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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-43549
<TABLE>
<CAPTION>
EXTENDICARE HEALTH SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
<S> <C> <C>
DELAWARE 8051 98-0066268
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employe
Incorporation or Organization) Classification Code Number) Identification Number)
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
</TABLE>
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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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<TABLE>
<CAPTION>
EXTENDICARE HEALTH SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1 Condensed Financial Statements:
Consolidated Statements of Operations for the three months and nine months ended September 30, 3
2000 and 1999
Consolidated Balance Sheets September 30, 2000 and December 31, 1999 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 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 17
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Change in Securities 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Dollars in Thousands)
(Unaudited)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
Nursing and assisted living centers $ 225,661 $ 239,262 $ 677,072 $ 701,272
Medical supplies and outpatient therapy 2,478 10,834 7,458 35,220
Other 1,971 2,370 5,589 6,646
--------- --------- --------- ---------
230,110 252,466 690,119 743,138
COSTS AND EXPENSES:
Operating 214,499 208,772 624,166 632,820
General and administrative 11,350 11,120 33,433 31,989
Lease costs 4,586 4,968 13,149 14,768
Depreciation and amortization 11,189 13,067 34,074 38,543
Interest expense 11,285 13,742 35,221 38,749
Interest income (325) (159) (956) (977)
Loss (gain) on disposal of assets and other (940) 1,750 786 1,474
items --------- --------- --------- ---------
251,644 253,260 739,873 757,366
--------- --------- --------- ---------
LOSS BEFORE PROVISION FOR INCOME TAXES (21,534) (794) (49,754) (14,228)
Provision for income taxes 7,786 (859) 17,601 3,505
--------- ---------- --------- ---------
LOSS BEFORE MINORITY INTERESTS AND
EXTRAORDINARY ITEM (13,748) (1,653) (32,153) (10,723)
Minority interests -- 47 -- 68
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (13,748) (1,606) (32,153) (10,655)
Extraordinary loss on early retirement of
debt (net of income taxes $246) (436) -- (436) --
--------- ---------- --------- ---------
NET LOSS $ (14,184) $ (1,606) $ (32,589) $ (10,655)
========= ========= ========= =========
PER COMMON SHARE:
Loss before extraordinary item (15) (1) (34) (11)
Extraordinary item -- -- -- --
-------- --------- --------- ---------
Loss per common share $ (15) $ (1) $ (34) $ (11)
========= ========= -======== =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(Dollars in Thousands)
(Unaudited)
ASSETS SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,417 $ 2,941
Accounts receivable, less
allowances of $28,418 and $24,949, respectively 141,168 148,348
Inventories, supplies and prepaid expenses 7,327 8,882
Deferred state income taxes 4,899 4,185
Debt service trust funds 223 1,934
Due from shareholder -
Federal income taxes receivable 3,192 47,813
Deferred Federal income taxes 22,190 19,684
---------- ----------
Total current assets 181,416 233,787
PROPERTY AND EQUIPMENT, NET 537,987 610,343
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 84,211 87,143
OTHER ASSETS 86,606 43,175
---------- ----------
$ 890,220 $ 974,448
--======== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 110,377 128,722
Current due to shareholder
9,661 16,513
Current maturities of long-term debt 11,860 21,705
Bank indebtedness 7,753 5,895
Income taxes payable 1,587 1,174
---------- ---------
Total current liabilities 141,238 174,009
ACCRUAL FOR SELF-INSURED LIABILITIES 39,971 --
LONG-TERM DEBT 424,164 508,450
OTHER LONG-TERM LIABILITIES 45,981 8,451
DUE TO SHAREHOLDER AND AFFILIATES
Deferred Federal income taxes and other 29,250 39,846
DEFERRED STATE INCOME TAXES 3,715 5,141
MINORITY INTERESTS -- 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 (2,495) (3,090)
(392) 32,197
Retained earnings (accumulated deficit) ---------- ----------
Total shareholder's equity 205,901 237,895
---------- ----------
$ 890,220 $ 974,448
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
4
<PAGE> 5
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (32,589) $(10,655)
Adjustments to reconcile net loss to net cash
Provided from operating activities:
Depreciation and amortization 35,531 40,120
Provision for uncollectible accounts receivable 8,576 9,809
Provision for self-insured liabilities
Payment of self-insurance liability claims 36,000 --
Provision for punitive damages (358) --
Loss on disposal of assets and other items 9,000 --
