ASSETS AND LOSS ON DISPOSAL OF ASSETS (CONTINUED)
facilities for which notice has been given not to renew the leases upon their
maturities in June 2000 and September 2000. A further provision of $2,640 was
made for additional reserves related to the sale of non-core assets and
severance of non-essential personnel.
In 1998, the Company sold its pharmacy operation to Omnicare, Inc. for
consideration valued at $258,031 which resulted in a pre-tax gain of $97,797.
The consideration comprised of $250,000 of cash, 125,000 common shares of
Omnicare and warrants to purchase 1,500,000 common shares of Omnicare at $48.00
per share. Goodwill and other intangible assets, including pharmacy contract
rights, were reduced by $90,000 as part of the sale of the pharmacy operations.
Revenue and net earnings of the pharmacy operations during 1998 were $76,786 and
$3,458, respectively. The Company applied the net after-tax proceeds of the sale
of $165,000 to debt reduction. Offsetting this gain was $3,260 in severance
costs related to certain staff reductions and $1,200 of costs relating to the
closing of a nursing facility.
5. ACQUISITIONS
In 1998, the Company acquired the property and equipment of five nursing
facilities and one assisted living facility, and the assets of four medical
specialty services-related businesses for cash and the assumption of debt. The
Company also added one nursing facility through an operating lease.
In 1997, the Company acquired Arbor Health Care Company ("Arbor"), a
company engaged in operating 31 nursing facilities for cash. The Arbor
facilities included seven facilities which are leased under long-term operating
leases. The acquisition of Arbor also included Arbor's institutional pharmacy
and outpatient rehabilitation businesses. The Company also acquired the property
and equipment of nine nursing facilities, two of which were previously leased by
the Company, and the assets of seven medical specialty services-related
businesses.
The cost of the businesses and assets acquired in 1998 and 1997 was $22,587
and $497,332, respectively, and included the following:
<TABLE>
<CAPTION>
1997
------------------
1998 ARBOR OTHER
---- ----- -----
<S> <C> <C> <C>
Consideration:
Cash...................................................... $18,857 $336,497 $36,085
Long-term debt assumed.................................... 3,680 109,745 14,655
Other..................................................... 50 -- 350
------- -------- -------
$22,587 $446,242 $51,090
======= ======== =======
Net assets acquired:
Net current assets (liabilities).......................... $(1,481) $ 13,634 $ 1,968
Property and equipment.................................... 20,697 227,064 43,542
Goodwill and other identifiable intangible assets......... 1,638 227,587 5,989
Other net assets.......................................... 1,733 11,935 (409)
Deferred taxes............................................ -- (33,978) --
------- -------- -------
$22,587 $446,242 $51,090
======= ======== =======
</TABLE>
Prior to its acquisition by the Company, Arbor had recognized revenue and
received payments for waiver requests outstanding of approximately $23,450, of
which $5,044 and $9,310 were approved through December 31, 1998 and 1999,
respectively. During 1998, the Company adjusted the amount of goodwill recorded
33
<PAGE> 36
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. ACQUISITIONS (CONTINUED)
relating to the Arbor acquisition by $9,121, which is net of deferred taxes of
$6,475. These adjustments were due primarily to available new information
regarding estimated Medicare settlement balances.
Acquisitions in 1998 and 1997 have been accounted for using the purchase
method and, accordingly, the results of the acquired operations are included in
the accompanying consolidated financial statements since their dates of
acquisition.
6. PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation and
amortization as of December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and land improvements............................... $ 54,935 $ 59,268
Buildings and improvements............................... 643,507 672,852
Furniture and equipment.................................. 111,107 120,411
Leasehold improvements................................... 20,710 20,275
Construction in progress................................. 4,770 33,296
-------- --------
835,029 906,102
Less accumulated depreciation and amortization........... 224,686 205,961
-------- --------
$610,343 $700,141
======== ========
</TABLE>
Interest is capitalized in connection with the construction of facilities
and is amortized over the estimated useful life of the facilities. Interest
capitalized in 1999, 1998 and 1997 was $301, $1,099 and $825, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of related amortization,
consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Goodwill, net............................................. $78,836 $142,349
Leasehold rights, net..................................... 8,307 9,621
------- --------
$87,143 $151,970
======= ========
</TABLE>
Accumulated amortization of goodwill and other intangible assets as of
December 31, 1999 and 1998 was $10,587 and $8,604, respectively.
34
<PAGE> 37
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. OTHER ASSETS
Other assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Non-current settlement of accounts receivable from Medicare
and Medicaid programs, less reserve of $27,400 in 1999
(see Note 12)............................................. $15,532 $20,000
Deferred financing costs, net............................... 11,133 12,276
Note receivable............................................. 4,000 --
Indemnification escrow...................................... 3,700 --
Shares held for investment.................................. 1,500 4,344
Warrants held for investment................................ 1,381 4,000
Security deposits........................................... 1,532 3,972
Debt service and capital expenditure trust funds............ 1,117 3,151
Other....................................................... 3,280 6,691
------- -------
$43,175 $54,434
======= =======
</TABLE>
Accumulated amortization of deferred financing costs as of December 31,
1999 and 1998 was $6,166 and $4,384, respectively.
9. BANK INDEBTEDNESS, LINES OF CREDIT AND LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Tranche A Term Loan......................................... $ 61,679 $ 96,990
Tranche B Term Loan......................................... 88,634 115,654
Senior Subordinated Notes................................... 200,000 200,000
Revolving credit facilities at variable interest rates...... 121,000 77,000
Industrial Development Bonds, variable interest rates
ranging from 4.15% to 8.50%, maturing through 2014,
secured by certain facilities............................. 39,860 40,505
Promissory notes payable, interest rates ranging from 3.0%
to 10.0%, maturing through 2008........................... 7,417 8,315
Mortgages, interest rates ranging from 7.25% to 13.61%
maturing through 2010..................................... 8,736 9,093
Other, primarily capital lease obligations.................. 2,829 191
-------- --------
530,155 547,748
Less current maturities..................................... 21,705 20,647
-------- --------
$508,450 $527,101
======== ========
</TABLE>
The Company entered into a syndicated bank credit agreement (the "Credit
Facility") dated November 26, 1997 that provided the Company with senior secured
credit facilities of up to $800,000. The Credit Facility initially consisted of
a six-year revolving credit facility (the "Revolving Credit Facility") under
which up to an aggregate principal amount of $200,000 is available for
borrowing, a six-year $200,000 term loan (the "Tranche A Term Loan"), a seven
year $200,000 term loan (the "Tranche B Term Loan") and a six-year loan of up to
$200,000 (the "Tranche C Loan"). Borrowings from the Credit Facility were used
to complete the acquisition of Arbor (see Note 4), to pay transaction costs
related thereto, and to refinance certain
35
<PAGE> 38
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. BANK INDEBTEDNESS, LINES OF CREDIT AND LONG-TERM DEBT (CONTINUED)
indebtedness of the Company and Arbor. Amounts borrowed under the Tranche C Loan
were subsequently repaid with the proceeds from the Company's offering of
$200,000 9.35% Senior Subordinated Notes due 2007 (the "Senior Subordinated
Notes"). The Credit Facility replaced a credit agreement and other lines of
credit available to the Company during 1997.
In the second quarter of 1999, the Company renegotiated specific terms in
the Credit Facility and as part of the agreement, the Company waived its right
to $25,000 of the Revolving Credit Facility. On March 16, 2000, the Company
negotiated specific terms in the Credit Facility relating to the accounting of
general provisions for Medicare settlements and non-cash provisions for general
and professional liability claims.
The Company is required to make mandatory prepayments of principal upon the
occurrence of certain events, such as certain asset sales and certain issuances
of securities and is permitted to make voluntary prepayments at any time. Such
prepayments may, under certain conditions, reduce the amounts available to be
borrowed under the Credit Facility.
The Company incurred a charge to earnings in 1999 from the write-off of
unamortized debt issuance costs incurred in connection with the reduction of
Tranche A and Tranche B borrowings resulting from proceeds of the sale of the
home health operations and nine nursing facilities. Similarly in 1998, the
Company incurred a charge to earnings from the write-off of unamortized debt
issuance costs resulting from application of proceeds of the sale of the
pharmacy operations to Tranche A and B borrowings, and in 1997, the Company
incurred a charge to earnings from the write-off of unamortized debt issuance
costs and debt prepayment penalties incurred in connection with the refinancing
of its debt. The extraordinary loss realized after income taxes totaled $342,
$1,660 and $10,218 in 1999, 1998 and 1997, respectively.
Borrowings outstanding under the Revolving Credit Facility at December 31,
1999 totaled $121,000. Up to $75,000 of the Revolving Credit Facility is
available for the issuance of standby letters of credit of which $35,511 were
outstanding at December 31, 1999. The standby letters of credit outstanding
generally secure debt outstanding, primarily the Industrial Revenue Bonds. At
December 31, 1999 the unused portion of the Revolving Credit Facility available
for working capital and general corporate purposes was $18,489.
The Revolving Credit Facility, the Tranche A Term Loan and the Tranche B
Term Loan bear interest at the Company's option at rates equal to the prime rate
or LIBOR plus applicable margins depending upon the Company's leverage ratios.
Applicable margins at December 31, 1999 under the Revolving Credit Facility and
Tranche A Term Loan were 2.00% for prime rate loans and 2.75% for LIBOR based
borrowings. The applicable margin at December 31, 1999 under the Tranche B Term
Loan was 2.75% for prime rate borrowings and 3.00% for LIBOR based borrowings.
