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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C 20549
-----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBERS 333-43549 AND 333-97293
EXTENDICARE HEALTH SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 111 WEST MICHIGAN STREET 98-0066268
(State or other jurisdiction of Milwaukee, WI 53203 (I.R.S. Employer
incorporation or organization) (Address of principal executive office Identification Number)
Including zip code)
(414) 908-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
Common Stock - authorized 1,000 shares, $1.00 par value; issued and
outstanding 947 shares as of August 12, 2003. All issued and outstanding shares
of Common Stock are held indirectly by Extendicare Inc., a publicly traded
Canadian company.
EXTENDICARE HEALTH SERVICES, INC.
INDEX
PART I FINANCIAL INFORMATION: PAGE
Item 1 Financial Statements:
Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended
June 30, 2003 and 2002................................................................... 3
Condensed Consolidated Balance Sheets, June 30, 2003 and December 31, 2002...................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002.................................................................... 5
Notes to Condensed Consolidated Financial Statements............................................ 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations........... 14
Item 3 Quantitative and Qualitative Disclosures About Market Risk...................................... 25
Item 4 Controls and Procedures..................................................................... 26
PART II OTHER INFORMATION:
Item 1 Legal Proceedings............................................................................... 27
Item 2 Changes in Securities and Use of Proceeds....................................................... 27
Item 3 Defaults Upon Senior Securities................................................................. 27
Item 4 Submission of Matters to a Vote of Security Holders............................................. 27
Item 5 Other Information............................................................................... 27
Item 6 Exhibits and Reports on Form 8-K................................................................ 27
SIGNATURES ............................................................................................... 28
EXHIBIT INDEX.............................................................................................. 29
CERTIFICATIONS............................................................................................. 30
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXTENDICARE HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
--------- --------- --------- ---------
REVENUES:
Nursing and assisted living centers ................... $ 206,204 $ 194,906 $ 411,009 $ 385,904
Outpatient therapy .................................... 3,084 2,642 5,728 5,094
Other ................................................. 3,970 4,230 7,947 9,021
--------- --------- --------- ---------
213,258 201,778 424,684 400,019
COSTS AND EXPENSES (INCOME):
Operating ............................................. 179,045 168,572 359,541 335,176
General and administrative ............................ 7,721 8,332 15,559 16,543
Lease costs ........................................... 2,285 2,680 4,536 5,714
Depreciation and amortization ......................... 9,149 9,411 18,310 18,845
Interest expense ...................................... 8,566 7,640 17,061 15,970
Interest income ....................................... (482) (468) (1,125) (810)
Loss (gain) on disposal of assets ..................... -- (3,961) -- (3,961)
Provision for closure and exit costs and other items .. -- 5,293 -- 5,293
Loss on early retirement of debt ...................... -- 2,849 -- 2,849
--------- --------- --------- ---------
206,284 200,348 413,882 395,619
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES ............................ 6,974 1,430 10,802 4,400
Income tax expense ...................................... 2,793 923 4,333 2,236
--------- --------- --------- ---------
NET EARNINGS ............................................ $ 4,181 $ 507 $ 6,469 $ 2,164
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
EXTENDICARE HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2003 2002
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 38,858 $ 27,016
Accounts receivable, less allowances of $11,402
and $9,309, respectively ....................... 98,907 104,064
Supplies, inventories and other current assets .... 8,281 7,226
Income taxes receivable ........................... 384 518
Deferred state income taxes ....................... 5,751 5,810
Due from shareholder and affiliates:
Federal income taxes receivable ................. 11,366 12,292
Deferred federal income taxes ................... 29,399 29,647
Other ........................................... 6,043 4,493
--------- ---------
Total current assets............................ 198,989 191,066
Property and equipment .............................. 445,495 453,119
Goodwill and other intangible assets ................ 75,761 76,339
Other assets ........................................ 112,507 112,410
--------- ---------
Total Assets ................................... $ 832,752 $ 832,934
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Bank indebtedness ................................. $ 579 $ 2,656
Current maturities of long-term debt .............. 727 716
Accounts payable .................................. 19,921 20,850
Accrued liabilities ............................... 99,529 100,879
Current portion of accrual for self-insured
liabilities...................................... 23,000 28,000
--------- ---------
Total current liabilities....................... 143,756 153,101
Accrual for self-insured liabilities ................ 24,770 27,089
Long-term debt ...................................... 397,181 397,434
Deferred state income taxes ......................... 9,023 8,495
Other long-term liabilities ......................... 41,467 40,749
Due to shareholder and affiliates:
Deferred federal income taxes ..................... 45,895 43,381
Other ............................................. 3,484 3,484
--------- ---------
Total liabilities............................... 665,576 673,733
--------- ---------
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 .............. (883) (2,388)
Accumulated deficit ............................... (40,729) (47,199)
--------- ---------
Total Shareholder's Equity...................... 167,176 159,201
--------- ---------
Total Liabilities and Shareholder's Equity ..... $ 832,752 $ 832,934
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
EXTENDICARE HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
---------------- ----------------
OPERATING ACTIVITIES:
Net earnings .................................................. $ 6,469 $ 2,164
Adjustments to reconcile net earnings to net cash
provided from operating activities:
Depreciation and amortization ........................... 18,310 18,845
Amortization of deferred financing costs ................ 746 1,028
Provision for uncollectible accounts receivable ......... 5,097 5,349
Provision for self-insured liabilities .................. 3,000 2,625
Payment of self-insured liability claims ................ (10,319) (14,496)
Deferred income taxes ................................... 2,362 1,848
Gain on disposal of assets .............................. -- (3,961)
Provision for closure and exit costs and other items .... -- 5,293
Loss on early retirement of debt ........................ -- 2,849
Changes in assets and liabilities:
Accounts receivable ..................................... (24) 2,122
Supplies, inventories and other current assets .......... (1,056) (603)
Accounts payable ........................................ (929) (3,911)
Accrued liabilities ..................................... (1,135) 6,783
Income taxes payable/receivable ......................... 134 (18)
Current due to shareholder and affiliates ............... (623) (5,734)
--------- ---------
Cash provided from operating activities .............. 22,032 20,183
--------- ---------
INVESTING ACTIVITIES:
Payments for purchase of property and equipment ......... (8,875) (7,445)
Proceeds from sale of property and equipment ............ 28 14,267
Changes in other non-current assets ..................... 548 1,459
--------- ---------
Cash (used for) provided from investing activities ... (8,299) 8,281
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ................. -- 160,625
Payments of deferred financing costs ..................... -- (7,090)
Other long-term liabilities .............................. 444 1,720
Payments of long-term debt .............................. (259) (155,259)
Repayments of bank indebtedness ......................... (2,076) (590)
--------- ---------
Cash used for financing activities ................... (1,891) (594)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS ......................... 11,842 27,870
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 27,016 997
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 38,858 $ 28,867
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Extendicare Health Services, Inc. and its subsidiaries (hereafter referred
to as the "Company", unless the context requires otherwise) operates in one
reporting segment, nursing and assisted living facilities, throughout the United
States. The Company is an indirect wholly owned subsidiary of Extendicare Inc.
("Extendicare"), a Canadian publicly traded company.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements as of, and for
the three and six month periods ended June 30, 2003 and 2002 are unaudited and
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 in the United States of America for complete statements.
In the opinion of management, all adjustments necessary for a fair presentation
of such financial statements have been included. The condensed consolidated
balance sheet information as of December 31, 2002 has been derived from audited
financial statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management's most significant estimates
include provision for bad debts, provision for Medicaid and Medicare revenue
rate settlements, recoverability of long-lived assets, provision for
self-insured general and professional liability, facility closure accruals,
workers compensation accruals and self-insured health and dental claims. Actual
results could differ from those estimates.
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.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 2002 contained in the Company's Annual Report on Form
10-K. Certain reclassifications have been made to the 2002 condensed
consolidated financial statements to conform to the presentation for 2003.
2. NEW ACCOUNTING PRONOUNCEMENTS
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." The most significant provision of SFAS No. 145 addresses the
termination of extraordinary item treatment for gains and losses on early
retirement of debt. The Company adopted the provisions of this standard in the
first quarter of 2003 and has modified the presentation of its financial
statements for the comparative 2002 period by recording the loss on early
retirement of debt in earnings before income taxes.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit and
Disposal Activities." The provisions of SFAS No. 146 modify the accounting for
the costs of exit and disposal activities by requiring that liabilities for
these activities be recognized when the liability is incurred. Previous
accounting literature permitted recognition of some exit and disposal
liabilities at the date of commitment to an exit plan. The provisions of this
statement apply to exit or disposal activities initiated after December 31,
2002.
