e424b3
Pursuant to Rule 424(b)(3)
Registration No. 333-116927
PROSPECTUS
Offer to Exchange
All Outstanding
6 7/8% Senior Subordinated Notes due
2014
$125,000,000 Aggregate Principal Amount
for
New 6 7/8% Senior Subordinated Notes
due 2014
$125,000,000 Aggregate Principal Amount
|
|
|
We are offering to exchange new registered
6 7/8% Senior Subordinated Notes due 2014 for all of
our outstanding unregistered 6 7/8% Senior
Subordinated Notes due 2014.
|
|
|
The exchange offer expires at 5:00 p.m., New
York City time, on August 17, 2004, unless we extend it.
|
|
|
The terms of the new notes to be issued are
substantially identical to those of the old notes, except that
the new notes will not have securities law transfer restriction
and registration rights relating to the old notes and the new
notes will not provide for the payment of liquidated damages
under circumstances relating to the timing of the exchange offer.
|
|
|
All of our existing and future domestic
significant subsidiaries, all of our existing and future
domestic subsidiaries that guarantee or incur any indebtedness
and any other existing and future significant subsidiaries or
restricted subsidiaries that guarantee or otherwise provide
direct credit support for indebtedness of ours or any of our
domestic subsidiaries will fully and unconditionally guarantee
the new notes.
|
|
|
All outstanding old notes that are validly
tendered and not validly withdrawn will be exchanged.
|
|
|
No established trading market for the new notes
currently exists. We do not intend to apply for the new notes to
be listed on any securities exchange or to arrange for any
automated quotation system to quote them.
|
|
|
Each broker-dealer who acquired its old notes as
a result of market-making activities or other trading activities
and thereafter receives new notes issued for its own account in
the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes
issued in the exchange offer.
|
|
|
You may withdraw your tender of old notes any
time before the exchange offer expires.
|
|
|
Neither we nor any subsidiary guarantor will
receive any proceeds from the exchange offer.
|
|
|
The exchange of notes will not be a taxable event
for U.S. federal income tax purposes.
|
See Risk Factors beginning on page 18 for a
discussion of risk factors that you should consider before
deciding to exchange your old notes for new notes.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is July 20, 2004
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
ii |
|
|
|
|
1 |
|
|
|
|
15 |
|
|
|
|
18 |
|
|
|
|
29 |
|
|
|
|
38 |
|
|
|
|
39 |
|
|
|
|
41 |
|
|
|
|
42 |
|
|
|
|
75 |
|
|
|
|
96 |
|
|
|
|
98 |
|
|
|
|
102 |
|
|
|
|
103 |
|
|
|
|
108 |
|
|
|
|
146 |
|
|
|
|
147 |
|
|
|
|
147 |
|
|
|
|
147 |
|
|
|
|
147 |
|
|
|
|
F-1 |
|
Unless the context otherwise requires, references
in this prospectus to EHSI, we,
us, our and ours refer to
Extendicare Health Services, Inc. and its subsidiaries on a
combined basis. When the context requires, we refer to these
entities separately.
You should rely only upon the information
contained in this prospectus. We have not authorized any other
person to provide you with different information. If anyone
provides you with different or inconsistent information, you
should not rely on it. The information appearing in this
prospectus is accurate only as of the date on the front cover of
this prospectus. Our business, financial condition, results of
operations and prospects may have changed since that date.
Unless otherwise indicated, information contained
in this prospectus concerning the long-term care industry,
general expectations concerning this industry and our market
positions are based on estimates prepared by us using data from
various sources, including the Health Care Market Update issued
in May 2003 by the Centers for Medicare and Medicaid Services,
or CMS, and on assumptions made by us based on such data and our
knowledge of the long-term care industry. We have not sought the
consent of any of these sources to refer to their data in this
prospectus. With respect to certain industry participants, we
rely on press releases and public filings these participants
make with the Securities and Exchange Commission. Although we
believe all of this data is reliable, we have not independently
verified the data and cannot guarantee its accuracy or
completeness.
i
FORWARD-LOOKING STATEMENTS
This prospectus 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 managements
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 section
of this prospectus beginning on page 18 and the following:
|
|
|
|
|
Medicare and Medicaid payment levels and
reimbursement methodologies and the application of such
methodologies and policies adopted by the government and its
fiscal intermediaries;
|
|
|
|
liabilities and claims asserted against us, such
as resident care litigation, including our exposure to punitive
damage claims and increased insurance costs;
|
|
|
|
national and local economic conditions, including
their effect on the ability to hire and retain qualified staff
and employees and the associated costs;
|
|
|
|
federal and state regulation of our business and
changes in such regulations, as well as our compliance with such
regulations;
|
|
|
|
actions by our competitors; and
|
|
|
|
our ability to maintain and increase census
levels.
|
We will only update publicly any forward-looking
statements contained in this prospectus, whether as a result of
new information, future events or otherwise, to the extent
required by law.
ii
PROSPECTUS SUMMARY
This summary highlights selected information
contained elsewhere in this prospectus and may not contain all
of the information that may be important to you. We encourage
you to read this prospectus carefully, including Risk
Factors and our financial statements and the notes to our
financial statements included elsewhere in this
prospectus.
Extendicare Health Services, Inc.
We are one of the largest providers of long-term
care and related services in the United States. Through our
subsidiary network of geographically clustered facilities, we
offer a continuum of healthcare services, including skilled
nursing care, assisted living and related medical specialty
services, such as subacute care and rehabilitative therapy. As
of March 31, 2004, we operated or managed 186 long-term
care facilities with 16,901 beds in 13 states, of which 147
were skilled nursing facilities with 15,030 beds and 39 were
assisted living and retirement facilities with 1,871 units.
We also provided consulting services to 72 facilities with 8,839
beds in five states. In addition, we operated 24 outpatient
rehabilitation clinics in four states. We receive payment for
our services from Medicare, Medicaid, private insurance, self
pay residents and other third-party payors. For the year ended
December 31, 2003, we generated total revenue of
$870.4 million, and we generated EBITDA (as defined in
Summary Consolidated Historical Financial and
Operating Data) of $99.3 million. For the three
months ended March 31, 2004, we generated total revenue of
$231.5 million, and we generated EBITDA of
$32.3 million.
We focus on our core skilled nursing facility
operations, while continuing to grow our complementary long-term
care services. By emphasizing quality care of patients and by
clustering several long-term care facilities together within the
geographic areas we serve, our goal is to build upon our
reputation as a leading provider of a full range of long-term
care services in our communities and, as a result, to continue
to improve our Medicare census and occupancy rate. For the three
months ended March 31, 2004, our average occupancy rate was
91.3% in our skilled nursing facilities and 86.7% in our
assisted living facilities. For the year ended December 31,
2003, our average occupancy rate was 91.5% in our skilled
nursing facilities and 86.3% in our assisted living facilities.
The Long-Term Care Industry
According to CMS, total healthcare spending is
expected to grow at an annual rate of 7.3% from 2002 through
2013. Based on these estimates, healthcare expenditures will
account for $3.4 trillion, or 18.4% of the gross domestic
product by 2013. Skilled nursing facility expenditures were
approximately $103.7 billion in 2002, or 6.6% of total
healthcare spending, representing one of the largest components
of national healthcare spending. The spending related to skilled
nursing facilities is expected to grow at an annual rate of 7.4%
through 2013.
The long-term care industry is changing as a
result of several fundamental factors, which we believe we can
capitalize on. These factors include:
Aging Population.
The aging of the U.S. population is a leading driver of
demand for long-term care services. According to the 2000 census
conducted by the U.S. Census Bureau, there were
approximately 34.4 million Americans aged 65 or older,
representing 12.6% of the total U.S. population. The
U.S. Census Bureau has forecasted that the population of
Americans aged 65 or older will increase to 53.2 million by
2020, representing 16.4% of the total U.S. population, and
78.8 million in 2050, representing 20% of the total
U.S. population. Based upon these projections, the annual
growth rate for persons over 65 will be 2.6% through 2020 and
1.8% through 2050, whereas the annual growth rate for persons
over 85 will be 2.6% through 2020 and 6.6% through 2050.
According to the August 2003 MetLife Market Survey of Nursing
Home Report, or MetLife Report, in 2000, approximately
1.6 million, or 4.5%, of all persons aged 65 and over were
living in a skilled nursing facility. This number is expected to
increase to approximately 6.6 million, or 8.4%, of all
persons aged 65 by 2050.
1
Supply/ Demand
Imbalance. Acquisition and
construction of additional skilled nursing facilities are
subject to certain restrictions on supply, including legislation
moratoriums on new capacity or licensing restrictions limiting
the growth of services. Such restrictions on supply, coupled
with an aging population, are causing a decline in the
availability of long-term beds per person 85 years of age
and older. Additionally, advances in medical technology are
enabling the treatment of certain medical conditions outside the
hospital setting. As a result, patients requiring a higher
degree of monitoring, more intensive and specialized medical
care, 24-hour per day nursing and a comprehensive array of
rehabilitative therapies are increasing, resulting in a need for
long-term care. We believe that such specialty care can be
provided in skilled nursing facilities at a significantly lower
cost than in traditional acute care and rehabilitation hospitals.
Cost Containment
Pressures. According to the MetLife
Report, the remaining life expectancy of a male age 65 has
increased to 16.3 years in 2002 from 12.7 years in
1942, and the remaining life expectancy of a female age 65
has increased to 19.2 years in 2002 from 14.7 years in
1942. As the number of people over age 65 continues to grow
and as advances in medicine and technology continue to increase
life expectancies, the likelihood of chronic conditions
requiring treatment, and the resulting healthcare costs, are
expected to rise faster than the availability of resources from
government-sponsored healthcare programs. In response to such
rising costs, governmental and private pay sources in the United
States have adopted cost containment measures that encourage
reduced lengths of stay in acute care hospitals. As a result,
average acute care hospital stays have been shortened, and many
patients are discharged despite a continuing need for nursing or
specialty healthcare services, including a higher degree of
monitoring, intensive and specialized medical care, 24-hour per
day nursing services and a comprehensive array of rehabilitative
therapies. This trend has increased demand for long-term care,
home healthcare, outpatient facilities, hospices and assisted
living facilities. We believe that long-term care companies with
information systems to process clinical and financial data, an
integrated network and a broad range of services will be in a
good position to contract with managed care or other payors.
Changing Family
Dynamics. As a result of the growing
number of two-income families, we believe the immediate family
has become less of a primary source of care-giving for the
elderly. Women, who under more traditional roles were viewed as
the primary caretakers of the family, have moved back into the
workforce in increasing numbers, as evidenced through their
labor participation rates increasing from 38% in 1963 to 59% in
1998. At the same time, two-income families are better able to
provide financial support for elderly parents to receive the
care they need in a skilled nursing or assisted living facility.
Competitive Strengths
According to the May 2003 CMS Healthcare Industry
Market Update, the long-term care industry is fragmented, with
the 10 largest skilled nursing facility companies accounting for
15.5% of the total facility beds as of April 2003. There are
approximately 16,500 skilled nursing facilities certified under
the Medicare and/or Medicaid program with approximately
1.8 million available beds, and during 2002, approximately
3.5 million individuals lived in skilled nursing
facilities. Approximately 65% of skilled nursing facilities are
operated by for-profit companies, 28% are operated by non-profit
organizations and 7% are operated by local government.
Our major competitive strengths are:
Leading Provider of Long-Term Care
Services. We are among the largest
providers of long-term care services in the United States. As of
March 31, 2004, we operated or managed 186 long-term care
facilities with 16,901 beds, and we operated 24 outpatient
rehabilitation clinics, compared to 22 in 2002 and 20 in 2001.
We also opened two new rehabilitation clinics during 2003. Our
scope of operations allows us to achieve economies of scale in
purchasing and contracting with suppliers and customers. For
example, through our subsidiary, Extendicare Health Network,
Inc., we provide purchasing services for skilled nursing
facilities in numerous states in addition to the facilities we
operate or manage. Through our affiliate, Virtual Care Provider,
Inc., we also provide technology support services to
unaffiliated long-term
2
care facilities. We continue to explore
opportunities to expand in states where we currently operate to
provide either full management, consulting or accounting
services.
Focus on Core
Business. In the past, we have
successfully identified and disposed of business segments that
did not fit within our core business or facilities located in
states with unacceptable litigation risks. From 1998 through
2001, in response to the implementation of the Medicare
Prospective Payment System, or PPS, increased litigation and
insurance costs in certain states and increased operational
costs resulting from changes in legislation and regulatory
scrutiny, we divested under-performing skilled nursing and
assisted living facilities and non-core healthcare assets. These
asset divestitures primarily included the sale of our pharmacy
to Omnicare, Inc. and the sales of facilities and/or the
transfer of all operations in the states of Florida and Texas in
1999, 2000 and 2001. We have more recently commenced development
projects, acquired facilities and undertaken management or
consulting contracts to grow in states that are attractive and
offer opportunities for us to expand our present base of
operations. In 2003, we commenced the development of seven
projects that will expand several facilities (125 beds) and
add one free-standing assisted living facility (40 units),
acquired one skilled nursing facility (99 beds) and
approved eight future development projects that will expand or
add to our assisted living facilities (329 units). During
the three months ended March 31, 2004, we completed two of
the seven projects that we commenced in 2003, which increased
our operational capacity at one skilled nursing facility and one
assisted living facility. We intend to continue to focus on
operating and managing long-term care facilities. In addition,
we plan to continue to review the performance of our current
facilities and exit markets or sell facilities that do not meet
our performance goals.
Significant Facility
Ownership. We own rather than lease a
majority of our properties, unlike a number of other long-term
care providers. As of March 31, 2004, we owned 174
facilities, or 94.3% of the total number of facilities we
operated. We believe that owning properties increases our
operating flexibility by allowing us to:
|
|
|
|
|
refurbish facilities to meet changing consumer
demands;
|
|
|
|
add assisted living and retirement facilities
adjacent to our skilled nursing facilities;
|
|
|
|
adjust licensed capacity to avoid occupancy-based
rate penalties;
|
|
|
|
divest facilities and exit markets at our
discretion; and
|
|
|
|
more directly control our occupancy costs.
|
Dual Medicare and Medicaid
Certification. We have certified
substantially all of our beds for the provision of care to both
Medicare and Medicaid patients. We believe that dual
certification increases the potential for higher occupancy rates
by increasing the availability of beds to patients who require a
specific bed certification. In addition, dual certification
allows our facilities to easily shift patients from one level of
care and reimbursement to another without physically moving the
patient.
Experienced and Proven Management
Team. Our management team has
demonstrated competency in dealing with significant changes in
the reimbursement environment resulting from the shift to PPS,
and identifying the significant exposures and risks of operating
in the extremely litigious environments in Florida and Texas. We
executed a planned divestiture program that reduced our level of
debt and reduced our exposure to liability claims and increased
insurance costs. We have been successful in recruiting
experienced management staff from our competitors to further
strengthen our existing experienced executive and operating
management team.
Geographic
Diversity. We operate or manage
facilities located in specific markets across 13 states
primarily throughout the Northeast, Midwest and Northwest
regions of the United States. No state contains more than 19% of
our facilities or 20% of our beds. Each state is unique in terms
of its competitive dynamics as well as its political and
regulatory environment. Each state administers its own Medicaid
program, which constitutes a significant portion of our revenue.
Our diversified market scope limits our exposure to events or
trends that may occur in any individual state, including changes
in any
3
states Medicaid reimbursement program and
changes in regional and local economic conditions and
demographics.
Management Focus on Key Performance
Drivers. We believe that our senior
management, as well as our field personnel, are proficient at
focusing on the key areas that drive revenues, profits and cash
flows. Our senior management has identified the following four
critical drivers of operating and financial performance:
|
|
|
|
|
improving census, particularly increasing our
Medicare census;
|
|
|
|
increasing cash flow from operations through
expedited billing and collections and other initiatives;
|
|
|
|
improving earnings from operations through
control of labor and other costs; and
|
|
|
|
diversifying within the long-term care industry
through expansion of facilities under management and consulting
agreements and expansion of our rehabilitation clinics.
|
Every level of management, starting with our
Chief Executive Officer, devotes a significant portion of its
time to improving these key performance drivers. We believe that
this focused attention and commitment, along with the hard work
by our employees, have resulted in substantial improvement in
several of our key performance drivers.
For the three months ended March 31, 2004,
total average daily census, or ADC, was 12,880, resulting in an
occupancy rate of 91.2% for our skilled nursing facilities
compared to an ADC of 12,875 and a 91.3% occupancy rate for our
skilled nursing facilities for the same period in 2003, on a
same facility basis. For the year ended December 31, 2003,
total ADC increased to 12,901, resulting in an occupancy rate of
91.5% for our skilled nursing facilities. Total ADC was 1.4%
higher in 2003 than the total ADC in 2002 of 12,727 (occupancy
rate of 90.3%) and 3.5% higher than the total ADC in 2001 of
12,465 (occupancy rate of 87.8%), on a same facility basis. For
the three months ended March 31, 2004, our Medicare ADC
increased to 2,206, resulting in the percentage of Medicare
residents to total residents of 17.1%. Medicare ADC increased
12.2% from the 1966 Medicare ADC for the same period last year,
on a same facility basis. For 2003, our Medicare ADC increased
to 1,997, resulting in a percentage of Medicare to total
residents of 15.5%. Medicare ADC increased 17.5% in 2003 from
1,699 in 2002 and increased 39.9% from 1,427 in 2001, on a same
facility basis. Occupancy in our assisted living facilities
increased to 86.7% for the three months ended March 31,
2004, compared to 85.5% for the same period in 2003. In 2003,
occupancy in our assisted living facilities occupancy increased
to 86.3% compared to 83.9% in 2002 and 83.1% in 2001.
Cash flow from operations was $18.5 million
for the three months ended March 31, 2004 compared to
$4.5 million for the same period in 2003. This increase was
primarily due to an improvement in earnings, the collection of
$6.1 million of Medicare settlement receivables and a
reduction of $2.5 million in payments for self-insured
liabilities. Cash flow from operations was $56.0 million
for the year ended December 31, 2003 compared to
$38.8 million for the year ended December 31, 2002 and
$82.6 million for the year ended December 31, 2001.
Cash flow from operations in 2001 included an income tax
recovery of $22.5 million and a lower level of payments for
self-insured liability claims than in 2003 and 2002. Through
consistent emphasis on admissions protocols, attention to older
and larger account balances and proactive collection efforts at
regional and head offices, we have improved our accounts
receivable management. Average days of revenues outstanding
decreased to approximately 40 days in 2003, compared to
approximately 43 days in 2002 and approximately
45 days in 2001. As of March 31, 2004, average days of
revenues outstanding decreased to approximately 37 days
compared to approximately 40 days for the same period in
2003.
We monitor earnings from operations by focusing
on EBITDA (as defined in Summary Consolidated
Historical Financial and Operating Data) and EBITDA
expressed as a percentage of total revenues. EBITDA increased to
$32.3 million during the three months ended March 31,
2004 compared to $20.8 million during the three months
ended March 31, 2003. EBITDA increased to
$99.3 million during the year ended December 31, 2003,
compared to $80.4 million during the year ended
December 31, 2002
4
and $62.4 million during the year ended
December 31, 2001, and EBITDA as a percentage of total
revenues increased to 11.4% in 2003, compared to 9.9% in 2002
and 7.8% in 2001. The improvement in EBITDA resulted primarily
from the implementation of a variety of strategies to control
labor costs and minimize the use of temporary staff. Regular
wages as a percentage of total revenues decreased to 43.8% for
the three months ended March 31, 2004 compared to 45.3% for
the year ended December 31, 2003, 46.5% for the year ended
December 31, 2002 and 46.8% for the year ended
December 31, 2001, while temporary wages as a percentage of
total revenues decreased to 0.3% for the three months ended
March 31, 2004 compared to 0.4% for the year ended
December 31, 2003, 1.2% for the year ended
December 31,2002 and 2.5% for the year ended
December 31, 2001. We also improved our level of Part B
Medicare revenues and increased Medicaid and Medicare rates
through the admission of residents with higher levels of acuity.
Business Strategy
The principal elements of our business strategy
are to:
Provide Quality, Clinically Based
Services. Our corporate clinical
services group monitors quality of care indicators and survey
results and drives continuous quality improvement processes at
the facility and regional levels. Focused review meetings are
held on a regular basis to monitor trends in facilities and to
communicate new protocols and issues within the industry. The
corporate clinical services group directs an internal team of
field-based quality validation specialists who are responsible
for mirroring the regulatory survey process and regularly
communicating with our clinical service specialists in our
corporate office. On-site data is integrated with clinical
indicators, facility human resource data and state regulatory
outcomes to provide a detailed picture of problems, challenges
and successes in achieving performance at all levels of our
organization. This information pool allows us to determine best
practices for duplication in similarly situated facilities. We
emphasize these programs when marketing our services to acute
care providers, community organizations and physicians in the
communities we serve.
Increase Medicare
Census. We continue to develop and
implement strategies and capabilities to attract residents, with
a focus on increasing Medicare census. For the three months
ended March 31, 2004, Medicare payments represented
approximately 30% of our total revenues, up from approximately
27% in the year ended December 31, 2003 and 22% in 1999.
Senior management continually works with our regional and local
management teams to develop strategies to continue to increase
this percentage. Strategies, such as focused marketing efforts,
standardized admissions protocols, streamlined admitting
procedures, dual certification of beds and improved management
communication have driven this improvement. In addition to
increasing the profitability of our skilled nursing facilities,
the increased Medicare census expands the market for our
service-related businesses as Medicare patients utilize
significant ancillary services.
Leverage Presence in Small Urban
Markets. We geographically cluster our
long-term care facilities and services in small urban markets in
order to improve operating efficiencies and to offer our
customers a broad range of long-term care and related health
services, including assisted living services. Future expansion
of our owned skilled nursing facility operations is anticipated
to be through the selective acquisition and construction of new
facilities in areas that are in close proximity to existing
facilities, where management is experienced in dealing with the
regulatory and reimbursement environments, where the facility
can participate as an active member of the skilled nursing
facility association and where the facilitys reputation is
established.
Expand Asset
Portfolio. We seek to expand our
portfolio of skilled nursing and assisted living facilities in
states where we currently operate or that offer attractive
reimbursement systems. We plan to expand through both
acquisitions and internal growth. Opportunities exist to add on
to existing facilities and to develop new assisted living
facilities in locations close to existing skilled nursing
facilities. We currently employ an internal design and
development team that is well-experienced in the design and
construction of new facilities.
5
Actively Manage Our Asset
Portfolio. We continually review our
asset portfolio in terms of facilities physical condition,
facilities meeting the needs of the marketplace,
facilities financial performance and long-term outlook.
When facilities do not meet our performance criteria, risks
within the marketplace increase or litigation risk increases
beyond acceptable limits, we exit the marketplace or sell
facilities. Over the past four years, we have disposed of a
number of facilities and exited two states, while improving the
performance of the balance of our asset portfolio.