The average interest rate outstanding for the Revolving Credit Facility, Tranche
A Term Loan and Tranche B Term Loan at December 31, 1999 was 8.92%, 8.86% and
9.12%, respectively. The weighted average interest rate was 7.79% and 7.66% for
amounts outstanding on the Revolving Credit Facility during 1999 and 1998,
respectively. The average interest rate at December 31, 1999 and 1998 for all
outstanding debt was 8.59% and 7.98%, respectively. The Company pays a
commitment fee on the unused portion of the Credit Facility at an annual rate of
.375%.
Borrowings under the Credit Facility are secured by the pledge of
outstanding shares of common stock and various assets of the Company and each of
its existing and future domestic subsidiaries. The Credit Facility contains a
number of covenants including among others, restrictions on the payment of
dividends and redemption of the Company's common stock, as well as financial
covenants, including fixed charge coverage, debt leverage, and net worth ratios.
36
<PAGE> 39
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. BANK INDEBTEDNESS, LINES OF CREDIT AND LONG-TERM DEBT (CONTINUED)
The Revolving Credit Facility matures on December 31, 2003, at which time
all outstanding borrowings are due. The Tranche A Term Loan matures on December
31, 2003 and the Tranche B Term Loan matures on December 31, 2004, and are
payable in quarterly installments as follows:
<TABLE>
<CAPTION>
TRANCHE A TRANCHE B
--------- ---------
<S> <C> <C>
2000...................................................... $12,761 $ 904
2001...................................................... 14,888 904
2002...................................................... 17,015 905
2003...................................................... 17,015 905
2004...................................................... -- 85,016
------- -------
$61,679 $88,634
======= =======
</TABLE>
The Subordinated Notes are unsecured senior subordinated obligations of the
Company subordinated in right of payment to all existing and future senior
indebtedness of the Company, which includes all borrowings under the Credit
Facility as well as all indebtedness not refinanced by the Credit Facility. The
Senior Subordinated Notes mature on December 15, 2007. Interest on the Senior
Subordinated Notes is payable semi-annually.
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 $32,000 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 $50,000 of notional
value) with three banks which effectively changes the interest rates on LIBOR
based borrowings to fixed rates ranging from 5.53% to 5.84% plus applicable
margins, for periods over three to seven years.
In 1999, the Company terminated three agreements (each $50,000 in notional
value) reducing its hedging period from seven to four years. The first two of
these terminations were disposed of at no cost or material gain to the Company.
The third termination resulted in a cash payment to the Company of $290 which is
being amortized over the term of the underlying credit agreement. 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.
Principal payments on long-term debt due within the next five years and
thereafter are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 21,705
2001........................................................ 18,645
2002........................................................ 20,465
2003........................................................ 140,035
2004........................................................ 85,275
After 2004.................................................. 244,030
--------
$530,155
========
</TABLE>
Interest paid in 1999 and 1998 was $49,534 and $55,397, respectively.
Interest paid in 1997 was $25,297 which included financing costs totaling $1,500
incurred for the Tranche C financing in connection with the acquisition of
Arbor.
37
<PAGE> 40
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Salaries and wages, fringe benefits and payroll taxes..... $42,890 $ 49,868
Worker's compensation..................................... 11,410 15,836
Medicaid and Medicare programs............................ 7,628 19,996
Real estate and other taxes............................... 5,669 6,091
Indemnification escrow.................................... 3,700 --
Interest.................................................. 3,474 2,985
Reserves for facility closures............................ 2,131 1,200
Other..................................................... 19,624 20,774
------- --------
$96,526 $116,750
======= ========
</TABLE>
11. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred compensation....................................... $7,741 $12,555
Other....................................................... 710 855
------ -------
$8,451 $13,410
====== =======
</TABLE>
The Company maintains an unfunded deferred compensation plan offered to all
corporate employees defined as highly compensated by the Internal Revenue
Service Code in which participants may defer up to 10% of their base salary. The
Company will match up to 50% of the amount deferred. The Company also maintains
non-qualified deferred compensation plans covering certain executive employees.
Expense incurred for Company contributions under such plans were $565, $897 and
$1,325 in 1999, 1998 and 1997, respectively. The liability for the deferred
compensation plan is recorded in other long-term liabilities.
The Company maintains defined contribution retirement 401(k) savings plans
which are made available to substantially all of the Company's employees. The
Company pays a matching contribution of 17% to 25% of every qualifying dollar
contributed by plan participants, net of any forfeitures. Expenses incurred by
the Company related to the 401(k) savings plans were $1,041, $1,776, and $1,094
in 1999, 1998 and 1997, respectively.
12. REVENUES
The Company derived approximately 63%, 65% and 67% of its revenues in 1999,
1998 and 1997, respectively, from services provided under various Federal
(Medicare) and state (Medicaid) medical assistance programs. For each
participating facility, differences between estimated revenues to be derived
under third-party payor programs and amounts received as payments are reflected
as accounts receivable in such cases when estimated revenues are greater than
interim payments and as accrued liabilities when interim payments have exceeded
revenues that the Company ultimately expects to be realized. Accounts receivable
at December 31, 1999 and 1998, which are expected to be substantially collected
within one year, include estimated settlements from third-party payors of
$11,795 and $6,894, respectively.
38
<PAGE> 41
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
12. REVENUES (CONTINUED)
a) Balanced Budget Act and the Prospective Payment System
The Balanced Budget Act ("BBA"), signed into law on August 5, 1997, made
numerous changes to the Medicare and Medicaid programs. With respect to the
Medicare program, the BBA established a Prospective Payment System ("PPS") for
nursing center funding. All of the Corporation's nursing facilities were funded
under the provisions of the BBA during 1999. The PPS establishes a Federal per
diem rate for virtually all covered services and the provisions of the BBA
provided that for facilities in operation prior to 1996, the Federal per diem
rate would be phased in over a three year period. In November 1999, the Balanced
Budget Relief Act was passed to allow each facility to apply to adopt the full
Federal rate effective January, 1, 2000 or to continue to phase in to the
Federal rate over the next two years.
With respect to the Medicaid program, the new law repealed the Federal
payment standard which required state Medicaid programs to pay rates that were
reasonable and adequate to meet the costs necessary to efficiently and
economically operate nursing facilities. As a result, states have considerable
flexibility in establishing payment rates for Medicaid services provided after
October 1, 1997.
b) Prior to Balanced Budget Act
Prior to 1999, the Company was able to apply to recover incremental costs
associated with care for Medicare patients where these costs exceeded regional
reimbursement limits established by Medicare. As of December 31, 1999, the
Company had outstanding formal waiver requests relating to 1998 for 124
facilities. In prior years, action was required by the Health Care Financing
Administration ("HCFA") on such requests. A new rule which is now in effect
allows the Fiscal Intermediary ("FI") to approve the waiver requests without
HCFA approval. All of the formal waiver requests for years prior to 1998 have
been approved by the FI. The Company recorded $2,026 and $4,109 as revenue in
1998 and 1997, respectively relating to waiver requests for prior years, as well
as the Company's approval experience realized to date. In view of such approval
experience for the prior years, the Company recorded in 1998 and 1997, revenues
of $16,985 and $4,361, respectively, related to waiver requests anticipated to
be filed for those years.
c) Provision for Outstanding Medicare Receivable
In the normal course of business, the Company has ongoing discussions with
its FI regarding the treatment of various items related to prior years' cost
reports. The FI has notified the Company of several adjustments for services
rendered in 1995 through 1998. The Company disagrees with the adjustments and is
currently in discussions with the FI.
Differences in opinions regarding cost report methodologies between the
Company and the FI can be settled through a formal appeal process. The Company
has filed one appeal and is in the process of filing others. Though the Company
remains confident of winning these appeals, the first of which is in April,
2000, the Company recorded a $27,400 general reserve as a reduction of revenue
for items in dispute with the FI and items under appeal or to be appealed
through the Provider Reimbursement Review Board. Other adjustments relating to
prior years' estimated settlements, including Medicare waiver requests set out
above, increased revenues by $1,859, $5,482 and $6,326 in 1999, 1998, and 1997,
respectively.
39
<PAGE> 42
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
13. LEASE COMMITMENTS
The Company at December 31, 1999 was committed under non-cancelable
operating leases requiring future minimum rentals as follows:
<TABLE>
<S> <C>
2000........................................................ $14,525
2001........................................................ 9,641
2002........................................................ 7,724
2003........................................................ 6,284
2004........................................................ 5,715
After 2004.................................................. 43,088
-------
Total minimum payments...................................... $86,977
=======
</TABLE>
Operating lease costs were $18,806, $15,895 and $10,213 in 1999, 1998 and
1997, respectively. These leases expire on various dates extending to the year
2012 and in many cases contain renewal options.
14. COMMITMENTS AND CONTINGENCIES
Capital Expenditures
The Company as of December 31, 1999 had capital expenditure purchase
commitments outstanding of approximately $3,555.
Reimbursement
The Company is unable to predict whether the Federal or any state
government will adopt changes in their reimbursement systems, or if adopted and
implemented, what effect such initiatives would have on the Company. Limitations
on Medicare and Medicaid reimbursement for health care services are continually
proposed. Changes in applicable laws and regulations could have an adverse
effect on the levels of reimbursement from governmental, private, and other
sources.
Insurance
The Company insures against property, general and professional liability
risks which are subject to specified deductible and retention amounts, and
limits of liability which change based upon arrangements made with insurance
carriers based upon claims experience and the prevailing insurance market. Such
changes can impact the costs incurred by the Company.