Deferred income taxes (15,638) 1,697
Extraordinary loss on early retirement of debt 436 --
Minority interests -- (68)
Changes assets and liabilities:
Accounts receivable (3,923) 9,392
Inventories, supplies and prepaid expenses 1,633 (258)
Debt service trust funds 1,710 (42)
Accounts payable and accrued liabilities (20,280) (18,426)
Income taxes payable/receivable 412 (3,612)
--------------- ------------
Cash provided from operating activities 21,296 29,049
INVESTING ACTIVITIES:
Payments for purchase of property and equipment (9,850) (17,912)
Proceeds from sale of property and equipment 5,989 8,959
Proceeds received from divestiture agreement 30,000 --
Income taxes recovered (paid) on disposal of assets 47,283 (25,000)
Changes in other non-current assets (2,454) 2,172
--------------- ------------
Cash provided from (used for) investing activities 70,968 (31,781)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 3,048 50,000
Other long-term liabilities (1,471) (5,814)
Payments of long-term debt (95,635) (45,896)
Bank indebtedness 1,859 4,793
Distribution of minority interests' earnings (589) (51)
--------------- ------------
Cash (used for) provided from financing activities (92,788) 3,032
--------------- ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (524) 300
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 2,941 1,084
--------------- ------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 2,417 $ 1,384
=============== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
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., a Canadian
Corporation.
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
condensed 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 condensed 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.
6
<PAGE> 7
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. 138 was recently issued to amend SFAS No. 133. SFAS 133 and 138
require that an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. The Company is currently analyzing the impact of SFAS 133 and 138 but
does not expect the SFAS to significantly impact the Company's financial
position, results of operations or disclosures.
3- COMMITMENTS AND CONTINGENCIES
Capital Expenditures
As of September 30, 2000, the Company had capital expenditure purchase
commitments outstanding of approximately $5.9 million.
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.
On September 27, 2000 the Company received notification of a favorable
ruling in its worker's compensation case from the Provider Reimbursement Review
Board which indicates the Company should be successful in recovering $10.0
million to $12.0 million. If the Company is successful in the matter, the
settlement will be recorded in the fourth quarter. The Fiscal Intermediary has
made an appeal to the administrator to reconsider an appeal of the ruling. A
decision is anticipated by November 30, 2000.
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.
On September 27, 2000 a jury in Florida returned a verdict of $3.0 million
in compensatory damages and $17.0 million in punitive damages against two
subsidiaries of the Company in respect to the care of a resident. Florida state
statutes provide that the judgement for the total amount of punitive damages in
civil action, with some exception, may not exceed three times the amount of
compensatory damage. Punitive damages are not generally covered by insurance and
though final judgement on the case remains outstanding, the Company has recorded
a provision of $9.0 million. The Company intends to aggressively pursue all
appellant remedies available, but has in any event, provided for three times the
compensatory damages. This case is one in a series of lawsuits within the long
term care industry against nursing home providers in Florida.
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.
7
<PAGE> 8
Subsequent Event
On October 20, 2000, the Company received notification from the State of
Indiana recommending to Health Care Financing Administration (HCFA) a nursing
home in Indiana lose its certification under the Medicare and Medicaid systems.
At this point in time, the Company is awaiting formal notification from HCFA,
but has already submitted an appeal and has commenced action to rectify the
deficiencies alleged by the State. The Company remains confident in its ability
to rectify the deficiencies but at this time can not ascertain any loss in
revenues or additional cost that it may incur.
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 178 nursing (17,985
operational beds) and 42 assisted living and retirement facilities (1,950 units)
at September 30, 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 nine months ended
September 30, 2000 and September 30, 1999, respectively.