6
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Direct Guarantees of Indebtedness of Others." FIN 45 clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. FIN 45 also
elaborates on the disclosures to be made by a guarantor about its obligations
under certain guarantees that it has issued. The recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements are effective
for financial statements for interim or annual periods ending after December 15,
2002. The Company has no guarantees as defined in FIN 45.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 addresses consolidation by business enterprises of "variable interest
entities," which have one or both of the following characteristics: (1) the
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties,
which is provided through other interests that will absorb some or all of the
expected losses of the entity, and/or (2) the equity investors lack one or more
of the following essential characteristics of a controlling financial interest:
(a) the direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights, (b) the obligation to absorb
the expected losses of the entity if they occur, which makes it possible for the
entity to finance its activities, and/or (c) the right to receive the expected
residual returns of the entity if they occur, which is the compensation for the
risk of absorbing the expected losses. Not-for-profit organizations are not
subject to FIN 46 unless they are used by business enterprises in an attempt to
circumvent the provisions of this Interpretation. If a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities and results of the activities of the variable interest entity must
be included in the consolidated financial statements of the business enterprise.
FIN 46 applies immediately to variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company expects that FIN 46 will not have a material effect on its financial
statements.
3. GAIN ON DISPOSAL OF ASSETS, PROVISION FOR CLOSURE AND EXIT COSTS, AND
IMPAIRMENT OF LONG-LIVED ASSETS
In May 2002, Tandem Health Care, Inc. ("Tandem") exercised its option to
purchase seven leased properties in Florida from the Company for gross proceeds
of $28.6 million, consisting of cash of $15.6 million and $13.0 million in 8.5%
five-year notes (net proceeds of $25.5 million). Until this date, Tandem
operated these facilities under a lease agreement with a purchase option. The
carrying value of the seven facilities was $21.5 million. The Company applied
$12.4 million of the proceeds to reduce bank debt and, as a result recorded a
gain on the sale of the assets of $4.0 million, inclusive of the deferred gain
of $2.2 million from the sale of two leased nursing properties in April 2001.
The Company deferred the gain from the April 2001 transaction in accordance with
Statement of Financial Accounting Standard No. 66. The May 2002 transaction also
involved the conversion of $1.9 million in preferred shares received in the
April 2001 transaction into $1.9 million 8.5% notes, due in April 2006.
In May 2002, the Company recorded a provision for closure and exit costs
relating to the divested Florida operations of $5.3 million relating to cost
report settlement issues, and the settlement of claims with suppliers and
employees.
7
Below is a summary of activity of the accrued liabilities balance relating
to divested operations and facility closures:
RESIDENT
EMPLOYEE LIABILITY AND RENT OTHER
TERMINATION OTHER CLAIMS EXPENSE EXPENSES(1) TOTAL
----------- ------------ ------- ----------- -----
(IN THOUSANDS)
Balance December 31, 2000... 32 -- 698 2,784 3,514
Cash Payments............. (1,377) (1,113) (234) (5,016) (7,740)
Provisions................ 1,399 3,163 (464) 8,130 12,228
-------- ------- ------ ------- --------
Balance December 31, 2001... 54 2,050 -- 5,898 8,002
-------- ------- ------ ------- --------
Cash Payments............. -- (1,231) -- (3,460) (4,691)
Provisions(2)............. -- 295 -- 6,112 6,407
-------- ------- ------ ------- --------
Balance December 31, 2002... 54 1,114 -- 8,550 9,718
Cash Payments............. -- (572) -- (376) (948)
-------- ------- ------ ------- --------
Balance June 30, 2003....... $ 54 $ 542 $ -- $ 8,174 $ 8,770
======== ======= ====== ======= ========
(1) The liability for other expenses consists of amounts reserved for cost
report and other settlements with the states of Florida and Texas and other
Medicare fiscal intermediaries, collection of receivables, and settlement of
claims with suppliers and employees.
(2) The provision of $6.4 million for 2002 includes the provision for closure
and exit costs of $5.3 million and selling expenses relating to the sale of
assets to Tandem and other items of $1.1 million.
4. ACQUISITION OF PREVIOUSLY-LEASED FACILITIES
On October 1, 2002 the Company completed a transaction in which it
exercised its right to acquire seven previously-leased nursing facilities in the
states of Ohio and Indiana for $17.9 million. The purchase included cash of $7.4
million and a $10.5 million interest bearing 10-year note. Negotiation on the
interest rate continues with the vendor who holds the note and, failing any
agreement, will be settled through arbitration.
5. OTHER ASSETS
The Company is pursuing settlement of a number of outstanding Medicaid and
Medicare receivables. As of June 30, 2003 the balance of outstanding Medicaid
and Medicare receivables was $44.2 million, net of an allowance of $15.4
million. For one specific issue involving the allocation of overhead costs
totaling $14.8 million, the first of three specific claim years was presented to
the Provider Reimbursement Review Board ("PRRB") at a hearing on January 30,
2003. The hearing procedures were discontinued after the parties negotiated a
methodology for resolution of the claim, and an administrative resolution has
been signed by the Fiscal Intermediary ("FI") and the Company to settle the
amount, which will be determined later in 2003. For another specific issue
involving a staffing cost matter totaling $7.3 million, a settlement of the
first year of seven specific claim years was reached prior to the PRRB hearing,
and the Company continues to negotiate the remaining years in dispute with the
FI. For both issues, further negotiations on the remaining years under appeal
are to occur during 2003.
6. LINE OF CREDIT AND LONG-TERM DEBT
On June 28, 2002, the Company completed a private placement of $150 million
of its 9.5% Senior Notes due July 1, 2010 (the "Senior Notes") which were issued
at a discount of 0.25% of par to yield 9.54%. In January 2003, the Company
completed its offer to exchange new 9.5% Senior Notes due 2010 that have been
registered under the Securities Act of 1933 for the Notes issued in June 2002.
The terms of the new Senior Notes are identical to the terms of the Senior Notes
issued in June 2002 and are guaranteed by all existing and future active
subsidiaries of the Company.
The Company used the proceeds of $149.6 million from the Senior Notes to pay
related fees and expenses of $8.3 million, to retire $124.5 million of
indebtedness outstanding under its previous credit facility and term loans, to
refinance $6.3 million of other debt, and for general corporate purposes. The
retirement of the previous credit facility resulted in a loss on early
8
retirement of debt of $2.8 million ($1.7 million after income taxes). Also on
June 28, 2002, the Company entered into an interest rate swap agreement and an
interest rate cap agreement. See Note 7 for terms of these agreements.
Concurrent with the sale of the Senior Notes, the Company established a new
five-year $105 million senior secured revolving credit facility (the "Credit
Facility") that is used to back letters of credit and for general corporate
purposes. Borrowings under the Credit Facility bear interest, at the Company's
option, at the Eurodollar rate or the prime rate, plus applicable margins,
depending upon the Company's leverage ratio. As of June 30, 2003 the Company had
no borrowings under the Revolving Credit Facility. The unused portion of the
Revolving Credit Facility, that is available for working capital and corporate
purposes, after reduction for outstanding letters of credit of $41.4 million,
was $63.6 million as of June 30, 2003.
The Senior Notes and the Credit Facility contain a number of covenants,
including: restrictions on the payment of dividends by the Company; limitations
on capital expenditures, investments, redemptions of the Company's common stock
and changes of control of the Company; as well as financial covenants, including
fixed charge coverage, debt leverage, and tangible net worth ratios. The Company
is required to make mandatory prepayments of principal upon the occurrence of
certain events, such as certain asset sales and certain issuances of securities.
The Company is permitted to make voluntary prepayments at any time under the
Credit Facility. The Senior Notes are redeemable at the option of the Company
starting on July 1, 2006. The redemption prices, if redeemed during the 12-month
period beginning on July 1 of the year indicated, are as follows:
YEAR PERCENTAGE
---- ----------
2006................. 104.750%
2007................. 102.375%
2008 and thereafter.. 100.000%
The Company is in compliance with the financial covenants as of June 30,
2003.
The Company has no independent assets or operations, the guarantees of the
Senior Notes are full and unconditional, and joint and several, and any of the
Company's subsidiaries that do not guarantee the Senior Notes are minor.
7. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Objectives and Strategies Prior to Issuance of Senior Notes
Prior to the issuance of the Senior Notes in June 2002, the Company had
variable-rate long-term debt of approximately $124.5 million, which exposed the
Company to variability in interest payments due to changes in interest rates.
The Company hedged a portion of its variable-rate debt through interest rate
swaps designated as cash-flow hedges with a notional amount of $25 million
maturing in February 2003 under which the Company received variable interest
rate payments and made fixed-rate interest payments. When the Company issued the
fixed-rate Senior Notes these interest rate swaps were terminated by the Company
in June 2002 with a cash payment of $0.6 million and charged to loss on early
retirement of debt.
Objectives and Strategies After Issuance of Senior Notes
After the issuance of the Senior Notes, all but $32 million of the Company's
outstanding debt obligations have fixed interest rates. In June 2002, the
Company entered into an interest rate swap (used to hedge the fair value of
fixed-rate debt obligations) with a notional amount of $150 million maturing in
December 2007. Under this swap, the Company pays a variable rate of interest
equal to the one-month London Interbank Borrowing rate ("LIBOR") (1.18% as of
June 30, 2003), adjustable monthly, plus a spread of 4.805% and receives a fixed
rate of 9.35%. Under the terms of the interest rate swap, the counterparty can
call the swap upon 30 days notice. This swap is designated as a fair value hedge
and, as a result, changes in the market value of the swap had no impact on the
income statement during 2002 or 2003.
Also in June 2002, the Company entered into an interest rate cap with a
notional amount of $150 million maturing in December 2007. Under this cap, the
Company pays a fixed rate of interest equal to 0.24% and receives a variable
rate of interest equal to the excess, if any, of the one-month LIBOR rate,
adjusted monthly, over the cap rate of 7%. Under the terms
9
of the interest rate cap, the counterparty can call the cap upon 30 days notice.
A portion of the interest rate cap with a notional amount of $32 million is
designated as a hedging instrument (cash-flow hedge) to effectively limit
possible increases in interest payments under variable-rate debt obligations.
The remainder of the interest rate cap with a notional amount of $118 million is
used to offset increases in variable-rate interest payments under the interest
rate swap to the extent one-month LIBOR exceeds 7%. This portion of the interest
rate cap is not designated as a hedging instrument under SFAS 133.
Quantitative Disclosures
Changes in the fair value of a derivative that is highly effective and that
is designated and qualifies as a fair-value hedge, along with the loss or gain
on the hedged asset or liability of the hedged item that is attributable to the
hedged risk, are recorded in earnings. Changes in the fair value of cash flow
hedges are reported as Accumulated Other Comprehensive Income ("AOCI") as a
component of Shareholder's Equity. Changes in the fair value of the portion of
the interest rate cap not designated as a hedging instrument is reported in
earnings. As of June 30, 2003, the fair value of the interest rate swap
designated as a fair value hedge is an asset of $6.7 million and is offset by a
liability of $6.7 million relating to the change in market value of the hedged
item (long-term debt obligations). The fair value of the cash-flow hedges is a
liability recorded in other long-term liabilities of $0.2 million as of June 30,
2003 and the loss charged to AOCI (net of income tax effect) for the six months
ended June 30, 2003 was $24,000. The fair value of the portion of the interest
rate cap not designated as a hedging instrument is a liability recorded in other
long-term liabilities as of June 30, 2003 of $1.0 million. During the remainder
of 2003, none of the gains or losses in AOCI (net of income tax effect) related
to the interest rate cap are expected to be reclassified into interest expense
as a yield adjustment of the hedged debt obligation.
8. COMMITMENTS AND CONTINGENCIES
Capital Expenditures
At June 30, 2003, the Company had capital expenditure purchase commitments
outstanding of approximately $4.2 million relating to on-going capital
improvements and purchases. In addition, the Company has entered into
construction agreements for the expansion of four assisted living facilities (86
units) and two skilled nursing facilities (38 beds) and the addition of one new
assisted living facility (40 units). These projects are expected to be completed
in 2004 at an approximate cost of $15.0 million and capital expenditure
commitments totaling $12.0 million have been made.
Insurance and Self-insured Liabilities
The Company insures certain risks with affiliated insurance subsidiaries of
Extendicare and third party insurers. The insurance policies cover comprehensive
general and professional liability (including malpractice insurance) for the
Company's health providers, assistants and other staff as it relates to their
respective duties performed on the Company's behalf, property coverage, workers'
compensation and employers' liability in amounts and with such coverage and
deductibles as determined by the Company, based on the nature and risk of its
businesses, historical experiences, availability and industry standards. The
Company also self-insures for health and dental claims, in certain states for
workers' compensation and employers' liability and for general and professional
liability claims. Self-insured liabilities with respect to general and
professional liability claims are included within the accrual for self-insured
liabilities.
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
healthcare providers. The Company is diligently addressing these regulatory
efforts.
10
Omnicare Preferred Provider Agreement
In 1998, the Company disposed of its pharmacy operations to Omnicare, Inc.
("Omnicare"). Subsequently, the Company entered into a Preferred Provider
Agreement with Omnicare, the terms of which enabled Omnicare to execute Pharmacy
Service Agreements and Consulting Service Agreements with all of the Company's
skilled nursing facilities. Under the terms of the agreement, the Company
secured "per diem" pricing arrangements for pharmacy supplies for the first four
years of the Agreement, which period expired December 2002. The Preferred
Provider Agreement contains a number of provisions which involve sophisticated
calculations to determine the "per diem" pricing during this first four-year
period. Under the "per diem" pricing arrangement, pharmacy costs fluctuate based
upon occupancy levels in the facilities. The "per diem" rates were established
assuming a declining "per diem" value over the initial four years of the
contract to coincide with the phase-in of the Medicare Prospective Payment
System ("PPS") rates. Omnicare subsequently asserted that "per diem" rates for
managed care and Medicare beneficiaries are subject to an upward adjustment
based upon a comparison of per diem rates to pricing models based on Medicaid
rates.
In 2001, the Company and Omnicare brought a matter to arbitration, involving
a "per diem" pricing rate billed for managed care residents. This matter was
subsequently settled and amounts reflected in the financial results. The parties
are currently negotiating the pricing of drugs for Medicare residents and should
this matter not be settled, the matter will be taken to arbitration. Provision
for settlement of this claim is included within the financial statements.
In 2002, in connection with its agreements to provide pharmacy services to
the Company, Omnicare requested arbitration for an alleged lost profits claim
related to the Company's disposition of assets, primarily in Florida. Damage
amounts, if any, cannot be reasonably estimated based on information available
at this time. An arbitration hearing has not yet been scheduled. The Company
believes it has interpreted correctly and has complied with the terms of the
Preferred Provider Agreement. However, there can be no assurance that other
claims will not be made with respect to the agreement.
9. COMPREHENSIVE INCOME
Comprehensive Income is as follows for the periods shown (dollars in
thousands):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
NET EARNINGS ................................. $ 4,181 $ 507 $ 6,469 $ 2,164
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gain (loss) on investments,
before tax ............................ 1,427 (342) 2,550 (1,200)
Gain (loss) on cash flow hedges,
before tax ............................ (72) 818 (58) 1,576
------- ------- ------- -------
Other comprehensive income, before tax ... 1,355 476 2,492 376
Income tax provision related to items
of other comprehensive income ......... 542 149 987 71
------- ------- ------- -------
Other comprehensive income, net of tax ... 813 327 1,505 305
------- ------- ------- -------
COMPREHENSIVE EARNINGS ....................... $ 4,994 $ 834 $ 7,974 $ 2,469
======= ======= ======= =======
11
10. UNCERTAINTIES AND CERTAIN SIGNIFICANT RISKS
Medicare and Medicaid funding
The Company's earnings are highly contingent on Medicare and Medicaid
funding rates, and the effective management of staffing and other costs of
operations which are strictly monitored through state and federal regulatory
authorities. 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 healthcare 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.
The incremental Medicare relief packages received from the Balanced Budget
Refinement Act of 1999 ("BBRA") and Benefits Improvement and Protection Act of
2000 ("BIPA") provided a total of $2.7 billion in temporary Medicare funding
enhancements to provide some interim relief to the long-term care industry. The
funding enhancements implemented by the BBRA and BIPA fall into two categories.