Litigation
The Company and its subsidiaries are defendants in actions brought against
them from time to time in connection with their operations. While it is not
possible to estimate the final outcome of the various proceedings at this time,
such actions generally are resolved within amounts provided.
The U.S. Department of Justice and other Federal agencies are increasing
resources dedicated to regulatory investigations and compliance audits of
health-care providers. The Company is diligent to these regulatory efforts. The
Corporation is currently unaware of any regulatory matters which could have a
material adverse effect on the Corporation's financial position or results of
operations.
40
<PAGE> 43
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
15. TRANSACTIONS WITH SHAREHOLDER AND AFFILIATES
The Company is an indirect wholly-owned subsidiary of Extendicare Inc.
("Extendicare"), a Canadian publicly-held Company. The following is a summary of
the Company's transactions with Extendicare and its affiliates in 1999, 1998 and
1997:
Insurance
The Company insures certain risks with affiliated insurance subsidiaries of
Extendicare. The cost of general and professional liability premiums was the
most significant insurance expense charged to the Company by the affiliates. In
1999 and 1998, the premiums charged to the Company for this general and
professional liability coverage increased significantly, due to the adverse
claims development experienced by the affiliates. Consequently, effective
January 1, 2000, the Company's per claim retained risk increased significantly,
which could have a material effect on the future operating results and liquidity
of the Company. The consolidated statements of net earnings for 1999, 1998 and
1997 include expenses of $13,912, $5,313 and $189, respectively. These figures
are net of favorable actuarial adjustments for prior years under its
retroactively-rated workers' compensation coverage in the amounts of $1,900,
$2,243 and $5,054 in 1999, 1998 and 1997, respectively.
Leases
In 1999, the Company entered into a capital lease relating to computer
equipment with an affiliated subsidiary of Extendicare. The 1999 consolidated
statement of operations for 1999 includes interest expense of $319 related to
this lease. The capital lease requires monthly lease payments of $70 through
October, 2002 at an interest rate of 10%.
Other Payables
The Company at December 31, 1999 and 1998 had a non-interest bearing
payable to a subsidiary company of Extendicare of $3,484 with no specific due
date.
Due to Shareholders and Affiliates
The net current due to (from) shareholder and affiliates as of December 31,
1999 and 1998 were $(32,404) and $37,416, respectively. Transactions affecting
these accounts were general and professional liability insurance charges and
accrued liability claims from an affiliate in 1999, fees charged in conjunction
with the pharmacy sale in 1998, and charges (payments) from (to) shareholder and
affiliates for income taxes in each of the three years.
Capital Transactions
Extendicare made a cash equity contribution in the amount of $2,000 to the
Company during 1998.
Affiliates of the Company during 1997 contributed certain net assets at
book value, which approximated fair value, totaling $10,836 to the Company. The
net assets contributed included land and a building held for sale of $3,683. The
remaining $7,153 consisted primarily of land and buildings relating to two
assisted living facilities.
16. INCOME TAXES
The Company's results of operations are included in the consolidated
Federal tax return of its U.S. parent company. Accordingly, Federal current and
deferred income taxes payable are transferred to the Company's
41
<PAGE> 44
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
16. INCOME TAXES (CONTINUED)
parent company. The provisions for income taxes have been calculated as if the
Company were a separately taxed entity for each of the periods presented in the
accompanying consolidated financial statements.
The income tax expense (benefit) on earnings (losses) before extraordinary
items consists of the following the year ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal:
Current........................................ $(42,729) $69,814 $16,951
Deferred....................................... (9,225) (2,709) 1,180
-------- ------- -------
Total Federal.......................... (51,954) 67,105 18,131
State
Current........................................ 2,736 13,482 4,098
Deferred....................................... (3,623) (907) 107
-------- ------- -------
Total State............................ (887) 12,575 4,205
-------- ------- -------
Total............................................ $(52,841) $79,680 $22,336
======== ======= =======
</TABLE>
The differences between the effective tax rates on earnings before
provision for income taxes and the United States Federal income tax rate are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate.............. 35.0% 35.0% 35.0%
Increase (reduction) in tax rate resulting
from:
State income taxes, net of Federal income tax
benefit................................... 0.4 7.5 4.6
Goodwill and other items..................... (1.5) 30.8 0.1
Impairment of long-lived assets.............. (6.8) -- --
Recovery of prior year's taxes............... 19.1 -- --
Work opportunity credit...................... 0.5 (0.6) (0.7)
Other, net................................... (3.8) 0.3 (1.2)
-------- -------- --------
Effective tax rate............................. 42.9% 73.0% 37.8%
======== ======== ========
</TABLE>
42
<PAGE> 45
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
16. INCOME TAXES (CONTINUED)
The components of the net state deferred tax assets and liabilities as of
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Employee benefit accruals................................ $ 2,530 $ 1,685
Accounts receivable reserves............................. 4,043 1,826
Other assets............................................. 3,687 1,152
------- -------
Total deferred tax assets........................ 10,260 4,663
Deferred tax liabilities:
Depreciation............................................. 9,658 9,348
Goodwill................................................. 291 212
Leasehold rights......................................... 413 487
Miscellaneous............................................ 854 1,289
------- -------
Total deferred tax liabilities................... 11,216 11,336
------- -------
Net deferred tax liability....................... $ 956 $ 6,673
======= =======
</TABLE>
The Company paid state income taxes of $4,853, $9,397 and $3,473 in 1999,
1998 and 1997, respectively. The Company also made payments for Federal income
taxes to its U.S. parent of $24,487, $40,285 and $17,339 in 1999, 1998 and 1997,
respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which these temporary differences become deductible. Management has considered
the scheduled reversal of deferred tax liabilities in making this assessment and
believes it is more likely than not the Company will realize the benefits of
these deductible differences.
17. USE OF ESTIMATES, UNCERTAINTIES AND CERTAIN SIGNIFICANT RISKS
The following information is provided in accordance with the AICPA
Statement of Position No. 94 -- 6, "Disclosure of Certain Significant Risks and
Uncertainties." The Company has a substantial level of indebtedness and, as a
result, significant debt service obligations totaling $530,155 in borrowings at
December 31, 1999, which represented 64.3% of total capitalization. The degree
to which the Company is leveraged could have important consequences, including,
but not limited to the following:
- A substantial portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest on the Company's
indebtedness, thereby reducing the funds available for other purposes;
- The Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or other purposes may
be limited;
- The Company's debt agreements establish minimum net worth requirements
and/or limit the Company's ability to incur additional indebtedness, to
enter into other financial transactions, or pay dividends;
43
<PAGE> 46
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
17. USE OF ESTIMATES, UNCERTAINTIES AND CERTAIN SIGNIFICANT RISKS (CONTINUED)
- The Company's degree of leverage may make it more vulnerable to industry
downturns and less competitive in responding to changing business and
industry conditions and may limit the Company's ability to pursue other
business opportunities, to finance the Company's future operations or
capital needs, and to implement its business strategy; and
- Certain of the Company's borrowings are and will continue to be at
variable rates of interest, which exposes the Company to the risk of
higher interest rates.
The Company expects to satisfy the required payments of principal and
interest on indebtedness from cash flow from operations. However, the Company's
ability to generate sufficient cash flows from operations depends on a number of
internal and external factors, including factors beyond the Company's control
such as prevailing industry conditions. There can be no assurances that cash
flow from operations will be sufficient to enable the Company to service its
debt and meet other obligations. If such cash flow is insufficient, the Company
may be required to refinance and/or restructure all or a portion of its existing
debt, to sell assets or to obtain additional financing. The Company anticipates
full recovery for prior year taxes by the third quarter of 2000 which is subject
to a normal filing and review process by the Internal Revenue Service. The cash
recovery of these taxes is currently reflected within financial covenant
calculations until the third quarter of 2000, which if delayed could impair the
Company's ability to comply with its financial covenants.
18. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Non-current accounts receivable.................... $ 15,532 $ 13,494 $ 20,000 $ 15,232
Other assets....................................... 17,728 17,707 20,274 20,218
Interest rate swaps................................ -- 1,405 -- (7,302)
Long-term debt..................................... 530,155 500,024 547,748 562,483
Deferred compensation.............................. 7,741 7,741 12,555 12,555
Other long-term liabilities........................ 710 710 855 --
Long-term due to affiliate......................... 3,484 3,484 3,484 3,484
</TABLE>
The carrying values of accounts receivable approximate fair values due to
their short maturities with the exception of certain settlement receivables from
third-party payors which are anticipated to be collected beyond one year. The
fair value of these settlement receivables are estimated based on discounted
cash flows at management's estimated current borrowing rates.
Other assets consist of debt service and capital expenditure trust funds
and other financial instruments, the fair values of which are estimated based on
market prices from the same or similar issues of the underlying investments.
The fair value of the interest rate swaps from various financial
institutions is based on the quoted market prices as provided by the financial
institutions which are counterparties to the swaps.
The fair value of long-term debt is estimated based on approximate
borrowing rates currently available to the Company for debt equal to the
existing debt maturities. For other long-term liabilities, principally
refundable escrows, it is not practicable to estimate fair value.