LOSS (GAIN) ON DISPOSAL OF ASSETS AND OTHER ITEMS
On September 19, 2000 the Company disposed of eleven Florida nursing
facilities (1,435 operational beds) and four Florida assisted living facilities
(135 units) to Greystone Tribeca ("Greystone") for initial cash proceeds of
$30.0 million and contingent consideration in the form of a series of interest
bearing notes which have an aggregate potential value of up to $30.0 million
plus interest. The notes have a maximum term of three and one half years and may
be retired at any time out of the proceeds from the sale or refinancing of the
facilities by Greystone. During the term of the notes, the Company retains the
right of first refusal and an option to repurchase the facilities in March 2004,
which if not accepted will trigger repayment of the balance of the notes. The
option to repurchase, along with the significant portion of the sales price
being contingent, results in the disposition being accounted for as a deferred
sale in accordance with SFAS 66. There will be no gain or loss recorded on the
initial transaction, and the Company will continue to depreciate the fixed
assets on its records, which as of September 30, 2000 had a net book value of
$42.2 million and have been classified under "Other Assets" as `Assets held
under Divestiture Agreement'. The initial cash proceeds has been classified
within "Other Long Term Liabilities" in the balance sheet as "Deposits held
under Divestiture Agreement". Additional payments received, including interest,
will increase the deposits net of carrying costs paid. On July 14, 2000 the
Company also sold one nursing facility (119 operational beds) for $2.8 million.
The sale resulted in a pretax gain of $0.9 million. The Company applied the net
after tax proceeds from these transactions of $29.5 million to reduce debt.
On June 30, 2000, the lease at one of the Company's nursing homes (75
operational beds) expired and was not renewed. Certain equipment assets of the
Company were sold for $0.1 million.
During the second quarter, the Company sold two previously closed nursing
facility on May 15, 2000 for $2.0 million and another on June 9, 2000 for $0.7
million resulting in pretax losses of $0.5 million and $1.1 million,
respectively. On February 29, 2000, the Company sold seven outpatient therapy
facilities resulting in a pretax loss of $0.1 million. The Company applied the
net after tax proceeds of $2.0 million from these transactions to reduce debt.
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.
8
<PAGE> 9
RESULTS OF OPERATIONS
The following table sets forth details of revenues and earnings as a
percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Nursing and assisted living centers............. 98.1% 94.8% 98.1% 94.4%
Medical supplies and outpatient therapy......... 1.1 4.3 1.1 4.7
Other........................................... 0.8 0.9 0.8 0.9
----- ----- ----- -----
100.0 100.0 100.0 100.0
Operating and general and administrative costs.... 98.1 87.1 95.3 89.4
Lease, depreciation and amortization.............. 6.9 7.1 6.8 7.2
Interest, net..................................... 4.8 5.4 5.0 5.1
Loss (gain) on disposal of assets and other items. (0.4) 0.7 0.1 0.2
----- ----- ----- -----
(Loss) before taxes............................... (9.4) (0.3) (7.2) (1.9)
(Benefit) from income taxes....................... (3.4) 0.3 (2.5) (0.5)
----- ----- ----- -----
(Loss) before minority interest and extraordinary (6.0) (0.6) (4.7) (1.4)
item ----- ----- ----- -----
Extraordinary item 0.2 - - -
===== ===== ===== =====
Net (loss)...................................... (6.2) (0.6) (4.7) (1.4)
===== ===== ===== =====
</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 or at Company owned clinics.
Medical supplies and outpatient therapy revenue decreased $27.7 million
resulting from the disposal of operations in 2000 and 1999.
The Company derives its revenue from Medicare, Medicaid and private pay sources.
The following table details the Company's private pay, Medicare and Medicaid
sources of revenue by percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Private Pay.......... 37% 36% 37% 36%
Medicare............. 20% 22% 21% 23%
Medicaid............. 43% 42% 42% 41%
</TABLE>
Effective January 1, 1999, all of the Company's facilities were on the
Medicare Prospective Payment System (PPS), 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, makes 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
Residence Utilization Group (RUGs) categories to recognize the costs associated
with the more medically complex patients. The increase was originally to be
effective for six months but has since been extended with no specific sunset
date, though HFCA continues to work on a refinement of RUGs rates. A favorable
impact on revenue through September 30, 2000 is estimated at $2.2 million. 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 were given the
option of moving to the full Federal PPS rate. The Company has identified 17
facilities to date and have filed the necessary applications in order to benefit
from the full Federal PPS rate. Certain other Part A changes, of lesser
significance to the Company, are included in the BBRA. The Part B revision is
the replacement of a two year moratorium on the $1,500 cap on speech, physical
and occupational therapy. The moratorium is effective on January 1, 2000 and
applies to home health, therapy clinics, and nursing homes. The Part B revision
has a favorable impact on the Company's revenue.
