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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-43549
EXTENDICARE HEALTH SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
DELAWARE 8051 98-0066268
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
111 WEST MICHIGAN STREET
MILWAUKEE, WI 53203-2903
(Address of Principal Executive Offices and Zip Code)
(414) 908-8000
(Registrant's telephone number, including area code)
SEE TABLE OF ADDITIONAL REGISTRANTS
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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EXTENDICARE HEALTH SERVICES, INC.
INDEX
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PART I. FINANCIAL INFORMATION Page
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Item 1 Condensed Financial Statements:
Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999 3
Consolidated Balance Sheets March 31, 2000 and December 31, 1999 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operation 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 2 Change in Securities 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Dollars in Thousands Except Per Common Share Amounts)
(Unaudited)
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<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
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<S> <C> <C>
REVENUES:
Nursing and assisted living centers $ 223,403 $ 227,846
Medical supplies and outpatient therapy 2,566 11,415
Other 1,921 2,280
--------- ---------
227,890 241,541
COSTS AND EXPENSES:
Operating 205,278 211,154
General and administrative 10,897 9,523
Lease costs 4,418 4,645
Depreciation and amortization 11,419 12,707
Interest expense 12,338 12,382
Interest income (210) (354)
Loss on disposal of assets and other items 195 -
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LOSS BEFORE PROVISION FOR INCOME TAXES (16,445) (8,516)
Provision for income taxes (5,923) (2,708)
--------- ---------
LOSS BEFORE MINORITY INTERESTS (10,522) (5,808)
Minority interests - 15
--------- ---------
NET LOSS $ (10,522) $ (5,793)
========= =========
PER COMMON SHARE:
Net loss per common share $ (11) $ (6)
========= =========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(Dollars in Thousands)
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<CAPTION>
ASSETS MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,549 $ 2,941
Accounts receivable, less
allowances of $27,955 and $24,949, respectively 140,070 148,348
Inventories, supplies and prepaid expenses 7,500 8,882
Income taxes receivable - -
Deferred state income taxes 4,973 4,185
Debt service trust funds 140 1,934
Due from shareholder -
Federal income tax receivable 49,191 47,813
Deferred federal income taxes 23,766 19,684
---------- ----------
Total current assets 227,189 233,787
PROPERTY AND EQUIPMENT, NET 602,659 610,343
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 86,043 87,143
OTHER ASSETS 43,371 43,175
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$ 959,262 $ 974,448
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued liabilities and due to shareholder $ 142,358 145,235
Current maturities of long-term debt 19,370 21,705
Bank indebtedness 950 5,895
Income taxes payable 1,783 1,174
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Total current liabilities 164,461 174,009
ACCRUAL FOR SELF-INSURED LIABILITIES 12,000 -
LONG-TERM DEBT 501,740 508,450
OTHER LONG-TERM LIABILITIES 8,269 8,451
DUE TO SHAREHOLDER AND AFFILIATES
Deferred federal income taxes and other 40,095 39,846
DEFERRED STATE INCOME TAXES 5,168 5,141
MINORITY INTERESTS 148 656
SHAREHOLDER'S EQUITY:
Common stock, $1 par value, 1,000 shares authorized,
947 shares issued and outstanding 1 1
Additional paid-in capital 208,787 208,787
Accumulated other comprehensive loss (3,081) (3,090)
Retained earnings 21,674 32,197
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Total shareholder's equity 227,381 237,895
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$ 959,262 $ 974,448
========== ==========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Dollars in Thousands)
(Unaudited)
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<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
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OPERATING ACTIVITIES:
Net loss $(10,522) $ (5,793)
Adjustments to reconcile net loss to net cash
provided from (used for) operating activities:
Depreciation and amortization 11,913 13,234
Provision for uncollectible accounts receivable 2,584 2,860
Provision for self-insured liabilities 12,000 --
Loss on disposal of assets and other items 195 --
Deferred income taxes (4,599) (1,029)
Minority interests (15)
Changes in assets and liabilities:
Accounts receivable 3,553 9,370
Inventories, supplies and prepaid expenses 1,382 (87)
Debt service trust funds 1,794 36
Accounts payable and accrued liabilities (2,263) (17,335)
Income taxes payable/receivable 608 (2,486)
-------- --------
Cash provided from (used for) operating activities 16,645 (1,245)
INVESTING ACTIVITIES:
Payments for purchase of property and equipment (3,412) (7,262)
Proceeds from sale of property and equipment 509 95
Income taxes paid on sale of pharmacy operations -- (25,000)
Changes in other non-current assets (786) (1,339)
-------- --------
Cash used for investing activities (3,689) (33,506)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 3,000 44,000
Other long-term liabilities (183) (4,283)
Payments of long-term debt (11,711) (476)
Bank indebtedness (4,945) --
Distribution of minority interests' earnings (509) --
-------- --------
Cash (used for) provided from financing activities (14,348) 39,241
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,392) 4,490
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 2,941 1,084
-------- --------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 1,549 $ 5,574
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying financial statements reflect the operations of Extendicare
Health Services, Inc. ("Extendicare" or the "Company"). Extendicare, a Delaware
corporation is a wholly owned subsidiary of Extendicare Inc.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company and
its majority-owned subsidiaries. All transactions between Extendicare and its
majority-owned subsidiaries have been eliminated.