44
<PAGE> 47
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
19. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999
------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
--- --- --- --- -----
<S> <C> <C> <C> <C> <C>
Total revenues................................... $241,541 $249,131 $252,466 $224,447 $ 967,585
======== ======== ======== ======== ==========
Loss on impairment of assets..................... $ -- $ -- $ -- $(38,173) $ (38,173)
Gain (loss) on sale of operations and other
items.......................................... -- 276 (1,750) (41,300) (42,774)
Loss before provision for income taxes, minority
interests and extraordinary items.............. (8,516) (4,918) (794) (108,952) (123,180)
Provision (benefit) for income taxes............. (2,708) (1,656) 859 (49,336) (52,841)
-------- -------- -------- -------- ----------
Loss before minority interests and extraordinary
items.......................................... (5,808) (3,262) (1,653) (59,616) (70,339)
Minority interests............................... 15 6 47 156 224
-------- -------- -------- -------- ----------
Loss before extraordinary items.................. (5,793) (3,256) (1,606) (59,460) (70,115)
Extraordinary items.............................. -- -- -- (342) (342)
-------- -------- -------- -------- ----------
Net loss......................................... (5,793) (3,256) (1,606) (59,802) (70,457)
======== ======== ======== ======== ==========
Loss per common share:
Net loss....................................... $ (6) $ (4) $ (1) $ (63) $ (74)
======== ======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
--- --- --- --- -----
<S> <C> <C> <C> <C> <C>
Total revenues................................... $292,372 $291,134 $289,950 $266,979 $1,140,435
======== ======== ======== ======== ==========
Gain (loss) on sale of operations and other
unusual
items.......................................... $ -- $ -- $ 94,537 $ (1,200) $ 93,337
Income (loss) before provision for income taxes,
minority interests and extraordinary items..... 4,000 6,006 100,399 (1,153) 109,252
Provision for income taxes....................... 1,880 3,375 74,279 146 79,680
-------- -------- -------- -------- ----------
Income (loss) before minority interests and
extraordinary items............................ 2,120 2,631 26,120 (1,299) 29,572
Minority interests............................... (213) (330) (217) 112 (648)
-------- -------- -------- -------- ----------
Income (loss) before extraordinary items......... 1,907 2,301 25,903 (1,187) 28,924
Extraordinary items.............................. -- -- (1,660) -- (1,660)
-------- -------- -------- -------- ----------
Net income (loss)................................ 1,907 2,301 24,243 (1,187) 27,264
======== ======== ======== ======== ==========
Income (loss) per common share:
Before extraordinary items..................... 2 2 28 (1) 31
Extraordinary items............................ -- -- (2) -- (2)
-------- -------- -------- -------- ----------
Net income (loss).............................. $ 2 $ 2 $ 26 $ (1) $ 29
======== ======== ======== ======== ==========
</TABLE>
45
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
46
<PAGE> 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of certain key executive
officers of Extendicare, effective March 1, 2000:
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---- -------- ---
<S> <C> <C>
Dr. Joy D. Calkin.................... Deputy Chairman and Chief Executive Officer 61
Mel A. Rhinelander................... President and Chief Operating Officer 49
Mark W. Durishan..................... Vice President, Finance and Chief Financial Officer 51
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, positions and ages of the directors and
executive officers of the Company effective March 1, 2000:
<TABLE>
<S> <C> <C>
Dr. Joy D. Calkin.................... Director and Chairman 61
Mel A. Rhinelander................... Chief Executive Officer and Director 49
John G. McLaughlin................... President and Chief Operating Officer 52
Richard L. Bertrand.................. Senior Vice President, Planning and Development 51
Roch Carter.......................... Vice President, General Counsel and Assistant Secretary 60
Mark W. Durishan..................... Vice President, Chief Financial Officer, Treasurer and 51
Director
Douglas J. Harris.................... Vice President and Controller 44
Walter A. Levonowich................. Vice President, Accounting 43
Timothy J. Murphy.................... Vice President and Assistant Secretary 37
L. William Wagner.................... Vice President 51
</TABLE>
The respective terms of office of the directors of the Company are for
three years and until their respective successors are elected. All executive
officers of Extendicare and the Company serve at the discretion of the
respective board of directors of such corporations.
DR. JOY D. CALKIN joined Extendicare in 1995 as a member of the Board of
Directors. In August 1997, Dr. Calkin was appointed President and Chief
Executive Officer of Extendicare and in August 1999, she relinquished her title
as President and was appointed Deputy Chairman. In January 1998, Dr. Calkin was
appointed Director and Chairman of the Company. Prior to her appointment with
Extendicare, Dr. Calkin was Vice President and Provost of the University of
Calgary. She was also a professor in the Faculty of Nursing, specializing in
health systems management and design as well as pediatric nursing. Dr. Calkin
received her Ph.D. in Health Services Administration and is widely published in
the healthcare field. Dr. Calkin has over 30 years of healthcare experience.
MEL A. RHINELANDER has been with Extendicare for 22 years. In August 1999
he was appointed President and Chief Operating Officer of Extendicare. Mr.
Rhinelander has been an officer of the Company since 1989 and a Director since
1998. In December 1999, he was appointed Chief Executive Officer of the Company.
In addition, he serves as Chief Executive Officer of Extendicare (Canada) Inc.
JOHN G. MCLAUGHLIN joined the Company in 1999 as President. Prior to his
appointment with the Company, Mr. McLaughlin served as President of Extendicare,
and had previously served in a number of roles since joining Extendicare in
1984. Mr. McLaughlin has over 27 years of experience in the healthcare industry.
RICHARD L. BERTRAND joined the Company in 1995 as Senior Vice President.
Mr. Bertrand has been with Extendicare in various financial capacities,
including Senior Vice President, since 1976.
ROCH CARTER joined the Company in 1974 as Legal Counsel. In 1985 he was
appointed General Counsel and in January 1998, he was appointed Vice President,
General Counsel and Secretary. Mr. Carter was formerly an attorney with the
United States Attorney's office in Milwaukee. Mr. Carter was also an attorney
47
<PAGE> 50
with the City of Milwaukee and was in practice with Young and McManus, S.C. Mr.
Carter has over 26 years experience in healthcare law and practice.
MARK W. DURISHAN joined Extendicare and the Company in August 1999 in his
current position. Prior to joining Extendicare, Mr. Durishan served Blue Cross
and Blue Shield of Minnesota as Senior Vice-President for Finance and Operations
from 1995 to 1998, and from 1991 to 1995, held the position of Chief Financial
Officer of Graduate Health System of Philadelphia, a healthcare corporation
encompassing seven hospitals, a 100,000-member HMO, a captive insurance company
and a home health agency. During his career, Mr. Durishan was a partner at
Coopers & Lybrand responsible for the Philadelphia and Washington healthcare
consulting offices. Mr. Durishan has over 30 years experience in the healthcare
industry.
DOUGLAS J. HARRIS joined the Company in December 1999 in his current
position. Mr. Harris has been with Extendicare since 1981, where he had various
financial capacities, and was more recently the Managing Director of Extendicare
(U.K.) Limited for the period 1994 through 1999. Prior to joining Extendicare,
Mr. Harris was an audit supervisor with KPMG.
WALTER A. LEVONOWICH has been with the Company since 1987 in various
financial capacities. In 1998, Mr. Levonowich was appointed Vice President,
Accounting.
TIMOTHY J. MURPHY joined the Company in 1991 as Corporate Counsel. In 1995,
Mr. Murphy was appointed Assistant General Counsel and promoted to Deputy
General Counsel and Assistant Secretary in 1998. In January, 2000 he was
appointed Vice President of the Company. Prior to joining the Company, Mr.
Murphy was in practice with Foley & Lardner.
L. WILLIAM WAGNER joined the Company in 1987 as Vice President of Human
Resources. Prior to that he served as Vice President of Human Resources for ARA
Living Centers and Director of Personnel for General Foods Corp. Mr. Wagner has
16 years of experience in healthcare and over 22 years of human resources
experience.
48
<PAGE> 51
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The summary Compensation Table details compensation information for the
three fiscal years ended December 31, 1999 for each of the Chief Executive
Officer and the four other most highly compensated executive officers and one
former executive officer (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
(AMOUNTS IN U.S. DOLLARS, EXCEPT WHERE NOTED)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- ------------------
NAME AND PRINCIPAL OTHER ANNUAL SECURITIES ALL OTHER
POSITION WITH THE YEAR SALARY BONUS COMPENSATION(1) UNDERLYING OPTIONS COMPENSATION(2)
COMPANY ($) ($) ($) ($) (#) ($)
- ------------------ ---- ------ ----- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
M.A. Rhinelander(3)............. 1999 225,000 -- -- 50,000 3,654
President and Chief Operating 1998 112,500/ -- -- -- Cdn 3,986
Officer, Extendicare Inc.; and Cdn 100,000
Chief Executive Officer, 1997 Cdn 170,833 Cdn 63,750 -- 25,000 Cdn 2,685
Extendicare Health Services,
Inc.
J.D. Calkin(4).................. 1999 350,000 -- 139,450 75,000 18,000
Deputy Chairman and Chief 1998 116,666/ -- Cdn 121,225 -- Cdn 18,000
Executive Officer, Extendicare Cdn 233,333
Inc.; and Chairman, Extendicare 1997 Cdn 145,833 Cdn 94,791 -- 102,000 Cdn 3,093
Health Services, Inc.
J.G. McLaughlin(5).............. 1999 216,666/ -- -- 50,000 4,587/
President and Chief Operating Cdn 37,500 Cdn 2,088
Officer 1998 Cdn 225,000 Cdn 87,775 -- -- Cdn 4,479
1997 Cdn 195,000 Cdn 92,625 -- 50,000 Cdn 3,192
R.L. Bertrand................... 1999 210,000 -- -- 5,000 38,105
Senior Vice-President, 1998 210,000 -- -- -- 39,176
Planning and Development 1997 202,000 80,800 -- 20,000 33,815
R.P. Knox(6).................... 1999 200,000 -- -- 10,000 29,725
Senior Vice-President, 1998 200,000 -- -- -- 42,464
Operations 1997 190,000 76,000 -- 20,000 36,110
J.W. Carter(7).................. 1999 Cdn 174,999/ -- -- 50,000 6,685/
President, Laurier 174,999 Cdn 6,685
Formerly, Chief Operating
Officer, 1998 350,000 -- -- -- Cdn 13,122
Extendicare Inc.; and 1997 72,915/ Cdn 208,542 -- 55,000 Cdn 12,126
Chief Executive Officer of Cdn 267,000
Extendicare Health Services,
Inc.