The first category is "Legislative Add-ons", which included a 16.66% add-on to
the nursing component of the Resource Utilization Groupings ("RUGs") rate and a
4% base adjustment. The second category is "RUGs Refinements" which involves an
initial 20% add-on for 15 RUGs categories identified as having high intensity,
non-therapy ancillary services. The 20% add-ons from three RUGs categories were
later redistributed to 14 rehabilitation categories at an add-on rate of 6.7%
each.
On September 30, 2002 the Legislative Add-ons expired resulting in a
reduction in Medicare funding for all long-term care providers. The Company
estimates that based upon the Medicare case mix and census for the nine months
ended September 30, 2002, it received an average rate of $31.22 per resident day
related to the Legislative Add-ons. This decline in Medicare rates was partially
offset by a 2.6% market basket increase received on October 1, 2002. For the six
months ended June 30, 2003 the average daily Medicare Part A rate was $292.33,
as compared to $311.77 for the six months ended June 30, 2002. Based upon the
Medicare case mix and census for the six months ended June 30, 2003, the lower
average Medicare Part A rate, primarily resulting from the loss of the
Legislative Add-ons, reduced revenues by approximately $7.0 million for the six
months ended June 30, 2003 as compared to the six months ended June 30, 2002.
With respect to the RUGs Refinements, on April 23, 2002 the Centers for
Medicare and Medicaid Services ("CMS") announced that it would delay the
refinement of the RUGs categories thereby extending the related funding
enhancements for at least one additional year to September 30, 2003. In May
2003, CMS released a proposed rule to maintain the current RUGs classification
until October 1, 2004. Further to this, Congress enacted legislation directing
CMS to conduct a study of the RUGs classification system and report its
recommendations to Congress by January 2005. The proposed federal 2003/2004
budget extends the additional funding for the RUGs Refinements to September 30,
2004. Based upon the Medicare case mix and census for the six months ended June
30, 2003, the Company estimates that it received an average $23.79 per resident
day, which on an annualized basis amounts to $17.2 million related to the RUGs
Refinements. A decision to discontinue all or part of the enhancement could have
a significant impact on the Company.
In July 2003, CMS announced that the moratorium on implementing payment caps
for outpatient Part B therapy services, which were scheduled to take effect on
July 1, 2003, would be extended to September 1, 2003. The impact of a payment
cap cannot be reasonably estimated based on the information available at this
time, however, such a cap would reduce therapy revenues.
12
In February 2003, CMS announced its plan to reduce its level of
reimbursement for uncollectible Part A co-insurance. Under current law, skilled
nursing facilities are reimbursed 100% for any bad debts incurred. Over the next
three years, CMS plans to phase down the reimbursement level to 70% as follows:
90% effective for the government fiscal year commencing October 1, 2003; 80% for
the government fiscal year commencing October 1, 2004; and 70% for the
government fiscal year commencing October 1, 2005 and thereafter. This plan is
consistent with the bad debt reimbursement plan for hospitals. The Company
estimates that should this plan be implemented, the impact on net earnings would
be approximately $1.0 million in 2004, increasing to approximately $2.5 million
in 2006. These estimates are based upon historical experience and known state
reimbursement changes which may be different in the future and, as such, are
subject to change.
In June 2003, CMS announced a proposed cumulative forecast correction
("Administrative Fix") which would increase the Federal base payment rates by
3.26% effective October 1, 2003, for skilled nursing facilities. This would be
in addition to the annual market basket increase announced by CMS in May 2003.
The Administrative Fix increase of 3.26% and annual market basket increase of
3.0% have subsequently been confirmed through the release of the Federal
Register dated August 2003. Both increases are effective October 1, 2003. The
Company estimates that based on the Medicare case mix for the first six months
of 2003, these proposed increases would add approximately $9.80 and $8.75 per
Medicare day, respectively to the Company's average Medicare rates. Based on the
Medicare patient days of the first half of 2003, the combined increases amount
to additional annualized revenue of approximately $13.4 million going forward.
However, the impact of this increase in revenue will be tempered by higher labor
and other operating costs.
Assets from Divested Operations
Through the divestiture program in Texas and Florida, the Company has
assumed notes from the purchasers and retained ownership of certain nursing home
properties, which the Company leases to other unrelated long-term care
providers. In aggregate, as of June 30, 2003, the Company has $21.5 million in
notes receivables and $9.6 million in accounts receivable and owns $16.6 million
in nursing home properties in Texas and Florida. For the six months ended June
30, 2003 and 2002, the Company earned management and consulting fees of $0.5
million and $0.6 million, respectively, and rental revenue of $1.0 million and
$2.4 million, respectively, from properties owned and leased to unrelated
long-term care operators. As a result, the earnings and cash flow of the Company
could be influenced by the financial stability of these unrelated long-term care
providers.
Accrual for Self-Insured Liabilities
The Company has $47.8 million in accruals for self-insured liabilities as of
June 30, 2003. Though the Company has been successful in exiting from the states
of Texas and Florida and limiting future exposure to general liability claims in
these states, the timing and eventual settlement costs for these claims cannot
be precisely defined.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
OVERVIEW
Based on number of beds, we are one of the largest providers of long-term
care and related services in the United States. As of June 30, 2003, we operated
139 nursing facilities (14,088 beds) and 35 assisted living and retirement
facilities (1,732 units) located in 13 states. In addition, we managed 17
nursing facilities (2,254 beds) and five assisted living and retirement
facilities (156 units) and provided selected consulting services to 40 nursing
facilities (4,445 beds) and one assisted living facility (116 beds) owned by
third parties. In total, we operated, managed or provided selected consulting
services to 237 long-term care facilities (22,791 beds) in 16 states, of which
196 are nursing facilities (20,787 beds) and 41 are assisted living and
retirement facilities (2,004 units).
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements that
are intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical fact, including statements regarding anticipated
financial performance, business strategy and management's plans and objectives
for future operations, are forward-looking statements. These forward-looking
statements can be identified as such because the statements generally include
words such as "expect," "intend," "believe," "anticipate," "estimate," "plan" or
"objective" or other similar expressions. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in, or implied by, these statements. Some, but
not all, of the risks and uncertainties include those described in the "Risk
Factors of the Industry" section of our Annual Report on Form 10-K for the year
ended December 31, 2002 and include the following:
- Medicare and Medicaid reimbursement policies;
- resident care litigation, including exposure for punitive damage
claims and increased insurance costs, which among other things caused
us to exit Florida and Texas markets;
- the shortage of, and related costs of hiring and retraining
qualified staff and employees;
- federal and state regulation of our business;
- actions by our competitors; and
- fee pressures and slow payment practices by health maintenance
organizations and preferred provider organizations.
All forward-looking statements contained in this report are based upon
information available at the time the statement is made and we assume no
obligation to update any forward-looking statement.
14
REVENUES
We derive revenues by providing healthcare services in our network of
facilities, including long-term care services such as nursing care, assisted
living and other related medical services such as subacute care and
rehabilitative therapy. We derive nursing and assisted living facility revenues
by providing routine and ancillary services for our facilities' residents. We
derive outpatient therapy revenue by providing such services to outside third
parties at our clinics.
We generate our revenue from Medicare, Medicaid and private pay sources. The
following table sets forth our Medicare, Medicaid and private pay sources of
revenue by percentage of total revenue:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30,
-------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Medicare............................. 28.1% 25.5% 27.6% 25.5%
Medicaid............................. 47.7% 50.1% 48.3% 49.8%
Private Pay.......................... 24.2% 24.4% 24.1% 24.7%
LEGISLATIVE ACTIONS AFFECTING REVENUES
The Company's earnings are highly contingent on Medicare and Medicaid
funding rates, and the effective management of staffing and other costs of
operations which are strictly monitored through state and federal regulatory
authorities. 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 healthcare 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.
The incremental Medicare relief packages received from the Balanced Budget
Refinement Act of 1999 ("BBRA") and Benefits Improvement and Protection Act of
2000 ("BIPA") provided a total of $2.7 billion in temporary Medicare funding
enhancements to provide some interim relief to the long-term care industry. The
funding enhancements implemented by the BBRA and BIPA fall into two categories.
The first category is "Legislative Add-ons", which included a 16.66% add-on to
the nursing component of the Resource Utilization Groupings ("RUGs") rate and a
4% base adjustment. The second category is "RUGs Refinements" which involves an
initial 20% add-on for 15 RUGs categories identified as having high intensity,
non-therapy ancillary services. The 20% add-ons from three RUGs categories were
later redistributed to 14 rehabilitation categories at an add-on rate of 6.7%
each.