The financial information presented as of any date other than December 31 has
been prepared from the books and records without audit. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and the
footnotes required by generally accepted accounting principles for complete
statements. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
financial statements, have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1999 contained in the Company's Annual Report in Form 10-K.
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2-RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133's effective date was delayed
one year under recently issued SFAS 137. Thus , the effective date for SFAS 133
is for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS
No. 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is not expected to significantly impact the
Company's reporting and disclosures.
3-COMMITMENTS AND CONTINGENCIES
Capital Expenditures
The Company as of March 31, 2000 had capital expenditure purchase
commitments outstanding of approximately $1,587.
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 certain risks with affiliated insurance subsidiaries of
Extendicare, Inc. The cost of general and professional liability insurance
premiums was the most significant insurance expense charged to the Company by
the affiliates. In 2000 and 1999, the premiums charged to the Company for this
general and professional liability coverage increased significantly due to
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.
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
Company is currently unaware of any regulatory matters which could have a
material adverse effect on the Company's financial position or results of
operations.
7
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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 (19,875
operational beds) and 46 assisted living and retirement facilities (2,085 units)
at March 31, 2000. The Company's facilities are located in 14 states.
SIGNIFICANT EVENTS IN 2000 AND 1999
The following is a summary of significant events in the three months ended
March 31, 2000 and March 31, 1999, respectively.
LOSS ON DISPOSAL OF ASSETS AND OTHER ITEMS
The Company sold seven outpatient therapy facilities for $0.6 million on
February 29, 2000. The sale resulted in a pretax loss of $0.1 million.
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.
RESULTS FROM OPERATION
The following table sets forth details of revenues and earnings as a
percentage of total revenues:
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<CAPTION>
THREE MONTHS
ENDED
MARCH 31
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2000 1999
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<S> <C> <C>
Revenues
Nursing and assisted living centers............. 98.0 94.3
Medical supplies and outpatient therapy......... 1.1 4.7
Other........................................... 0.9 1.0
----- -----
100.0 100.0
Operating and general and administrative costs.... 94.9 91.3
Lease, depreciation and amortization.............. 6.9 7.2
Interest, net..................................... 5.3 5.0
Loss on disposal of assets and other items........ 0.1 --
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(Loss) before taxes............................... (7.2) (3.5)
(Benefit) for income taxes........................ (2.6) (1.1)
----- ------
Net (loss)...................................... (4.6) (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.
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<PAGE> 9
The Company derives its revenue from Medicare, Medicaid and private pay sources.
The following table sets forth the Company's private pay, Medicare and Medicaid
sources of revenue by percentage of total revenue:
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THREE MONTHS
ENDED
MARCH 31
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2000 1999
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<S> <C> <C>
Private Pay.......... 37% 37%
Medicare............. 21% 22%
Medicaid............. 42% 41%
</TABLE>
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
Balanced Budget Refinement Act ("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 the three months ended March 31,
2000 and 1999 was 86.5% and 85.8%, respectively; and for assisted living
facilities, 83.9% and 78.9%, respectively.
Medical supplies and outpatient therapy revenue decreased $8.8 million resulting
from the disposal of operations in 2000 and 1999.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1999
REVENUES
Revenues in the three months ended March 31, 2000 were $227.9 million,
representing a decrease of $13.6 million (5.7%) from $241.5 million in the three
months ended March 31, 1999. The decrease in revenues of $13.6 million included
reductions in nursing and assisted living centers revenues of $4.4 million,
medical supplies and outpatient therapy revenues of $8.8 million and other
revenues of $0.4 million.