Increase Facilities Under Management and
Consulting Services Agreements and Rehabilitation
Clinics. We seek to increase the
number of management and consulting contracts with third party
operators. We have knowledge and expertise in both the
operational and administrative aspects of the long-term care
sector. We believe that the increasingly complex and
administratively burdensome nature of the long-term care sector,
coupled with our commitment and reputation as a leading,
high-quality operator, will drive demand for new contracts. We
believe this strategy is a logical extension of our business
model and competencies and will drive growth without requiring
substantial capital expenditures. In the year ended
December 31, 2003, we continued to increase the number of
facilities under management or consulting service agreements
bringing the total number of facilities under such agreements to
82, compared to 61 in the year ended December 31, 2002 and
58 in the year ended December 31, 2001. As of
March 31, 2004, we had 84 facilities under management or
consulting service agreements.
Increase Operating
Efficiency. We are focused on reducing
operating costs by improving our communications systems,
streamlining documentation and strengthening the formalization
of procedures to approve expenditures. We have reduced the
duplication of roles at the corporate and regional levels and
continue to seek to improve our utilization of regional
resources by adding management and consulting contracts to our
existing regions, thereby enabling us to spread the overhead
costs of our regional structure over a wider base of operations.
Recent Developments
Tender Offer/ Redemption and Sale and Issuance
of 2014 Notes. On April 5, 2004,
we commenced a tender offer to purchase any and all of our
outstanding $200.0 million 2007 Notes. Approximately
$104.9 million aggregate principal amount of outstanding
2007 Notes were validly tendered in the tender offer, which we
purchased for cash. Any and all of the outstanding 2007 Notes
that were not tendered in the tender offer were either cancelled
or redeemed for cash and cancelled as of May 24, 2004.
On April 22, 2004, we sold and issued
$125 million aggregate principal amount of 2014 Notes
pursuant to Rule 144A and Regulation S under the
Securities Act of 1933, as amended, or the Securities Act. The
2014 Notes were issued at a price of 97.5001% of par to yield
7.23%.
The net proceeds from the sale and issuance of
the 2014 Notes were approximately $117.4 million, net of a
$3.1 million discount and fees and expenses of
$4.5 million. We used these net proceeds, together with
borrowings under our amended and restated credit facility to
purchase for cash approximately $104.9 million aggregate
principal amount of 2007 Notes validly tendered in the tender
offer and to redeem any 2007 Notes not tendered in the tender
offer or cancelled prior to May 24, 2004.
The 2014 Notes are fully and unconditionally
guaranteed on a senior subordinated basis, jointly and
severally, by all of our existing and future domestic
significant subsidiaries, all of our existing and future
domestic subsidiaries that guarantee or incur any indebtedness
and any other existing and future significant subsidiaries or
restricted subsidiaries that guarantee or otherwise provide
direct credit support for indebtedness of ours or any of our
domestic subsidiaries. The 2014 Notes and guarantees are our and
our subsidiary guarantors general unsecured obligations.
On or after May 1, 2009, we may redeem all
or part of the 2014 Notes, at the redemption prices (expressed
as percentages of principal amount) listed below, plus accrued
and unpaid interest, if any, to
6
the date of redemption, if redeemed during the
twelve-month period commencing on May 1 of the years set
forth below:
|
|
|
|
|
Year |
|
Redemption Price |
|
|
|
2009
|
|
|
103.438 |
% |
2010
|
|
|
102.292 |
% |
2011
|
|
|
101.146 |
% |
2012 and thereafter
|
|
|
100.000 |
% |
Holders of the 2007 Notes who validly tendered
their 2007 Notes or whose 2007 Notes were redeemed by us
received a premium that, in the aggregate, amounts to
approximately $6.6 million. As a result of the tender
offer, redemption and repayment of the 2007 Notes, in the second
quarter of 2004, we will write off deferred finance charges of
approximately $2.4 million related to the 2007 Notes and
incur legal costs estimated at $0.3 million. In addition,
pursuant to the termination of our existing interest rate swap
and cap agreements (discussed below), we will record a gain of
approximately $3.3 million which will be recognized in the
second quarter of 2004. The net after tax impact to earnings
will be a loss of approximately $3.9 million, which will be
reflected within our accumulated deficit. Below is a summary of
the loss to be reported in the second quarter of 2004.
|
|
|
|
|
|
|
(Dollars in |
|
|
thousands) |
|
|
|
Tender premium and call premium
|
|
$ |
(6,636 |
) |
Write-off of deferred finance charges
|
|
|
(2,359 |
) |
Gain on termination of interest rate swap and cap
agreements
|
|
|
3,302 |
|
Legal expenses
|
|
|
(250 |
) |
|
|
|
|
|
|
|
|
(5,943 |
) |
Income taxes
|
|
|
2,080 |
|
|
|
|
|
|
Net impact
|
|
$ |
(3,863 |
) |
|
|
|
|
|
Amendment and Restatement of Credit
Facility. In connection with the
April 22, 2004 closing of the sale and issuance of
$125.0 million 6 7/8% Senior Subordinated Notes
due 2014, or the 2014 Notes, we amended and restated our credit
facility. The terms of our amended and restated credit facility
include the following changes, among other things:
|
|
|
|
|
a two year maturity extension, to June 28,
2009;
|
|
|
|
an additional $50.0 million of senior
secured financing on a revolving basis, resulting in total
borrowing capacity of $155.0 million;
|
|
|
|
an interest rate spread which ranges from LIBOR
plus 2.50% per annum to 3.25% per annum or the base
rate plus 1.50% per annum to 2.25% per annum, subject,
in each case, to adjustments based on our senior leverage ratio;
|
|
|
|
a commitment fee of 0.50% per annum on the
undrawn capacity regardless of utilization;
|
|
|
|
a requirement that we maintain a maximum senior
leverage ratio starting at 4.25 to 1 and reducing to 4.00 to 1
in 2007;
|
|
|
|
a requirement that we maintain a maximum senior
secured leverage ratio starting at 2.25 to 1 and reducing to
2.00 to 1 in 2007; and
|
|
|
|
changes to the collateral securing the facility
to permit us to substitute certain assets with other assets.
|
As of March 31, 2004, we did not have any
borrowings outstanding under our credit facility, but we had
$33.7 million of letters of credit outstanding under our
credit facility. Subsequent to March 31, 2004, we borrowed
$40.0 million under our amended and restated credit
facility to partially fund the redemption of any and all of the
outstanding $200.0 million 9.35% Senior Subordinated
Notes due 2007, or the 2007 Notes, which were not tendered in
our tender offer discussed above. As of the date of this
prospectus, our
7
borrowings under our amended and restated credit
facility were less than $20 million. Based on our as
adjusted capitalization and EBITDA for the three months ended
March 31, 2004, all borrowings to be drawn under the
amended and restated credit facility will initially bear
interest at a rate per annum equal to:
|
|
|
|
|
the Eurodollar rate plus 2.75%; or
|
|
|
|
the Base Rate plus 1.75%,
|
and thereafter, in each case, subject to
adjustments based on our senior leverage ratio.
Interest Rate Swap and Cap
Agreements. In April 2004, coterminous
with the sale and issuance of the 2014 Notes, we terminated our
existing interest rate swap and cap agreements for an aggregate
gain of $3.3 million to be recognized in the second quarter
of 2004. In addition, to hedge our exposure to fluctuations in
market value, we entered into two new interest rate swap
agreements and two new interest rate cap agreements relating to
the 9.50% Senior Notes due 2010, or the Senior Notes, and
the 2014 Notes.
With respect to the Senior Notes, we entered into
an interest rate swap agreement expiring July 1, 2010 with
a notional amount of $150.0 million. This agreement
effectively converted up to $150.0 million of fixed
interest rate indebtedness into variable interest rate
indebtedness. Under the terms of this interest rate swap
agreement, the counterparty can call the swap at any time on or
after July 1, 2006 with payments as determined under the
agreement. We also entered into an interest rate cap agreement
expiring July 1, 2010 with a notional amount of
$150.0 million. Under this cap agreement, we paid an
upfront fee of $3.5 million to the counterparty that will
be amortized to interest expense over the term of the cap. We
will receive a variable rate of interest equal to the excess, if
any, of the six-month LIBOR rate, adjusted semi-annually, over
the cap rate of 7%. We use the interest rate cap to offset
possible increases in interest payments under the interest rate
swap agreement expiring July 1, 2010 caused by increases in
market interest rates over a certain level. Under the terms of
the interest rate cap agreement, the counterparty can call the
cap if the interest rate swap agreement expiring July 1,
2010 is terminated.
With respect to the 2014 Notes, we also entered
into an interest rate swap agreement expiring May 1, 2014
with a notional amount of $125.0 million. This agreement
effectively converted up to $125.0 million of fixed
interest rate indebtedness into variable interest rate
indebtedness. Under the terms of this interest rate swap
agreement, the counterparty can call the swap at any time on or
after May 1, 2009 with payments as determined under the
agreement. We also entered into an interest rate cap agreement
expiring May 1, 2014 with a notional amount of
$125.0 million. Under this cap agreement, we pay a fixed
rate of interest equal to 0.75% to the counterparty and receive
a variable rate of interest equal to the excess, if any, of the
six-month LIBOR rate, adjusted semi-annually, over the cap rate
of 7%. We use the interest rate cap to offset possible increases
in interest payments under the interest rate swap agreement
expiring May 1, 2014 caused by increases in market interest
rates over a certain level. Under the terms of the interest rate
cap agreement, the counterparty can call the cap if the interest
rate swap agreement expiring May 1, 2014 is terminated.
Refinancing of Loan Resulting From Acquisition
of Previously Leased Facilities. On
October 1, 2002, we completed a transaction in which we
exercised our right to acquire seven previously leased nursing
facilities in the states of Ohio and Indiana for
$17.9 million. The purchase price included cash of
$7.4 million and a $10.5 million interest bearing
10-year note. The interest rate on the note was subject to
negotiation and failing an agreement would have been settled
through arbitration. In the latter part of 2003, we prepaid
$4.5 million against the note and agreed to refinance the
balance of the 10-year note. On April 15, 2004 we
refinanced the facilities with mortgages whose interest rates
vary with LIBOR, and repaid the remaining balance of the note
due to the seller.
Settlement of Medicare Receivable
Issue. In April 2004, we reached a
negotiated settlement with the Fiscal Intermediary, or FI, in
respect of the remaining two years regarding an issue involving
the allocation of overhead costs. The settlement will result in
our receiving a payment of approximately $7.7 million,
$6.5 million of which we received in May 2004. We will
receive the balance of the payment upon
8
resolution of other matters concerning the cost
report years under appeal. There are certain matters related to
the settlement and the cost report years that were appealed that
have to be resolved with the FI, which could influence the
financial impact of the settlement. We anticipate that the
resolution of these matters and the determination of the
financial impact of the related settlement, if any, will be
recorded within our financial results for the second quarter of
2004.
Settlement of Greystone Tribeca Acquisition,
L.L.C. Transaction. In June 2004, we
concluded the transaction with Greystone Tribeca Acquisition,
L.L.C., or Greystone, by receipt of the final consideration of
$10.0 million on the Vendor Take Back Note plus
$2.6 million of interest, which completes the September
2000 divestiture agreement. The initial transaction in 2000 was
treated as a deferred sale as a significant portion of the
proceeds was contingent and we held an option to repurchase the
facilities. Finalizing this transaction will result in our
recognizing in the second quarter of 2004 a pre-tax gain from
the sale of assets of $4.8 million and interest income of
$1.6 million.
Opening of New Assisted Living
Facility. On May 1, 2004, we
opened a new assisted living facility (40 units) in
Chippewa Falls, Wisconsin.
Acquisition of Four Nursing
Facilities. On June 1, 2004, we
acquired for approximately $5.0 million in cash four
nursing facilities (321 beds) in Indiana.
Acquisition of Land for
Development. In April 2004, we
acquired for $0.3 million a piece of land adjacent to the
nursing facility in Manitowoc, Wisconsin that we acquired in
December 2003.
Transfer of Operations of Chippewa Falls,
Wisconsin Facility. In June 2004, the
Company reached a tentative agreement with the State of
Wisconsin to transfer the operations of its skilled nursing
facility in Chippewa Falls, Wisconsin to a new licensee in
response to facility citations for survey deficiencies. The
facility made no contribution to income during the first quarter
of 2004. The terms of the agreement with the new licensee are
currently under negotiation and have not yet been finalized.
Upon finalization of the agreement, which is expected to occur
during the third quarter of 2004, it is possible that the
Company may be required to take a charge for asset impairment
under Statement of Financial Accounting Standards No. 144.
We are an indirect wholly owned subsidiary of
Extendicare Inc., a Canadian publicly traded company. Our
principal executive offices are located at 111 West Michigan
Street, Milwaukee, Wisconsin 53203. Our telephone number is
(414) 908-8000.
9
The Exchange Offer
|
|
|
Old Notes |
|
On April 22, 2004, we sold to the initial
purchasers $125,000,000 aggregate principal amount of our
6 7/8% Senior Subordinated Notes due 2014, which are
fully and unconditionally guaranteed on a senior subordinated
unsecured basis, jointly and severally, by:
|
|
|
|
all of our existing and future
domestic significant subsidiaries;
|
|
|
|
all of our existing and future
domestic subsidiaries that guarantee or incur any
indebtedness; and
|
|
|
|
any other existing or future
significant subsidiaries or restricted subsidiaries that
guarantee or otherwise provide direct credit support for
indebtedness of ours or any of our domestic subsidiaries.
|
|
|
|
In this prospectus we refer to the unregistered
senior subordinated notes as the old notes. We issued the old
notes at a price per old note of 97.5001% of par, which means
the initial purchasers paid less than the principal amount for
the old notes. The initial purchasers resold the old notes to
qualified institutional buyers under Rule 144A under the
Securities Act and outside the United States to
non-U.S. persons in offshore transactions meeting the
requirements of Regulation S under the Securities Act.
|
|
Registration Rights Agreement |
|
When we sold the old notes we entered into a
registration rights agreement with the initial purchasers in
which we agreed, among other things, to provide to you and all
other holders of these old notes the opportunity to exchange
your unregistered old notes for substantially identical new
notes that we have registered under the Securities Act. This
exchange offer is being made for that purpose.
|
|
New Notes |
|
We are offering to exchange the old notes for
6 7/8% Senior Subordinated Notes due 2014 that have
been registered under the Securities Act, which are fully and
unconditionally guaranteed on a senior subordinated unsecured
basis, jointly and severally, by:
|
|
|
|
all of our existing and future
domestic significant subsidiaries;
|
|
|
|
all of our existing and future
domestic subsidiaries that guarantee or incur any
indebtedness; and
|
|
|
|
any other existing or future
significant subsidiaries or restricted subsidiaries that
guarantee or otherwise provide direct credit support for
indebtedness of ours or any of our domestic subsidiaries.
|
|
|
|
In this prospectus we refer to the registered
senior subordinated notes as the new notes. In this prospectus
we may refer to the old notes and the new notes collectively as
the notes. The terms
|
10
|
|
|
|
|
of the new notes are substantially identical to
the terms of the old notes except:
|
|
|
|
the new notes will be issued in a
transaction that will have been registered under the Securities
Act;
|
|
|
|
the new notes will not contain
securities law restrictions on transfer, and
|
|
|
|
the new notes will not provide for
the payment of liquidated damages under circumstances relating
to the timing of the exchange offer.
|
|
The Exchange Offer |
|
We are offering to exchange $1,000 principal
amount of the new notes for each $1,000 principal amount of your
old notes. As of the date of this prospectus, $125,000,000
aggregate principal amount of the old notes are outstanding. For
procedures for tendering, see The Exchange
Offer Procedures for Tendering Old Notes.
|
|
Expiration Date |
|
This exchange offer will expire at
5:00 p.m., New York City time, on August 17, 2004,
unless we extend it.
|
|
Resales of Notes |
|
We believe that the new notes issued pursuant to
the exchange offer in exchange for old notes may be offered for
resale, resold and otherwise transferred by you without
compliance with the registration and prospectus delivery
provisions of the Securities Act if:
|
|
|
|
you are not our affiliate
within the meaning of Rule 405 under the Securities Act;
|
|
|
|
you are acquiring the new notes in
the ordinary course of your business;
|
|
|
|
you have not engaged in, do not
intend to engage in, and have no arrangement or understanding
with any person or entity to participate in, a distribution of
the new notes; and
|
|
|
|
you deliver a prospectus, as required
by law, in connection with any resale of the new notes, see
Plan of Distribution, if you are a broker- dealer
that receives new notes for your own account in exchange for old
notes that were acquired as a result of market-making activities
or other trading activities.
|
|
|
|
If you are an affiliate of ours, or are engaging
in or intend to engage in, or have any arrangement or
understanding with any person to participate in, a distribution
of the new notes, then:
|
|
|
|
you may not rely on the applicable
interpretations of the staff of the Securities and Exchange
Commission;
|
|
|
|
you will not be permitted to tender
old notes in the exchange offer; and
|
|
|
|
you must comply with the registration
and prospectus delivery requirements of the Securities Act in
connection with any resale of the old notes.
|
11
|
|
|
|
|
Each participating broker-dealer that receives
new notes for its own account under the exchange offer in
exchange for old notes that were acquired by the broker-dealer
as a result of market-making or other trading activity must
acknowledge that it will deliver a prospectus in connection with
any resale of the new notes. See Plan of
Distribution.
|
|
|
|
Any broker-dealer that acquired old notes
directly from us may not rely on the applicable interpretations
of the staff of the Securities and Exchange Commission and must
comply with the registration and prospectus delivery
requirements of the Securities Act (including being named as a
selling securityholder) in connection with any resales of the
old notes or the new notes.
|
|
Acceptance of Old Notes and Delivery of New
Notes |
|
We will accept for exchange any and all old notes
that are validly tendered in the exchange offer and not
withdrawn before the offer expires. The new notes will be
delivered promptly following the exchange offer.
|
|
Withdrawal Rights |
|
You may withdraw your tender of old notes at any
time before the exchange offer expires.
|
|
Conditions of the Exchange Offer |
|
The exchange offer is subject to certain
customary conditions, which we may waive. Please see The
Exchange Offer Conditions to the Exchange
Offer for more information regarding the conditions to the
exchange offer.
|
|
Consequences of Failure to Exchange Old
Notes |
|
If you are eligible to participate in the
exchange offer and you do not tender your old notes, then you
will continue to hold your old notes and you will be subject to
all the limitations and restrictions on transfer applicable to
such old notes. Generally, untendered old notes will remain
restricted securities and may not be offered or sold, unless
registered under the Securities Act, except pursuant to an
exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable
state securities laws. Other than in connection with the
exchange offer, we do not currently anticipate that we will
register the old notes under the Securities Act. The trading
market for the old notes could be adversely affected if some but
not all of the old notes are tendered and accepted in the
exchange offer.
|
|
Federal Income Tax Consequences |
|
The exchange of an old note for a new note in the
exchange offer will not be a taxable event for United States
federal income tax purposes. Consequently, you will not
recognize any gain or loss upon receipt of the new notes. See
Certain U.S. Federal Income Tax Considerations
for a more detailed description of the tax consequences of the
exchange.
|
|
Use of Proceeds |
|
Neither we nor any subsidiary guarantor will
receive any proceeds from the issuance of new notes pursuant to
the exchange offer.
|
12
|
|
|
Accounting Treatment |
|
We will not recognize any gain or loss on the
exchange of old notes for new notes. See The Exchange
Offer Accounting Treatment.
|
|
Exchange Agent |
|
U.S. Bank, N.A. is the exchange agent. See
The Exchange Offer Exchange Agent.
|
The New Notes
The new notes will evidence the same debt as the
old notes and will be governed by the same indenture under which
the old notes were issued. The summary below describes the
principal terms of the new notes. The Description of the
New Notes section of this prospectus contains a more
detailed description of the terms of the new notes.
|
|
|
Issuer |
|
Extendicare Health Services, Inc.
|
|
Notes Offered |
|
$125,000,000 in aggregate principal amount of
6 7/8% Senior Subordinated Notes due 2014.
|
|
Guarantees |
|
All payments with respect to the old notes,
including principal and interest, are , and with respect to the
new notes will be, fully and unconditionally guaranteed on a
senior subordinated unsecured basis, jointly and severally, by:
|
|
|
|
all of our existing and future
domestic significant subsidiaries;
|
|
|
|
all of our existing and future
domestic subsidiaries that guarantee or incur any
indebtedness; and
|
|
|
|
any other existing and future
significant subsidiaries or restricted subsidiaries that
guarantee or otherwise provide direct credit support for
indebtedness of ours or any of our domestic subsidiaries.
|
|
|
|
The old notes and guarantees are, and the new
notes and guarantees will be, our and our subsidiary
guarantors general unsecured obligations. Each of our
subsidiary guarantors has guaranteed our amended and restated
credit facility on a senior secured basis.
|
|
Maturity Date |
|
May 1, 2014.
|
|
Interest Payment Dates |
|
May 1 and November 1, commencing
November 1, 2004.
|
|
Ranking |
|
The old notes and guarantees are, and the new
notes and guarantees will be, unsecured and:
|
|
|
|
subordinated in right of payment to
all of our and our subsidiary guarantors existing and
future senior indebtedness;
|
|
|
|
equal in right of payment with all of
our and our subsidiary guarantors existing and future
senior subordinated indebtedness;
|
|
|
|
senior in right of payment to all of
our and our subsidiary guarantors subordinated
indebtedness.
|
|
Optional Redemption |
|
On or after May 1, 2009, we may redeem all
or part of the notes, at the redemption prices (expressed as
percentages of principal amount) listed below, plus accrued and
unpaid interest,
|
13
|
|
|
|
|
if any, to the date of redemption, if redeemed
during the twelve-month period commencing on May 1 of the
years set forth below:
|
|
|
|
|
|
|
|
Redemption |
Year |
|
Price |
|
|
|
2009
|
|
|
103.438 |
% |
2010
|
|
|
102.292 |
% |
2011
|
|
|
101.146 |
% |
2012 and thereafter
|
|
|
100.000 |
% |
|
|
|
|
|
Before May 1, 2007, we may redeem up to 35%
of the aggregate principal amount of outstanding notes issued
under the indenture with the net cash proceeds of qualified
equity offerings.
|
|
Change of Control |
|
Upon specified change of control events, unless
we have exercised our option to redeem all of the notes as
described above, each holder of a note will have the right to
require us to repurchase all or a portion of its notes at a
purchase price in cash equal to 101% of the principal amount,
plus accrued and unpaid interest, if any, to the date of
repurchase.
|
|
Covenants |
|
The indenture governing the notes limits our
ability and the ability of our subsidiary guarantors to, among
other things:
|
|
|
|
incur additional indebtedness;
|
|
|
|
create liens;
|
|
|
|
pay dividends on or redeem capital
stock;
|
|
|
|
make certain investments;
|
|
|
|
make restricted payments;
|
|
|
|
make certain dispositions of assets;
|
|
|
|
engage in certain transactions with
affiliates;
|
|
|
|
engage in certain business
activities; and
|
|
|
|
engage in mergers, consolidations and
certain sales of assets.
|
|
|
|
The indenture governing the notes will also limit
our ability to permit restrictions on the ability of some of our
subsidiaries to pay dividends or make certain other
distributions.
|
|
|
|
These covenants are subject to important
exceptions and qualifications, as described under
Description of the New Notes.
|
|
Absence of Established Market for the
Notes |
|
The notes are a new issue of securities, and
there is currently no market for them. We do not intend to apply
for the notes to be listed on any securities exchange or to
arrange for any quotation system to quote them. The notes are
expected to be designated for trading on the PORTAL
Market®. The initial purchasers of the old notes have
advised us that they intend to make a market for the notes, but
they are not obligated to do so. The initial purchasers may
discontinue any market making in the notes at any time in their
sole discretion. Accordingly, we cannot assure you that a liquid
market will develop or continue for the notes.
|
For a discussion of certain risks that you should
consider before deciding to exchange your old notes for new
notes, see Risk Factors.