On September 30, 2002 the Legislative Add-ons expired resulting in a
reduction in Medicare funding for all long-term care providers. The Company
estimates that based upon the Medicare case mix and census for the nine months
ended September 30, 2002, it received an average rate of $31.22 per resident day
related to the Legislative Add-ons. This decline in Medicare rates was partially
offset by a 2.6% market basket increase received on October 1, 2002. For the six
months ended June 30, 2003 the average daily Medicare Part A rate was $292.33,
as compared to $311.77 for the six months ended June 30, 2002. Based upon the
Medicare case mix and census for the six months ended June 30, 2003, the lower
average Medicare Part A rate, primarily resulting from the loss of the
Legislative Add-ons, reduced revenues by approximately $7.0 million for the six
months ended June 30, 2003 as compared to the six months ended June 30, 2002.
With respect to the RUGs Refinements, on April 23, 2002 the Centers for
Medicare and Medicaid Services ("CMS") announced that it would delay the
refinement of the RUGs categories thereby extending the related funding
enhancements for at least one additional year to September 30, 2003. In May
2003, CMS released a proposed rule to maintain the current RUGs classification
until October 1, 2004. Further to this, Congress enacted legislation directing
CMS to conduct a study on the RUGs classification system and report its
recommendations to Congress by January 2005. The proposed federal 2003/2004
budget extends the additional funding for the RUGs Refinements to September 30,
2004. Based upon the Medicare case mix and census for the six months ended June
30, 2003, the Company estimates that it received an average $23.79 per resident
day, which on an annualized basis amounts to approximately $17.2 million related
to the RUGs
15
Refinements. A decision to discontinue all or part of the enhancement could have
a significant impact on the Company. In May 2003, CMS released a proposed rule
to maintain the current RUGs classification until October 1, 2004.
In June 2003, CMS announced a proposed cumulative forecast correction
("Administrative Fix") which would increase the Federal base payment rates by
3.26% effective October 1, 2003, for skilled nursing facilities. This would be
in addition to the annual market basket increase announced by CMS in May 2003.
The Administrative Fix increase of 3.26% and annual market basket increase of
3.0% have subsequently been confirmed through the release of the Federal
Register dated August 2003. Both increases are effective October 1, 2003. The
Company estimates that based on the Medicare case mix for the first six months
of 2003, these proposed increases would add approximately $9.80 and $8.75 per
Medicare day, respectively to the Company's average Medicare rates. Based on the
Medicare patient days of the first half of 2003, the combined increases amount
to additional annualized revenue of approximately $13.4 million going forward.
However, the impact of this increase in revenue will be tempered by higher labor
and other operating costs.
CRITICAL ACCOUNTING POLICIES
For a full discussion of our accounting policies as required by accounting
principles in the United States, refer to the accompanying notes to the
consolidated financial statements in our Annual Report on Form 10K for the year
ended December 31, 2002. Our disclosures in such report on Form 10K have not
materially changed since that report was filed. We consider our accounting
policies to be critical to an understanding of our financial statements because
their application requires significant judgement and reliance on estimations of
matters that are inherently uncertain. Specific risks relate to the accounting
policies applied in revenue recognition and the valuation of accounts
receivable, the valuation of assets and determination of asset impairment, the
accrual for self-insured liabilities and accounting for deferred income taxes.
SIGNIFICANT EVENTS IN 2003 AND 2002
ISSUANCE OF SENIOR NOTES
On June 28, 2002 we completed a private placement of $150 million of our
9.5% Senior Notes due July 1, 2010, which were issued at a discount of 0.25% of
par to yield 9.54%. In January 2003, we completed the offer to exchange our 9.5%
Senior Notes due 2010 that have been registered under the Securities Act of 1933
for the Notes issued in June 2002. The terms of the new Senior Notes are
identical to the terms of the Senior Notes issued in June 2002 and are
guaranteed by all of our existing and future active subsidiaries.
We used the proceeds of $149.6 million to pay $8.3 million of related fees
and expenses, retire $130.8 million of debt (consisting of $124.5 million
outstanding under the previous credit facility and term loans and $6.3 million
of other debt), and the remainder for general corporate purposes. We had hedged
a portion of our previous variable-rate long-term debt through an interest rate
swap with a notional amount of $25 million maturing in February 2003. Upon
refinancing of the debt, we terminated this swap with a cash payment of $0.6
million. This amount and other deferred financing costs related to the previous
credit facility resulted in a loss on early retirement of debt of $2.8 million
($1.7 million after income taxes) in June 2002.
PURCHASE OF PREVIOUSLY-LEASED FACILITIES
In October 2002, we purchased three skilled nursing facilities in Ohio and
four skilled nursing facilities in Indiana that we previously leased for an
aggregate purchase price of $17.9 million. The purchase price consisted of $7.4
million in cash and a $10.5 million ten-year note, which bears interest at a
rate under negotiation with the vendor, (currently being accrued at 10.5%).
Failing any agreement, the interest rate will be determined through arbitration.
16
ASSET DIVESTITURES AND PROVISION FOR CLOSURE AND EXIT COSTS
In May 2002, Tandem Health Care, Inc. exercised its option to purchase seven
properties that it leased from us in Florida for gross proceeds of $28.6
million, consisting of cash of $15.6 million and $13.0 million in 8.5% five-year
notes (net proceeds of $25.5 million). The carrying value of the seven
facilities was $21.5 million. We applied $12.4 million of the proceeds to reduce
our bank debt and, as a result, we recorded a gain on the sale of assets of $4.0
million, inclusive of the deferred gain of $2.2 million from the sale of two
leased nursing properties in April 2001 to Tandem. We deferred the gain from
this April 2001 transaction in accordance with Statement of Financial Accounting
Standard No. 66.
We review on an ongoing basis the level of our overall reserves for losses
related to our Florida and Texas operations, which reserves were initially
established when we decided to exit these states. See footnote 4 to our
consolidated financial statements in our Annual Report on Form 10K for the year
ended December 31, 2002. As a result of events which became known to us in 2002,
we concluded in the second quarter of 2002 that we should increase our overall
reserves by $5.3 million for cost report and other settlements with the state of
Florida and other Medicare fiscal intermediaries, collection of receivables, and
settlement of claims with suppliers and employees.
DEVELOPMENT OF NEW FACILITIES
In the second quarter of 2003, we entered into construction agreements for
the expansion of four assisted living facilities (86 units) and two skilled
nursing facilities (38 beds) and the addition of one new assisted living
facility (40 units). These projects are expected to be completed in 2004 at an
approximate cost of $15.0 million. Costs incurred through June 30, 2003 were
$0.3 million.
OTHER ITEMS
We continue to negotiate settlement on a number of outstanding Medicare and
Medicaid receivables. Normally such issues are resolved during an annual audit
process; however we record provisions for disagreements that require settlement
through a formal appeal process. For one specific issue involving the allocation
of overhead costs totaling $14.8 million, the first of three specific claim
years was presented to the Provider Reimbursement Review Board ("PRRB") at a
hearing on January 30, 2003. The hearing procedures were discontinued after the
parties negotiated a methodology for resolution of the claim, and an
administrative resolution has been signed by the Fiscal Intermediary ("FI")and
us to settle the amount, which will be determined later in 2003. For another
specific issue involving a staffing cost issue totaling $7.3 million, a
settlement of the first year of seven specific claim years was reached prior to
the PRRB hearing, and the Company continues to negotiate years in dispute with
the FI. Further negotiations on the remaining years under appeal are to occur
during 2003. As of June 30, 2003 we had $59.6 million in gross Medicare and
Medicaid settlement receivables with a related allowance for doubtful accounts
of $15.4 million. The net amounts receivable represents our estimate of the
amount collectible on Medicare and Medicaid prior period cost reports.
We entered into a Preferred Provider Agreement with Omnicare, Inc.
("Omnicare") pursuant to the divestiture of its pharmacy operation in 1998. We
and Omnicare are currently negotiating the 2001 and 2002 pricing of drugs for
Medicare residents and, should this matter not be settled, the matter will be
taken to arbitration. In connection with its agreement to provide pharmacy
services, Omnicare has requested arbitration for an alleged lost profits claim
relating to our disposition of assets, primarily in Florida. Damage amounts, if
any cannot be reasonably estimated based on information available at this time.