</TABLE>
- ---------------
NOTES:
(1) The aggregate amount of perquisites and other benefits for each named
executive officer is less than the lesser of $50,000 and 10% of total annual
salary and bonus. In the case of J.D. Calkin, she receives a deferred
retirement contribution of $100,000 per year; the remainder of the amount is
comprised of car allowance and flexible account.
(2) For J.D. Calkin, M.A. Rhinelander, J.G. McLaughlin and J.W. Carter these
amounts reflect premiums paid by the Company for term life insurance and
long-term disability. All other compensation, in the case of R.L. Bertrand
and R.P. Knox, includes payments for life insurance and long-term disability
premiums and contributions to a deferred compensation and defined
contribution retirement plan.
(3) M.A. Rhinelander relocated to the United States in August 1998 and his
salary prior thereto was in Canadian dollars.
49
<PAGE> 52
(4) J.D. Calkin relocated to the United States in September 1998 and her salary
prior thereto was in Canadian dollars.
(5) J.G. McLaughlin was appointed President and Chief Operating Officer in March
1999. Prior to his relocation to the United States in March, his salary was
in Canadian dollars.
(6) R.P. Knox's employment with the Company terminated February 28, 2000.
(7) J.W. Carter retired as Chief Executive Officer of the Company in August,
1999 and as an employee of Extendicare effective December 31, 1999
DEFERRED COMPENSATION PLAN
The Company maintains a non-qualified, deferred compensation plan (the
"Deferred Compensation Plan") covering certain employees. The maximum amount of
annual compensation, which may be deferred, is 10% of such employee's base
salary (excluding any bonus). The Company matches (up to 50%) of the amount so
deferred, and the combined amount earns interest at the prime rate. The Company
amount, along with interest thereon, will vest to the employee over an
eight-year period. Amounts deferred and vested matching amounts are payable upon
the occurrence of certain events (i.e., death, disability or termination).
Amounts deferred are not guaranteed, are "at risk", and subject to the ability
of the Company to subsequently make such payments. The deferred compensation
account is a book reserve, and the Company's obligations are unfunded and
unsecured.
EXECUTIVE RETIREMENT PLAN
The Company provides an Executive Retirement Program ("ERP") for certain of
its key officers and executives. The ERP provides for a company contribution of
10% of the participant's base salary to be placed into certain mutual funds at
the participant's discretion. The amounts in the ERP become vested to the
participant based on certain events which are specified in the participant's ERP
plan, and by discretionary actions by the Board of Directors of Extendicare. For
certain of the ERP participants, a graduated ERP vesting is applicable in the
case of an employer-initiated termination. Any funds, which may be invested, or
assets, which may be acquired by the Company relating to the ERP, continue to be
a part of the general funds of the Company and no party, other than the Company,
has any interest in such funds. To the extent that any participant acquires a
right to receive payment from the Company under the ERP, such right shall be no
greater than the right of any unsecured general creditor of the Company. The
Company expenses amounts it funds into the ERP on a monthly basis.
STOCK OPTION PLANS
Extendicare's Stock Option Plan (the "Plan") provides for the granting,
from time to time, at the discretion of the Board of Directors of Extendicare
(the "Extendicare Board of Directors"), to certain directors, officers and
employees of the Extendicare group of companies, of options to purchase
Subordinate Voting Shares of Extendicare (the "Subordinate Voting Shares") for
cash. The Plan provides that the exercise price of any options granted shall not
be less than the closing price (or, if there is no closing price, the simple
average of the bid and ask price) for the Subordinate Voting Shares as quoted on
The Toronto Stock Exchange on the trading day prior to the date of grant. It
also permits options to be exercised for a period not to exceed either five or
ten years from the date of grant, as determined by the Extendicare Board of
Directors at the time the option is granted. The Plan contains provisions for
appropriate adjustments in the event of corporate reorganizations of
Extendicare.
At December 31, 1999, a total of 4,798,350 Subordinate Voting Shares of
Extendicare were reserved under the Plan, of which 1,879,250 Subordinate Voting
Shares were under option and 2,919,100 were available for option.
50
<PAGE> 53
The following table outlines stock options granted during 1999 to the Named
Executive Officers under the plan:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL POTENTIAL REALIZABLE
SECURITIES OPTIONS/SARS VALUE AT ASSUMED
UNDERLYING GRANTED TO EXERCISE OR ANNUAL RATES OF STOCK
OPTIONS/SARS EMPLOYEES IN BASE PRICE PRICE APPRECIATION FOR
NAME GRANTED FISCAL YEAR (CDN $ PER SHARE) OPTION TERM (CDN $) EXPIRATION DATE
- ---- ------------ ---------------- ----------------- ---------------------- ---------------
5% 10%
<S> <C> <C> <C> <C> <C> <C>
M.A. Rhinelander..... 50,000 5.77% $4.35 $60,091 $132,786 April 26, 2004
J.D. Calkin.......... 75,000 8.65 4.35 90,137 199,179 April 26, 2004
J.G. McLaughlin...... 50,000 5.77 4.35 60,091 132,786 April 26, 2004
R.L. Bertrand........ 5,000 0.58 5.60 6,009 13,279 February 23, 2004
R.P. Knox............ 10,000 1.15 5.60 12,018 26,557 February 23, 2004
J.W. Carter.......... 50,000 5.77 4.35 60,091 132,786 April 26, 2004
</TABLE>
These amounts do not represent the present value of the options. The
amounts shown represent what would be received upon exercise (five years after
the date of grant) assuming certain rates of stock price appreciation during the
entire period. Actual gains, if any, on stock option exercises are dependent on
future performance of the Common Stock and overall stock conditions. In
addition, actual gains are dependent upon whether, and the extent to which, the
options actually vest.
The following table outlines stock options exercised during 1999 and option
values at December 31, 1999 for the Named Executive Officers.
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS/SAR
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED VALUE (#) ($)
ON EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
M.A. Rhinelander........... -- -- 22,500 62,500 -- --
J.D. Calkin................ -- -- 59,500 126,500 -- --
J.G. McLaughlin............ -- -- 75,000 75,000 -- --
R.L. Bertrand.............. -- -- 30,000 15,000 -- --
R.P. Knox.................. -- -- 25,000 20,000 -- --
J.W. Carter................ -- -- 27,500 77,500 -- --
</TABLE>
- ---------------
Note: The closing price of the Extendicare Subordinate Voting Shares on The
Toronto Stock Exchange on December 31, 1999 was Cdn $4.35.
RETIREMENT ARRANGEMENTS
M.A. Rhinelander, J.G. McLaughlin and R.L. Bertrand are covered by a
retirement arrangement established by Extendicare. It provides for a benefit of
4% of the best three consecutive years of base salary for each year of service
to a maximum of 15 years and 1% per year thereafter. These arrangements provide
a maximum benefit guarantee of 60% of base salary after 15 years of service and
70% after 25 years of service. Normal retirement age is 60 years or 55 with
company consent. M.A. Rhinelander and J.G. McLaughlin have company consent to
retire at age 55. Retirement benefits are payable as an annuity over the
lifetime of the executive with a portion continuing to be paid to the
executive's spouse after the death of the executive. Projected years of credited
service at retirement for Messrs. Rhinelander, McLaughlin and Bertrand are: 33
years; 24 years; and 33 years, respectively.
51
<PAGE> 54
Estimated annual benefits payable upon retirement of the specified
compensation and years of credited service classifications are as shown in the
following table:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE AS AN EXECUTIVE
-----------------------------------------------
REMUNERATION (CDN$) 15 20 25 30 35
- ------------------- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
200,000...................................... 120,000 130,000 140,000 140,000 140,000
250,000...................................... 150,000 162,500 175,000 175,000 175,000
300,000...................................... 180,000 195,000 210,000 210,000 210,000
350,000...................................... 210,000 227,500 245,000 245,000 245,000
400,000...................................... 240,000 260,000 280,000 280,000 280,000
450,000...................................... 270,000 292,000 315,000 315,000 315,000
</TABLE>
J.D. Calkin is not a participant in these arrangements and is entitled to
receive a deferred retirement contribution of $100,000 per year.
R.P. Knox was not a participant in these arrangements. Mr. Knox was a
participant in money purchase, 401(K) and deferred compensation plans
established for the Company's executives.
J.W. Carter retired from the Company in December 1999. Mr. Carter's
retirement arrangement was established by Extendicare and provides for a pension
that will generate a benefit at age 59 of 33% of Mr. Carter's best three
consecutive years of basic salary. This benefit amounts to approximately
Cdn$137,000 per year. Retirement benefits are payable as an annuity over the
lifetime of the executive with a portion continuing to be paid to the
executive's spouse after death of the executive.
TERMINATION OF EMPLOYMENT AGREEMENTS
J.D. Calkin has a termination of employment agreement that provides for 18
months' severance in the event of termination other than for cause.
M.A. Rhinelander and J.G. McLaughlin each have a termination of employment
agreement that provides for one month of salary for each year of service to a
maximum of 24 months' severance.