14
SUMMARY CONSOLIDATED HISTORICAL
FINANCIAL AND OPERATING DATA
The following table summarizes our consolidated
historical financial and operating data. You should read this
table in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes. The
summary consolidated financial data as of March 31, 2004
and for the three-month periods ended March 31, 2004 and
2003 have been derived from our unaudited consolidated quarterly
financial statements included elsewhere in this prospectus, and
the summary consolidated financial data as of March 31,
2003 have been derived from our unaudited consolidated quarterly
financial statements, all of which, in our opinion, reflect all
adjustments necessary to present fairly the data for such
periods. Interim results for the three months ended
March 31, 2004 and 2003 are not necessarily indicative of
results that can be expected in future periods. The summary
consolidated financial data as of December 31, 2003 and
2002 and for each of the years in the three-year period ended
December 31, 2003 have been derived from our audited
consolidated financial statements included elsewhere in this
prospectus. The summary consolidated financial data as of
December 31, 2001 have been derived from our audited
consolidated financial statements. Operating Data
below are not directly derived from our financial statements,
but have been presented to provide additional data for your
analysis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31, |
|
Year Ended December 31, |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
Statement of Operations Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing and assisted living facilities
|
|
$ |
224,426 |
|
|
$ |
204,805 |
|
|
$ |
843,414 |
|
|
$ |
787,419 |
|
|
$ |
766,952 |
|
|
Outpatient therapy and medical supplies
|
|
|
2,665 |
|
|
|
2,644 |
|
|
|
11,524 |
|
|
|
10,280 |
|
|
|
9,515 |
|
|
Other
|
|
|
4,410 |
|
|
|
3,977 |
|
|
|
15,494 |
|
|
|
17,352 |
|
|
|
17,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
231,501 |
|
|
|
211,426 |
|
|
|
870,432 |
|
|
|
815,051 |
|
|
|
794,107 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
189,456 |
|
|
|
180,496 |
|
|
|
731,134 |
|
|
|
691,094 |
|
|
|
684,814 |
|
|
General and administrative
|
|
|
7,490 |
|
|
|
7,838 |
|
|
|
30,871 |
|
|
|
32,947 |
|
|
|
32,387 |
|
|
Lease costs
|
|
|
2,264 |
|
|
|
2,251 |
|
|
|
9,113 |
|
|
|
10,642 |
|
|
|
14,575 |
|
|
Depreciation and amortization
|
|
|
8,681 |
|
|
|
9,161 |
|
|
|
37,448 |
|
|
|
37,575 |
|
|
|
40,772 |
|
|
Interest, net
|
|
|
6,658 |
|
|
|
7,852 |
|
|
|
29,815 |
|
|
|
32,275 |
|
|
|
35,560 |
|
|
Loss (gain) on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,961 |
) |
|
|
1,054 |
|
|
Provision for closure and exit costs and other
items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,293 |
|
|
|
23,192 |
|
|
Loss on early retirement of debt
|
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
2,849 |
|
|
|
75 |
|
|
Loss on impairment of long-lived assets
|
|
|
1,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
14,986 |
|
|
|
3,828 |
|
|
|
32,051 |
|
|
|
6,337 |
|
|
|
(40,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$ |
9,347 |
|
|
$ |
2,288 |
|
|
$ |
20,086 |
|
|
$ |
3,220 |
|
|
$ |
(27,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
47,893 |
|
|
$ |
24,912 |
|
|
$ |
48,855 |
|
|
$ |
24,360 |
|
|
$ |
407 |
|
Working capital
|
|
|
55,123 |
|
|
|
33,963 |
|
|
|
55,795 |
|
|
|
29,897 |
|
|
|
(2,554 |
) |
Property and equipment
|
|
|
449,638 |
|
|
|
449,574 |
|
|
|
448,743 |
|
|
|
453,119 |
|
|
|
477,830 |
|
Total assets
|
|
|
827,685 |
|
|
|
825,769 |
|
|
|
833,349 |
|
|
|
830,278 |
|
|
|
795,246 |
|
Total debt
|
|
|
380,237 |
|
|
|
398,030 |
|
|
|
392,918 |
|
|
|
398,150 |
|
|
|
385,347 |
|
Shareholders equity
|
|
|
192,622 |
|
|
|
162,182 |
|
|
|
182,660 |
|
|
|
159,201 |
|
|
|
156,002 |
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31, |
|
Year Ended December 31, |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
18,484 |
|
|
$ |
4,525 |
|
|
$ |
56,033 |
|
|
$ |
38,832 |
|
|
$ |
82,626 |
|
Property and equipment capital expenditures
|
|
|
5,345 |
|
|
|
4,709 |
|
|
|
21,029 |
|
|
|
18,659 |
|
|
|
16,348 |
|
Acquisition capital expenditures
|
|
|
2,129 |
|
|
|
|
|
|
|
4,124 |
|
|
|
17,930 |
|
|
|
|
|
New construction capital expenditures
|
|
|
3,800 |
|
|
|
31 |
|
|
|
4,304 |
|
|
|
|
|
|
|
|
|
EBITDA(2)
|
|
|
32,291 |
|
|
|
20,841 |
|
|
|
99,314 |
|
|
|
80,368 |
|
|
|
62,331 |
|
EBITDA as a percentage of total revenues(2)
|
|
|
13.9 |
% |
|
|
9.9 |
% |
|
|
11.4 |
% |
|
|
9.9 |
% |
|
|
7.8 |
% |
Days of revenues outstanding
|
|
|
37 |
|
|
|
40 |
|
|
|
40 |
|
|
|
43 |
|
|
|
45 |
|
Ratio of Earnings to Fixed
Charges(3)
|
|
|
2.59 |
x |
|
|
1.40 |
x |
|
|
1.84 |
x |
|
|
1.16 |
x |
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of facilities at end of period
Owned and leased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing
|
|
|
140 |
|
|
|
139 |
|
|
|
140 |
|
|
|
139 |
|
|
|
139 |
|
|
Assisted living and retirement
|
|
|
34 |
|
|
|
36 |
|
|
|
34 |
|
|
|
36 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owned and leased
|
|
|
174 |
|
|
|
175 |
|
|
|
174 |
|
|
|
175 |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed and consulting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed
|
|
|
12 |
|
|
|
22 |
|
|
|
19 |
|
|
|
22 |
|
|
|
23 |
|
|
Consulting services
|
|
|
72 |
|
|
|
41 |
|
|
|
63 |
|
|
|
39 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management and consulting
|
|
|
84 |
|
|
|
63 |
|
|
|
82 |
|
|
|
61 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident census
Skilled nursing
|
|
|
12,978 |
|
|
|
12,875 |
|
|
|
12,901 |
|
|
|
12,727 |
|
|
|
13,358 |
|
|
Assisted living and retirement
|
|
|
1,488 |
|
|
|
1,501 |
|
|
|
1,496 |
|
|
|
1,472 |
|
|
|
1,463 |
|
Average occupancy rate
Skilled nursing
|
|
|
91.3 |
% |
|
|
91.3 |
% |
|
|
91.5 |
% |
|
|
90.3 |
% |
|
|
87.5 |
% |
|
Assisted living and retirement
|
|
|
86.7 |
% |
|
|
85.5 |
% |
|
|
86.3 |
% |
|
|
83.9 |
% |
|
|
83.1 |
% |
Payor source as a percentage of total revenues
Private pay
|
|
|
24 |
% |
|
|
24 |
% |
|
|
24 |
% |
|
|
24 |
% |
|
|
25 |
% |
|
Medicare
|
|
|
30 |
% |
|
|
27 |
% |
|
|
27 |
% |
|
|
26 |
% |
|
|
24 |
% |
|
Medicaid
|
|
|
46 |
% |
|
|
49 |
% |
|
|
49 |
% |
|
|
50 |
% |
|
|
51 |
% |
|
|
(1) |
For a discussion of our operating results, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Effective
October 1, 2003, CMS increased Medicare rates by 6.26%
reflecting (1) a cumulative forecast correction, or
administrative fix, to correct past years under-funded rate
increases, which increased the federal base payment rates by
3.26%, and (2) the annual market basket increase of 3.0%.
We estimated that based on the Medicare case mix for the
nine-month period ended September 30, 2003, these Medicare
rate increases would add approximately $18.45 per Medicare
day. Based upon the Medicare case mix and census in the first
quarter of 2004, the impact of the 6.26% Medicare rate increase
increased our revenues by $3.7 million. Based upon the
Medicare case mix and census in the first quarter of 2003, this
Medicare rate increase amounts to additional annualized revenue
of approximately $14.8 million going forward, which will be
tempered by higher labor and other operating costs.
|
|
(2) |
EBITDA is defined as net income
(loss) before income taxes, interest expense net of interest
income, depreciation and amortization, and non-cash,
non-recurring (gains) and losses, including disposal of
assets, provision for closure and exit costs and other items,
early retirement of debt and impairment of long-lived assets.
Our definition of EBITDA may not be comparable to the definition
|
16
|
|
|
of EBITDA used by other companies. The following
table sets forth a reconciliation of net income (loss) before
income taxes to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31 |
|
Year Ended December 31 |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
Net income (loss) before income taxes
|
|
$ |
14,986 |
|
|
$ |
3,828 |
|
|
$ |
32,051 |
|
|
$ |
6,337 |
|
|
$ |
(40,007 |
) |
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,681 |
|
|
|
9,161 |
|
|
|
37,448 |
|
|
|
37,575 |
|
|
|
40,772 |
|
|
Interest expense
|
|
|
8,200 |
|
|
|
8,495 |
|
|
|
33,981 |
|
|
|
33,654 |
|
|
|
37,857 |
|
|
Interest income
|
|
|
(1,542 |
) |
|
|
(643 |
) |
|
|
(4,166 |
) |
|
|
(1,379 |
) |
|
|
(2,297 |
) |
Non-cash, non-recurring (gains) and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,961 |
) |
|
|
1,054 |
|
|
Provision for closure and exit costs and other
items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,293 |
|
|
|
23,192 |
|
|
Loss on early retirement of debt
|
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
2,849 |
|
|
|
75 |
|
|
Loss on impairment of long-lived assets
|
|
|
1,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
32,291 |
|
|
$ |
20,841 |
|
|
$ |
99,314 |
|
|
$ |
80,368 |
|
|
$ |
62,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We use EBITDA as a key performance indicator and
EBITDA as a percentage of total revenues as a measurement of
margin. We understand that EBITDA, or derivatives thereof, are
customarily used by lenders, financial and credit analysts and
many investors as a performance measure in evaluating healthcare
acquisitions. Moreover, substantially all of our financing
agreements, including the indenture governing our Senior Notes
and our credit facility, contain covenants in which EBITDA is
used as a measure of compliance. Thus, we use EBITDA to monitor
our compliance with these financing agreements. EBITDA is a not
measure of performance under generally accepted accounting
principles in the United States of America, or GAAP. EBITDA
should not be considered in isolation or as a substitute for net
income, cash flows from operating activities and other income or
cash flow statement data prepared in accordance with GAAP, or as
a measure of profitability or liquidity.
|
|
|
(3) |
For the purpose of calculating the ratio of
earnings to fixed charges, net income consist of earnings (loss)
before income taxes, minority interest and extraordinary item,
adjusted to add back interest expense, amortization of deferred
financing costs and estimated interest within rental expense.
Fixed charges consist of interest, amortization of deferred
financing costs and estimated interest within rental expense.
The ratio of earnings to fixed charges for the three-month
period ended March 31, 2004 and the year ended
December 31, 2003, on a pro forma basis to reflect the sale
and issuance of the old notes and the application of the
proceeds from that sale and issuance, was 3.52x and 2.48x,
respectively. The amount of the deficiency (the amount by which
fixed charges exceed earnings) for the years ended
December 31, 2001, 2000 and 1999 was $39,932, $82,346 and
$123,481, respectively.
|
17
RISK FACTORS
You should consider carefully each of the
following risks and all other information contained in this
prospectus before deciding to exchange your old notes for new
notes. The risks and uncertainties described below are not the
only ones we face.
Risks Relating to Us and Our
Business
We depend upon reimbursement for our
services by third-party payors, and changes in their
reimbursement levels could adversely affect our revenues,
results of operations and financial position.
Substantially all, or 76%, of our long-term and
rehabilitation revenues are derived from payments received from
the Medicare and Medicaid programs, with the remainder being
derived from commercial insurers, managed care plans, the
Department of Veteran Affairs, private individuals and third
parties for whom we provide management or consulting services.
In 2003, approximately 27% of our revenues were derived from
Medicare and 49% from Medicaid. As of March 31, 2004,
approximately 30% of our revenues were derived from Medicare and
46% from Medicaid. There are ongoing pressures from many payors
to control healthcare costs and to reduce or limit increases in
reimbursement rates for medical services. Governmental payment
programs are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative or executive orders
and government funding restrictions, all of which may materially
change the amount of payments to us for our services.
Our revenues may be adversely affected by
changes to or elimination of temporary Medicare funding
provisions or reductions in Medicare rates through new rules
introduced by CMS.
In 1999 the industry experienced a decline in
revenues primarily attributable to declines in government
reimbursement as a result of the Balanced Budget Act of 1997, or
BBA. The revenue rate reductions from the BBA were partially
offset by $2.7 billion in temporary relief funding
enhancements received through the Balanced Budget Refinement Act
of 1999, or BBRA, and the Benefits Improvement Protective Act of
2000, or BIPA. The funding enhancements implemented by 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 RUGs rate and a 4% base adjustment. Despite intensive
lobbying by the long-term care industry, Congress did not extend
these Medicare funding enhancements. On September 30, 2002,
the Legislative Add-ons expired (referred to as the Medicare
cliff), resulting in a reduction in Medicare rates for all
long-term care providers. Based upon the Medicare case mix and
census for the twelve-month period ended September 30,
2003, we estimate that the net impact of the Medicare cliff and
the market basket increase received on October 1, 2002 was
a reduction in revenues of approximately $16.7 million.
The second category is resource utilization
groupings, or RUGs, Refinements, which involved 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. In
April 2002, CMS announced that it would delay the refinement of
the RUGs categories thereby extending the related funding
enhancements until September 30, 2003. In May 2003, CMS
released a rule that maintained the current RUGs classification
until October 1, 2004. Further to, but independent of this,
Congress enacted legislation directing CMS to conduct a study on
the RUGs classification system and report its recommendations by
January 2005. Based upon the Medicare case mix and census for
the year ended December 31, 2003, we estimate that we
received an average $24.12 per resident day, which on an
annualized basis amounts to $17.6 million, related to the
RUGs Refinements. Based upon the Medicare case mix and census
for the three months ended March 31, 2004, we estimate that
we received an average $25.27 per resident day, which on an
annualized basis amounts to $20.5 million, related to the
RUGs Refinements. The implementation of a RUGs Refinement
change, where all or part of the enhancement is discontinued,
could have a significant impact on us.
In January 2003, CMS announced that the
moratorium on implementing payment caps for outpatient Part B
therapy services, which was scheduled to take effect on
January 1, 2003, would be extended. CMS
18
subsequently extended the moratorium until
September 1, 2003. The therapy caps were made effective
from September 1, 2003 until December 8, 2003. On
December 8, 2003, as a result of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, the moratorium
was reinstated for an additional two-year period until December
2005. The impact of a payment cap cannot be reasonably estimated
based on the information available to us at this time, however,
we believe that such a cap would reduce therapy revenues.
In February 2003, CMS announced its plan to
reduce its level of reimbursement for uncollectible Part A
co-insurance. Under the CMS plan, the reimbursement level would
be reduced to 70% over a three-year period as follows: 90%
effective for the government fiscal year commencing
October 1, 2003, 80% effective for the government fiscal
year commencing October 1, 2004 and 70% effective for
government fiscal years commencing on or after October 1,
2005. This plan is consistent with the Part A co-insurance
reimbursement plan applicable to hospitals. CMS did not
implement the rule change effective October 1, 2003, and
continues to review the proposed plan. We estimate that, should
this plan be implemented, the negative impact to our net
earnings would be $1.3 million in 2004, increasing to
$3.3 million in 2006.
In February 2004, the Medicare Payment Advisory
Commission recommended that Congress reallocate levels of
payments from rehabilitative RUGS to other RUGs categories,
which may negatively impact Medicare revenues. CMS and Congress
are not required to, and have not always in the past,
implemented Medicare Payment Advisory Commission recommendations.
We cannot assure you that Medicare payments will
remain at levels comparable to present levels or will be
sufficient in the future to cover the costs allocable to
patients eligible for reimbursement pursuant to such programs.
Financial pressures on state budgets will
directly impact the level of available Medicaid funding and,
hence, the level of available funding for inflationary
increases.
A majority of states were faced with serious
financial budgetary constraints in 2002 and 2003 as a result of
a reduction in state revenues from the slowdown in the economy
and escalation of costs dealing with the aftermath of
September 11, 2001. In response, budgetary constraints were
placed on Medicaid programs, which represent a significant
portion of state budgets. A January 2003 study issued by the
Kaiser Commission on Medicaid and the Uninsured indicated that
49 of the states had made, or planned to make, Medicaid cuts in
fiscal year 2003 and 32 states have made or are planning a
second round of cuts to the programs. A number of states
implemented reductions or freezes in Medicaid rates, or limited
their increases to below inflationary levels in 2003. The
majority of the states in which we operate reduced the level of
Medicaid increases to below inflationary levels in 2003.
In an effort to counter reduced state revenues, a
number of states have submitted proposed state plan amendments
and waivers to seek an increase in the level of federal funding
for their Medicaid programs and to provide skilled nursing
facilities with a revenue rate increase to offset new or
increased provider taxes or state assessment fees. Such programs
have been approved in the past, however, CMS announced in
December 2003 that all such plans were to be reviewed in detail,
and in January 2004 the General Accounting Office was contacted
to review all such programs being introduced. As a result, a
number of states have had to retract and resubmit their proposed
plans to CMS, and others are awaiting approval.
Some of the states in which we operate, including
Pennsylvania, Indiana, Oregon and Washington have submitted
proposed state plan amendments and waivers, which are awaiting
review and approval by CMS pertaining to the fiscal year
commencing July 1, 2003. The retrospective plan amendments
and waivers seek increases in the level of federal funding for
the states Medicaid programs and, if approved, would
result in providing skilled nursing facilities with a revenue
rate increase to offset new or increased provider taxes. Since
the plan amendments and waivers have not been approved, we have
recorded revenues based upon amounts received. Because Medicaid
revenues account for 52% of our skilled nursing facility
revenues and 68% of our costs are wages and associated benefits
to our staff, Medicaid funding restraints could have a
significant negative impact on our results f from operations and
cash flow.
19
In June 2004, CMS approved the state plan
amendment and waiver submitted by the state of Oregon. We will
record the net favorable impact, estimated at $0.3 million,
in the second quarter of 2004.
Legislative and regulatory actions have
resulted in continuing changes to Medicare and Medicaid
reimbursement programs.
Medicare and Medicaid reimbursement programs are
complicated and constantly changing as CMS continues to refine
its programs. There are considerable administrative costs
incurred in monitoring the changes made within the programs,
determining the appropriate actions to be taken to respond to
those changes and implementing the required actions to meet the
new requirements and minimize the repercussions of the changes
to our organization, reimbursement rates and costs. Examples of
changes adopted by either CMS or certain states that have
impacted our industry, include:
|
|
|
|
|
the repeal of the Boren Amendment federal payment
standard for Medicaid payments, which required states to provide
skilled nursing facilities with reasonable and adequate
reimbursement rates to cover the costs of efficiently and
economically operated healthcare facilities. As a result, budget
constraints may cause states to reduce Medicaid reimbursement to
skilled nursing facilities or delay payments to providers;
|
|
|
|
the limitation of costs being reimbursed under
Medicaid reimbursement programs when operators use a certain
level of agency staffing or incur leasing costs, which have an
imputed lease interest cost greater than the current market rate;
|
|
|
|
the establishment of a minimum occupancy
requirement in certain Medicaid programs, which effectively
reduces the eligible Medicaid reimbursement rate that a skilled
nursing facility can receive; and
|
|
|
|
the increasing number of states that have adopted
policies to discontinue the reimbursement of Part A
co-insurance payments for dually eligible residents.
|
The cost of general and professional
liability claims are significant and escalating in certain
states, resulting in significant increases in insurance or the
availability of insurance.
The industry has experienced an increasing trend
in the number and severity of litigation claims and punitive
settlements. We believe that this trend is endemic to the
long-term care industry and is a result of the increasing number
of large judgments, including large punitive damage awards,
against long-term care providers in recent years resulting in an
increased awareness by plaintiffs lawyers of potentially
large recoveries. According to a report issued by AON Risk
Consultants in February 2004 on long-term care operators
general liability and professional liability costs, such costs
are seven times higher in 2003, as compared to the early 1990s.
The average cost per bed for general liability and professional
liability costs increased from $310 in 1992 to $2,290 in 2003.
The average general and professional liability claim has more
than doubled from $65,000 in 1992 to $149,000 in 2003, whereas
the average number of claims per 1,000 beds has increased at an
average annual rate of 13% from 4.8 in 1992 to 15.3 in 2003 in
the long-term care industry. As a result, general and
professional claim costs absorbed a significant percentage of
the average Medicaid reimbursement rate increase for the period
from 1992 to 2003. Florida and Texas are the leaders where
general and professional liability claims are being incurred,
however Arkansas, California, Mississippi, Tennessee and Alabama
are showing similar signs. Industry sources report the average
cost of a claim in Florida in 2000 was three times higher than
most of the rest of the United States. Florida healthcare
providers experienced three times the number of claims that were
experienced by providers in most other states. As a result of
the litigious environment, insurance premiums for general and
professional liability claims have increased, and in certain
states coverage is unavailable to skilled nursing facility
operators since insurance companies have refrained from
providing insurance.
We have experienced an increasing trend in the
number and severity of litigation claims asserted against us,
including personal injury and wrongful death claims. This has
been particularly the case in Florida and Texas where we have
ceased to operate skilled nursing facilities. We ceased all
operations in
20
Florida as of December 31, 2000 and all
skilled nursing facility operations in Texas as of
September 30, 2001. Exclusive of claims pertaining to our
past operations in Florida and Texas, the growth of claims has
increased, but within our projections. We continually review
requests for medical records and claims by facility and by state
and use that information, along with operational performance
measures, to assess whether we should dispose of additional
facilities. At the present time, we have no significant
divestiture plans.