An arbitration hearing for this matter has not been scheduled. We believe that
we have interpreted correctly and complied with the terms of the Preferred
Provider Agreement. However, there can be no assurances that other claims will
not be made with respect to this agreement.
17
RESULTS FROM OPERATIONS:
The following table sets forth details of revenues and earnings as a
percentage of total revenues:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Nursing and assisted living centers ............. 96.7% 96.6% 96.8% 96.5%
Outpatient therapy .............................. 1.4 1.3 1.3 1.3
Other ........................................... 1.9 2.1 1.9 2.2
----- ----- ----- -----
100.0 100.0 100.0 100.0
Expenses:
Operating and general and administrative costs .. 87.5 87.7 88.4 87.9
Lease, depreciation and amortization ............ 5.4 6.0 5.4 6.1
Interest, net ................................... 3.8 3.6 3.7 3.8
Gain on disposal of assets ...................... -- (2.0) -- (1.0)
Provision for closure and exit costs ............ -- 2.6 -- 1.3
Loss on early retirement of debt................. -- 1.4 -- 0.7
----- ----- ----- -----
Earnings before taxes ........................... 3.3 0.7 2.5 1.2
Income tax expense .............................. 1.3 0.4 1.0 0.6
----- ----- ----- -----
NET EARNINGS .................................... 2.0% 0.3% 1.5% 0.6%
===== ===== ===== =====
Average occupancy in our long-term care facilities was as follows:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30,
-------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Skilled nursing facilities............................... 91.2% 89.8% 91.3% 89.7%
Assisted living facilities............................... 85.6% 83.0% 85.5% 82.4%
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002
Our key Medicare and Medicaid results and statistics for our nursing
operations, including ancillary revenues, for the three months ended June 30,
2003 ("2003 quarter") and the three months ended June 30, 2002 ("2002 quarter")
are summarized as follows:
MEDICARE MEDICAID
---------------------------------------- ---------------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
---- ---- ------ ---- ---- ------
Average daily rate ...... $ 322 $ 337 (4.4%) $ 129 $ 127 1.6%
Residents as a percent of
total census........... 15.6 13.0 20.0% 67.2 68.8 (2.3%)
Average daily census .... 1,999 1,645 21.5% 8,623 8,710 (1.0%)
18
The Medicare Part A average daily rate decreased from $311.24 for the 2002
quarter to $293.83 for the 2003 quarter, primarily relating to the loss of
Legislative Add-ons as discussed above.
REVENUES
Revenues in the 2003 quarter were $213.3 million, representing an increase
of $11.5 million, or 5.7%, from $201.8 million in the 2002 quarter. Outpatient
therapy and other revenues increased by $0.2 million.
Revenues from nursing and assisted living facilities increased $11.3 million
due to:
- an increase in Medicare residents from 13.0% of total residents in the
2002 quarter to 15.6% in the 2003 quarter, which increased revenues by
$4.5 million;
- a 1.4% increase in nursing resident census from an average daily census of
12,650 in the 2002 quarter to 12,827 in the 2003 quarter, which increased
revenues by $3.3 million;
- a 2.8% increase in the average daily nursing Medicaid rate, which
increased revenues by $2.7 million;
- increases in other average daily nursing rates, which resulted in
additional revenues of $2.6 million;
- an increase in nursing ancillary revenues of $2.0 million, primarily due
to increased therapy services; and
- an increase in assisted living revenues of $0.6 million due to increased
occupancy and higher rates;
These increases were offset by a decrease of $3.2 million in Medicare
revenue primarily relating to the expiration of the Legislative Add-ons as of
October 1, 2002 and a decrease of $1.2 million when comparing the 2003 quarter
with the 2002 quarter due to more favorable Medicaid cost settlements in 2002.
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
Operating and general and administrative costs increased $9.9 million, or
5.6%, between periods, and included increases of:
- wages and benefits of $4.2 million and contracted staffing for food and
laundry services of $1.1 million totaling $5.3 million, or a 4.2%
increase, of which 3.5% is attributable to wage rate increases;
- drug expense of $1.0 million due to higher resident census, Medicare mix
and drug prices;
- supplies expense of $0.7 million primarily due to higher occupancy;
- professional fees expense of $0.7 million primarily due to nursing
consulting;
- state assessments and bed taxes of $0.4 million;
- bad debt expense of $0.4 million; and
- other operating and general and administrative expenses of $1.4 million.
LEASE COSTS, DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased $0.3 million to $9.1 million for the
2003 quarter compared to $9.4 million for the 2002 quarter. Lease costs
decreased $0.4 million when comparing periods, including $0.5 million as a
result of the purchase of previously leased facilities in 2002, offset by an
increase of $0.1 million relating to other facilities that we continue to
operate.
19
INTEREST
Interest expense, net of interest income, increased $0.9 million to $8.1
million for the 2003 quarter compared to $7.2 million for the 2002 quarter. The
weighted average interest rate of all long-term debt increased to 7.79% during
the 2003 quarter compared to approximately 7.14% during the 2002 quarter. Net
interest expense was net of net interest income of $1.2 million from interest
rate swaps in the 2003 quarter and included $0.2 million of net interest expense
from interest rate swaps in the 2002 quarter. The average debt level increased
to $397.9 million during the 2003 quarter compared to $377.5 million during the
2002 quarter.
LOSS (GAIN) ON DISPOSAL OF ASSETS AND PROVISION FOR CLOSURE AND EXIT COSTS AND
OTHER ITEMS
For 2002, we recorded a gain on disposal of assets of $4.0 million relating
to the sale of seven properties in Florida to Tandem Health Care, Inc. and a
provision for closure and exit costs of $5.3 million. The gain of $4.0 million
includes a deferred gain of $2.2 million from the April 2001 sale of two other
properties to Tandem. We deferred the gain from the April 2001 transaction in
accordance with Statement of Financial Accounting Standard No. 66. The provision
for closure and exit costs relates to an increase in the overall disposition
reserve for cost report and other settlements with the states of Florida and
Texas and other Medicare FIs, collection of receivables, and settlement of
claims with suppliers and employees.
LOSS ON EARLY RETIREMENT OF DEBT
Loss on early retirement of debt was $2.8 million ($1.7 million after income
taxes) for the 2002 quarter due to the retirement in June 2002 of our credit
facility using proceeds from the issuance of the Senior Notes.
INCOME TAXES
Income tax expense for the 2003 quarter was $2.8 million compared to $0.9
million for the 2002 quarter. Our effective tax rate was 40.0% for the 2003
quarter as compared to 64.5% for the 2002 quarter. The tax rate for the 2002
quarter was higher due to the reversal of current and prior year state deferred
income tax benefits in the 2002 quarter. When we assess the realizability of
deferred tax assets, we consider whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized and record a
valuation allowance, if required. The ultimate realization of deferred tax
assets depends upon us generating future taxable income during the periods in
which those temporary differences become deductible. We consider the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies when we make this assessment.
NET EARNINGS
Net earnings for the 2003 quarter were $4.2 million compared to $0.5 million
for the 2002 quarter. The improvement in net earnings is due to the reasons
described herein.
RELATED PARTY TRANSACTIONS
We insure certain risks, including comprehensive general liability, property
coverage, excess workers' compensation and employer's liability insurance, with
Laurier Indemnity Company and Laurier Indemnity Ltd., affiliated insurance
subsidiaries of Extendicare Inc. We recorded approximately $2.7 million and $3.1
million of expenses for this purpose for the three months ended June 30, 2003
and 2002, respectively.
We purchase computer hardware and software support services from Virtual
Care Provider, Inc., an affiliated subsidiary of Extendicare Inc. Expenses
related to these services were $1.7 million and $2.1 million for the three
months ended June 30, 2003 and 2002, respectively.
20
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
Our key Medicare and Medicaid results and statistics for our nursing
operations, including ancillary revenues, for the six months ended June 30, 2003
("2003 period") and the six months ended June 30, 2002 ("2002 period) are
summarized as follows:
MEDICARE MEDICAID
---------------------------------- --------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
---- ---- ------ ---- ---- ------
Average daily rate ...... $ 320 $ 337 (5.0%) $ 130 $ 126 3.2%
Residents as a percent of
total census.......... 15.4 13.0 18.5% 67.3 68.7 (2.0%)
Average daily census .... 1,983 1,643 20.7% 8,649 8,681 (0.4%)
The Medicare Part A average daily rate decreased from $311.77 for the 2002
period to $292.33 for the 2003 period, primarily relating to the loss of
Legislative Add-ons as discussed above.