The decrease in nursing and assisted living centers revenues of $4.4 million
included a decrease of $15.8 million from divestitures, net of the opening of
newly constructed facilities. Revenues from facilities which the Company
operated during each of 2000 and 1999 ("same-facility"), increased $11.4 million
when comparing periods. Same-facility revenues increased approximately $2.4
million as a result of one more day in 2000 when compared to 1999. Same-facility
revenues, on a same-day basis, increased $9.0 million primarily due to
improvement in mix and increased rates.
The decrease in medical supplies and outpatient therapy revenues of $8.8
million (77.5%) included $8.9 million from divestitures during 2000 and 1999
(primarily home health operations of $7.8 million). The remaining increase of
$0.1 million is primarily due to growth in outpatient therapy operations.
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
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Operating and general and administrative costs decreased $4.5 million or
2.0% between periods. The decrease included decreases in costs relating to
divestitures and closed operations, net of acquisitions and newly constructed
facilities, of approximately $24.9 million. The remaining increase in operating
and general and administrative costs of $20.4 million (10.6%) included an
increase in wage-related costs of $18.6 million, offset partially by a decrease
in costs of $2.1 million due to the reduction in contract therapists, and an
increase in insurance expense and liability costs of $13.9 million. The increase
in wage-related costs included increases of $17.8 million due to staffing of
internal therapists at the nursing facilities replacing the contract therapists,
along with incentives to attract and retain qualified personnel and an increase
in workers' compensation costs of $0.8 million due to higher premiums in 2000.
Insurance and liability claim costs increased $13.9 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 decreased $1.5 million
when comparing 2000 to 1999. Lease costs decreased $0.2 million including $0.6
million as a result of divestitures offset by $0.4 million due to increased
computer lease costs at nursing facilities. Depreciation and amortization
expense decreased $1.3 million primarily due to the 1999 sales and related
goodwill of the home health operation and six nursing facilities in Florida.
INTEREST
Net interest expense increased $0.1 million to $12.1 million in the three
months ended March 31, 2000 compared with $12.0 million in the comparable period
in 1999. The increase was primarily due to an increase in the weighted average
interest rate of all long-term debt to approximately 9.38% during the first
quarter of 2000 compared to approximately 8.45% during the first quarter of
1999. This was offset by a decrease in the average debt level to $526.2 million
during the first quarter of 2000 compared to $586.1 million during the first
quarter of 1999 resulting from the Company's use of various 1999 divestiture
proceeds to pay-down debt. Net interest expense was also affected by less
favorable investment earnings and fewer investments in 2000 compared to 1999.
LOSS ON DISPOSAL OF ASSETS AND OTHER ITEMS
The Company sold seven outpatient tharapy facilities for $0.6 million on
February 29, 2000 resulting in a loss of $0.1 million before taxes. The sale of
a Florida Certificate of Need resulted in a pretax gain of $0.3 million.
Severance costs for non-essential personnel resulted in a loss of $0.4 million.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION AND RENT ("EBITDAR")
EBITDAR declined to $11.7 million in the first quarter of 2000 from $20.9
million in the comparable period in 1999 and represented 5.1% and 8.6%,
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 loss of earnings from asset dispositions in 2000 and 1999 and
increased insurance costs.
START-UP COSTS
The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in the first quarter of 2000 of $0.4 million compared to
$1.4 million in the first quarter of 1999. The $1.0 million decrease when
comparing periods was due to the timing of facility openings in 2000 versus
1999.
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INCOME TAXES
Income taxes in the three months ended March 31, 2000 decreased to a $5.9
million tax benefit from a $2.7 million benefit in the comparable period in 1999
as a result of decreased earnings.
NET LOSS
The net loss in the three months ended March 31, 2000 was $10.5 million
compared to a net loss of $5.8 million in the comparable period in 1999. The net
loss prior to loss on disposal of assets and other items was $10.3 million for
the three months ended March 31, 2000 compared to net loss of $5.8 million in
the comparable period in 1999, a decrease of $4.5 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $1.5 million at March 31, 2000
and $2.9 million at December 31, 1999. Cash flow generated from operations
before working capital changes was $11.6 million for the three months ended
March 31, 2000 compared with cash flow generated from operations of $9.3 million
in the comparable period of 1999. The increase in cash flow from operations is
the result of an increase in operating earnings before provision for
self-insured liabilities.