COMPENSATION COMMITTEE INTERLOCKS & INSIDER PARTICIPATION
The Human Resources Committee of the Extendicare Board of Directors is
comprised of six directors. The Committee determines compensation matters for
Extendicare and its subsidiaries, including the Company, and consists of: Derek
H.L. Buntain, Sir Graham Day, David M. Dunlap, Michael J.L. Kirby, Frederick B.
Ladly and J. Thomas MacQuarrie, Q.C.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is an indirect wholly owned subsidiary of Extendicare.
Extendicare's principal executive offices are located at 3000 Steeles Avenue
East, Markham, Ontario L3R 9W2.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTIONS
The Company is an indirect wholly owned subsidiary of Extendicare and
insures certain risks, including comprehensive general liability, property
coverage and excess workers' compensation/employer's liability insurance, with
affiliated insurance subsidiaries of Extendicare. Expenses of approximately
$13.9 million, $5.3 million and $0.2 million were recorded by the Company for
this purpose in the fiscal years ended December 31, 1999, 1998 and 1997,
respectively.
52
<PAGE> 55
The Company entered into a capital lease in 1999 relating to computer
equipment with an affiliated subsidiary of Extendicare. The 1999 consolidated
statement of net earnings includes interest expense of $0.3 million related to
this lease. The capital lease requires monthly payments of $70,000 through to
October, 2002 at an interest rate of 10%.
At December 31, 1999, 1998 and 1997, the Company had a non-interest bearing
payable to a subsidiary of Extendicare, in the amount of approximately $3.5
million with no specific due date.
53
<PAGE> 56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS
The following reports, financial statements and schedule are filed herewith
on the pages indicated:
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Auditors.............................. 24
Consolidated Balance Sheets at December 31, 1999 and 1998... 25
Consolidated Statements of Net Earnings for Years 1999,
1998, and 1997............................................ 26
Consolidated Statements of Shareholder's Equity for Years
1999, 1998 and 1997....................................... 27
Consolidated Statements of Cash Flows for Years 1999, 1998
and 1997.................................................. 28
Notes to Consolidated Financial Statements.................. 29
</TABLE>
2. FINANCIAL STATEMENT SCHEDULE
See the Exhibit Index, which is incorporated by reference herein.
3. EXHIBITS
See (c) below.
(B) REPORTS ON FORM 8-K:
<TABLE>
<CAPTION>
DATE OF REPORT ITEMS REPORTED
-------------- --------------
<S> <C>
</TABLE>
Not applicable
(C) EXHIBITS:
See the Exhibit Index, which is incorporated by reference herein.
(D) FINANCIAL STATEMENTS EXCLUDED FROM ANNUAL REPORT TO SHAREHOLDERS:
Not applicable.
54
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ MARK W. DURISHAN
------------------------------------
Mark W. Durishan
Vice President, Chief Financial
Officer,
Treasurer and Director (Principal
Financial
and Accounting Officer)
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and on the date indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
Chief Executive Officer and Director March 29, 2000
- ------------------------------------------ (Chief Executive Officer)
Melvin A. Rhinelander
President and Chief Operating Officer March 29, 2000
- ------------------------------------------
John G. McLaughlin
Vice President, Chief Financial Officer, March 29, 2000
- ------------------------------------------ Treasurer and Director (Principal
Mark W. Durishan Financial and Accounting Officer)
Chairman and Director March 29, 2000
- ------------------------------------------
Dr. Joy Durfee Calkin
Vice President and Controller March 29, 2000
- ------------------------------------------
Douglas J. Harris
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
The Company has not sent an annual report covering its last fiscal year or
proxy soliciting material to security holders and does not intend to do so.
55
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Certificate of Incorporation of Extendicare Health Services,
Inc.(1)
3.2 By-Laws of Extendicare Health Services, Inc.(1)
4.1 Indenture, dated as of December 2, 1997, by among the
Company, the Guarantors and the Bank of Nova Scotia Trust
Company of New York, as Trustee (Including form of the
outstanding Exchange Notes)(1)
4.2 Registration Rights Agreement, dated as of December 2, 1997,
by and among the Company, the Guarantor and the Initial
Purchasers.(1)
10.1 Credit Agreement dated as of November 26, 1997 among the
Company, Extendicare Holdings, Inc. and the subsidiary
Guarantor (as defined therein) and NationsBank, N.A., or
Agent, and the Lenders (as defined therein).(1)
10.2 Amendment and Consent to Credit Agreement dated as of July
31, 1998.(2)
10.3 First Amendment to Credit Agreement dated as of April 28,
1999.(3)
10.4 Second Amendment to Credit Agreement dated as of March 16,
2000
10.5 Asset Purchase Agreement, dated as of July 29, 1998, between
Extendicare Health Service, Inc. and certain affiliate and
Omnicare, Inc. and its affiliates.(2)
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.
99.1 Extendicare Health Services, Inc. and Subsidiaries Schedule
II -- Valuation and Qualifying Accounts (In Thousands).
</TABLE>
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4 (Registration No. 333-43549).
(2) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1998.
(3) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1999.
<PAGE> 1
EXHIBIT 10.4
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as
of March 16, 2000, is entered into by and among EXTENDICARE HEALTH SERVICES,
INC., a Delaware corporation (the "Borrower"), each of the Persons identified as
a "Guarantor" on the signature pages hereto, each of the Persons identified as a
"Lender" on the signature pages hereto and BANK OF AMERICA, N.A., formerly
NationsBank, N.A. (in such capacity, the "Agent").
RECITALS
A. The Borrower, the Guarantors, the Lenders and the Agent, are
party to that certain Credit Agreement dated as of November 26, 1997 (as
previously amended prior to the date hereof, the "Credit Agreement"). Unless
otherwise defined herein or the context otherwise requires, capitalized terms
used in this Amendment, including its preamble and recitals, have the meanings
provided in the Credit Agreement.
B. The Credit Parties have requested that the Required Lenders amend
the Credit Agreement.
C. The Required Lenders have agreed to amend the Credit Agreement as
set forth herein.
NOW, THEREFORE, in consideration of the agreements herein contained,
the parties hereto hereby agree as follows:
1. Amendments.
(a) The following definitions appearing in Section 1.1 of the Credit
Agreement are hereby amended and restated in their entireties to read as
follows:
"Adjusted Senior Funded Indebtedness" means, at any time, the sum
of (i) total Funded Indebtedness (other than Subordinated Indebtedness)
of the Consolidated Parties on a consolidated basis plus (ii) Adjusted
Consolidated Rental Expense plus (iii) future cash payments requested
or required by a Fiscal Intermediary to be made by the Consolidated
Parties to such Fiscal Intermediary related to (a) amounts in dispute
between the Consolidated Parties and such Fiscal Intermediary, (b)
amounts on appeal with the PRRB or (c) amounts in the process of being
appealed to the PRRB.
"Adjusted Total Funded Indebtedness" means, at any time, the sum
of (i) total Funded Indebtedness (including without limitation
Subordinated Indebtedness) of the Consolidated Parties on a
consolidated basis plus (ii) Adjusted Consolidated Rental Expense plus
(iii) future cash payments requested or required by a Fiscal
Intermediary to
<PAGE> 2
be made by the Consolidated Parties to such Fiscal Intermediary related
to (a) amounts in dispute between the Consolidated Parties and such
Fiscal Intermediary, (b) amounts on appeal with the PRRB or (c) amounts
in the process of being appealed to the PRRB.
"Consolidated EBITDA" means, for any period, the sum of (i)
Consolidated Net Income for such period, plus (ii) an amount which, in
the determination of Consolidated Net Income for such period, has been
deducted for (A) Consolidated Interest Expense, (B) total federal,
state, local and foreign income, value added and similar taxes, (C)
depreciation and amortization expense, (D) provisions (not to exceed an
aggregate amount of $30,000,000) recorded as deductions from revenue
relating to issues identified in cost reports filed for cost reporting
periods through December 31, 1998 (including the 1995 base year cost
report upon which subsequent prospective rates are determined) which
are related to amounts (1) in dispute between the Consolidated Parties
and a Fiscal Intermediary, (2) on appeal to the PRRB or (3) in the
process of being appealed to the PRRB, (E) provisions expensed during
such period for estimated future payments of general and professional
liability litigation claims, provided that such amounts do not exceed
an aggregate amount of (I) $55,000,000 during fiscal year 2000 and (II)
an amount set forth in the annual budget of the Consolidated Parties
delivered pursuant to Section 7.1(d) and approved by the Required
Lenders for each fiscal year thereafter, and (F) all other non-cash
charges, all as determined in accordance with GAAP; provided, however,
(x) Consolidated EBITDA shall not include revenues related to any
recoveries by the Consolidated Parties from Fiscal Intermediaries of
any amounts described in subclause (D) of clause (ii) above and (y) to
the extent not otherwise deducted from Consolidated EBITDA,
Consolidated EBITDA for any period shall be reduced by cash payments
made by the Consolidated Parties of general and professional liability
litigation claims during such period.
(b) The following new definitions are hereby added to Section 1.1 of
the Existing Credit Agreement in the appropriate alphabetical order to read as
follows:
"Fiscal Intermediary" means (i) any contractor of the U.S.
Department of Health and Human Services Health Care Financing
Administration responsible for administration of the Federal Medicare
Program or (ii) any state agency or other contractor responsible for
administration of the Federal Medicaid Program.
"PRRB" means the Provider Reimbursement Review Board established
by the U.S. Congress and which is responsible for resolving Medicare
payment disputes involving health care providers.
(c) Amendment to Section 2.1. The last sentence of Section 2.1(a) of
the Existing Credit Agreement is hereby amended and restated in its entirety to
read as follows:
Notwithstanding anything to the contrary contained herein, the Borrower shall
maintain at least $25,000,000 of undrawn availability under the Revolving
Committed Amount which may only be accessed with the approval of the Required
Lenders.