REVENUES
Revenues in the 2003 period were $424.7 million, representing an increase of
$24.7 million, or 6.2%, from $400.0 million in the 2002 period. Outpatient
therapy and other revenues declined by $0.4 million in the 2003 period primarily
due to the sale of facilities to Tandem, which reduced lease revenue.
Revenues from nursing and assisted living facilities increased $25.1
million in the 2003 period due to:
- a 1.7% increase in nursing resident census from an average daily census of
12,634 for the 2002 period to 12,851 in the 2003 period, which increased
revenues by $7.4 million;
- an increase in Medicare residents from 13.0% of total residents in the
2002 period to 15.4% in the 2003 period, which increased revenues by $8.5
million;
- a 3.1% increase in the average daily nursing Medicaid rate, which
increased revenues by $5.9 million;
- increases in other average daily nursing rates, which resulted in
additional revenues of $4.7 million;
- an increase in nursing ancillary revenues of $3.8 million, primarily due
to increased therapy services;
- a recovery of $1.5 million in Medicaid revenues as the outcome of a
favorable court decision in the State of Ohio relating to the recovery of
alleged government overpayments for adjudicated Medicaid cost report
periods. We continue to review prior year cost report settlements as they
relate to the court's decision; and
- an increase in assisted living revenues of $1.3 million due to increased
occupancy and higher rates.
These increases were offset by a decrease of $7.0 million in Medicare
revenue primarily relating to the expiration of the Legislative Add-ons as of
October 1, 2002 and a decrease of $1.0 million when comparing the 2003 period to
the 2002 period due to more favorable Medicaid cost settlements in 2002.
21
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
Operating and general and administrative costs increased $23.4 million, or
6.6%, between the 2003 period and the 2002 period, and included increases of:
- wages and benefits of $12.7 million and contracted staffing for food and
laundry services of $3.4 million totaling $16.1 million, or a 6.4%
increase, of which 4.6% is attributable to wage rate increases;
- drug expense of $1.9 million due to higher resident census, Medicare mix
and drug prices;
- supplies expense of $1.6 million primarily due to higher occupancy;
- state assessments and bed taxes of $0.8 million;
- professional fees expense of $0.6 million primarily due to nursing
consulting; and
- other operating and general and administrative expenses of $2.4 million.
LEASE COSTS, DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased $0.5 million to $18.3 million for
the 2003 period compared to $18.8 million for the 2002 period. Lease costs
decreased $1.2 million when comparing periods, including $1.0 million as a
result of the purchase of previously leased facilities in 2002 and $0.2 million
relating to other facilities that we continue to operate.
INTEREST
Interest expense, net of interest income, increased $0.7 million to $15.9
million for the 2003 period compared to $15.2 million for the 2002 period. The
weighted average interest rate of all long-term debt increased to 7.76% during
the 2003 period compared to approximately 7.49% during the 2002 period. Net
interest expense was net of net interest income of $2.3 million from interest
rate swaps in the 2003 period and included $0.7 million of net interest expense
from interest rate swaps in the 2002 period. The average debt level increased to
$398.0 million during the 2003 period compared to $380.8 million during the 2002
period.
LOSS (GAIN) ON DISPOSAL OF ASSETS AND PROVISION FOR CLOSURE AND EXIT COSTS AND
OTHER ITEMS
For 2002, we recorded a gain on disposal of assets of $4.0 million relating
to the sale of seven properties in Florida to Tandem Health Care, Inc. and a
provision for closure and exit costs of $5.3 million. The gain of $4.0 million
includes a deferred gain of $2.2 million from the April 2001 sale of two other
properties to Tandem. We deferred the gain from the April 2001 transaction in
accordance with Statement of Financial Accounting Standard No. 66. The provision
for closure and exit costs relates to an increase in the overall disposition
reserve for cost report and other settlements with the states of Florida and
Texas and other Medicare fiscal intermediaries, collection of receivables, and
settlement of claims with suppliers and employees.
LOSS ON EARLY RETIREMENT OF DEBT
Loss on early retirement of debt was $2.8 million ($1.7 million after income
taxes) for the 2002 period due to the retirement in June 2002 of our credit
facility using proceeds from the issuance of the Senior Notes.
INCOME TAXES
Income tax expense for the 2003 period was $4.3 million compared to $2.2
million for the 2002 period. Our effective tax rate was 40.1% for the 2003
period as compared to 50.8% for the 2002 period. The tax rate for the 2002
period was higher because of the reversal of current and prior year state
deferred income tax benefits in the 2002 quarter. When we assess the
realizability of deferred tax assets, we consider whether it is more likely than
not that some portion or all of the deferred tax
22
assets will not be realized and record a valuation allowance, if required. The
ultimate realization of deferred tax assets depends upon us generating future
taxable income during the periods in which those temporary differences become
deductible. We consider the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies when we make this
assessment.
NET EARNINGS
Net earnings for the 2003 period were $6.5 million compared to $2.2 million
for the 2002 period. The improvement in net earnings is due to the reasons
described herein.
RELATED PARTY TRANSACTIONS
We insure certain risks, including comprehensive general liability, property
coverage, excess workers' compensation and employer's liability insurance, with
Laurier Indemnity Company and Laurier Indemnity Ltd., affiliated insurance
subsidiaries of Extendicare Inc. We recorded approximately $5.1 million and $5.3
million of expenses for this purpose for the 2003 period and 2002 period,
respectively.
We purchase computer hardware and software support services from Virtual
Care Provider, Inc., an affiliated subsidiary of Extendicare Inc. Expenses
related to these services were $3.5 million and $3.8 million for the 2003 period
and 2002 period, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $38.9 million at June 30, 2003 and $27.0
million at December 31, 2002. We generated cash flow of $22.0 million from
operating activities for the six months ended June 30, 2003 compared with $20.2
million in the comparable 2002 period. The increase was due to an improvement in
earnings and a reduction of $4.2 million in payments for self-insured
liabilities.
Our working capital increased $17.2 million from $38.0 million at December
31, 2002 to $55.2 million at June 30, 2003. The increase included a $7.3 million
net decrease in accounts payable, accrued liabilities and current portion of
accrual for self-insured liability and an increase in supplies, inventories and
other current assets of $1.1 million. These increases in working capital were
partially offset by a $5.2 million decrease in accounts receivable.
Accounts receivable at June 30, 2003 were $98.9 million compared with $104.1
million at December 31, 2002, representing a decrease of $5.2 million. The
reduction in accounts receivable included a $4.9 million decrease within the
nursing operations, an increase of $0.1 million within the outpatient therapy
operations and a $0.4 million decrease in receivables from long-term care
operators for which we provide management and consulting services. Within the
nursing operations, billed patient care and other receivables decreased $2.8
million and third-party payor settlement receivables, based on Medicare and
Medicaid cost reports, decreased $2.1 million. The decrease in billed patient
care receivables of $2.8 million includes a decrease of $5.8 million due to our
improved collection efforts. The remaining increase of $3.0 million was due to
rate increases.
The decrease in settlement receivables of $2.1 million from December 31,
2002 to June 30, 2003 included decreases of $0.8 million from collections of
Medicare settlements, $3.6 million for collections of Medicare co-insurance
amounts recorded as revenue in 2002 and $2.8 million for Medicaid cost report
settlements. These decreases were partially offset by an increase of $5.1
million in revenue in the 2003 period for anticipated Medicare reimbursement for
uncollectible co-insurance amounts.
Property and equipment decreased $7.6 million from December 31, 2002 to a
total of $445.5 million at June 30, 2003. The decrease was the result of
depreciation expense of $16.4 million and asset disposals of $0.1 million. These
decreases were partially offset by capital expenditures of $8.9 million.
23
Total borrowings, including bank indebtedness and both current and long-term
maturities of debt, totaled $398.5 million at June 30, 2003. This represents a
decrease of $2.3 million from December 31, 2002. This decrease is due to
repayments.
The weighted average interest rate of all of our long-term debt was 7.57% at
June 30, 2003 and 7.76% for the 2003 period (including the effects of the
interest rate swap and cap) and such debt had maturities ranging from 2003 to
2014.
As of June 30, 2003, our parent, Extendicare Inc., held $27.9 million, or
14.0%, of our outstanding Senior Subordinated Notes.