Overall cash from operating activities was $16.6 million for the three
months ended March 31, 2000 as compared to cash used for operating activities of
$1.2 million in the first three months of 1999. The Company experienced a
decrease in working capital since December 31, 1999, excluding cash and
borrowings included in current liabilities, of $2.9 million. The decrease in
working capital resulted from a decrease in accounts receivable of $8.2 million,
a $1.8 million decrease in current trust funds, and a $1.4 million decrease in
inventories, supplies and prepaid expenses. These decreasing components of
working capital were partially offset by an increase in taxes recoverable of
$5.6 million, a $1.2 million decrease in accounts payable and accrued
liabilities and a decrease in insurance due to affiliates of $1.4 million.
Accounts receivable at March 31, 2000, were $140.1 million compared with
$148.3 million at December 31, 1999, representing a decrease of $8.2 million.
The reduction in accounts receivable included a $2.8 million decrease within the
nursing operations and a decline of $5.4 million within the medical supplies and
outpatient therapy operations. Billed patient care and other receivables
decreased $4.4 million while third-party payer settlement receivables increased
$1.6 million within the nursing operations. The decrease in billed patient care
receivables of $4.4 million included a decrease of $3.7 million due to an
improvement in collection efforts by the Company between periods. The remaining
decrease of $0.7 million reflects a decrease of $7.3 million due to the sale or
closure of nursing facilities, partially offset by an increase of $6.6 million
due to rate increases. The increase in settlement receivables of $1.6 million
between periods included increases of $0.9 million for anticipated Medicare
reimbursement for uncollectible coinsurance amounts and $4.2 million as a result
of Medicare cost report settlements. These increases were offset by collections
from Medicare for 1999 uncollectible coinsurance amounts of $2.9 million and
$0.6 million of collections from Pennsylvania for prior years rate increases.
The decrease in medical supplies and outpatient therapy receivables of $5.4
million between periods is due to a reduction in home health receivables of $4.9
million resulting from the sale of this operation in November, 1999 and a
reduction of other receivables of $0.4 million due to the timing of collections.
Property and equipment decreased $7.7 million from December 31, 1999 to a
total of $602.7 million at March 31, 2000. The decrease was the result of
depreciation expense of $10.5 million and asset disposals of $0.6 million,
offset by capital expenditures and asset transfers of $3.4 million.
Total borrowings, including bank indebtedness and both current and long-term
maturities of debt, totaled $522.1 million at March 31, 2000 for a decrease of
$14.0 million from December 31, 1999. The decrease was attributable to the
payment of a mortgage loan of $1.7 million using funds from a previously
established trust fund, draw-downs on the Revolving Credit Facility of $3.0
million and the use of operating cash to reduce bank indebtedness and current
debt for scheduled repayments. The weighted average interest rate of all
long-term debt was 8.64% at March 31, 2000 and such debt had maturities ranging
from 2000 to 2014.
11
<PAGE> 12
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 March 31, 2000, 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 March 31, 2000 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 $20.5 million at March 31, 2000 (net of letters of credit in
the amount of $36.5 million and the $25.0 million undrawn and unavailable
requirement per the amendment to the Senior Credit Facility).
In April 2000, the Company received $45.3 million representing income taxes
recoverable from 1999 operating losses and the $29.0 current tax benefit of its
December 31, 1999 sale of six facilities through a subsidiary. These proceeds
have been used to reduce overall debt. $25 million has been applied to the
Tranche A & B Term Loans with the remainder applied to the Revolving Credit
Facility.
12
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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, management enters into various types of derivative
instruments to manage fluctuations in cash flows resulting from interest rate
risk. These instruments consist of interest rate swaps. The interest rate swaps
change the variable rate cash-flow exposure on the long-term interest payments
to fixed-rate cash flows by entering into receive-variable, pay-fixed interest
rate swaps. Under the interest rate swaps, the Company receives variable
interest rate payments and makes fixed interest rate payments, thereby creating
fixed-rate long-term debt.
With respect to the stock and warrant holdings, management monitors the market
to adequately determine the appropriate market timing to act in order to
maximize the value of these instruments. With the exception of the above
holdings, the Company does not enter into derivative instruments for any purpose
other than cash flow hedging purposes. That is, the Company does not speculate
using derivative instruments and does not engage in trading activity of any
kind.