9
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Average occupancy in nursing facilities for the nine months ended September
30, 2000 and 1999 was 87.5% and 85.7%, respectively; and for assisted living
facilities, 84.5% and 79.2%, respectively. Average occupancy from facilities in
operation since 1998 rose to 88.0% in the third quarter of 2000 from 86.2% in
the prior year.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Revenues in the three months ended September 30, 2000 were $230.1 million,
representing a decrease of $22.4 million (8.9%) from $252.5 million in the three
months ended September 30, 1999. The decrease in revenues of $22.4 million
included reductions in nursing and assisted living center revenues of $13.6
million, medical supplies and outpatient therapy revenues of $8.4 million and
other revenues of $0.4 million.
The decrease in nursing and assisted living center revenues of $13.6 million
included a decrease of $18.9 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 $5.3 million
(2.6%) when comparing periods. Same-facility revenues increased approximately
$0.6 million in the third quarter of 2000 as a result of new blood glucose
revenue due to favorable rulings received from HCFA in dealings with the
Company's intermediary. The remaining $4.7 million increase in same-facility
revenues was due to improvement in mix and increased rates. The Company's
average daily Medicare Part A rate declined to $302 in the third quarter of 2000
compared to $323 in the comparable 1999 period. This was offset by improvements
in the Medicaid and private pay rates.
The decrease in medical supplies and outpatient therapy revenues of $8.4
million (77.1%) resulted from divestitures during 2000 and 1999. The most
significant impact was $7.9 million attributable to the home health operation
divestiture, which took place in the fourth quarter of 1999.
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
Operating and general and administrative costs increased $6.0 million or
2.7% between periods. The increase included decreases in costs relating to
divestitures and closed operations, net of acquisitions and newly constructed
facilities, of approximately $9.6 million. The remaining increase in operating
and general and administrative costs of $15.6 million (7.1%) included an
increase in wage-related costs of $7.1 million, and an increase in insurance
expense and liability claim provisions of $8.0 million. The increase in
wage-related costs included increases of $5.3 million due to incentives to
attract and retain qualified personnel along with staffing of internal
therapists at the nursing facilities and replacing contract therapists, and an
increase in workers' compensation costs of $1.8 million due to higher premiums
in 2000. Insurance and liability claim provisions increased due to first-time
liability deductibles and increased premiums due to claim experience. Other
operating and general and administrative costs increased $0.6 million.
LEASE COSTS, DEPRECIATION AND AMORTIZATION
Total lease costs, depreciation and amortization decreased $2.3 million when
comparing 2000 to 1999. Lease costs decreased $0.4 million including $0.6
million as a result of divestitures and $0.4 million due to capitalization of a
computer lease obligation which had been accounted for as an operating lease
during the third quarter of 1999. Depreciation and amortization expense
decreased $1.9 million primarily due to the related goodwill of the 1999
divestitures of the home health operation and nine nursing facilities in
Florida.
INTEREST
Net interest expense decreased $2.6 million to $11.0 million in the three
months ended September 30, 2000 compared with $13.6 million in the comparable
period in 1999. The decrease was primarily due to a decrease in the average debt
level to $461.8 million during the third quarter of 2000 compared to $569.1
million during the third quarter of 1999 resulting from the Company's use of
various 2000 and 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 9.78% during the third quarter of 2000 compared to approximately 9.66%
during the third quarter of 1999. More favorable investment earnings during the
third quarter of 2000 compared to the third quarter of 1999 also affected net
interest expense.
10
<PAGE> 11
LOSS (GAIN) ON DISPOSAL OF ASSETS AND OTHER ITEMS
The Company sold a nursing facility on July 14, 2000 for $2.8 million. The
sale of the facility resulted in a pretax gain of $0.9 million. In 1999, the
Company sold two nursing facilities for $4.8 million resulting in a pretax loss
of $0.3 million. In addition, the Company recorded $0.3 million in costs related
to the planned shutdown of two nursing facilities.
START-UP COSTS
The Company had no pre-tax start-up losses associated with newly constructed
facilities in the third quarter of 2000 compared to $0.7 million in the third
quarter of 1999.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION AND RENT ("EBITDAR")
EBITDAR declined to $4.3 million in the third quarter of 2000 from $32.6
million in the comparable period in 1999. While the Company succeeded in
reducing costs in excess of reductions in Medicare PPS rates, the declines in
EBITDAR of $28.3 million was attributable to increased insurance and liability
claim provisions of $13.8 million, the provision for the punitive damage award
of $9.0 million and the loss of earnings from asset dispositions in 2000 and
1999 and increased insurance costs.