Cash used in investing activities was $8.3 million for the six months ended
June 30, 2003 compared to $8.3 million provided from investing activities for
the comparable 2002 period. The change of $16.6 million was primarily due to
proceeds in 2002 from the sale of property and equipment of $14.3 million, an
increase in 2003 of $1.4 million in purchases of property and equipment and a
decrease in 2003 in the collection of notes receivable of $0.9 million.
Cash used in financing activities was $1.9 million for the 2003 period
compared to $0.6 million in the comparable 2002 period. The increase of $1.3
million primarily relates to the payoff of debt in June 2002 using proceeds from
the issuance of new debt as described below.
On June 28, 2002, we refinanced all outstanding indebtedness under our then
existing credit facility with the proceeds from the issuance of our 9.5% Senior
Notes due 2010 and we entered into a new credit facility that provides senior
secured financing of up to $105.0 million on a revolving basis. As of June 30,
2003, we did not have any borrowings outstanding under this new credit facility,
but we had $41.4 million of letters of credit outstanding thereunder. The new
credit facility will terminate on June 28, 2007. Borrowings drawn during the
first four fiscal quarters following closing of the new credit facility will
initially bear interest, at our option, at an annual rate equal to:
- LIBOR, plus 3.50%; or
- the Base Rate, as defined in our new credit facility, plus 2.50%;
thereafter, in each case, subject to adjustments based on financial performance.
Our obligations under the new credit facility are guaranteed by:
- Extendicare Holdings, Inc., our direct parent;
- each of our current and future domestic subsidiaries excluding certain
inactive subsidiaries; and
- any other current or future foreign subsidiaries that guarantee or
otherwise provide direct credit support for any U.S. debt obligations of
ours or any of our domestic subsidiaries.
Our obligations are secured by a perfected first priority security interest
in certain of our tangible and intangible assets and all of our and our
subsidiary guarantors' capital stock. The new credit facility is also secured by
a pledge of 65% of the voting stock of our and our subsidiary guarantors'
foreign subsidiaries, if any. Our new credit facility contains customary
covenants and events of default and is subject to various mandatory prepayments
and commitment reductions. The new credit facility requires that we comply with
various financial covenants, on a consolidated basis including:
- a minimum fixed charge coverage ratio starting at 1.10 to 1 and increasing
to 1.20 to 1 in 2005;
- a minimum tangible net worth starting at 85% of our tangible net worth at
March 31, 2002 and increasing by 50% of our net income for each fiscal
quarter plus 100% of any additional equity we raise;
- a maximum senior leverage ratio starting at 4.25 to 1 and reducing to 4.00
to 1 in 2005; and
- a maximum senior secured leverage ratio starting at 1.75 to 1 and reducing
to 1.50 to 1 in 2005.
24
We are in compliance with these financial covenants as of June 30, 2003.
To hedge our exposure to fluctuations in the market value of the Senior
Notes, we entered into a five-year interest rate swap contract with a notional
amount of $150 million. The contract effectively converted up to $150 million of
our fixed interest rate indebtedness into variable interest rate indebtedness.
Also in June 2002, we entered into a five-year interest rate cap with a
notional amount of $150 million. Under this cap, we pay a fixed rate of interest
equal to 0.24% and receive a variable rate of interest equal to the excess, if
any, of the one-month LIBOR rate, adjusted monthly, over the cap rate of 7%. We
use the interest rate cap to offset possible increases in interest payments
under the interest rate swap caused by increases in market interest rates over a
certain level and also as a cash flow hedge to effectively limit increases in
interest payments under our variable-rate debt obligations. Under the terms of
the interest rate cap, the counterparty can call the cap upon 30 days notice.
We believe that our cash from operations and anticipated growth, together
with other available sources of liquidity, including borrowings available under
our new credit facility, will be sufficient for the foreseeable future to fund
anticipated capital expenditures and make required payments of principal and
interest on our debt, including payments due on the notes and obligations under
our new credit facility.
OFF BALANCE SHEET ARRANGEMENTS
We have no significant off balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Qualitative Disclosures
We use interest rate swaps to hedge the fair value of our debt obligations
and interest rate caps as a cash flow hedge of our variable-rate debt and also
to offset possible increases in variable-rate payments under our interest rate
swap related to increases in market interest rates.
We also have market risk relating to investments in stock and stock warrants
that we obtained in connection with the 1998 sale of our pharmacy operations. In
effect, these holdings can be considered contingent purchase price proceeds
whose value, if any, may not be realized for several years. These stock and
warrant holdings are subject to various trading and exercise limitations. We
intend to hold them until we believe the market opportunity is appropriate to
trade or exercise the holdings.
We monitor the markets to adequately determine the appropriate market timing
to sell or otherwise act with respect to our stock and warrant holdings in order
to maximize their value. With the exception of the above holdings, we do not
enter into derivative instruments for any purpose other than cash flow hedging
purposes. That is, we do not speculate using derivative instruments and do not
engage in trading activity of any kind.
25
Quantitative Disclosures
The table below presents principal, or notional, amounts and related
weighted average interest rates by year of maturity for our debt obligations and
interest rate swaps as of June 30, 2003 (dollars in thousands):
FAIR
VALUE OF
AFTER LIABILITY
2003 2004 2005 2006 2007 2007 TOTAL (ASSET)
------ ------ ------ ------ ------ ------ ----- ---------
LONG-TERM DEBT:
Fixed Rate ......................... $ 450 $ 756 $ 733 $ 698 $203,491 $159,778 $365,908 $363,097
Average Interest Rate .............. 7.29% 7.69% 7.76% 7.64% 9.32% 9.59% 9.42%
Variable Rate ...................... -- -- -- -- -- $ 32,000 $ 32,000 $ 28,405
Average Interest Rate .............. -- -- -- -- 1.10% 1.10%
INTEREST RATE SWAPS: (fixed to
variable)
Notional Amount .................... -- -- -- -- -- $150,000 $150,000 $ (6,651)
Average Pay Rate (variable rate) .. -- -- -- -- -- 5.98%
Average Receive Rate (fixed
rate) ............................ -- -- -- -- -- 9.35%
INTEREST RATE CAPS:
Notional Amount .................. -- -- -- -- -- $150,000 $150,000 $ 1,222
The above table incorporates only those exposures that existed as of June
30, 2003 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. Our ultimate results with respect
to interest rate fluctuations will depend upon the exposures that occur, our
hedging strategies at the time and interest rate movements.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company's management evaluated, with the participation of the
Company's Chairman of the Board and Chief Executive Officer and Vice President,
Chief Financial Officer and Treasurer, the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) as
of the end of the quarter ended June 30, 2003. Based upon their evaluation of
these disclosure controls and procedures, the Chairman of the Board and Chief
Executive Officer and Vice President, Chief Financial Officer and Treasurer
concluded that the disclosure controls and procedures were effective, as of the
end of the quarter ended June 30, 2003, to ensure that material information
relating to the Company (including its consolidated subsidiaries) was made known
to them by others within those entities, particularly during the period in which
this Quarterly Report on Form 10-Q was being prepared.
Changes in internal control
There was no change in the Company's internal control over financial
reporting that occurred during the quarter ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material developments related to the Company's legal
proceedings during the quarter ended June 30, 2003. For further information
regarding the Company's legal proceedings, refer to Item 3 - Legal Proceedings
in the Company's Annual Report on Form 10-K for the year ended December 31, 2002
as well as the paragraphs which discuss litigation and the Omnicare Preferred
Provider Agreement in note 8 of the condensed consolidated financial statements
included in this Form 10-Q.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
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:
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Chairman of the Board and Chief Executive Officer
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Vice President, Chief Financial Officer and Treasurer
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chairman of the Board and Chief Executive Officer and
Vice President, Chief Financial Officer and Treasurer
(b) Reports on Form 8-K
Form 8-K furnished on May 12, 2003, relating to a press release dated
May 8, 2003, which announced earnings for the quarter ended March 31,
2003.
27
EXTENDICARE HEALTH SERVICES, INC.
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: August 13, 2003 By: /s/ Mark W. Durishan
---------------- -------------------------------
Mark W. Durishan
Vice President, Chief Financial
Officer and Treasurer
(principal financial officer and
principal accounting officer)
28
EXTENDICARE HEALTH SERVICES, INC.
EXHIBIT INDEX
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -
Chairman of the Board and Chief Executive Officer
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -
Vice President, Chief Financial Officer and Treasurer
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chairman of the Board and Chief Executive Officer and Vice President,
Chief Financial Officer and Treasurer
29