2
<PAGE> 3
(d) Amendment to Section 7.1. Clause (l) of the Existing Credit
Agreement is hereby reidentified as clause (n), and new clauses (l) and (m) are
hereby added to Section 7.1 of the Existing Credit Agreement to read as follows:
(l) Reimbursement Requests. Immediately upon receipt by a
Consolidated Party of a notice, request or demand from a Fiscal
Intermediary for recoupment, offset, payment or repayment by any of the
Consolidated Parties to such Fiscal Intermediary, the Borrower shall
notify the Agent and deliver a copy of such request to the Agent.
(m) Monthly Financial Statements. Upon the request of any
Lender, the Borrower shall deliver to such Lender within 20 days of
such request, internally prepared financial statements for the fiscal
month most recently ended.
2. Effective Date. This Amendment shall be and become effective when
all of the following conditions shall have been satisfied:
(a) The Agent shall have received executed counterparts (or
other evidence of execution, including facsimile signatures,
satisfactory to the Agent) of this Amendment, which collectively shall
have been duly executed on behalf of each of the Credit Parties and the
Required Lenders; and
(b) The Agent shall have received, for the account of each
Lender approving this Amendment on or before 5:00 P.M., EST, March 16,
2000, an amendment fee equal to 25 basis points on such Lender's
Commitments.
3. Construction. This Amendment is a Credit Document executed
pursuant to the Credit Agreement and shall (unless otherwise expressly indicated
therein) be construed, administered and applied in accordance with the terms and
provisions of the Credit Agreement.
4. References. At such time as this Amendment shall become effective
pursuant to the terms of paragraph 2 above, all references in the Credit
Documents to the "Credit Agreement" shall be deemed to refer to the Credit
Agreement as amended by this Amendment.
5. Representations and Warranties. Each Credit Party hereby
represents and warrants that (i) each Credit Party that is party to this
Amendment: (a) has the requisite corporate power and authority to execute,
deliver and perform this Amendment, as applicable and (b) is duly authorized to,
and has been authorized by all necessary corporate action, to execute, deliver
and perform this Amendment, (ii) the representations and warranties contained in
Section 6 of the Credit Agreement are true and correct in all material respects
on and as of the date hereof upon giving effect to this Amendment as though made
on and as of such date (except for those which expressly relate to an earlier
date) and (iii) no Default or Event of Default exists under the Credit Agreement
on and as of the date hereof upon giving effect to this Amendment.
3
<PAGE> 4
6. Acknowledgment. The Guarantors acknowledge and consent to all of
the terms and conditions of this Amendment and agree that this Amendment does
not operate to reduce or discharge the Guarantors' obligations under the Credit
Agreement (as amended by this Amendment) or the other Credit Documents. The
Guarantors further acknowledge and agree that the Guarantors have no claims,
counterclaims, offsets, or defenses to the Credit Documents and the performance
of the Guarantors' obligations thereunder or if the Guarantors did have any such
claims, counterclaims, offsets or defenses to the Credit Documents or any
transaction related to the Credit Documents, the same are hereby waived,
relinquished and released in consideration of the Lenders' execution and
delivery of this Amendment.
7. Counterparts. This Amendment may be executed by the parties
hereto in several counterparts, each of which shall be deemed to be an original
and all of which shall constitute together but one and the same agreement.
8. Binding Effect. This Amendment, the Credit Agreement and the
other Credit Documents embody the entire agreement between the parties and
supersede all prior agreements and understandings, if any, relating to the
subject matter hereof. These Credit Documents represent the final agreement
between the parties and may not be contradicted by evidence of prior,
contemporaneous or subsequent oral agreements of the parties. Except as
expressly modified and amended in this Amendment, all the terms, provisions and
conditions of the Credit Documents shall remain unchanged and shall continue in
full force and effect.
9. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
4
<PAGE> 5
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Amendment to be duly executed and delivered as of the date first above
written.
BORROWER: EXTENDICARE HEALTH SERVICES, INC.,
By:_________________________________
Name: Mark W. Durishan
Title: Vice President-Finance
GUARANTORS: EXTENDICARE HOLDINGS, INC.
EXTENDICARE HEALTH FACILITY
HOLDINGS, INC.
EXTENDICARE HEALTH FACILITIES, INC.
COVENTRY CARE, INC.
NORTHERN HEALTH FACILITIES, INC.
EXTENDICARE HOMES, INC.
EXTENDICARE HEALTH NETWORK, INC.
THE PROGRESSIVE STEP CORPORATION
EXTENDICARE OF INDIANA, INC.
UNITED REHABILITATION SERVICES, INC.
EDGEWOOD NURSING CENTER, INC.
ELDER CREST, INC.
HAVEN CREST, INC.
MEADOW CREST, INC.
OAK HILL HOME OF REST AND CARE, INC.
EXTENDICARE GREAT TRAIL, INC.
FIR LANE TERRACE CONVALESCENT
CENTER, INC.
UNITED PROFESSIONAL SERVICES, INC.
ADULT SERVICES UNLIMITED, INC.
ARBORS EAST, INC.
ARBORS AT TOLEDO, INC.
HEALTH POCONOS, INC.
MARSHALL PROPERTIES, INC.
By:_________________________________
Name: Mark W. Durishan
Title: Vice President-Finance
[Signatures continue.]
S-1
<PAGE> 6
INDIANA HEALTH AND REHABILITATION
CENTER PARTNERSHIP
By: Extendicare Homes, Inc.,
as General Partner
By:_______________________________________
Name: Mark W. Durishan
Title: Vice President-Finance
By: Extendicare of Indiana, Inc.,
as General Partner
By:________________________________________
Name: Mark W. Durishan
Title: Vice President-Finance
CONCORDIA MANOR, LLC
FIRST COAST HEALTH AND
REHABILITATION CENTER, LLC
JACKSON HEIGHTS REHABILITATION
CENTER, LLC
TREASURE ISLE CARE CENTER, LLC
By: Extendicare Homes, Inc., as sole member
By:________________________________________
Name: Mark W. Durishan
Title: Vice President-Finance
KAUFMAN STREET, WV, LLC
NEW CASTLE CARE, LLC
By: Fir Lane Terrace Convalescent Center, Inc.,
as sole member
By:________________________________________
Name: Mark W. Durishan
Title: Vice President-Finance
[Signatures continue.]
S-2
<PAGE> 7
ALPINE HEALTH AND REHABILITATION
CENTER, LLC
COLONIAL CARE, LLC
GREENBRIAR CARE, LLC
GREENBROOK CARE, LLC
HERITAGE CARE, LLC
LADY LAKE CARE, LLC
NEW HORIZON CARE, LLC
NORTH REHABILITATION CARE, LLC
PALM COURT CARE, LLC
RICHEY MANOR, LLC
ROCKLEDGE CARE, LLC
SOUTH HERITAGE HEALTH AND
REHABILITATION CENTER, LLC
THE OAKS RESIDENTIAL AND
REHABILITATION CENTER, LLC
WINTER HAVEN HEALTH AND
REHABILITATION CENTER, LLC
By: Extendicare Health Facilities, Inc.,
as sole member
By:________________________________________
Name: Mark W. Durishan
Title: Vice President-Finance
[Signatures continue.]
S-3
<PAGE> 8
ARBORS AT BAYONET POINT,
LLC ARBORS AT TAMPA, LLC
JACKSONVILLE CARE, LLC
KISSIMMEE CARE, LLC ORANGE
PARK CARE, LLC PORT
CHARLOTTE CARE, LLC SAFETY
HARBOR CARE, LLC SARASOTA
CARE, LLC SEMINOLE CARE,
LLC WINTER HAVEN CARE, LLC
BLANCHESTER CARE, LLC
CANTON CARE, LLC COLUMBUS
HEALTH CARE LLC DAYTON
CARE, LLC DELAWARE CARE,
LLC FAIRLAWN CARE, LLC
GALLIPOLIS CARE, LLC
HILLIARD CARE, LLC LONDON
CARE, LLC MARIETTA CARE,
LLC TOLEDO CARE, LLC
WATERVILLE CARE, LLC WEST
JEFFERSON CARE, LLC
By: Northern Health Facilities, Inc.,
as sole member
By:________________________________________
Name: Mark W. Durishan
Title: Vice President-Finance
[Lenders' signatures follow.]
S-4
<PAGE> 9
LENDERS: BANK OF AMERICA, N.A.,
formerly NationsBank, N.A.,
individually in its capacity as a
Lender and in its capacity as Agent
By:_________________________________
Name:_______________________________
Title:______________________________
ROYAL BANK OF CANADA
By:_________________________________
Name:_______________________________
Title:______________________________
FIRSTAR BANK MILWAUKEE, N.A.
By:_________________________________
Name:_______________________________
Title:______________________________
CREDIT LYONNAIS NEW YORK BRANCH
By:_________________________________
Name:_______________________________
Title:______________________________
LEHMAN COMMERCIAL PAPER I
By:_________________________________
Name:_______________________________
Title:______________________________
DLJ CAPITAL FUNDING, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
S-5
<PAGE> 10
THE BANK OF NOVA SCOTIA
By:_________________________________
Name:_______________________________
Title:______________________________
KEY CORPORATE CAPITAL INC.
By:_________________________________
Name:_______________________________
Title:______________________________
LASALLE BANK NATIONAL ASSOCIATION
By:_________________________________
Name:_______________________________
Title:______________________________
TORONTO DOMINION (TEXAS), INC.