As of March 31, 2004, we have provided for
$43.6 million in accruals for known or potential general
and professional liability claims based on claims experience and
an independent actuarial review. We may need to increase our
accruals in excess of the amounts we have accrued as a result of
future actuarial reviews and claims that may develop. An adverse
determination in legal proceedings, whether currently asserted
or arising in the future, could have a material adverse effect
on our business. See Business Insurance.
The shortage of qualified registered
nursing staff and other healthcare workers could adversely
affect our ability to attract, train and retain qualified
personnel and could increase operating costs.
A national shortage of nurses and other trained
personnel and general inflationary pressures have forced us to
enhance our wage and benefits packages in order to compete for
qualified personnel. According to a survey by the American
Healthcare Association issued in February 2003, there were over
96,000 vacant positions in the long-term care sector, of which
39,000 were professional nursing staff and the remainder
certified nursing assistants. The survey reported that average
turnover within the industry was 50%, with a 36% turnover rate
for professional staff and a 71% turnover rate for certified
nursing assistants. However, the report cited that these
turnover and vacancy levels varied by state and location of the
facility. Looking into the future, the shortage of nurses is
documented by the U.S. Labor Department, which reports that
there will be a 1.0 million shortfall of professional
nurses by 2010. In some markets where we operate, there are
shortages of healthcare workers. This is supported by a report
by the North Carolina Medical Journal in March/April 2002, which
reported that between 2000 and 2010 there will be a shortage of
874,000 nursing workers in the long-term care industry.
As a result of the shortage of nursing and
healthcare workers, our average wage rate increased above
inflationary levels in 2002 and 2003. Wages increased by
approximately 3.8% in 2003 over 2002 and 6.9% in 2002 over 2001.
However, overall wage costs as a percentage of total revenues
have been reduced due to the wage strategies that we have
implemented, particularly in 2003. In order to supplement
staffing levels, we periodically are forced to utilize costly
temporary help from staffing agencies, which results in wage
premiums of 25% to 60%. We attempt to limit the use of temporary
help from staffing agencies to maintain a higher quality of
care. In 2003, we incurred temporary agency costs of
$3.4 million compared to $10.2 million in 2002 and
$18.4 million in 2001. During the three months ended
March 31, 2004, we incurred temporary agency costs of
$0.8 million compared to $1.5 million for the same
period in 2003.
We conduct our business in a heavily
regulated industry and our failure to comply with laws and
government regulation could lead to fines and
penalties.
We must comply with complex laws and regulations
at the federal, state and local government levels relating to,
among other things:
|
|
|
|
|
licensure and certification;
|
|
|
|
qualifications of healthcare and support
personnel;
|
|
|
|
maintenance of physical plant and equipment;
|
|
|
|
staffing levels and quality of healthcare
services;
|
|
|
|
maintenance, confidentiality and security issues
associated with medical records;
|
|
|
|
relationships with physicians and referral
sources;
|
21
|
|
|
|
|
billing for services;
|
|
|
|
operating policies and procedures; and
|
|
|
|
additions or changes to facilities and services.
|
There are ongoing initiatives at the federal and
state levels for comprehensive reforms affecting the payment for
and availability of healthcare services. In addition,
regulations and policies of regulatory agencies are subject to
change. Aspects of some of these healthcare initiatives, such as
the termination of Medicare funding improvements and limitations
on Medicare coverage, other pressures to contain healthcare
costs by Medicare, Medicaid and other payors, as well as
increased operational requirements in the administration of
Medicaid, could adversely affect our financial condition or our
results of operations. Revisions to regulatory requirements,
changes in scope and quality of care to residents and revisions
to licensure and certification standards also could potentially
have a material impact on us. In the future, different
interpretations or enforcement of existing, new or amended laws
and regulations could result in allegations of impropriety or
illegality or could result in changes requiring capital
expenditure programs and operating expenses.
If we do not comply with applicable laws and
regulations, then we could be subject to liabilities, including
criminal and civil penalties and exclusion of one or more of our
facilities from participation in Medicare, Medicaid and other
federal and state healthcare programs. If one of our facilities
lost its certification under either the Medicare or Medicaid
program, then it would have to cease future admissions and
displace residents funded by the programs from the facility. In
order to become re-certified, a facility must rectify all
identified deficiencies and, over a specified period of time,
pass a survey conducted by representatives of the respective
program through demonstrated care and operations for residents
in the facility. Until the appropriate agency has verified
through the reasonable assurance process that the
facility can achieve and maintain substantial compliance with
all applicable participation requirements, the facility will not
be admitted back into either the Medicare or Medicaid program.
Medicare and Medicaid re-certification processes, while similar,
are conducted separately. Re-certification requires considerable
staff resources. The loss of certification from either program
can have potentially significant financial consequences. In
1998, we operated one facility in Maryland that lost its
certification under the Medicare program, and we subsequently
closed the facility. In November 2000, we operated one facility
in Indiana that lost its certification under the Medicare and
Medicaid programs but has since been re-certified under both
programs.
In June 2004, the Company reached a tentative
agreement with the State of Wisconsin to transfer the operations
of its skilled nursing facility in Chippewa Falls, Wisconsin to
a new licensee in response to facility citations for survey
deficiencies. The facility made no contribution to income during
the first quarter of 2004. The terms of the agreement with the
new licensee are currently under negotiation and have not yet
been finalized. Upon finalization of the agreement, which is
expected to occur during the third quarter of 2004, it is
possible that the Company may be required to take a charge for
asset impairment under Statement of Financial Accounting
Standards No. 144.
If we do not achieve and maintain
competitive quality of care ratings from CMS, our business may
be negatively affected.
CMS provides comparative data available to the
public on its web site, rating every skilled nursing facility
operating in each state based upon nine quality of care
indicators. These quality of care indicators include such
measures as percentages of patients with infections, bedsores
and unplanned weight loss. We currently monitor the comparative
data posted on the web site to respond to potential consumers
should questions arise. If we are unable to achieve quality of
care ratings that are comparable or superior to those of our
competitors, our ability to attract and retain patients could be
affected and, as a result, our occupancy levels could decline.
22
Changes in the case mix of residents, the
mix of residents by payor type and payment methodologies may
significantly affect our profitability.
The sources and amounts of our patient revenues
will be determined by a number of factors, including licensed
bed capacity and occupancy rates of our skilled nursing
facilities, average length of stay of our residents, the mix of
residents by payor type (for example, Medicare versus Medicaid
or private) and within the Medicare and certain Medicaid
programs, the distribution of residents assessed within the
RUGS. Changes that increase the percentage of Medicaid residents
within our facilities can have a material adverse effect on our
financial operations, especially in states whose reimbursement
levels are below the cost of providing care.
If we fail to cultivate new or maintain
existing relationships with the physicians in the communities in
which we operate, our patient base may decrease.
Our success depends in part upon the admissions
and referral practices of the physicians in the communities in
which we operate and our ability to cultivate and maintain
relationships with these physicians. Physicians referring
patients to our facilities are not our employees and are free to
refer their patients to other providers. If we are unable to
successfully cultivate and maintain strong relationships with
these physicians, our patient population may decline.
We face national, regional and local
competition.
Our skilled nursing and assisted living
facilities compete on a local and regional basis with other
long-term care providers. The number of competing centers in the
local market, the types of services available, quality of care,
reputation, age and appearance of each center and the cost of
care in each locality all affect our ability to compete
successfully. The availability and quality of competing
facilities significantly influence occupancy levels in assisted
living facilities. There are relatively few barriers to entry in
the assisted living industry and, therefore, future development
of assisted living facilities in the markets we serve could
limit our ability to attract and retain residents, to maintain
or increase resident service fees or to expand our business. See
Business Competition.
State efforts to regulate the construction
or expansion of healthcare providers could impair our ability to
expand through construction and redevelopment.
Most of the states in which we currently operate
have adopted laws to regulate expansion of skilled nursing
facilities. Certificate of need laws generally require that a
state agency approve certain acquisitions or physical plant
changes and determine that a need exists prior to the addition
of beds or services, the implementation of the physical plant
changes or the incurrence of capital expenditures exceeding a
prescribed amount. Some states also prohibit, restrict or delay
the issuance of certificates of need. Many states have
established similar certificate of need processes to regulate
the expansion of assisted living facilities.
If certificates of need or other similar
approvals are required in order to expand our operations, our
failure or inability to obtain the necessary approvals, changes
in the standards applicable to such approvals and possible
delays and expenses associated with obtaining such approvals
could adversely affect our ability to expand and, accordingly,
to increase our revenues and earnings. We cannot assure you that
we will be able to obtain a certificate of need or other
regulatory approval for all future projects requiring such
approval.
Many states in which we operate have implemented
moratoriums on the granting of licenses for any additional
skilled nursing facility beds. In these states we may only
expand by acquiring existing operations and licensure rights
from other skilled nursing care providers. We cannot guarantee
that we will be able to find acceptable acquisition targets in
these states, and as a result, we may not be able to expand in
these states.
23
We face periodic reviews, audits and
investigations under our contracts with federal and state
government agencies, and these audits could have adverse
findings that may negatively impact our business.
As a result of our participation in the Medicare
and Medicaid programs, we are subject to various governmental
reviews, audits and investigations to verify our compliance with
these programs and applicable laws and regulations. Private pay
sources also reserve the right to conduct audits. An adverse
review, audit or investigation could result in:
|
|
|
|
|
refunding amounts we have been paid pursuant to
the Medicare or Medicaid programs or from private payors;
|
|
|
|
state or federal agencies imposing fines,
penalties and other sanctions on us;
|
|
|
|
loss of our right to participate in the Medicare
or Medicaid programs or one or more private payor
networks; or
|
|
|
|
damages to our reputation in various markets.
|
Both federal and state government agencies have
heightened and coordinated civil and criminal enforcement
efforts as part of numerous ongoing investigations of healthcare
companies and, in particular, skilled nursing facilities. The
focus of these investigations includes:
|
|
|
|
|
cost reporting and billing practices;
|
|
|
|
quality of care;
|
|
|
|
financial relationships with referral
sources; and
|
|
|
|
medical necessity of services provided.
|
We also are subject to potential lawsuits under a
federal whistleblower statute designed to combat fraud and abuse
in the healthcare industry. These lawsuits can involve
significant monetary and award bounties to private plaintiffs
who successfully bring these suits.
We are required to comply with laws
governing the transmission and privacy of health
information.
The Health Insurance Portability and
Accountability Act of 1996, or HIPAA, requires us to comply with
standards relating to the privacy of protected health
information, the exchange of health information within our
company and with third parties and the security of electronic
protected health information. The privacy standards became
effective in April 2003, and the standards for electronic data
transactions and code sets became effective in October 2003. We
have implemented the new transaction and code sets with all
fiscal intermediaries and the states that are currently ready to
accept them. In the states where we have not implemented the new
transaction and code sets as of the date of this prospectus, we
are currently in the testing stages and continue to process and
receive payments on a timely basis.
We established a HIPAA task force consisting of
clinical, legal, financial and information services
professionals to monitor our implementation of and compliance
with the HIPAA standards. At this time, we believe we fully
comply with the HIPAA privacy and transactions and code sets
standards and will be successful in the implementation of the
security standards by the required implementation date, which is
currently April 21, 2005. However, our ability to comply
with the transactions standards is dependent upon other third
parties, including the fiscal intermediaries and state program
providers also complying with the HIPAA requirements and
timetables. If we fail to comply with the new standards, we
could be subject to criminal penalties and civil sanctions.
We may make acquisitions and undertake
management and consulting contracts that could subject us to a
number of operating risks.
We anticipate that we may continue to make
acquisitions of, investments in, and strategic alliances with,
complementary businesses, which will enable us to provide
additional services for our customer base and for adjacent
markets and to expand each of our businesses geographically. In
addition, we may
24
undertake management and consulting service
arrangements with other organizations. Implementation of these
strategies entails a number of risks including:
|
|
|
|
|
inaccurate assessment of undisclosed liabilities;
|
|
|
|
entry into markets in which we may have limited
or no experience;
|
|
|
|
diversion of managements attention from our
existing core business;
|
|
|
|
difficulties in assimilating the acquired
business or in realizing projected efficiencies and cost
savings; and
|
|
|
|
increasing our indebtedness and limiting our
ability to access additional capital when needed.
|
Additionally, certain changes to our existing
operation may be necessary to integrate the acquired businesses,
to assimilate new employees and to implement reporting,
monitoring, compliance and forecasting procedures.
If we are unable to control operating costs
and generate sufficient cash flow to meet operational and
financial requirements, including servicing our indebtedness,
our business operations may be adversely affected.
Cost containment and lower reimbursement levels
by third party payors, including federal and state governments,
have had a significant impact on the healthcare industry as a
whole and on our cash flows. Our operating margins continue to
be under pressure because of continuing regulatory scrutiny and
growth in operating expenses, such as labor costs and insurance
premiums. In addition, as a result of competitive pressures, our
ability to maintain operating margins through price increases to
private patients is limited. If we are unable to generate
sufficient cash flow to service our indebtedness, our business
operations will be materially adversely affected. As of
March 31, 2003, we were in compliance with the financial
covenants of our credit facility, 2007 Notes and Senior Notes,
and management has a strategy to remain in compliance with such
covenants. However, there can be no assurance that we will
comply with our financial covenant requirements in the future.
If we are unable to do so, our business operations may be
materially adversely affected.
Risks Relating to the Exchange Offer and the
New Notes
You may have difficulty selling the old
notes that you do not exchange.
If you do not exchange your old notes for the new
notes offered in this exchange offer, then you will continue to
be subject to the restrictions on the transfer of your old
notes. Those transfer restrictions are described in the
indenture governing the notes and in the legend contained on the
old notes, and arose because we originally issued the old notes
under exemptions from, and in transactions not subject to, the
registration requirements of the Securities Act.
In general, you may offer or sell your old notes
only if they are registered under the Securities Act and
applicable state securities laws, or if they are offered and
sold under an exemption from those requirements. We do not
intend to register the old notes under the Securities Act.
If a large number of old notes are exchanged for
new notes in the exchange offer, then it may be more difficult
for you to sell your unexchanged old notes. Additionally, if you
do not exchange your old notes in the exchange offer, then you
will no longer be entitled to have those notes registered under
the Securities Act. See The Exchange Offer
Consequences of Failure to Exchange Old Notes.
Our indebtedness could adversely affect our
financial health and our ability to fulfill our obligations
under the new notes.
As of March 31, 2004, our total consolidated
indebtedness, after giving effect to the sale and issuance of
the 2014 Notes and anticipated borrowings under our amended and
restated credit facility and the
25
application of the proceeds therefrom, was
approximately $320 million. Our indebtedness could have
important consequences to you including:
|
|
|
|
|
making it more difficult for us to satisfy our
obligations with respect to the notes;
|
|
|
|
increasing our vulnerability to general adverse
economic and industry conditions;
|
|
|
|
requiring that a portion of our cash flow from
operations be used for the payment of interest on our debt,
thereby reducing our ability to use our cash flow to fund
working capital, capital expenditures, acquisitions and general
corporate requirements;
|
|
|
|
limiting our ability to obtain additional
financing to fund future working capital, capital expenditures,
acquisitions and general corporate requirements;
|
|
|
|
limiting our flexibility in planning for, or
reacting to, changes in our business and the healthcare
industry; and
|
|
|
|
placing us at a competitive disadvantage to our
competitors that have less indebtedness.
|
We and our subsidiaries may be able to incur
additional indebtedness in the future, including secured
indebtedness. The terms of the indenture do not fully prohibit
us or our subsidiaries from doing so. If new indebtedness is
added to our and our subsidiaries current indebtedness
levels, the related risks that we and they now face could
intensify.
Covenant restrictions under our amended and
restated credit facility and our indentures may limit our
ability to operate our business.
Our amended and restated credit facility, the
indenture governing our Senior Notes and the indenture governing
the 2014 Notes contain, among other things, covenants that may
restrict our and our subsidiary guarantors ability to
finance future operations or capital needs or to engage in other
business activities. Our amended and restated credit facility
and the indentures restrict, among other things, our ability and
the ability of our subsidiaries to:
|
|
|
|
|
incur additional indebtedness;
|
|
|
|
create liens;
|
|
|
|
pay dividends on or redeem capital stock;
|
|
|
|
make certain investments;
|
|
|
|
make restricted payments;
|
|
|
|
make certain dispositions of assets;
|
|
|
|
engage in certain transactions with affiliates;
|
|
|
|
engage in certain business activities; and
|
|
|
|
engage in mergers, consolidations and certain
sales of assets.
|
In addition, our amended and restated credit
facility requires us to maintain specified financial ratios and
tests, which may require that we take action to reduce our debt
or to act in a manner contrary to our business objectives.
Events beyond our control, including changes in general business
and economic conditions, may affect our ability to meet those
financial ratios and tests. We cannot assure you that we will
meet those ratios and tests or that the lenders will waive any
failure to meet those ratios and tests. A breach of any of these
covenants would result in a default under our amended and
restated credit facility, and any resulting acceleration under
the amended and restated credit facility may result in a default
under our indentures. If an event of default under our amended
and restated credit facility occurs, the lenders could elect to
declare all amounts outstanding thereunder, together with
accrued interest, to be immediately due and payable. See
Prospectus Summary Recent
Developments Amendment and
26
Restatement of Credit Facility,
Description of Other Indebtedness and
Description of the New Notes.
Our business and financial results depend
on our ability to generate sufficient cash flows to service our
debt or refinance our indebtedness on commercially reasonable
terms.
Our ability to make payments on and to refinance
our debt and to fund planned expenditures depends on our ability
to generate cash flow in the future. This, to some extent, is
subject to general economic, financial, competitive, legislative
and regulatory factors and other factors that are beyond our
control. We cannot assure you that our business will generate
cash flows from operations or that future borrowings will be
available to us under our amended and restated credit facility
in an amount sufficient to enable us to pay our debt or to fund
our other liquidity needs. We cannot assure you that we will be
able to refinance our borrowing arrangements or any other
outstanding debt on commercially reasonable terms or at all.
Refinancing our borrowing arrangements could cause us to:
|
|
|
|
|
pay higher interest;
|
|
|
|
be subject to additional or more restrictive
covenants than those outlined above; and
|
|
|
|
grant additional security interests in our
collateral.
|
Our inability to generate sufficient cash flow to
service our debt or refinance our indebtedness on commercially
reasonable terms would have a material adverse effect on our
business and results of operations.
As a holding company, we rely on payments
from our subsidiaries in order for us to make payments on the
notes.
We are a holding company with no significant
operations of our own. Because our operations are conducted
through our subsidiaries, we depend on dividends, loans,
advances and other payments from our subsidiaries in order to
allow us to satisfy our financial obligations. Our subsidiaries
are separate and distinct legal entities and have no obligation
to pay any amounts to us, whether by dividends, loans, advances
or other payments. The ability of our subsidiaries to pay
dividends and make other payments to us depends on their
earnings, capital requirements and general financial conditions
and is restricted by, among other things, applicable corporate
and other laws and regulations and future agreements to which
our subsidiaries may be a party. Although our subsidiary
guarantors have guaranteed the old notes, and are guaranteeing
the new notes, each guarantee is subordinated to all senior debt
of the relevant subsidiary guarantor.
The notes and the subsidiary guarantees
will be subordinated to our and our subsidiary guarantors
senior indebtedness.
The old notes and the subsidiary guarantees are,
and the new notes and the subsidiary guarantees will be,
subordinated in right of payment to all of our and our
subsidiary guarantors senior indebtedness. The indenture
governing the notes permits the incurrence of additional
indebtedness, including senior indebtedness, by us and our
restricted subsidiaries in the future. See Description of
the New Notes Certain Covenants
Incurrence of Indebtedness and Issuance of Preferred
Stock. Because of the subordination provisions of the
notes, in the event of our or one of our subsidiary
guarantors bankruptcy, liquidation, reorganization or
other winding up, our assets or the assets of our subsidiary
guarantors will be available to pay obligations on the notes or
the subsidiary guarantees only after all such senior debt has
been repaid in full from such assets. There may not be
sufficient assets remaining to pay amounts due on any or all of
the notes or guarantees, as the case may be, that are
outstanding.
In addition, all payments on the notes and the
subsidiary guarantees will be prohibited in the event of a
payment default on certain of our and our subsidiary
guarantors senior indebtedness (including our Senior Notes
and borrowings under our amended and restated credit facility)
and may be blocked for up to 179 days each year upon the
occurrence of other defaults under such indebtedness.
27
A court may void the subsidiary guarantees
of the notes or further subordinate the subsidiary guarantees to
other obligations of our subsidiary guarantors.
Although standards may vary depending upon the
applicable law, generally under U.S. federal bankruptcy law
and comparable provisions of state fraudulent transfer laws, a
court could void all or a portion of the subsidiary guarantees
of the notes or further subordinate the subsidiary guarantees to
other obligations of our subsidiary guarantors. If the claims of
the holders of the notes against any subsidiary guarantor were
held to be unenforceable or further subordinated in favor of
other creditors of that subsidiary guarantor, the other
creditors would be entitled to be paid in full before any
payment could be made on the notes. If one or more of the
subsidiary guarantees is voided or further subordinated, we
cannot assure you that after providing for all prior claims,
there would be sufficient assets remaining to satisfy the claims
of the holders of the notes.
We may be unable to repurchase the notes
and the Senior Notes if we experience a change of
control.
If we were to experience a change of control, the
indentures governing the 2014 Notes and the Senior Notes require
us to offer to purchase all of the outstanding notes and Senior
Notes. Our failure to repay holders tendering notes upon a
change of control will result in an event of default under these
indentures. A change of control or an event of default under
these indentures may also result in an event of default under
our amended and restated credit facility, which may result in
the acceleration of the indebtedness under that facility
requiring us to repay that indebtedness immediately. If a change
of control were to occur, we cannot assure you that we would
have sufficient funds to repay debt outstanding under our
amended and restated credit facility or to purchase the 2014
Notes, the Senior Notes or any other securities that we would be
required to offer to purchase. We expect that we would require
additional financing from third parties to fund any such
purchases, and we cannot assure you that we would be able to
obtain financing on satisfactory terms or at all. See
Prospectus Summary Recent
Developments Amendment and Restatement of Credit
Facility, Description of Other Indebtedness
and Description of the New Notes.
No public market exists for the notes, and
any market for the notes may be illiquid.
The notes are a new issue of securities with no
established trading market. We do not intend to list the notes
for trading on any stock exchange or arrange for any quotation
system to quote prices for them. The initial purchasers have
informed us that they intend to make a market in the notes,
however, they are not obligated to do so and may cease
market-making activities at any time. As a result, we cannot
assure you that an active trading market will develop or
continue for the notes.