INCOME TAXES
Income taxes in the three months ended September 30, 2000 increased to a
$7.8 million benefit from a $0.9 million expense in the comparable period in
1999 as a result of increased losses.
EXTRAORDINARY ITEM
The extraordinary loss in the third quarter of 2000 of $0.4 million relates
to the write off of deferred financing costs in connection with debt reduction
upon the sale of nursing and assisted living facilities.
NET LOSS
The net loss in the three months ended September 30, 2000 was $14.2 million
compared to a net loss of $1.6 million in the comparable period in 1999. The net
loss prior to gain (loss) on disposal of assets and other items and
extraordinary item was $14.3 million for the three months ended September 30,
2000 compared to net loss of $0.5 million in the comparable period in 1999, a
decrease of $13.8 million.
Refer to footnotes within Commitments and Contingencies and Management
Discussion and Analysis of Financial Conditions & Results of Operation.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Revenues in the nine months ended September 30, 2000 were $690.1 million,
representing a decrease of $53.0 million (7.1%) from $743.1 million in the nine
months ended September 30, 1999. The decrease in revenues of $53.0 million
included reductions in nursing and assisted living centers revenues of $24.2
million, medical supplies and outpatient therapy revenues of $27.8 million and
other revenues of $1.0 million.
The decrease in nursing and assisted living center revenues of $24.2 million
included a decrease of $49.5 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 $25.3
million (3.6%) 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 $22.9 million
including $2.9 million as a result of the accrual for blood glucose revenue for
the period of October 1, 1997 through September 30, 2000 due to favorable
rulings regarding reimbursement litigation with the Company's intermediary. The
remaining $20.0 million increase is primarily due to improvement in mix and
increased rates. The Company's average daily Medicare Part A rate declined to
$302 in 2000 compared to $323 in 1999. This was offset by improvements in the
Medicaid and private pay rates.
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<PAGE> 12
The decrease in medical supplies and outpatient therapy revenues of $27.8
million (78.8%) resulted from divestitures during 2000 and 1999 (primarily home
health operations of $23.5 million).
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
Operating and general and administrative costs decreased $7.2 million or
1.1% between periods. The decrease included decreases in costs relating to
divestitures and closed operations, net of acquisitions and newly constructed
facilities, of approximately $54.7 million. The remaining increase in operating
and general and administrative costs of $47.5 million (8.9%) included an
increase in wage-related costs of $36.6 million, offset partially by a decrease
in costs of $20.9 million due to the reduction in contract therapists, an
increase in insurance expense and liability claim provisions of $31.0 million.
The increase in wage-related costs included increases of $34.3 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 $2.3 million due to higher
premiums in 2000. Insurance and liability claim provisions increased $31.0
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 $6.1 million
when comparing 2000 to 1999. Lease costs decreased $1.6 million as a result of
divestitures. Depreciation and amortization expense decreased $4.5 million
primarily due to the related goodwill and depreciation of the 1999 divestitures
of the home health operation and six nursing facilities in Florida.
INTEREST
Net interest expense decreased $3.5 million to $34.3 million in the nine
months ended September 30, 2000 compared with $37.8 million in the comparable
period in 1999. The decrease was primarily due to a reduction in the average
debt level to $489.3 million during the first nine months of 2000 compared to
$580.3 million during the first nine months of 1999 resulting from the Company's
use of various 2000 and 1999 divestiture proceeds and income tax refund to
pay-down debt. The decrease was partially offset by an increase in the weighted
average interest rate of all long-term debt to approximately 9.60% during the
first nine months of 2000 compared to approximately 8.90% during the first nine
months of 1999.