By:_________________________________
Name:_______________________________
Title:______________________________
BANK ONE, N.A.
By:_________________________________
Name:_______________________________
Title:______________________________
BANK ONE DAYTON
By:_________________________________
Name:_______________________________
Title:______________________________
S-6
<PAGE> 11
BANK OF MONTREAL
By:_________________________________
Name:_______________________________
Title:______________________________
THE FUJI BANK, LTD., CHICAGO BRANCH
By:_________________________________
Name:_______________________________
Title:______________________________
U.S. BANK NATIONAL ASSOCIATION
By:_________________________________
Name:_______________________________
Title:______________________________
BANK OF TOKYO-MITSUBISHI
TRUST COMPANY
By:_________________________________
Name:_______________________________
Title:______________________________
COMERICA BANK
By:_________________________________
Name:_______________________________
Title:______________________________
AMSOUTH BANK
By:_________________________________
Name:_______________________________
Title:______________________________
S-7
<PAGE> 12
VAN KAMPEN PRIME
RATE INCOME TRUST
By:_________________________________
Name:_______________________________
Title:______________________________
VAN KAMPEN SENIOR
INCOME TRUST
By:_________________________________
Name:_______________________________
Title:______________________________
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By:_________________________________
Name:_______________________________
Title:______________________________
WILLIAM E SIMON SONS
By:_________________________________
Name:_______________________________
Title:______________________________
BANKBOSTON, N.A.
By:_________________________________
Name:_______________________________
Title:______________________________
INDOSUEZ CAPITAL FUNDING III,
LIMITED
By: Indosuez Capital Luxembourg SA,
as Collateral Manager
By:_________________________________
Name:_______________________________
Title:______________________________
S-8
<PAGE> 13
MARINER LDC
By:_________________________________
Name:_______________________________
Title:______________________________
PARIBAS CAPITAL FUNDING LLC
By:_________________________________
Name:_______________________________
Title:______________________________
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company,
its Investment Manager
By:_________________________________
Name:_______________________________
Title:______________________________
KZH CRESCENT LLC
By:_________________________________
Name:_______________________________
Title:______________________________
KZH CRESCENT-2 LLC
By:_________________________________
Name:_______________________________
Title:______________________________
S-9
<PAGE> 14
ROYALTON COMPANY
By: Pacific Investment Management Company,
as its Investment Advisor
By:_________________________________
Name:_______________________________
Title:______________________________
CAPTIVA III FINANCE LTD.
By:_________________________________
Name:_______________________________
Title:______________________________
JACKSON NATIONAL LIFE INSURANCE
COMPANY
By: PPM America, Inc., as attorney-in-fact,
on behalf of Jackson National Life
Insurance Company
By:_________________________________
Name:_______________________________
Title:______________________________
ARCHIMEDES FUNDING LLC
By:_________________________________
Name:_______________________________
Title:______________________________
S-10
<PAGE> 15
SENIOR DEBT PORTFOLIO
By: By Boston Management and Research, as
Investment Advisor
By:_________________________________
Name:_______________________________
Title:______________________________
EATON VANCE INSTITUTIONAL SENIOR
LOAN FUND
By: Eaton Vance Management, as
Investment Advisor
By:_________________________________
Name:_______________________________
Title:______________________________
CYPRESSTREE INVESTMENT PARTNERS I, LTD.
By: CypressTree Investment Management Company, Inc., as
Portfolio Manager
By:_________________________________
Name:_______________________________
Title:______________________________
JOHN HANCOCK MUTUAL LIFE
By:_________________________________
Name:_______________________________
Title:______________________________
JOHN HANCOCK VARIABLE LIFE
By:_________________________________
Name:_______________________________
Title:______________________________
S-11
<PAGE> 16
NATIONAL CITY BANK
By:_________________________________
Name:_______________________________
Title:______________________________
CITY NATIONAL BANK
By:_________________________________
Name:_______________________________
Title:______________________________
S-12
<PAGE> 1
EXHIBIT 21.1
EXTENDICARE HEALTH SERVICES, INC. & SUBSIDIARIES
ADULT SERVICES UNLIMITED, INC
ALACHUA COUNTY HEALTH CARE, LLC
ALPINE HEALTH & REHABILITATION CENTER, LLC
ARBORS AT BAYONET POINT, LLC
ARBORS AT FT. WAYNE, INC
ARBORS AT TAMPA, LLC
ARBORS AT TOLEDO, INC
ARBORS EAST, INC
BLANCHESTER CARE, LLC
CANTON CARE, LLC
CITRUS COUNTY HEALTH CARE, LLC
COLONIAL CARE, LLC
COLUMBUS HEALTH CARE, LLC
CONCORDIA MANOR, LLC
COVENTRY CARE HOLDINGS, INC
COVENTRY CARE
CSI SOFTWARE, INC
DAYTON CARE, LLC
DELAWARE CARE, LLC
EDGEWOOD CARE, LP
EDGEWOOD NURSING CENTER, INC
ELDERCREST CARE, LP
ELDER CREST, INC.
EXTENDICARE GREAT TRAIL, INC
EXTENDICARE HEALTH FACILITY HOLDINGS, INC
EXTENDICARE HEALTH FACILITIES, INC.
EXTENDICARE HEALTH SERVICES, INC
EXTENDICARE HOMES, INC.
<PAGE> 2
EXTENDICARE HOMES OF WISCONSIN, LLC
EXTENDICARE OF INDIANA, INC.
FAIRLAWN CARE, LLC
FIR LANE TERRACE CONVALESCENT CENTER, INC
FIRST COAST HEALTH & REHAB CENTER, LLC
GALLIPOLIS CARE, LLC
GREENBRIAR CARE, LLC
GREENBROOK CARE, LLC
HAVEN CARE, LP
HAVEN CREST, INC
HEALTH POCONOS, INC
HERITAGE CARE, LLC
HILLIARD CARE, LLC
JACKSON HEIGHTS REHABILITATION CENTER, LLC
JACKSONVILLE CARE, LLC
KAUFMAN STREET, WV, LLC
KISSIMMEE CARE, LLC
LADY LAKE CARE, LLC
LONDON CARE, LLC
MARIETTA CARE, LLC
MARSHALL PROPERTIES, INC
MEADOW CARE, LP
MEADOW CREST, INC
NEW CASTLE CARE, LLC
NEW HORIZON CARE, LLC
NORTHERN HEALTH FACILITIES, INC.
NORTH REHABILITATION CARE, LLC
OAK HILL CARE, LP
OAK HILL HOME OF REST & CARE, INC
THE OAKS RESIDENTIAL & REHAB CENTER, LLC
ORANGE PARK CARE, LLC
PALM COURT CARE, LLC
PORT CHARLOTTE CARE, LLC
<PAGE> 3
THE PROGRESSIVE STEP CORPORATION
RICHEY MANOR, LLC
ROCKLEDGE CARE, LLC
SAFETY HARBOR CARE, LLC
SARASOTA CARE, LLC
SEMINOLE CARE, LLC
STONEBRIDGE CARE, LP
SOUTH HERITAGE HEALTH & REHAB CENTER, LLC
TOLEDO CARE, LLC
TREAURE ISLE CARE CENTER, LLC
UNION PRESCRIPTION CENTERS OF MICHIGAN
UNITED PROFESSIONAL COMPANIES, INC
UNITED PROFESSIONAL SERVICES, INC.
UNITED REHABILITATION SERVICES, INC.
WATERVILLE CARE, LLC
WEST JEFFERSON CARE, LLC
WINTER HAVEN CARE, LLC
WINTER HAVEN HEALTH & REHAB CENTER, LLC
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF EXTENDICARE HEALTH SERVICES, INC. FOR THE
TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,941
<SECURITIES> 0
<RECEIVABLES> 173,297
<ALLOWANCES> 24,949
<INVENTORY> 1,693
<CURRENT-ASSETS> 233,787
<PP&E> 835,029
<DEPRECIATION> 224,686
<TOTAL-ASSETS> 974,448
<CURRENT-LIABILITIES> 174,009
<BONDS> 508,450
0
0
<COMMON> 1
<OTHER-SE> 237,894
<TOTAL-LIABILITY-AND-EQUITY> 974,448
<SALES> 0
<TOTAL-REVENUES> 967,585
<CGS> 0
<TOTAL-COSTS> 842,216
<OTHER-EXPENSES> 154,508
<LOSS-PROVISION> 11,905
<INTEREST-EXPENSE> 51,267
<INCOME-PRETAX> (123,180)
<INCOME-TAX> (52,841)
<INCOME-CONTINUING> (70,115)
<DISCONTINUED> 0
<EXTRAORDINARY> (342)
<CHANGES> 0
<NET-INCOME> (70,457)
<EPS-BASIC> (74)
<EPS-DILUTED> (74)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
EXTENDICARE HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS SUBTRACTIONS
----------------------- ------------
PROVISIONS ACCOUNTS
BALANCE AT FOR LOSSES ADDITIONS SUBTRACTIONS WRITTEN OFF BALANCE
BEGINNING ON ACCOUNTS FROM FROM NET OF AT END
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF PERIOD RECEIVABLE ACQUISITION DIVESTITURE RECOVERIES OF PERIOD
- ------------------------------------ ---------- ----------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996........ 7,196 7,293 -- -- 5,186 9,303
Year ended December 31, 1997........ 9,303 8,111 8,326 -- 6,814 18,926
Year ended December 31, 1998........ 18,926 12,698 4,683 2,724 7,684 25,899
Year ended December 31, 1999........ 25,899 11,905 -- -- 12,855 24,949
</TABLE>
37