28
THE EXCHANGE OFFER
Purpose and Effect; Registration
Rights
We sold the old notes on April 22, 2004 in
transactions exempt from the registration requirements of the
Securities Act. Therefore, the old notes are subject to
significant restrictions on resale. In connection with the
issuance of the old notes; we and our subsidiary guarantors
entered into a registration rights agreement, which required
that we and our subsidiary guarantors:
|
|
|
|
|
use our reasonable best efforts to file with the
Securities and Exchange Commission a registration statement
under the Securities Act relating to the exchange offer and the
issuance and delivery of the new notes in exchange for the old
notes;
|
|
|
|
use our reasonable best efforts to cause the
Securities and Exchange Commission to declare the exchange offer
registration statement effective under the Securities Act; and
|
|
|
|
use our reasonable best efforts to consummate the
exchange offer not later than 30 business days following the
effective date of the exchange offer registration statement.
|
If you participate in the exchange offer, you
will, with limited exceptions, receive new notes that are freely
tradable and not subject to restrictions on transfer. You should
refer to The Exchange Offer Resales of New
Notes for more information relating to your ability to
transfer new notes.
If you are eligible to participate in the
exchange offer and do not tender your old notes, you will
continue to hold the untendered old notes, which will continue
to be subject to restrictions on transfer under the Securities
Act.
The exchange offer is intended to satisfy our
exchange offer obligations under the registration rights
agreement. The above summary of the registration rights
agreement is not complete and is subject to, and qualified by
reference to, all the provisions of the registration rights
agreement. A copy of the registration rights agreement has been
filed as an exhibit to the registration statement that includes
this prospectus.
Terms of the Exchange Offer
We are offering to exchange $125,000,000 in
aggregate principal amount of our 6 7/8% Senior
Subordinated Notes due 2014 that have been registered under the
Securities Act for a like aggregate principal amount of our
outstanding unregistered 6 7/8% Senior Subordinated
Notes due 2014.
Upon the terms and subject to the conditions set
forth in this prospectus and in the accompanying letter of
transmittal, we will accept all old notes validly tendered and
not withdrawn before 5:00 p.m., New York City time, on
the expiration date of the exchange offer. We will issue $1,000
principal amount of new notes in exchange for each $1,000
principal amount of outstanding old notes we accept in the
exchange offer. You may tender some or all of your old notes
under the exchange offer. However, the old notes are issuable in
authorized denominations of $1,000 and integral multiples
thereof. Accordingly, old notes may be tendered only in
denominations of $1,000 and integral multiples thereof. The
exchange offer is not conditioned upon any minimum amount of old
notes being tendered.
The form and terms of the new notes will be the
same as the form and terms of the old notes, except that:
|
|
|
|
|
the new notes will be registered with the
Securities and Exchange Commission and thus will not be subject
to the restrictions on transfer or bear legends restricting
their transfer;
|
|
|
|
all of the new notes will be represented by
global notes in book-entry form unless exchanged for notes in
definitive certificated form under the limited circumstances
described under Description of the New Notes
Book-Entry, Delivery and Form; and
|
|
|
|
the new notes will not provide for registration
rights and the payment of liquidated damages under circumstances
relating to the timing of the exchange offer.
|
29
The new notes will evidence the same debt as the
old notes and will be issued under, and be entitled to the
benefits of, the indenture governing the old notes.
The new notes will accrue interest from the most
recent date to which interest has been paid on the old notes or,
if no interest has been paid, from the date of issuance of the
old notes. Accordingly, registered holders of new notes on the
record date for the first interest payment date following the
completion of the exchange offer will receive interest accrued
from the most recent date to which interest has been paid on the
old notes or, if no interest has been paid, from the date of
issuance of the old notes. However, if that record date occurs
prior to completion of the exchange offer, then the interest
payable on the first interest payment date following the
completion of the exchange offer will be paid to the registered
holders of the old notes on that record date.
In connection with the exchange offer, you do not
have any appraisal or dissenters rights under applicable
law or the indenture. We intend to conduct the exchange offer in
accordance with the registration rights agreement and the
applicable requirements of the Securities Exchange Act of 1934
and the rules and regulations of the Securities and Exchange
Commission. The exchange offer is not being made to, nor will we
accept tenders for exchange from, holder of the old notes in any
jurisdiction in which the exchange offer or the acceptance of it
would not be in compliance with the securities or blue sky laws
of the jurisdiction.
We will be deemed to have accepted validly
tendered old notes when we have given oral or written notice of
our acceptance to the exchange agent. The exchange agent will
act as agent for the tendering holders for the purpose of
receiving the new notes from us.
If we do not accept any tendered old notes
because of an invalid tender or for any other reason, then we
will return certificates for any unaccepted old notes without
expense to the tendering holder as promptly as practicable after
the expiration date.
Expiration Date; Amendments
The exchange offer will expire at 5:00 p.m.,
New York City time, on August 17, 2004, unless we, in our
sole discretion, extend the exchange offer.
If we determine to extend the exchange offer,
then we will notify the exchange agent of any extension by oral
or written notice and give each registered holder notice of the
extension by means of a press release or other public
announcement before 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date.
We reserve the right, in our sole discretion, to
delay accepting any old notes, to extend the exchange offer or
to amend or terminate the exchange offer if any of the
conditions described below under Conditions to
the Exchange Offer have not been satisfied or waived by
giving oral or written notice to the exchange agent of the
delay, extension, amendment or termination. Further, we reserve
the right, in our sole discretion, to amend the terms of the
exchange offer in any manner. We will notify you as promptly as
practicable of any extension, amendment or termination. We will
also file a post-effective amendment to the registration
statement of which this prospectus is a part with respect to any
fundamental change in the exchange offer.
Procedures for Tendering Old Notes
A holder who wishes to tender old notes in the
exchange offer must do either of the following:
|
|
|
|
|
properly complete, sign and date the letter of
transmittal, including all other documents required by the
letter of transmittal; have the signature on the letter of
transmittal guaranteed if the letter of transmittal so requires;
and deliver that letter of transmittal and other required
documents to the exchange agent at the address listed below
under Exchange Agent on or before the
expiration date; or
|
30
|
|
|
|
|
if the old notes are tendered under the
book-entry transfer procedures described below, transmit to the
exchange agent an agents message, which agents
message must be received by the exchange agent prior to
5:00 p.m., New York City time, on the expiration date.
|
In addition, one of the following must occur:
|
|
|
|
|
the exchange agent must receive certificates
representing your old notes along with the letter of transmittal
on or before the expiration date, or
|
|
|
|
the exchange agent must receive a timely
confirmation of book-entry transfer of the old notes into the
exchange agents account at The Depository Trust Company,
or DTC, under the procedure for book-entry transfers described
below along with the letter of transmittal or a properly
transmitted agents message, on or before the expiration
date; or
|
|
|
|
the holder must comply with the guaranteed
delivery procedures described below.
|
The term agents message means a
message, transmitted by a book-entry transfer facility to and
received by the exchange agent and forming a part of the
book-entry confirmation, which states that the book-entry
transfer facility has received an express acknowledgement from
the tendering participant stating that the participant has
received and agrees to be bound by the letter of transmittal,
and that we may enforce the letter of transmittal against the
participant.
To be tendered effectively, the exchange agent
must receive any physical delivery of the letter of transmittal
and other required documents at the address set forth below
under Exchange Agent on or before the
expiration of the exchange offer. To receive confirmation of
valid tender of old notes, a holder should contact the exchange
agent at the telephone number listed under
Exchange Agent.
Any tender of old notes that is not withdrawn
prior to the expiration date will constitute a binding agreement
between the tendering holder and us upon the terms and subject
to the conditions set forth in this prospectus and in the
accompanying letter of transmittal. Only a registered holder of
old notes may tender the old notes in the exchange offer. If a
holder completing a letter of transmittal tenders less than all
of the old notes held by that holder, then that tendering holder
should fill in the applicable box of the letter of transmittal.
The amount of old notes delivered to the exchange agent will be
deemed to have been tendered unless otherwise indicated.
The method of delivery of old notes, the letter
of transmittal and all other required documents to the exchange
agent is at your election and risk. Rather than mail these
items, we recommend that you use an overnight or hand delivery
service. In all cases, you should allow sufficient time to
assure timely delivery to the exchange agent before the
expiration date. Do not send letters of transmittal or old notes
to us.
Generally, an eligible institution must guarantee
signatures on a letter of transmittal or a notice of withdrawal
unless the old notes are tendered:
|
|
|
|
|
by a registered holder of the old notes who has
not completed the box entitled Special Issuance
Instructions or Special Delivery Instructions
on the letter of transmittal; or
|
|
|
|
for the account of an eligible institution.
|
If signatures on a letter of transmittal or a
notice of withdrawal are required to be guaranteed, the
guarantee must be by a firm which is:
|
|
|
|
|
a member of a registered national securities
exchange;
|
|
|
|
a member of the National Association of
Securities Dealers, Inc.;
|
|
|
|
a commercial bank or trust company having an
office or correspondent in the United States; or
|
|
|
|
another eligible guarantor
institution within the meaning of Rule 17Ad-15 under
the Securities Exchange Act.
|
31
If the letter of transmittal is signed by a
person other than the registered holder of any outstanding old
notes, the original notes must be endorsed or accompanied by
appropriate powers of attorney. The power of attorney must be
signed by the registered holder exactly as the registered
holder(s) name(s) appear(s) on the old notes and an eligible
guarantor institution must guarantee the signature on the power
of attorney.
If the letter of transmittal, or any old notes or
powers of attorney are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative
capacity, these persons should so indicate when signing. Unless
waived by us, they should also submit evidence satisfactory to
us of their authority to so act.
If you wish to tender old notes that are
registered in the name of a broker, dealer, commercial bank,
trust company or other nominee, you should promptly instruct the
registered holder to tender on your behalf. If you wish to
tender on your behalf, you must, before completing the
procedures for tendering old notes, either register ownership of
the old notes in your name or obtain a properly completed bond
power from the registered holder. The transfer of registered
ownership may take considerable time.
We will determine in our sole discretion all
questions as to the validity, form, eligibility, including time
of receipt, and acceptance of old notes tendered for exchange.
Our determination will be final and binding on all parties. We
reserve the absolute right to reject any and all tenders of old
notes not properly tendered or old notes our acceptance of which
might, in the judgment of our counsel, be unlawful. We also
reserve the absolute right to waive any defects, irregularities
or conditions of tender as to any particular old notes. Our
interpretation of the terms and conditions of the exchange
offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of old
notes must be cured within the time period we determine. Neither
we, the exchange agent nor any other person will incur any
liability for failure to give you notification of defects or
irregularities with respect to tenders of your old notes.
By tendering, you will represent to us that:
|
|
|
|
|
any new notes that the holder receives will be
acquired in the ordinary course of its business;
|
|
|
|
the holder has no arrangement or understanding
with any person or entity to participate in the distribution of
the new notes;
|
|
|
|
if the holder is not a broker-dealer, that it is
not engaged in and does not intend to engage in the distribution
of the new notes;
|
|
|
|
if the holder is a broker-dealer that will
receive new notes for its own account in exchange for old notes
that were acquired as a result of market-making activities or
other trading activities, that it will deliver a prospectus, as
required by law, in connection with any resale of those new
notes (see Plan of Distribution); and
|
|
|
|
the holder is not our affiliate, as
defined in Rule 405 of the Securities Act, or, if the
holder is our affiliate, it will comply with any applicable
registration and prospectus delivery requirements of the
Securities Act.
|
If any holder or any such other person is our
affiliate, or is engaged in or intends to engage in
or has an arrangement or understanding with any person to
participate in a distribution of the new notes to be acquired in
the exchange offer, then that holder or any such other person:
|
|
|
|
|
may not rely on the applicable interpretations of
the staff of the Securities and Exchange Commission;
|
|
|
|
is not entitled and will not be permitted to
tender old notes in the exchange offer; and
|
|
|
|
must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with
any resale transaction.
|
32
Each broker-dealer who acquired its old notes as
a result of market-making activities or other trading activities
and thereafter receives new notes issued for its own account in
the exchange offer, must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes
issued in the exchange offer. The letter of transmittal states
that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an
underwriter within the meaning of the Securities
Act. See Plan of Distribution for a discussion of
the exchange and resale obligations of broker-dealers in
connection with the exchange offer.
Any broker-dealer that acquired old notes
directly from us may not rely on the applicable interpretations
of the staff of the Securities and Exchange Commission and must
comply with the registration and prospectus delivery
requirements of the Securities Act (including being named as a
selling securityholder) in connection with any resales of the
old notes or the new notes.
Acceptance of Old Notes for Exchange; Delivery
of New Notes
Upon satisfaction of all conditions to the
exchange offer, we will accept, promptly after the expiration
date, all old notes properly tendered and will issue the new
notes promptly after acceptance of the old notes.
For purposes of the exchange offer, we will be
deemed to have accepted properly tendered old notes for exchange
when we have given oral or written notice of that acceptance to
the exchange agent. For each old note accepted for exchange, you
will receive a new note having a principal amount equal to that
of the surrendered old note.
In all cases, we will issue new notes for old
notes that we have accepted for exchange under the exchange
offer only after the exchange agent timely receives:
|
|
|
|
|
certificates for your old notes or a timely
confirmation of book-entry transfer of your old notes into the
exchange agents account at DTC; and
|
|
|
|
a properly completed and duly executed letter of
transmittal and all other required documents or a properly
transmitted agents message.
|
If we do not accept any tendered old notes for
any reason set forth in the terms of the exchange offer or if
you submit old notes for a greater principal amount than you
desire to exchange, we will return the unaccepted or
non-exchanged old notes without expense to you. In the case of
old notes tendered by book-entry transfer into the exchange
agents account at DTC under the book-entry procedures
described below, we will credit the non-exchanged old notes to
your account maintained with DTC.
Book-Entry Transfer
We understand that the exchange agent will make a
request within two business days after the date of this
prospectus to establish accounts for the old notes at DTC for
the purpose of facilitating the exchange offer, and any
financial institution that is a participant in DTCs system
may make book-entry delivery of old notes by causing DTC to
transfer the old notes into the exchange agents account at
DTC in accordance with DTCs procedures for transfer.
Although delivery of old notes may be effected through
book-entry transfer at DTC, the exchange agent must receive a
properly completed and duly executed letter of transmittal with
any required signature guarantees, or an agents message in
lieu of a letter of transmittal, and all other required
documents at its address listed below under
Exchange Agent on or before the
expiration date, or if you comply with the guaranteed delivery
procedures described below, within the time period provided
under those procedures.
33
Guaranteed Delivery Procedures
If you wish to tender your old notes and your old
notes are not immediately available, or you cannot deliver your
old notes, the letter of transmittal or any other required
documents or comply with DTCs procedures for transfer
before the expiration date, then you may participate in the
exchange offer if:
|
|
|
|
|
the tender is made through an eligible guarantor
institution;
|
|
|
|
before the expiration date, the exchange agent
receives from the eligible guarantor institution a properly
completed and duly executed notice of guaranteed delivery,
substantially in the form provided by us, by facsimile
transmission, mail or hand delivery, containing:
|
|
|
|
|
|
the name and address of the holder and the
principal amount of old notes tendered;
|
|
|
|
a statement that the tender is being made
thereby; and
|
|
|
|
a guarantee that within three New York Stock
Exchange trading days after the expiration date, the
certificates representing the old notes in proper form for
transfer or a book-entry confirmation and any other documents
required by the letter of transmittal will be deposited by the
eligible guarantor institution with the exchange agent; and
|
|
|
|
|
|
the exchange agent receives the properly
completed and executed letter of transmittal as well as
certificates representing all tendered old notes in proper form
for transfer, or a book-entry confirmation, and all other
documents required by the letter of transmittal within three New
York Stock Exchange trading days after the expiration date.
|
Withdrawal Rights
You may withdraw your tender of old notes at any
time before the exchange offer expires.
For a withdrawal to be effective, the exchange
agent must receive a written notice of withdrawal at its address
listed below under Exchange Agent. The
notice of withdrawal must:
|
|
|
|
|
specify the name of the person who tendered the
old notes to be withdrawn;
|
|
|
|
identify the old notes to be withdrawn, including
the principal amount, or, in the case of old notes tendered by
book-entry transfer, the name and number of the DTC account to
be credited, and otherwise comply with the procedures of DTC; and
|
|
|
|
if certificates for old notes have been
transmitted, specify the name in which those old notes are
registered if different from that of the withdrawing holder.
|
If you have delivered or otherwise identified to
the exchange agent the certificates for old notes, then, before
the release of these certificates, you must also submit the
serial numbers of the particular certificates to be withdrawn
and a signed notice of withdrawal with the signatures guaranteed
by an eligible institution, unless the holder is an eligible
institution.
We will determine in our sole discretion all
questions as to the validity, form and eligibility, including
time of receipt, of notices of withdrawal. Our determination
will be final and binding on all parties. Any old notes so
withdrawn will be deemed not to have been validly tendered for
purposes of the exchange offer. We will return any old notes
that have been tendered but that are not exchanged for any
reason to the holder, without cost, as soon as practicable after
withdrawal, rejection of tender or termination of the exchange
offer. In the case of old notes tendered by book-entry transfer
into the exchange agents account at DTC, the old notes
will be credited to an account maintained with DTC for the old
notes. You may retender properly withdrawn old notes by
following one of the procedures described under
Procedures for Tendering Old Notes at
any time on or before the expiration date.
34
Conditions to the Exchange Offer
Notwithstanding any other term of the exchange
offer, we will not be required to accept for exchange, or to
exchange new notes for, any old notes if in our reasonable
judgment:
|
|
|
|
|
the new notes to be received will not be tradable
by the holder, without restriction under the Securities Act and
the Securities Exchange Act and without material restrictions
under the blue sky or securities laws of substantially all of
the states of the United States;
|
|
|
|
the exchange offer, or the making of any exchange
by a holder of old notes, would violate any applicable law or
applicable interpretation by the staff of the Securities and
Exchange Commission; or
|
|
|
|
any action or proceeding is instituted or
threatened in any court or by or before any governmental agency
with respect to the exchange offer which, in our judgment, would
reasonably be expected to impair our ability to proceed with the
exchange offer.
|
The conditions listed above are for our sole
benefit and we may assert them regardless of the circumstances
giving rise to any condition. Subject to applicable law, we may
waive these conditions in our discretion in whole or in part at
any time and from time to time. If we waive these conditions,
then we intend to continue the exchange offer for at least five
business days after the waiver. If we fail at any time to
exercise any of the above rights, the failure will not be deemed
a waiver of those rights, and those rights will be deemed
ongoing rights which may be asserted at any time and from time
to time.
We will not accept for exchange any old notes
tendered, and will not issue new notes in exchange for any old
notes, if at that time a stop order is threatened or in effect
with respect to the registration statement of which this
prospectus is a part or the qualification of the indentures
under the Trust Indenture Act of 1939.
Exchange Agent
U.S. Bank, N.A. is the exchange agent for
the exchange offer. You should direct any questions and requests
for assistance and requests for additional copies of this
prospectus, the letter of transmittal or the notice of
guaranteed delivery to the exchange agent addressed as follows:
|
|
|
By Hand, Overnight Mail, Courier, or
Registered or Certified Mail: |
|
|
U.S. Bank National Association
|
|
60 Livingston Ave
|
|
St. Paul, MN 55107
|
|
Attention: Specialized Finance
|
|
|
By Facsimile: |
|
|
(651) 495-8158
|
|
Attention: Specialized Finance
|
Delivery of the letter of transmittal to an
address other than as listed above or transmission via facsimile
other than as listed above will not constitute a valid delivery
of the letter of transmittal.
Fees and Expenses
We will pay the expenses of the exchange offer.
We will not make any payments to brokers, dealers or others
soliciting acceptances of the exchange offer. We are making the
principal solicitation by mail; however, our officers and
employees may make additional solicitations by facsimile
transmission, e-mail, telephone or in person. You will not be
charged a service fee for the exchange of your old notes, but we
may require you to pay any transfer or similar government taxes
in certain circumstances.
35
Transfer Taxes
You will be obligated to pay any transfer taxes
applicable to the transfer of the old notes pursuant to the
exchange offer.
Accounting Treatment
We will record the new notes in our accounting
records at the same carrying values as the old notes, which is
the aggregate principal amount of the old notes, as reflected in
our accounting records on the date of exchange. Accordingly, we
will not recognize any gain or loss for accounting purposes in
connection with the exchange offer.
Resales of New Notes
Based on interpretations of the staff of the
Securities and Exchange Commission, as set forth in no-action
letters to third parties, we believe that new notes issued under
the exchange offer in exchange for old notes may be offered for
resale, resold and otherwise transferred by any old note holder
without further registration under the Securities Act and
without delivery of a prospectus that satisfies the requirements
of Section 10 of the Securities Act if:
|
|
|
|
|
the holder is not our affiliate
within the meaning of Rule 405 under the Securities Act;
|
|
|
|
the new notes are acquired in the ordinary course
of the holders business; and
|
|
|
|
the holder does not intend to participate in a
distribution of the new notes.
|
Any holder who exchanges old notes in the
exchange offer with the intention of participating in any manner
in a distribution of the new notes must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction.
This prospectus may be used for an offer to
resell, resale or other transfer of new notes. With regard to
broker-dealers, only broker-dealers that acquired the old notes
as a result of market-making activities or other trading
activities may participate in the exchange offer. Each
broker-dealer that receives new notes for its own account in
exchange for old notes, where the old notes were acquired by the
broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of the new notes.
Please see Plan of Distribution for more details
regarding the transfer of new notes.
Consequences of Failure to Exchange Old
Notes
Holders who desire to tender their old notes in
exchange for new notes registered under the Securities Act
should allow sufficient time to ensure timely delivery. Neither
we nor the exchange agent is under any duty to give notification
of defects or irregularities with respect to the tenders of old
notes for exchange.
Old notes that are not tendered or are tendered
but not accepted will, following the consummation of the
exchange offer, continue to be subject to the provisions in the
indenture regarding the transfer and exchange of the old notes
and the existing restrictions on transfer set forth in the
legend on the old notes and in the offering memorandum, dated
April 15, 2004, relating to the old notes. Except in
limited circumstances with respect to the specific types of
holders of old notes, we will have no further obligation to
provide for the registration under the Securities Act of such
old notes. In general, old notes, unless registered under the
Securities Act, may not be offered or sold except pursuant to an
exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable
state securities laws. We do not anticipate that we will take
any action to register the untendered old notes under the
Securities Act or under any state securities laws.
Upon completion of the exchange offer, holders of
the old notes will not be entitled to any further registration
rights under the registration rights agreement, except under
limited circumstances.
36
Old notes that are not exchanged in the exchange
offer will remain outstanding and continue to accrue interest
and will be entitled to the rights and benefits their holders
have under the indenture relating to the old notes and the new
notes. Holders of the new notes and any old notes that remain
outstanding after consummation of the exchange offer will vote
together as a single class for purposes of determining whether
holders of the requisite percentage of the class have taken
certain actions or exercised certain rights under the indenture.