LOSS (GAIN) ON DISPOSAL OF ASSETS AND OTHER ITEMS
The Company sold a nursing facility on July 14, 2000 for $2.8 million
resulting in a pretax gain of $0.9 million. The Company sold a previously closed
nursing facility for $2.0 million on May 15, 2000 and another previously closed
nursing facility for $0.7 million on June 9, 2000 resulting in losses of $0.5
million and $1.1 million, respectively, before taxes. The Company sold seven
outpatient therapy facilities for $0.6 million on February 29, 2000 resulting in
a pre-tax loss of $0.1 million. The sale of a Florida Certificate of Need during
2000 resulted in a pretax gain of $0.3 million while severance costs for
non-essential personnel resulted in a loss of $0.4 million. In 1999 the Company
sold three nursing facilities for $9.1 million resulting in a pretax gain of
$0.3 million, recorded $1.4 million in costs related to the planned shutdown of
two nursing facilities and $0.4 million in severance costs related to certain
staff reductions.
START-UP COSTS
The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in the first nine months of 2000 of $1.0 million compared
to $3.3 million in the first nine months of 1999. The $2.3 million decrease when
comparing periods was due to the timing of facility openings in 2000 versus
1999.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION AND RENT ("EBITDAR")
EBITDAR declined to $32.5 million in the first nine months of 2000 from
$78.3 million in the comparable period in 1999. While the Company succeeded in
reducing costs in excess of reductions in Medicare PPS rates, the decline in
EBITDAR of $45.8 million was attributable to increased insurance and liability
claim provisions of $41.3 million, the provision for punitive damages award of
$9.0 million and the loss of earnings from asset dispositions in 2000 and 1999
and increased insurance costs.
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<PAGE> 13
INCOME TAXES
Income tax benefit in the nine months ended September 30, 2000 increased to
$17.6 million from $3.5 million in the comparable period in 1999 as a result of
increased losses.
EXTRAORDINARY ITEM
The extraordinary loss in 2000 of $0.4 million relates to the write off of
deferred financing costs in connection with debt reduction upon the sale of
nursing and assisted living facilities and upon receipt of an income tax refund.
NET LOSS
The net loss in the nine months ended September 30, 2000 was $32.6 million
compared to a net loss of $10.7 million in the comparable period in 1999. The
net loss prior to loss on disposal of assets and other items and extraordinary
item was $31.7 million for the nine months ended September 30, 2000 compared to
net loss of $9.7 million in the comparable period in 1999, a decrease of $22.0
million.
Refer to footnotes within Commitments and Contingencies and Management
Discussion and Analysis of Financial Conditions & Results of Operation.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $2.4 million at September 30,
2000 and $2.9 million at December 31, 1999. Cash flow generated from operations
before working capital changes was $41.7 million for the nine months ended
September 30, 2000 compared with cash flow generated from operations of $42.0
million in the comparable period of 1999.
Overall cash from operating activities was $21.3 million for the nine months
ended September 30, 2000 as compared to $29.0 million in the first nine months
of 1999. The Company experienced a decrease in working capital since December
31, 1999, excluding cash and borrowings included in current liabilities, of
$27.1 million.
The decrease in working capital resulted from a decrease in taxes
recoverable of $41.8 million, a decrease in accounts receivable of $7.3 million,
a $1.7 million decrease in current trust funds and a decrease in inventories,
supplies and prepaid expense of $1.5 million. These decreasing components of
working capital were partially offset by a $18.3 million decrease in accounts
payable and accrued liabilities and a decrease in insurance due to affiliates
and other amounts due to shareholder of $5.7 and $1.2 million, respectively.
Taxes recoverable decreased from $70.5 million at December 31, 1999 to $28.7
million at September 30, 2000, representing a decrease of $41.8 million. The
decrease was due to a tax refund of $47.3 million partially offset by a current
year tax benefit of $5.5 million.
Accounts receivable at September 30, 2000, were $141.1 million compared with
$148.3 million at December 31, 1999, representing a decrease of $7.2 million.
The reduction in accounts receivable included a $1.0 million decrease within the
nursing operations and a decline of $6.2 million within the medical supplies and
outpatient therapy operations. Billed patient care and other receivables
decreased $11.6 million while third-party payer settlement receivables increased
$10.6 million within the nursing operations. The decrease in billed patient care
receivables of $11.6 million included a decrease of $11.2 million due to an
improvement in collection efforts by the Company between periods. The remaining
decrease of $0.4 million reflects a decrease of $8.8 million due to the sale or
closure of nursing and assisted living facilities, partially offset by an
increase of $8.4 million due to rate increases. The increase in settlement
receivables of $10.6 million between periods included increases of $2.5 million
for anticipated Medicare reimbursement for uncollectible coinsurance amounts and
$12.9 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, $1.1 million as a result of Medicaid settlements and
$0.8 million of collections from Pennsylvania for prior years rate increases.