Risk Management Policies
The Company assesses interest rate cash flow risk by continually identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities.
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 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 $0.3
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. The component of this
amount relating to the hedges' ineffectiveness was not deemed material.
13
<PAGE> 14
Since the Company has not adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," changes
in the fair value of interest rate swaps designed to hedge the variability of
cash flows associated with the floating-rate, long-term debt obligations are not
reported in accumulated other comprehensive income (AOCI). In addition, the
Financial Accounting Standards Board has voted to delay the effective date of
this statement to years beginning after June 15, 2000. If this statement were
adopted as of March 31, 2000, AOCI would reflect a gain of $1.7 million based
upon quoted market prices provided by the financial institutions which are
counterparts to the swaps. Changes in the fair values of the stock and warrant
holdings are reported in AOCI net of related deferred tax accruals required
under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The amount reflected in AOCI
for 2000 related to stock and warrant holdings equals a gain of $0.02 million.
The estimated net amount of the gains or losses that are expected to be
reclassified into earnings within the next 12 months is uncertain due to the
uncertainty of stock market conditions and the interest rate environment.
As of March 31, 2000, 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 5,085 2,439 2,121 676 259 207,712 218,292 206,721
Average Interest Rate 9.28% 9.30% 9.30% 9.31% 9.31% 9.31% 9.30%
Variable Rate 10,575 16,206 18,344 136,358 85,016 36,318 302,817 284,258
Average Interest Rate 8.25% 8.22% 8.19% 7.56% 4.14% 3.97% 6.72%
Interest Rate Swaps
Variable to Fixed 32,000 0 50,000 50,000 0 0 132,000 1,672
Average Pay Rate 5.28% 5.63% 5.63% 5.53% 0.00% 0.00% 5.52%
Average Receive Rate 5.43% 6.11% 6.11% 6.11% 0.00% 0.00% 5.94%
</TABLE>
The above table incorporates only those exposures that exist as of March 31,
2000 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.
14
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
There are no material pending legal proceedings other than litigation
arising in the ordinary course of business. Management believes, on the
basis of information furnished by legal counsel, that none of these actions
will have a material effect on the financial position results of operations
of the Company.
ITEM 2. Change in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
11.0 Computation of earnings per share for the three months ended
March 31, 2000.
27.0 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
March 31, 2000.
15
<PAGE> 16
EXTENDICARE HEALTH SERVICES, INC.
EXHIBIT INDEX
Exhibit No. Description
11.0 Computation of earnings per share for the three months ended March 31,
2000.
27.0 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXTENDICARE HEALTH SERVICES, INC.
Date: May 15, 2000 By:/s/ Mark W. Durishan
Mark W. Durishan
Vice President, Chief Financial Officer,
Treasurer and Director (principal
financial officer and principal
accounting officer)
16
<PAGE> 1
EXHIBIT 11.0
EXTENDEDCARE HEALTH SERVICES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OUTSTANDING)
<TABLE>
<CAPTION>
Three Months ended
March 31
2000 1999
-------- --------
<S> <C> <C>
Net Earnings $(10,522) $ (5,793)
Weighted Average Number of
Common Shares Outstanding 947 947
-------- --------
Net earnings per Common Share $ (11) $ (6)
======= ========
</TABLE>
The Company does not have a complex capital structure and therefore, only has
basic earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,549
<SECURITIES> 0
<RECEIVABLES> 140,070
<ALLOWANCES> 27,955
<INVENTORY> 0
<CURRENT-ASSETS> 227,189
<PP&E> 873,932
<DEPRECIATION> 235,273
<TOTAL-ASSETS> 959,262
<CURRENT-LIABILITIES> 16,461
<BONDS> 501,740
0
0
<COMMON> 1
<OTHER-SE> 227,380
<TOTAL-LIABILITY-AND-EQUITY> 959,262
<SALES> 0
<TOTAL-REVENUES> 227,890
<CGS> 0
<TOTAL-COSTS> 205,278
<OTHER-EXPENSES> 15,315
<LOSS-PROVISION> 2,584
<INTEREST-EXPENSE> 12,338
<INCOME-PRETAX> (16,445)
<INCOME-TAX> (5,923)
<INCOME-CONTINUING> (10,522)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,522)
<EPS-BASIC> (11)
<EPS-DILUTED> (11)
</TABLE>