37
USE OF PROCEEDS
This exchange offer is intended to satisfy our
obligations under the registration rights agreement entered into
in connection with the issuance of the old notes. Neither we nor
any subsidiary guarantor will receive any proceeds from the
issuance of the new notes. In consideration for issuing the new
notes as contemplated by this prospectus, we will receive the
old notes in like principal amount, the terms of which are
identical in all material respects to the new notes. The old
notes surrendered in exchange for the new notes will be retired
and canceled and cannot be reissued. Accordingly, the issuance
of the new notes will not result in any increase or decrease in
our indebtedness.
We used the net proceeds of approximately
$117.4 million, net of a $3.1 million discount and
fees and expenses of $4.5 million, from the sale and
issuance of the old notes, together with borrowings under our
amended and restated credit facility to purchase for cash
approximately $104.9 million aggregate principal amount of
2007 Notes validly tendered in the tender offer and to redeem
any 2007 Notes not tendered in the tender offer or cancelled
prior to May 24, 2004.
38
CAPITALIZATION
The following table sets forth the cash and cash
equivalents and our consolidated capitalization as of
March 31, 2004 on an actual basis and as adjusted to give
effect to the sale and issuance of the 2014 Notes and the
application of the proceeds therefrom and the borrowings under
our amended and restated credit facility. You should read this
table in conjunction with our audited consolidated financial
statements and the related notes to the audited consolidated
financial statements included elsewhere in this prospectus. See
Use of Proceeds, Summary Consolidated
Historical Financial and Operating Data, Selected
Consolidated Historical Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Description
of Other Indebtedness.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2004 |
|
|
|
|
|
|
|
As |
|
|
Actual |
|
Adjusted |
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
Cash and cash equivalents
|
|
$ |
47,893 |
|
|
$ |
2,834 |
|
Total debt:
|
|
|
|
|
|
|
|
|
|
Amended and restated credit facility(1)
|
|
|
|
|
|
|
18,000 |
|
|
Industrial development revenue bonds(2)
|
|
|
20,160 |
|
|
|
20,160 |
|
|
Promissory notes, mortgages, capital lease
obligations and other debt
|
|
|
10,392 |
|
|
|
10,392 |
|
|
9.500% Senior Notes due 2010
|
|
|
149,685 |
|
|
|
149,685 |
|
|
9.350% Senior Subordinated Notes due 2007(3)
|
|
|
200,000 |
|
|
|
|
|
|
6.875% Senior Subordinated Notes due 2014
|
|
|
|
|
|
|
121,875 |
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
380,237 |
|
|
|
320,112 |
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1 |
|
|
|
1 |
|
|
Additional paid-in capital
|
|
|
208,787 |
|
|
|
208,787 |
|
|
Accumulated other comprehensive loss
|
|
|
1,600 |
|
|
|
985 |
|
|
Accumulated deficit(4)
|
|
|
(17,766 |
) |
|
|
(21,629 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
192,622 |
|
|
|
188,144 |
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
572,859 |
|
|
$ |
508,256 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
As of March 31, 2004, we had available
borrowings under our credit facility of $105.0 million and
$33.7 million of letters of credit outstanding under our
credit facility. As discussed in Prospectus
Summary Recent Developments Amendment
and Restatement of Credit Facility, in connection with the
sale and issuance of the 2014 Notes, we amended and restated our
credit facility to provide, among other things, an additional
$50.0 million of senior secured financing on a revolving
basis.
|
|
(2) |
In February 2004, we prepaid in full two
industrial development revenue bonds totaling $13.0 million.
|
|
(3) |
As of March 31, 2004, Extendicare Inc., our
parent company, held $27.9 million of our 2007 Notes. These
2007 Notes were repaid on May 24, 2004.
|
|
(4) |
Holders of the 2007 Notes who tendered their 2007
Notes or whose 2007 Notes were redeemed received a premium that
in aggregate amounted to approximately $6.6 million. As a
result of the tender offer, redemption and repayment of the 2007
Notes, in the second quarter of 2004, we will write off deferred
finance charges of approximately $2.4 million related to
the 2007 Notes and incur legal costs estimated at
$0.3 million. In addition, pursuant to the termination of
our existing interest rate swap and cap agreements, we will
record a gain of approximately $3.3 million which will be
recognized in the second quarter of 2004. The net after tax
impact to earnings will be a loss of
|
39
|
|
|
approximately $3.9 million, which will be
reflected within our accumulated deficit. Below is a summary of
the loss to be reported in the second quarter of 2004.
|
|
|
|
|
|
|
|
(dollars in |
|
|
thousands) |
|
|
|
Tender premium and call premium
|
|
$ |
(6,636 |
) |
Write-off of deferred finance charges
|
|
|
(2,359 |
) |
Gain on termination of interest rate swap and cap
agreements
|
|
|
3,302 |
|
Legal expenses (estimated)
|
|
|
(250 |
) |
|
|
|
|
|
|
|
|
(5,943 |
) |
Income taxes
|
|
|
2,080 |
|
|
|
|
|
|
Net impact
|
|
$ |
(3,863 |
) |
|
|
|
|
|
40
SELECTED CONSOLIDATED HISTORICAL FINANCIAL
DATA
The following table summarizes our selected
consolidated historical financial data, which you should read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
consolidated financial statements and related notes. The
selected consolidated financial data as of March 31, 2004
and for the three-month periods ended March 31, 2004 and
2003 have been derived from our unaudited consolidated quarterly
financial statements included elsewhere in this prospectus, and
the selected consolidated financial data as of March 31,
2003 have been derived from our unaudited consolidated quarterly
financial statements, all of which, in our opinion, reflect all
adjustments necessary to present fairly the data for such
periods. Interim results for the three months ended
March 31, 2004 and 2003 are not necessarily indicative of
results that can be expected in future periods. The selected
consolidated financial data as of December 31, 2003 and
2002 and for each of the years in the three-year period ended
December 31, 2003 have been derived from our audited
consolidated financial statements included elsewhere in this
prospectus. The selected consolidated financial data as of
December 31, 2001, 2000 and 1999 and for each of the years
in the two-year period ended December 31, 2000 have been
derived from our audited consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31, |
|
Year Ended December 31, |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing and assisted living facilities
|
|
$ |
224,426 |
|
|
$ |
204,805 |
|
|
$ |
843,414 |
|
|
$ |
787,419 |
|
|
$ |
766,952 |
|
|
$ |
904,847 |
|
|
$ |
916,195 |
|
|
Outpatient therapy and medical supplies
|
|
|
2,665 |
|
|
|
2,644 |
|
|
|
11,524 |
|
|
|
10,280 |
|
|
|
9,515 |
|
|
|
9,716 |
|
|
|
43,068 |
|
|
Other
|
|
|
4,410 |
|
|
|
3,977 |
|
|
|
15,494 |
|
|
|
17,352 |
|
|
|
17,640 |
|
|
|
8,506 |
|
|
|
8,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
231,501 |
|
|
|
211,426 |
|
|
|
870,432 |
|
|
|
815,051 |
|
|
|
794,107 |
|
|
|
923,069 |
|
|
|
967,585 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
189,456 |
|
|
|
180,496 |
|
|
|
731,134 |
|
|
|
691,094 |
|
|
|
684,814 |
|
|
|
825,172 |
|
|
|
844,391 |
|
|
General and administrative
|
|
|
7,490 |
|
|
|
7,838 |
|
|
|
30,871 |
|
|
|
32,947 |
|
|
|
32,387 |
|
|
|
46,507 |
|
|
|
45,524 |
|
|
Lease costs
|
|
|
2,264 |
|
|
|
2,251 |
|
|
|
9,113 |
|
|
|
10,642 |
|
|
|
14,575 |
|
|
|
15,731 |
|
|
|
16,631 |
|
|
Depreciation and amortization
|
|
|
8,681 |
|
|
|
9,161 |
|
|
|
37,448 |
|
|
|
37,575 |
|
|
|
40,772 |
|
|
|
45,434 |
|
|
|
52,005 |
|
|
Interest, net
|
|
|
6,658 |
|
|
|
7,852 |
|
|
|
29,815 |
|
|
|
32,275 |
|
|
|
35,560 |
|
|
|
45,155 |
|
|
|
51,267 |
|
|
(Gain) loss on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,961 |
) |
|
|
1,054 |
|
|
|
3,306 |
|
|
|
37,292 |
|
|
Provision for closure and exit costs and other
items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,293 |
|
|
|
23,192 |
|
|
|
3,357 |
|
|
|
5,482 |
|
|
Loss on early retirement of debt
|
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
2,849 |
|
|
|
75 |
|
|
|
699 |
|
|
|
582 |
|
|
Loss on impairment of long-lived assets
|
|
|
1,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,685 |
|
|
|
20,753 |
|
|
|
38,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
14,986 |
|
|
|
3,828 |
|
|
|
32,051 |
|
|
|
6,337 |
|
|
|
(40,007 |
) |
|
|
(83,045 |
) |
|
|
(123,762 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$ |
9,347 |
|
|
$ |
2,288 |
|
|
$ |
20,086 |
|
|
$ |
3,220 |
|
|
$ |
(27,495 |
) |
|
$ |
(55,121 |
) |
|
$ |
(70,457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
47,893 |
|
|
$ |
24,912 |
|
|
$ |
48,855 |
|
|
$ |
24,360 |
|
|
$ |
407 |
|
|
$ |
1,102 |
|
|
$ |
2,941 |
|
Working capital
|
|
|
55,123 |
|
|
|
33,963 |
|
|
|
55,795 |
|
|
|
29,897 |
|
|
|
(2,554 |
) |
|
|
44,473 |
|
|
|
67,807 |
|
Property and equipment
|
|
|
449,638 |
|
|
|
449,574 |
|
|
|
448,743 |
|
|
|
453,119 |
|
|
|
477,830 |
|
|
|
507,536 |
|
|
|
610,643 |
|
Total assets
|
|
|
827,685 |
|
|
|
825,769 |
|
|
|
833,349 |
|
|
|
830,278 |
|
|
|
795,246 |
|
|
|
873,051 |
|
|
|
974,448 |
|
Total debt(2)
|
|
|
380,237 |
|
|
|
398,030 |
|
|
|
392,918 |
|
|
|
398,150 |
|
|
|
385,347 |
|
|
|
451,147 |
|
|
|
530,155 |
|
Shareholders equity
|
|
|
192,622 |
|
|
|
162,182 |
|
|
|
182,660 |
|
|
|
159,201 |
|
|
|
156,002 |
|
|
|
184,161 |
|
|
|
237,895 |
|
|
|
(1) |
Revenues have been restated for consistency to
reflect therapy services within skilled nursing facilities.
|
|
(2) |
Total debt includes long-term debt and current
maturities of long-term debt.
|
41
MANAGEMENTS DISCUSSION AND
ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Executive Overview
During the years 1998 through 2001, we went
through a divestiture phase and ceased operating skilled nursing
facilities in Florida and Texas due to the litigious
environment. Since that time, we have been able to focus on our
key business goals to improve our financial strength and
operating results. During 2003, and moving forward, our key
business goals are to:
|
|
|
|
|
strengthen both Medicare and total average daily
census;
|
|
|
|
improve operating cash flow;
|
|
|
|
actively improve our asset portfolio through
renovation, expansion or acquisition of facilities or, where
appropriate, to divest facilities that fail to meet our
performance goals;
|
|
|
|
diversify within the long-term care industry in
the areas of rehabilitative clinics and management, consulting,
accounting and purchasing services; and
|
|
|
|
manage resident care liability claim settlements.
|
The concentrated focus on our key business goals
and the hard work of our employees resulted in the 2003 results
representing a break through year. Improvement in total census
(1.4%) and Medicare census (17.5%), along with a focus on
operating costs, resulted in an increase of revenues of
$55.3 million and a $25.7 million improvement in net
income before income taxes. The increase was in spite of a
reduction of $12.8 million in revenues resulting from the
Medicare rate decreases implemented in October 2002. Though we
are encouraged by the positive actions taken by CMS in providing
an administrative fix (see
Legislative Actions Affecting Revenues)
in October 2003 to correct past years under-funded rate
increases, we continue to be cautious of future potential CMS
actions that could result in the discontinuance of temporary
enhancements through the implementation of a RUGs Refinement
change.
In the first quarter of 2004, we continued to
improve Medicare average daily census, while our total census
remained comparable to the prior year. We completed two of the
seven renovation projects in the first quarter of 2004, which
increased operational capacity at one skilled nursing and one
assisted living facility. In May 2004, we opened a new
(40 units) assisted living facility. The remaining projects
continue to be on schedule, one of which is to be completed in
2004 and the three other projects in early 2005. We also have
approved eight additional development projects to be completed
in 2005 or later that will expand or add 329 units to our
assisted living facilities. In June we acquired for
approximately $5.0 million in cash four nursing facilities
(321 beds) in Indiana.
We initiated and completed after the end of the
first quarter of 2004 several transactions that will improve our
operating cash flow and cash resources. In April 2004, we sold
and issued $125.0 million aggregate principal amount of
2014 Notes. The net proceeds from the sale and issuance of the
2014 Notes were approximately $117.4 million, net of a
$3.1 million discount and fees and expenses of
$4.5 million. We used these net proceeds, together with
borrowings under our amended and restated credit facility to
purchase for cash approximately $104.9 million aggregate
principal amount of 2007 Notes validly tendered in the tender
offer that we commenced on April 5, 2004 and to redeem any
2007 Notes not tendered in the tender offer or cancelled prior
to May 24, 2004. See Prospectus Summary
Recent Developments Tender Offer/ Redemption and
Sale and Issuance of 2014 Notes for more information
regarding the sale and issuance of the 2014 Notes. In addition,
in April 2004, coterminous with the sale and issuance of the
2014 Notes, we terminated our existing interest rate swap and
cap agreements for an aggregate gain of $3.3 million to be
recognized in the second quarter of 2004. In addition, to hedge
our exposure to fluctuations in market value, we entered into
two new interest rate swap agreements and two new interest rate
cap agreements relating to the Senior Notes, and the 2014 Notes.
See Prospectus Summary Recent
Developments Interest Rate Swap and Cap
Agreements for more information regarding our interest
rate swap and cap agreements. As a result of our debt
refinancing, we will lower our long-term debt from
$380.2 million as of March 31, 2004 to
$320.1 million; and reduce our weighted average interest
42
rate to approximately 5.1%, as compared to 7.7%
as of March 31, 2004. At, and subject to, these current
interest rates and debt levels, the refinancing of our debt will
result in annual interest savings of approximately
$12.4 million.
In February 2004, we received prepayment in full
of $4.4 million of notes receivable from Tandem Health
Care, Inc. or Tandem. In January 2004, we negotiated and
subsequently received a cash settlement of $5.6 million for
all remaining years of a Medicare settlement receivable
involving a staffing cost matter. In April 2004, we reached a
negotiated settlement with our FI, on one Medicare settlement
receivable issue that will result in our receiving a payment of
approximately $7.7 million, $6.5 million of which we
received in May 2004. We will receive the balance of the payment
upon resolution of other matters concerning the cost report
years under appeal. See Prospectus Summary
Recent Developments Settlement of Medicare
Receivable Issue for more information about this Medicare
settlement. In June 2004, we concluded the transaction with
Greystone by receipt of the final consideration of
$10.0 million on the Vendor Take Back Note plus
$2.6 million of interest, which completes the September
2000 divestiture agreement. See Prospectus
Summary Recent Developments Settlement
of Greystone Tribeca Acquisition, L.L.C. Transaction for
more information about this settlement.
We operate in a competitive marketplace and
depend substantially on revenues derived from governmental
third-party payors, with the remainder of our revenues derived
from commercial insurers, managed care plans, and private
individuals. The on-going pressures from the Medicare and
Medicaid programs, along with other payors seeking to control
costs and/or limit reimbursement rates for medical services, are
but one of the business risks that we face. We also operate in a
heavily regulated industry, subject to the scrutiny of federal
and state regulators. Each of our facilities must comply with
regulations regarding staffing levels, resident care standards,
occupational health and safety, resident confidentiality,
billing and reimbursement, environmental and biological and
other standards. Government agencies have steadily increased
their enforcement activity over the past several years. As a
result, we are continually allocating increased resources to
ensure compliance with applicable regulations and to respond to
inspections, investigations and/or enforcement actions. Federal
law requires each state to have a Medicaid Fraud Control Unit,
which is responsible for investigating provider fraud and
resident abuse. We are aware of investigations by these units in
Kentucky and Wisconsin. The investigations have not been
sufficiently developed to enable us to predict an outcome.
Revenues
We derive revenues by providing routine and
ancillary healthcare services to residents in our network of
facilities. Long-term healthcare services provided to our
residents include services such as nursing care, assisted living
and related medical services, such as subacute care. We also
derive revenues by providing rehabilitative therapy to outside
third parties at our rehabilitation clinics and earn management
and consulting revenues from other long-term care organizations.
Skilled Nursing
Facilities. Within our skilled nursing
facilities, we generate our revenue from Medicare, Medicaid and
private pay sources. Medicaid rates are generally lower than
rates earned from Medicare, private, commercial insurance and
other sources, and therefore, an important performance
measurement is quality mix, which is defined as
revenues or census earned from payor sources other than from
Medicaid programs. The following table sets forth our Medicare,
Medicaid and private pay sources of revenue of our skilled
nursing facilities by percentage of total revenue and the level
of quality
43
mix presented on a same facility basis. These
percentages are the same when including all skilled nursing
facilities.
Percentage Total Skilled Nursing
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31 |
|
Year Ended December 31 |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
32.7 |
% |
|
|
28.8 |
% |
|
|
29.2 |
% |
|
|
27.3 |
% |
|
|
25.0 |
% |
Private and other
|
|
|
17.8 |
% |
|
|
18.6 |
% |
|
|
18.5 |
% |
|
|
19.0 |
% |
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quality Mix
|
|
|
50.5 |
% |
|
|
47.4 |
% |
|
|
47.7 |
% |
|
|
46.3 |
% |
|
|
45.2 |
% |
Medicaid
|
|
|
49.5 |
% |
|
|
52.6 |
% |
|
|
52.3 |
% |
|
|
53.7 |
% |
|
|
54.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled Nursing and Assisted Living
Facilities. Within our assisted living
facilities, we generate our revenue primarily from private pay
sources, with a small portion earned from Medicaid where states
offer such programs. The following table sets forth our
Medicare, Medicaid and private pay sources of revenues for all
skilled nursing and assisted living facilities by percentage of
total revenue and the level of quality mix.
Percentage Total Skilled Nursing and Assisted
Living Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31 |
|
Year Ended December 31 |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
31.3 |
% |
|
|
27.5 |
% |
|
|
27.9 |
% |
|
|
26.1 |
% |
|
|
23.9 |
% |
Private and other
|
|
|
21.1 |
% |
|
|
22.0 |
% |
|
|
21.8 |
% |
|
|
22.4 |
% |
|
|
23.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quality Mix
|
|
|
52.4 |
% |
|
|
49.5 |
% |
|
|
49.7 |
% |
|
|
48.5 |
% |
|
|
47.4 |
% |
Medicaid
|
|
|
47.6 |
% |
|
|
50.5 |
% |
|
|
50.3 |
% |
|
|
51.5 |
% |
|
|
52.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Revenues. We
derive outpatient therapy revenues by providing rehabilitation
therapy services to outside third parties at our clinics. The
revenue sources are primarily HMOs and commercial insurance
(31%), workers compensation (24%), Medicare (21%),
Medicaid (10%) and other sources, including self-pay clients
(14%). Management and consulting fees are paid directly from the
long-term care organizations that we contract with to provide
services.
Legislative Actions Affecting
Revenues
BBRA and Temporary Funding
Enhancements. Prior to October 1,
2002, the incremental Medicare relief packages received from
BBRA, and BIPA, provided a total of $2.7 billion in
temporary Medicare funding enhancements to the long-term care
industry. The funding enhancements implemented by 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 RUGs rate and a 4% base adjustment. The second category
is RUGs Refinements which involved 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.
Medicare Cliff October 1,
2002. The Legislative Add-ons expired
on September 30, 2002, hereafter referred to as the
Medicare cliff, resulting in a reduction of Medicare
funding for our skilled nursing facilities. Based on the
Medicare case mix and census over the nine months ended
September 30, 2002, we received an estimated average rate
of $31.22 per resident day relating to the Legislative
Add-ons. Offsetting this, on October 1, 2002 long-term care
providers received a 2.6% market basket increase in
44
Medicare rates. The impact of these two items in
the three months ended December 31, 2002 resulted in a net
decline in our average rate of $23.64 per patient day.
Based upon the Medicare case mix and census in the fourth
quarter of 2002, the net impact of the Medicare cliff and the
market basket increase reduced our revenues by approximately
$3.9 million. Based upon the Medicare case mix and census
during the nine months ended September 30, 2003, the net
impact of the Medicare cliff and the market basket increase
reduced our revenues by approximately $12.8 million as
compared to the nine-month period ended September 30, 2002.
This was partially offset by RUGs improvement, which increased
revenues by $2.7 million over the nine months ended
September 30, 2003. Based upon the Medicare case mix and
census for the twelve-month period ended September 30,
2003, the net impact of the Medicare cliff and the market basket
increase reduced our revenues by $16.7 million.
Administrative Fix October 1,
2003. Effective October 1, 2003,
CMS increased Medicare rates by 6.26% reflecting (1) a
cumulative forecast correction, or administrative fix, to
correct past years under-funded rate increases, which increased
the federal base payment rates by 3.26%, and (2) the annual
market basket increase of 3.0%. We estimated that based on the
Medicare case mix for the nine-month period ended
September 30, 2003, these Medicare rate increases would add
approximately $18.45 per Medicare day. Based on the
Medicare case mix and census for the year ended
December 31, 2003, the 6.26% Medicare rate increase amounts
to additional annualized revenue of approximately
$13.4 million going forward, which will be tempered by
higher labor and other operating costs. Based upon the Medicare
case mix and census in the first quarter of 2004, the impact of
the 6.26% Medicare rate increase increased our revenues by
$3.7 million, offset by higher labor and other operating
costs. In order to maintain their commitment to Senator Grassley
and CMS in providing the administrative fix, in October 2003 the
Alliance for Quality Nursing Home Care (which is a membership of
large long-term care providers) and the American Health Care
Association announced their support to spend the administrative
fix over the next fiscal period on direct care and services for
residents. In October 2003, CMS published notice to skilled
nursing facilities that within future cost reports, it will
require confirmation that the administrative fix funding was
spent on direct patient care and related expenses.
Future Medicare
Changes. With respect to the RUGs
Refinements, in April 2002, CMS announced that it would delay
the refinement of the RUGs categories thereby extending the
related funding enhancements until September 30, 2003. In
May 2003, CMS released a rule that maintained the current RUGs
classifications until October 1, 2004. Further to, but
independent of this, Congress enacted legislation directing CMS
to conduct a study on the resource utilization grouping
classification system and report its recommendations by January
2005. Based upon the Medicare case mix and census for the year
ended December 31, 2003, we estimate that we received an
average $24.12 per resident day, which on an annualized
basis amounts to $17.6 million related to the RUGs
Refinements. Based upon the Medicare case mix and census for the
three months ended March 31, 2004, we estimate that we
received an average $25.27 per resident day, which on an
annualized basis amounts to $20.5 million related to the
RUGs Refinements. The implementation of a RUGs Refinement
change, where all or part of the enhancement is discontinued,
could have a significant impact on us.