The decrease in medical supplies and outpatient therapy receivables of $6.2
million between periods is due to a reduction in home health receivables of $6.0
million resulting from the sale of this operation in November 1999 and by a
decrease of other receivables of $0.2 million.
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<PAGE> 14
Property and equipment decreased $72.4 million from December 31, 1999 to a
total of $580.2 million at September 30, 2000. The decrease was the result of
depreciation expense of $31.5 million, asset disposals of $7.1 million, a
decrease in equipment of $1.2 million resulting from the buy-out of a capital
lease and a decrease of $42.2 million as a result of the reclassification of the
net book value of property and equipment related to the sale to Greystone to
"Other Assets" . These decreases were offset by capital expenditures and asset
transfers of $9.6 million.
Total borrowings, including bank indebtedness and both current and long-term
maturities of debt, totaled $443.8 million at September 30, 2000 for a decrease
of $92.3 million from December 31, 1999. The decrease was attributable to the
use of $25.0 million from a tax refund and $31.5 from the sales of nursing and
assisted living facilities to pay down the Tranche A and Tranche B term loans,
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 $25.0
million and the use of operating cash to reduce the current debt for scheduled
repayments. The weighted average interest rate of all long-term debt was 8.64%
at September 30, 2000 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 September 30, 2000, the
applicable margin under the Revolving Credit Facility and Tranche A Term Loan
were 2.50% for Eurodollar loans and 1.75% for base rate loans, and the
applicable margin under the Tranche B Term Loan was 3.00% for Eurodollar loans
and 2.50% 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 September 30, 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 $42.5 million at September 30, 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). The
Company believes it has adequate capital resources and access to capital
resources to fund operations.
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
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<PAGE> 15
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. Interest income for
the quarter ended September 30, 2000 includes $0.2 million of net income,
resulting in year-to-date income of $0.3 million. The component of this amount
relating to the hedges' ineffectiveness was not deemed material.
Since the Company has not adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," changes
in the fair value of interest rate swaps designed to hedge the variability of
cash flows associated with the floating-rate, long-term debt obligations are not
reported in accumulated other comprehensive income (AOCI). In addition, the
Financial Accounting Standards Board has voted to delay the effective date of
this statement to years beginning after June 15, 2000. If this statement were
adopted as of September 30, 2000, AOCI would reflect a gain of $1.6 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 loss of $0.7 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 September 30, 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.
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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 4,439 1,770 675 676 259 207,712 215,531 203,960
Average Interest Rate 9.28% 9.30% 9.30% 9.31% 9.31% 9.31% 9.30%
Variable Rate 4,366 9,690 10,901 113,915 83,651 36,318 258,841 240,282
Average Interest Rate 8.77% 8.76% 8.74% 8.33% 5.13% 5.13% 7.47%
Interest Rate Swaps
Variable to Fixed 32,000 0 50,000 50,000 0 0 132,000 1,633
Average Pay Rate 5.28% 5.63% 5.63% 5.735% 0.00% 0.00% 5.57%
Average Receive Rate 6.32% 6.83% 6.83% 6.83% 0.00% 0.00% 6.70%
</TABLE>
The above table incorporates only those exposures that exist as of September 30,
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.
16
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
Except for the litigation discussed within Commitments and Contingencies,
footnote 3, there are no material pending legal proceedings other than
litigation arising in the ordinary course of business. Management believes,
on the basis of information furnished by legal counsel, that none of these
actions will have a material effect on the financial position results of
operations of the Company.
ITEM 2. Change in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
11.0 Computation of earnings per share for the three months and nine
months ended September 30, 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
September 30, 2000.
17
<PAGE> 18
>
EXTENDICARE HEALTH SERVICES, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
11.0 Computation of earnings per share for the three months and nine months ended September 30, 2000.
27.0 Financial Data Schedule
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXTENDICARE HEALTH SERVICES, INC.
Date: November 14, 2000 By: /s/ Mark W. Durishan
Mark W. Durishan
Vice President, Chief Financial Officer,
Treasurer and Director (principal
financial officer and principal
accounting officer)
18