In January 2003, CMS announced that the
moratorium on implementing payment caps for outpatient Part B
therapy services, which was scheduled to take effect on
January 1, 2003, would be extended. CMS subsequently
extended the moratorium until September 1, 2003. The
therapy caps were made effective from September 1, 2003
until December 8, 2003. On December 8, 2003, as a
result of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, the moratorium was reinstated for an
additional two-year period until December 2005. The impact of a
payment cap cannot be reasonably estimated based on the
information available to us at this time, however, such a cap
would reduce therapy revenues.
In February 2003, CMS announced its plan to
reduce its level of reimbursement for uncollectible Part A
co-insurance. Under the plan announced by CMS, the reimbursement
level would be reduced to 70% over a three year period as
follows: 90% effective for the government fiscal year commencing
October 1, 2003, 80% effective for the government fiscal
year commencing October 1, 2004 and 70% effective for
government fiscal years commencing on or after October 1,
2005. This plan is consistent with the Part A
45
co-insurance reimbursement plan applicable to
hospitals. CMS did not implement the rule change effective
October 1, 2003, and continues to review the proposed plan.
We estimate that, should this plan be implemented, the negative
impact to our net earnings would be $1.3 million in 2004,
increasing to $3.3 million in 2006.
Medicaid Rates Subject to CMS
Approval. Some of the states in which
we operate, including Pennsylvania, Indiana, Oregon and
Washington, have submitted proposed state plan amendments and
waivers pertaining to the fiscal year commencing July 1,
2003, which are awaiting review and approval by CMS. The
retrospective plan amendments and waivers seek to increase the
level of federal funding for the states Medicaid programs
and, if approved, would result in providing skilled nursing
facilities with revenue rate increases to offset new or
increased provider taxes. Since the plan amendments and waivers
have not been approved, we have recorded revenues based upon
amounts received. In Pennsylvania, should CMS approve the
States plan amendment and waiver as submitted, incremental
earnings, net of the provider tax, of $2.8 million could be
recorded in 2004 pertaining to the nine-month period ended
March 31, 2004. Without approval, we could record a
negative adjustment to earnings of up to $4.5 million in
2004 pertaining to this same nine-month period. In Indiana,
approval of the original amendment and waiver submitted could
result in the recording of net incremental earnings of
$2.3 million in 2004 pertaining to the nine-month period
ended March 31, 2004, and there would be no impact if the
plan were not approved. In Washington, the state has proceeded
to implement the provider tax and fund the incremental Medicaid
rates, while seeking approval from CMS on their proposal. If the
plan is not approved, a retroactive negative adjustment of no
greater than $0.5 million to earnings may be required. In
June 2004, CMS approved the state plan amendment and waiver
submitted by the state of Oregon. We will record the net
favorable financial impact estimated at $0.3 million in the
second quarter of 2004. For the remaining states, we anticipate
that amendments will be made to the original plans submitted to
CMS and cannot, therefore, predict the outcome of these plan
submissions or their impact on us and our results of operations.
Based upon the final CMS approved state plan amendments and
waivers, changes in Medicaid rates and any associated provider
taxes could result in adjustments to earnings for the period
from July 1, 2003 to March 31, 2004.
Significant Events and Developments
Events of 2004 Quarter
Medicare average daily census for the three
months ended March 31, 2004, or the 2004 quarter, increased
to 2,206 from 1,966 for the three months ended March 31,
2003, or 2003 quarter, on a same facility basis, representing a
12.2% increase over 2003. Total average daily census for the
2004 quarter increased slightly to 12,880 from 12,875 for 2003
quarter on a same facility basis. The improvement in Medicare
census was the direct result of a number of our initiatives,
including the implementation of consistent admission practices,
the Medicare certification of all our nursing facility beds and
senior managements focus on census, all of which drove the
improved financial results for the 2004 quarter.
Our financial results include the operations of
one newly acquired facility in Wisconsin that was purchased on
December 31, 2003. On February 12, 2004, we acquired a
skilled nursing facility in Washington, which we had previously
leased, for $1.4 million. In the 2004 quarter, we completed
for a total cost of $3.5 million two development projects
involving additions to existing facilities adding 16 units
to one assisted living facility in Kentucky and 20 nursing beds
to one nursing facility in Wisconsin. We also commenced managing
two new nursing facilities and transferred management
responsibilities to another long-term care provider while
retaining consulting services for nine facilities.
In March 2004, we concluded the evaluation of two
nursing facilities that operate adjacent to one another in
Indiana, both of which require capital renovations. After
evaluation of the respective operations, we made a decision,
subject to State of Indiana approval, to consolidate the two
operations into one renovated facility, which upon completion
will accommodate all residents within both facilities, however,
decrease the total available nursing beds by 46. The
consolidation of the two operations is expected to be
46
completed by March 2005. As a result of the
decision to close the one facility, we have recorded a provision
of $1.6 million for impairment of long-lived assets.
In February 2004, Tandem refinanced two of its
skilled nursing facilities, and we subsequently received
prepayment in full of $4.4 million of notes receivable held
in respect of certain properties. In February 2004, we prepaid
in full two Industrial Development Revenue Bonds totaling
$13.0 million. The repayment of this debt resulted in a
charge to earnings of $0.4 million to write off deferred
financing costs.
Events Subsequent to the 2004
Quarter
See Prospectus Summary Recent
Developments for information regarding events subsequent
to the 2004 quarter.
Events of 2003
The most significant event in 2003 was the
continued improvement in total census, particularly Medicare
census. Total ADC increased to 12,901 in 2003 from 12,727 in
2002 and 12,465 in 2001 on a same facility basis, representing a
1.4% increase over 2002 and 3.5% over 2001. Medicare ADC
increased to 1,997 in 2003 from 1,699 in 2002 and 1,427 in 2001
on a same facility basis, representing a 17.5% increase over
2002, and 39.9% over 2001. The improvement in census was the
direct result of a number of our initiatives, including the
implementation of consistent admission practices, the Medicare
certification of all our skilled nursing facility beds and
senior managements focus on census, all of which drove the
improved financial results for the 2003 fiscal year.
The October 2003 Medicare rate increase, which
included an administrative fix of 3.26% in addition to the
market basket increase of 3%, was partial recognition by CMS of
past under-funding of the industry.
On December 31, 2003, we acquired a skilled
nursing facility (99 beds) in Manitowoc, Wisconsin for
$4.1 million. During 2003, we commenced seven new
developments involving additions to two nursing facilities (38
beds), additions to four assisted living facilities
(87 units) and the construction of one new free-standing
assisted living facility (40 units). One of the
developments, with 16 assisted living units, opened in February
2004. Three of the developments are expected to be completed
later in 2004, with the remaining three developments to be
completed in 2005. In late 2003, we also approved for
development, but did not commence, the expansion of, or addition
to, eight assisted living facilities totaling 329 units for
an approximate cost of $36.3 million. None of these
projects will be completed in 2004.
Events Prior to 2003
Issuance of Senior
Notes. On June 28, 2002, we
completed a private placement of $150.0 million of our
Senior Notes, 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 Senior Notes that have been registered under the Securities
Act for the Senior Notes issued in June 2002. The terms of the
registered Senior Notes are identical to the terms of the
privately placed 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
$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
agreement with a notional amount of $25.0 million maturing
in February 2003. Upon refinancing of the debt, we terminated
this swap agreement with a cash payment of $0.6 million.
The retirement of the previous credit facility resulted in the
write-off of deferred financing charges and a loss from the
early retirement of debt totaling $2.8 million
($1.7 million after tax).
47
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 interest-bearing note. The interest
rate interest rate on the note was subject to negotiation and
failing agreement the issued would have been settled through
arbitration. In the latter part of 2003, we prepaid
$4.5 million against the note and agreed to refinance the
10-year note. On April 15, 2004, we refinanced the
facilities with mortgages that have interest rates varying with
LIBOR, and repaid the remaining balance of the note due to the
seller.
Loss on Disposal of Assets, Provision for
Closure and Exit Costs, and Impairment of Long-lived
Assets. During the period 1998 through
2001, in response to the implementation of Medicare PPS,
increased litigation and insurance costs in certain states and
increased operational costs resulting from changes in
legislation and regulatory scrutiny, we divested
under-performing skilled nursing and assisted living facilities
and non-core healthcare assets. These asset divestitures
primarily included the sale of our pharmacy to Omnicare, Inc.,
and the sales of facilities and/or the transfer of all skilled
nursing facility operations in the states of Florida and Texas
in 1999, 2000 and 2001. With the exception of our assisted
living facilities in Texas, we ceased to operate facilities in
Florida and Texas through transactions primarily involving
Tandem, Greystone, Senior Health Properties South,
Inc., or Senior Health South, and Senior Health
Properties Texas, Inc., or Senior Health
Texas. As a result of this strategy, for the years 2002 and
2001, we recorded significant:
|
|
|
|
|
loss (gain) on the disposal of assets;
|
|
|
|
provisions for closure and exit costs; and
|
|
|
|
loss on the impairment of long-lived assets.
|
Below is a summary of the significant
transactions in 2002 and 2001 that resulted in the above
provisions, gains and losses.
In May 2002, Tandem exercised its option to
purchase seven properties in Florida that it leased from us for
gross proceeds of $28.6 million, consisting of cash of
$15.6 million and $13.0 million in 8.5% five-year
notes. We applied $12.4 million of the proceeds to reduce
our bank debt. 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. 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 facilities in
April 2001. The 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 April
2006.
In May 2002, we recorded a provision for closure
and exit costs relating to divested Florida operations of
$5.3 million relating to cost report settlement issues and
the settlement of claims with suppliers and employees.
In 2001, we recorded a loss on disposal of assets
of $1.0 million and a provision for closure and exit costs
and other items of $23.2 million, totaling
$24.2 million, as discussed below:
|
|
|
|
|
In September 2001, we transferred all 17 of our
skilled nursing facilities (1,421 beds) in Texas to Senior
Health-Texas resulting in a pre-tax loss of $1.8 million.
As outlined under Significant Assets and
Liabilities Assets, Liabilities and Contingencies
Resulting from Divestiture Program, we now lease or
sublease 16 of these facilities in Texas to Senior Health-Texas;
|
|
|
|
We recorded provisions totaling $2.2 million
relating to the closure and/or sale of three skilled nursing
properties for $2.0 million and a loss on another property
for $0.2 million; and
|
|
|
|
We recorded additional provisions of
$20.2 million relating to our previously sold operations,
of which $19.0 million related to the skilled nursing
facilities in Florida. This $19.0 million consisted of an
$11.0 million provision related to Florida claims for years
prior to 2001 based upon an actuarial review of resident
liability costs and an $8.0 million provision for Florida
closure and exit
|
48
|
|
|
|
|
costs. The $11.0 million provision was the
result of an increase in the estimate of the incurred but not
yet reported claims and an increase in the frequency and
severity of claims.
|
In April 2001, Tandem exercised its option to
purchase two leased properties in Florida for gross proceeds of
$11.4 million. The proceeds we received consisted of cash
of $7.0 million, a $2.5 million 8.5% interest-bearing
five-year note and $1.9 million in 9% cumulative dividend
preferred shares, mandatorily redeemable after five years. The
carrying value of the two facilities on our books was
$9.2 million. Tandem continued to operate seven skilled
nursing facilities under a lease agreement with us, with an
option to purchase these facilities at any time, which Tandem
exercised in May 2002. We deferred a potential gain on the sale
of these assets of $2.2 million because a significant
portion of the proceeds had not been received
(SFAS No. 66) and the ultimate determination of the
gain was dependent on Tandem exercising some or all of the
remaining purchase options available to it. We applied
$4.0 million of the net proceeds to reduce our term bank
debt.
Significant Assets and Liabilities
Assets, Liabilities and Contingencies
Resulting from Divestiture Program. As
a result of the divestiture programs in Florida and Texas, we
received cash proceeds and notes, and we retained interest in,
or ownership of, certain skilled nursing home properties and
entered into ongoing consulting service agreements with
operators in these two states. As of March 31, 2004, we:
|
|
|
|
|
held an interest, through $30.0 million in
contingent notes, in 15 long-term facilities with Greystone;
|
|
|
|
held $17.0 million in notes due from Tandem
($13.0 million due in May 2007 and $4.0 due in December
2007) and $7.0 million in non-current amounts receivable
from Senior Health South and Senior
Health Texas; and
|
|
|
|
owned six leased skilled nursing home properties
in Florida and four leased skilled nursing home properties in
Texas with a net book value of $15.4 million, and subleased
another 12 properties in Texas.
|
In September 2000, we disposed of 15 long-term
care facilities in Florida to Greystone for initial cash
proceeds of $30.0 million and contingent consideration in
the form of a $10.0 million Vendor Take Back Note and two
other contingent and interest bearing notes. The three notes
have an aggregate potential value of up to $30.0 million
plus interest and would have been retired out of proceeds from
the sale or refinancing of the facilities by Greystone. For the
period September 2000 through March 2004, we retained the right
of first refusal to repurchase the facilities. We also retained
an option to repurchase the facilities until March 2003,
however, we elected not to place an offer to repurchase the
facilities. Upon maturity of the notes in March 2004, unless the
facilities are sold or refinanced, we were entitled to receive
the $10.0 million Vendor Take Back Note and accrued
interest pursuant to the terms of the vendor take back and other
contingent notes. The notes were due in March 2004, however,
repayment of the notes and interest was delayed due to
negotiations with Greystone. In 2000, the option to repurchase
along with the significant portion of the sales price being
contingent, resulted in the disposition being accounted for as a
deferred sale in accordance with SFAS No. 66.
Accordingly, there was no gain or loss recorded on the initial
transaction. The fixed assets have been classified as
Assets held under Divestiture Agreement, and as of
March 31, 2004 had a net book value of $33.7 million.
As of December 31, 2003, we anticipated the final
consideration would be received in 2004 and, therefore, the
Assets held under Divestiture Agreement were
classified as a current asset of December 31, 2003, and we
ceased depreciating these assets as of January 1, 2004. In
June 2004, we concluded the transaction with Greystone by
receipt of the final consideration of $10.0 million on the
Vendor Take Back Note plus $2.6 million of interest, which
completes the September 2000 divestiture agreement. The
finalization of this transaction will result in the recognition
of a pre-tax gain from the sale of assets of $4.8 million
and interest income of $1.6 million in the second quarter
of 2004. See Prospectus Summary Recent
Developments Settlement of Greystone Tribeca
Acquisition, L.L.C. Transaction for further information
about this settlement.
49
We lease six Florida properties to Senior
Health South with lease expiration dates in December
2006. We lease four Texas properties to Senior
Health Texas with lease expiration dates in
September 2006 and sublease 12 Texas properties to Senior
Health Texas with sublease expiration dates in
February 2012. In addition, we provide on-going consulting
services to Senior Health South and Senior
Health Texas and earn rental income from the
operators of these facilities. As of March 31, 2004, we had
$7.0 million in non-current accounts receivable due from
Senior Health Texas and Senior Health
South. As a result, our earnings and cash flow can be influenced
by the financial stability of these unrelated companies.
We have recorded provisions for all estimated
future costs related to operations that we disposed of. Those
estimates were made at the time of disposition, recorded in a
divested operations liability account and can be subject to
revisions which may impact our future earnings. On an on-going
basis we review the levels 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.
During 2002, as a result of events that became known to us then,
we concluded 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. During 2003, we settled certain
Medicare and Medicaid claims and charged to the divested
operations liability account approximately $1.3 million.
We entered into a preferred provider agreement
with Omnicare, Inc. pursuant to the disposition of our pharmacy
operations in 1998. The terms of the preferred provider
agreement enabled Omnicare to execute pharmacy service
agreements and consulting service agreements with all of our
skilled nursing facilities. In connection with its agreements to
provide pharmacy services, Omnicare has requested arbitration
for an alleged lost profits claim related 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 yet been
scheduled. We believe we have interpreted correctly and complied
with the terms of the preferred provider agreement; however, we
cannot assure you that other claims will not be made with
respect to the agreement.
Medicare and Medicaid Settlement
Receivables. As of March 31,
2004, we are pursuing settlement of a number of outstanding
Medicare and Medicaid receivable balances, which in aggregate,
have a net book value of $32.1 million. For Medicare
revenues earned prior to the implementation of PPS and Medicaid
programs with a retrospective reimbursement system, differences
between revenues that we ultimately expect to be realized from
these programs and amounts received are reflected as accounts
receivable, or as accrued liabilities when payments have
exceeded revenues that we ultimately expect to receive. For
Medicare pre-PPS claims, normally such issues are resolved
during the audit process, however, we record general provisions
for disagreements that require settlement through a formal
appeal process.
For a specific staffing cost issue, a settlement
of the first year of seven specific claim years was reached
prior to the January 2003 Provider Reimbursement Review Board,
or PRRB, hearing. During 2003, we continued to negotiate the
remaining years in dispute with the FI. In January 2004, we
negotiated and subsequently received a cash settlement of
$5.6 million for all remaining years of the staffing cost
settlement matter. The settlement resulted in no significant
adjustment to the recorded receivable balance.
For another specific issue involving the
allocation of overhead costs, the first of three specific claim
years was presented to the PRRB at a hearing in January 2003.
The hearing procedures were discontinued after the parties
negotiated a methodology for resolution of the claim. The
negotiated settlement for this and other issues relating to the
1996 cost report year resulted in no adjustment to the recorded
receivable balance, and we subsequently collected
$3.0 million from the FI. For the remaining two specific
claim years, in April 2004, we reached a negotiated settlement
with the FI that will result in our receipt of approximately
$7.7 million, $6.5 million of which we will receive by
May, 2004, and the balance of which we will receive upon
conclusion of resolution of other matters concerning the cost
report years under
50
appeal. There are certain matters related to the
settlement and cost report years that were appealed that have to
be resolved with the FI, which could influence the financial
impact of the settlement. We anticipate that the resolution of
these matters and the determination of the financial impact of
the settlement, if any, will be recorded within the second
quarter of 2004.
We have a hearing scheduled in September 2004 on
a director of nursing staff cost issue involving a claim for
$3.8 million. We continue to work on the balance of other
Medicare claims with the FI and on an on-going basis with each
of the states in respect of Medicaid receivables.
Self-Insured
Liabilities. We have
$43.6 million in accruals for self-insured liabilities with
respect to general and professional liability claims as of
March 31, 2004. We have estimated that approximately
$18.0 million of this liability will be paid within the
next twelve months. The majority of the liability balance was
accrued during the period that we operated in Florida and Texas.
In 2003 and 2002 respectively, we accrued $6.0 million and
$5.3 million. In 2001, we provided an additional accrual of
$11.0 million attributable to potential claims for
incidents in Florida and Texas. The total expense for 2001 was
$29.2 million.
Key Performance Indicators
We manage our business through monitoring certain
key performance indicators. The most important key performance
indicators are:
Census
Census is defined as the number of residents
occupying a bed (or unit in the case of an assisted living
facility).
ADC
ADC is the number of residents occupying a bed
over a period of time, divided by the number of days in that
period.
Occupancy Percentage
Occupancy is measured as the percentage of census
relative to the total available resident beds. Total available
resident beds is the number of beds (or units in the case of an
assisted living facility) available for occupancy multiplied by
the number of days in the period.
Quality Mix
Quality mix is the measure of the level of
non-Medicaid census. In most states, Medicaid is the most
unattractive payor source as rates are the lowest of all payor
types.
Average Revenue Rate by Payor Source
The average revenue rate by each payor source
influences our focus and marketing efforts to place certain
resident payor types and in certain states varies based on the
acuity of care required by a resident. The change in revenue
rates is largely dictated by CMS and state governments.
EBITDA and EBITDA Percentage
EBITDA is defined as net income (loss) before
income taxes, interest expense net of interest income,
depreciation and amortization, and non-cash, non-recurring
(gains) and losses, including disposal of assets, provision for
closure and exit costs and other items, early retirement of debt
and impairment of long-lived assets. EBITDA is not a measure of
performance under generally accepted accounting principles in
the United States of America, or GAAP. We use EBITDA as a key
performance indicator and EBITDA expressed as a percentage of
total revenues as a measurement of margin. We understand that
EBITDA, or
51
derivatives thereof, are customarily used by
lenders, financial and credit analysts, and many investors as a
performance measure in evaluating healthcare acquisitions.
Moreover, substantially all of our financing agreements,
including the indenture governing our Senior Notes and our
credit facility, contain covenants in which EBITDA is used as a
measure of compliance. Thus, we use EBITDA to monitor our
compliance with these financing agreements. EBITDA should not be
considered in isolation or as a substitute for net income, cash
flows from operating activities and other income or cash flow
statement data prepared with GAAP, or as a measure of
profitability or liquidity.
Percentage of Ownership of Assets
Our strategy involves the belief that our success
is influenced by the level of ownership of the facilities we
operate. We monitor the percentage of facilities owned as
opposed to leased.
Number of Facilities Under Operation,
Management and Consulting and Other Operating Units
We monitor the number of facilities under
operation, facilities under management or consulting contracts
and number of rehabilitation clinics.
Review of Key Performance Indicators
In order to compare our performance between
periods, we determine the amounts of the key performance
indicators for all of our facilities, as well as the facilities
that we operated in all reported periods, or same facility
operations. Set forth below, we provide an analysis of our key
performance indicators in total, and where appropriate, on a
same facility basis and discuss the significant trends during
the period 2001 through 2003 and the significant trends when
comparing the three months ended March 31, 2004 to the
three months ended March 31, 2003. The same facility basis
figures exclude our December acquisition of the new skilled
nursing facility in Manitowoc, Wisconsin.
Skilled Nursing Facilities ADC and
Quality Mix
The following table sets forth the ADC, by type
of payor, and the quality mix for all of our skilled nursing
facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31 |
|
Year Ended December 31 |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
2,225 |
|
|
|
1,966 |
|
|
|
1,997 |
|
|
|
1,699 |
|
|
|
1,506 |
|
Private and other
|
|
|
2,179 |
|
|
|
2,233 |
|
|
|
2,222 |
|
|
|
2,291 |
|
|
|
2,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quality Mix
|
|
|
4,404 |
|
|
|
4,199 |
|
|
|
4,219 |
|
|
|
3,990 |
|
|
|
4,024 |
|
Medicaid
|
|
|
8,574 |
|
|
|
8,676 |
|
|
|
8,682 |
|
|
|
8,737 |
|
|
|
9,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,978 |
|
|
|
12,875 |
|
|
|
12,901 |
|
|
|
12,727 |
|
|
|
13,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth for the three
months ended March 31, 2004 and 2003 the ADC, by type of
payor and percentage of ADC by payor type for all of our skilled
nursing facilities, presented on a same-facility basis, and
showing the percentage change in ADC between years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
% of |
|
2004 to |
|
|
ADC |
|
Total |
|
ADC |
|
Total |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
2,206 |
|
|
|
17.1 |
% |
|
|
1,966 |
|
|
|
15.3 |
% |
|
|
12.2 |
% |
Private and other
|
|
|
2,185 |
|
|
|
17.0 |
% |
|
|
2,233 |
|
|
|
17.3 |
% |
|
|
(2.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quality Mix
|
|
|
4,391 |
|
|
|
34.1 |
% |
|
|
4,199 |
|
|
|
32.6 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
|
|
|
8,489 |
|
|
|
65.9 |
% |
|
|
8,676 |
|
|
|
67.4 |
% |
|
|
(2.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,880 |
|
|
|
100.0 |
% |
|
|
12,875 |
|
|
|
100.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
On a same facility basis, total ADC remained
virtually unchanged between the 2004 quarter and the 2003
quarter. On a same facility basis, Medicare ADC increased 12.2%
between the 2004 quarter and the 2003 quarter. As a result, the
percentage of Medicare ADC to all payor sources increased to
17.1% in the 2004 quarter, as compared to 15.3% in the 2003. The
improvement in census was the direct result of a number of
initiatives, including an implementation of consistent admission
practices, the Medicare certification of all nursing facility
beds, and senior managements focus on census, all of which
drive the improved financial results for 2004.
The following table sets forth for the years
ended December 31, 2003, 2002 and 2001 the ADC, by type of
payor and percentage of ADC by payor type for all of our skilled
nursing facilities, presented on a same facility basis, and
showing the percentage change in ADC between years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2003 |
|
2002 |
|
2001 |
|
Changes |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
% of |
|
|
|
% of |
|
2003 |
|
2002 |
|
|
ADC |
|
Total |
|
ADC |
|
Total |
|
ADC |
|
Total |
|
to 2002 |
|
to 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
1,997 |
|
|
|
15.5 |
% |
|
|
1,699 |
|
|
|
13.4 |
% |
|
|
1,427 |
|
|
|
11.4 |
% |
|
|
17.5 |
% |
|
|
19.1 |
% |
Private and other
|
|
|
2,222 |
|
|
|
17.2 |
% |
|
|
2,291 |
|
|
|
18.0 |
% |
|
|
2,362 |
|
|
|
19.0 |
% |
|
|
(2.9 |
%) |
|
|
(3.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quality Mix
|
|
|
4,219 |
|
|
|
32.7 |
% |
|
|
3,990 |
|
|
|
31.4 |
% |
|
|
3,789 |
|
|
|
30.4 |
% |
|
|
5.8 |
% |
|
|
5.3 |
% |
Medicaid
|
|
|
8,682 |
|
|
|
67.3 |
% |
|
|
8,737 |
|
|
|
68.6 |
% |
|
|
8,676 |
|
|
|
69.6 |
% |
|
|
(0.6 |
%) |
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,901 |
|
|
|
100.0 |
% |
|
|
12,727 |
|
|
|
100.0 |
% |
|
|
12,465 |
|
|
|
100.0 |
% |
|
|
1.4 |
% |
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a same facility basis, total ADC increased
1.4% between 2003 and 2002 and 3.5% between 2003 and 2001. On a
same facility basis, Medicare ADC increased 17.5% between 2003
and 2002 and 39.9% between 2003 and 2001. As a result, the
percentage of Medicare ADC to all payor sources increased to
15.5% in 2003, as compared to 13.4% in 2002 and 11.4% in 2001.
The improvement in census was the direct result of a number of
initiatives, including an implementation of consistent admission
practices, the Medicare certification of all skilled nursing
facility beds and senior managements focus on census, all
of which drove the improved financial results for 2003.
All Skilled Nursing and Assisted Living
Facilities Occupancy and Number of Facilities Under
Operation
The following table sets forth occupancy
percentages, ADC and operational resident capacity for all of
our skilled nursing and assisted living facilities in total for
the three months ended March 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy |
|
|
|
Operational |
|
|
Percentage |
|
ADC |
|
Resident Capacity |
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled Nursing
|
|
|
91.3 |
% |
|
|
91.3 |
% |
|
|
12,978 |
|
|
|
12,875 |
|
|
|
14,215 |
|
|
|
14,096 |
|
Assisted Living
|
|
|
86.7 |
% |
|
|
85.5 |
% |
|
|
1,488 |
|
|
|
1,501 |
|
|
|
1,716 |
|
|
|
1,756 |
|
Skilled Nursing and Assisted Living
|
|
|
90.8 |
% |
|
|
90.7 |
% |
|
|
14,466 |
|
|
|
14,376 |
|
|
|
15,931 |
|
|
|
15,852 |
|
The following table sets forth occupancy
percentages, ADC and operational resident capacity for all of
our skilled nursing and assisted living facilities in total for
the years ended December 31, 2003, 2002 and 2001.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational |
|
|
Occupancy Percentage |
|
ADC |
|
Resident Capacity |
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
2003 |
|
2002 |
|
2001 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled Nursing
|
|
|
91.5 |
% |
|
|
90.3 |
% |
|
|
87.5 |
% |
|
|
12,901 |
|
|
|
12,727 |
|
|
|
13,358 |
|
|
|
14,103 |
|
|
|
14,093 |
|
|
|
15,266 |
|
Assisted Living
|
|
|
86.3 |
% |
|
|
83.9 |
% |
|
|
83.1 |
% |
|
|
1,496 |
|
|
|
1,472 |
|
|
|
1,463 |
|
|
|
1,733 |
|
|
|
1,756 |
|
|
|
1,761 |
|
Skilled Nursing and Assisted Living
|
|
|
90.9 |
% |
|
|
89.6 |
% |
|
|
87.1 |
% |
|
|
14,397 |
|
|
|
14,199 |
|
|
|
14,821 |
|
|
|
15,836 |
|
|
|
15,849 |
|
|
|
17,027 |
|
53
The following table sets forth occupancy
percentages, ADC and operational resident capacity for all of
our skilled nursing and assisted living facilities on a same
facility basis for the three months ended March 31, 2004
and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy |
|
|
|
Operational |
|
|
Percentage |
|
ADC |
|
Resident Capacity |
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled Nursing
|
|
|
91.2 |
% |
|
|
91.3 |
% |
|
|
12,880 |
|
|
|
12,875 |
|
|
|
14,116 |
|
|
|
14,096 |
|
Assisted Living
|
|
|
86.7 |
% |
|
|
85.5 |
% |
|
|
1,488 |
|
|
|
1,501 |
|
|
|
1,716 |
|
|
|
1,756 |
|
Skilled Nursing and Assisted Living
|
|
|
90.8 |
% |
|
|
90.7 |
% |
|
|
14,368 |
|
|
|
14,376 |
|
|
|
15,832 |
|
|
|
15,852 |
|
Occupancy percentages increased within the
assisted living facilities to 86.7% in the 2004 quarter from
85.5% in the 2003 quarter. The improvement in occupancy within
the assisted living facilities was due to the implementation of
regional marketing personnel to assist local managers in
improving their marketing efforts and changes in management
personnel in certain facilities.
The following table sets forth occupancy
percentages, ADC and operational resident capacity for all of
our skilled nursing and assisted living facilities on a same
facility basis for the years ended December 31, 2003, 2002
and 2001.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational |
|
|
Occupancy Percentage |
|
ADC |
|
Resident Capacity |
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
2003 |
|
2002 |
|
2001 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled Nursing
|
|
|
91.5 |
% |
|
|
90.3 |
% |
|
|
87.8 |
% |
|
|
12,901 |
|
|
|
12,727 |
|
|
|
12,465 |
|
|
|
14,103 |
|
|
|
14,093 |
|
|
|
14,203 |
|
Assisted Living
|
|
|
86.3 |
% |
|
|
83.9 |
% |
|
|
83.1 |
% |
|
|
1,496 |
|
|
|
1,472 |
|
|
|
1,463 |
|
|
|
1,733 |
|
|
|
1,756 |
|
|
|
1,761 |
|
Skilled Nursing and Assisted Living
|
|
|
90.9 |
% |
|
|
89.6 |
% |
|
|
87.2 |
% |
|
|
14,397 |
|
|
|
14,199 |
|
|
|
13,928 |
|
|
|
15,836 |
|
|
|
15,849 |
|
|
|
15,964 |
|
Occupancy percentages in our skilled nursing
facilities increased to 91.5% in 2003 from 90.3% in 2002 and
87.8% in 2001 due to the increases in ADC discussed above. The
divestiture of our skilled nursing facilities in Texas in
September 2001 resulted in the change in occupancy percentage in
the 2001 year. However, there was a reduction of
approximately 110 available beds (impacting the occupancy
percentage by 0.7%) between 2001 and 2002 as licensed beds were
reduced in certain facilities in certain states.
Occupancy percentages increased within the
assisted living facilities to 86.3% in 2003 from 83.9% in 2002
and 83.1% in 2001. The improvement in occupancy within the
assisted living facilities was due to the implementation of
regional marketing personnel to assist local managers in
improving their marketing efforts and changes in management
personnel in certain facilities.
The following table sets forth the number of
facilities under operation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
As of March 31, |
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
Percent of facilities owned
|
|
|
94.3 |
% |
|
|
93.7 |
% |
|
|
93.7 |
% |
|
|
89.7 |
% |
Number of facilities under operation
|
|
|
174 |
|
|
|
174 |
|
|
|
175 |
|
|
|
175 |
|
The percentage of facilities owned increased in
2002 due to the purchase of the seven previously leased
facilities in Indiana and Ohio. The total number of facilities
under operation changed as the result of our divestiture of
facilities in Texas (in September 2001), the closure of one
assisted living facility and conversion of another assisted
living facility into a skilled nursing facility (in 2003) and
our acquisition of one skilled nursing facility on
December 31, 2003. The percentage of facilities owned
increased in the 2004 quarter due to the purchase of a
previously leased facility in the State of Washington.
54
Skilled Nursing Facilities Average
Revenue per Resident Day by Payor Source
The following table sets forth the average
revenue per resident day by payor source, including the impact
of prior year revenue adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31, |
|
Year Ended December 31, |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
Medicare (Part A and Part B)
|
|
$ |
346.82 |
|
|
$ |
318.12 |
|
|
$ |
322.64 |
|
|
$ |
331.23 |
|
|
$ |
334.13 |
|
Private and other
|
|
$ |
192.77 |
|
|
$ |
181.16 |
|
|
$ |
183.76 |
|
|
$ |
170.86 |
|
|
$ |
164.45 |
|
Medicaid
|
|
$ |
136.11 |
|
|
$ |
131.63 |
|
|
$ |
132.99 |
|
|
$ |
126.56 |
|
|
$ |
120.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
181.75 |
|
|
$ |
168.71 |
|
|
$ |
171.09 |
|
|
$ |
161.86 |
|
|
$ |
153.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2003, we recorded a provision for
$4.0 million pertaining to individual Medicare claims in
dispute with the FI for the cost report years 1996 through 1998.
Of the $4.0 million provision, $1.3 million pertains
to discontinued operations and therefore was applied to the
previously accrued balance. The net adjustment of
$2.7 million resulted in a reduction of revenues during
2003. Offsetting this, we recorded a recovery of
$4.2 million in Medicaid revenues resulting from a
favorable court decision in Ohio relating to the recovery of
alleged government overpayments for adjudicated Medicaid cost
report periods. In 2002 and 2001, we recorded prior period
Medicaid revenue adjustments pursuant to the settlement of state
cost reports.
During the 2004 quarter we recorded prior period
Medicaid revenue adjustments of $1.3 million pursuant to
the settlement of state cost reports. During the 2003 quarter,
we recorded prior period Medicaid revenue adjustments of
$2.7 million, which included a recovery of
$1.5 million in Medicaid revenues resulting from a
favorable court decision in the State of Ohio relating to the
recovery of alleged government overpayments for adjudicated
Medicaid cost report periods.
The following table sets forth for the three
months ended March 31, 2004 and 2003 the average revenue
rate by payor source, excluding the above-mentioned revenue
adjustments, and the percentage changes between years. In
addition, the Medicare Part A rate is also
reported.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Three Months Ended |
|
Change |
|
|
March 31 |
|
From |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2004 to 2003 |
|
|
|
|
|
|
|
Medicare (Part A and Part B)
|
|
$ |
346.82 |
|
|
$ |
318.12 |
|
|
|
9.0 |
% |
Private and other
|
|
$ |
192.77 |
|
|
$ |
181.16 |
|
|
|
6.4 |
% |
Medicaid
|
|
$ |
134.37 |
|
|
$ |
128.15 |
|
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
180.60 |
|
|
$ |
167.63 |
|
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare Part A only
|
|
$ |
317.99 |
|
|
$ |
290.78 |
|
|
|
9.4 |
% |
Comparing the 2004 quarter to the same period in
2003, the Medicare rate increased 9.0% of which 6.26% was the
result of the October 2003 Medicare rate increase that included
an administrative fix of 3.26%. The balance of the increase is
attributable to an increase in the acuity and level of
rehabilitative residents admitted.
The following table sets forth for the years
ended December 31, 2003, 2002 and 2001 the average revenue
rate by payor source, excluding the above-mentioned revenue
adjustments, and the percentage
55
changes between years presented on a same
facility basis. In addition, the Medicare
Part A rate is also reported.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
Changes From |
|
|
Year Ended December 31, |
|
|
|
|
|
|
2003 to |
|
2002 to |
|
|
2003 |
|
2002 |
|
2001 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
Medicare (Part A and Part B)
|
|
$ |
326.31 |
|
|
$ |
331.23 |
|
|
$ |
334.13 |
|
|
|
(1.5 |
%) |
|
|
(0.9 |
%) |
Private and other
|
|
$ |
183.76 |
|
|
$ |
170.86 |
|
|
$ |
164.45 |
|
|
|
7.6 |
% |
|
|
3.9 |
% |
Medicaid
|
|
$ |
131.31 |
|
|
$ |
126.03 |
|
|
$ |
120.25 |
|
|
|
4.2 |
% |
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
170.53 |
|
|
$ |
161.49 |
|
|
$ |
153.12 |
|
|
|
5.6 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare Part A only
|
|
$ |
298.81 |
|
|
$ |
305.21 |
|
|
$ |
313.63 |
|
|
|
(2.1 |
%) |
|
|
(2.7 |
%) |
In 2002, the Medicare cliff, net of the market
basket increase, decreased the average Medicare
Part A rate by $23.64 per Medicare resident day, and
therefore, the total average Medicare rate effective October
2002. On an annualized basis, the net impact for 2002 was
$5.96 per Medicare day. The acuity of residents decreased
by approximately $1.14 per Medicare day, however, this was
more than offset by an increase in the level of Part B
Medicare revenues of $4.21 per Medicare day.
In 2003, the Medicare cliff revenue reductions,
net of the market basket increase, estimated at $23.64 per
Medicare resident day, continued through the nine-month period
ended September 30, 2003. On an annualized basis, the net
impact for 2003 as compared to 2002 was $17.68 per Medicare
day. However, on October 1, 2003, Medicare rates increased
by 6.26%, or $18.45 per Medicare resident day, reflecting
the administrative fix and the annual market basket increases.
On an annualized basis, this increased our Medicare rate by
$4.65 per Medicare day. In addition, we improved Medicare
rates from the admission of higher acuity residents
(approximately $6.66 per Medicare day) and increased the
level of Part B Medicare revenues (approximately
$1.45 per Medicare day).
For private and other payor sources, we
experienced a 7.6% increase in rates from 2002 to 2003, as
compared to a 3.9% increase from 2001 to 2002. The increase was
primarily due to the shift of lower paying private pay residents
into Medicare and increases in rates received from HMOs.
Average Medicaid revenue per resident day
increased 4.2% in 2003 relative to 2002 and 4.8% in 2002
relative to 2001. For a number of states, the increase in
average Medicaid revenue per resident day was primarily
attributable to increases in acuity of care levels and funding
for increased state assessment fees and taxes.
EBITDA and EBITDA Percentage
The following table sets forth a reconciliation
of net income before taxes and EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31 |
|
Year Ended December 31 |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
Net income (loss) before income taxes
|
|
$ |
14,986 |
|
|
$ |
3,828 |
|
|
$ |
32,051 |
|
|
$ |
6,337 |
|
|
$ |
(40,007 |
) |
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,681 |
|
|
|
9,161 |
|
|
|
37,448 |
|
|
|
37,575 |
|
|
|
40,772 |
|
|
Interest expense
|
|
|
8,200 |
|
|
|
8,495 |
|
|
|
33,981 |
|
|
|
33,654 |
|
|
|
37,857 |
|
|
Interest income
|
|
|
(1,542 |
) |
|
|
(643 |
) |
|
|
(4,166 |
) |
|
|
(1,379 |
) |
|
|
(2,297 |
) |
|
Loss (gain) on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,961 |
) |
|
|
1,054 |
|
|
Provision for closure and exit costs and other
items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,293 |
|
|
|
23,192 |
|
|
Loss on early retirement of debt
|
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
2,849 |
|
|
|
75 |
|
|
Loss on impairment of long-lived assets
|
|
|
1,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
32,291 |
|
|
$ |
20,841 |
|
|
$ |
99,314 |
|
|
$ |
80,368 |
|
|
$ |
62,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The following table sets forth the calculations
of EBITDA percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31 |
|
Year Ended December 31 |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
EBITDA
|
|
$ |
32,291 |
|
|
$ |
20,841 |
|
|
$ |
99,314 |
|
|
$ |
80,368 |
|
|
$ |
62,331 |
|
Revenues
|
|
$ |
231,501 |
|
|
$ |
211,426 |
|
|
$ |
870,432 |
|
|
$ |
815,015 |
|
|
$ |
794,107 |
|
EBITDA as a percentage of total revenues
|
|
|
13.9 |
% |
|
|
9.9 |
% |
|
|
11.4 |
% |
|
|
9.9 |
% |
|
|
7.8 |
% |
EBITDA as a percentage of total revenues
increased to 11.4% in 2003 from 9.9% in 2002 and 7.8% in 2001.
The increase was attributable to the improvement in total census
(1.4%) and Medicare census (17.5%) and reductions in general and
administrative expenses (approximately $2.1 million) and
certain operating costs. The operating costs that decreased as a
percentage of total revenues were premiums from the usage of
agency staffing, wage premiums paid to staff and specific supply
costs.
EBITDA, as a percentage of total revenues,
increased to 13.9% in the 2004 quarter from 9.9% in the 2003
quarter. The increase was attributable to the improvement in
Medicare census (12.2%) and reductions in certain operating
costs as a percentage of revenues, primarily wages and benefits.
Results from Operations
The following table sets forth details of our
revenues and earnings as a percentage of total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended March 31 |
|
Year Ended December 31 |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing and assisted living facilities
|
|
|
96.9 |
% |
|
|
96.9 |
% |
|
|
96.9 |
% |
|
|
96.6 |
% |
|
|
96.6 |
% |
|
Outpatient therapy
|
|
|
1.2 |
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
1.2 |
|
|
Other
|
|
|
1.9 |
|
|
|
1.8 |
|
|
|
1.8 |
|
|
|
2.1 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Operating and general and administrative costs
|
|
|
85.1 |
|
|
|
89.1 |
|
|
|
87.5 |
|
|
|
88.8 |
|
|
|
90.3 |
|
Lease, depreciation and amortization
|
|
|
4.7 |
|
|
|
5.4 |
|
|
|
5.4 |
|
|
|
5.9 |
|
|
|
7.0 |
|
Interest, net
|
|
|
2.9 |
|
|
|
3.7 |
|
|
|
3.4 |
|
|
|
4.0 |
|
|
|
4.5 |
|
Loss (gain) loss on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5 |
) |
|
|
0.1 |
|
Provision for closure and exit costs and other
items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
3.0 |
|
Loss on early retirement of debt
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
Loss on impairment of long-lived assets
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before taxes
|
|
|
6.4 |
|
|
|
1.8 |
|
|
|
3.7 |
|
|
|
0.8 |
|
|
|
(5.1 |
) |
Income tax expense (benefit)
|
|
|
2.4 |
|
|
|
0.7 |
|
|
|
1.4 |
|
|
|
0.4 |
|
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
|
4.0 |
% |
|
|
1.1 |
% |
|
|
2.3 |
% |
|
|
0.4 |
% |
|
|
(3.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2004 Quarter Compared with the 2003
Quarter
Revenues
Revenues in the 2004 quarter increased
$20.1 million, or 9.5%, to $231.5 million from
$211.4 million in the 2003 quarter. Outpatient therapy and
other revenues increased by $0.5 million in the 2004
quarter due to increased lease revenue and management and
consulting revenue.
Revenues from skilled nursing and assisted living
facilities increased $19.6 million in the 2004 quarter
compared to the 2003 quarter including $1.6 million as a
result of the acquisition of a facility in
57
Manitowoc, Wisconsin on December 31, 2003.
Revenues from nursing and assisted living facilities on a same
facility basis increased $18.0 million. This increase was
attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
(dollars in |
|
|
|
|
millions) |
|
|
|
|
|
|
|
a 5.0% increase (excluding prior period
adjustments) in the average daily nursing Medicaid rate (which
included cost-offset funding as a result of increased state
assessments and bed taxes of $1.6 million)
|
|
$ |
5.0 |
|
|
|
an increase in Medicare revenues due to the 6.26%
increase in the Medicare Part A rate effective
October 1, 2003
|
|
|
3.7 |
|
|
|
an increase in Medicare residents from 15.3% of
total residents in the 2003 quarter to 17.1% in the 2004 quarter
|
|
|
3.4 |
|
|
|
increase due to one extra day in the 2004 quarter
|
|
|
2.1 |
|
|
|
increases in other average daily skilled nursing
rates
|
|
|
1.9 |
|
|
|
an increase in Medicare revenues due to the
improvement in RUGs mix and other factors
|
|
|
1.7 |
|
|
|
an increase in skilled nursing ancillary revenues
|
|
|
1.1 |
|
|
|
an increase in assisted living revenues due to
increased occupancy and higher rates
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
19.4 |
|
These increases were offset by:
|
|
|
|
|
|
|
|
|
favorable prior year revenue adjustments recorded
in the 2003 quarter consisting of (1) a recovery of
$1.5 million in Medicaid revenues in the 2003 quarter as
the outcome of a favorable court decision in the State of Ohio,
and (2) $1.3 million in favorable settlements of prior
year state cost reports, in excess of $1.4 million of
settlements of prior year state cost reports recorded in 2004
|
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
Total increase in revenues from same facility
nursing and assisted living centers
|
|
$ |
18.0 |
|
|
|
|
|
|
|
|
Operating and General and Administrative
Costs
Operating and general and administrative costs
increased $8.6 million, or 4.6%, in the 2004 quarter
compared to the 2003 quarter, including $1.2 million as a
result of the acquisition of a facility in Manitowoc, Wisconsin
facility on December 31, 2003. Operating and general and
administrative costs on a same facility basis increased
$7.4 million. This increase was attributable to the
following:
|
|
|
|
|
|
|
|
|
|
|
(dollars in |
|
|
|
|
millions) |
|
|
|
|
|
|
|
wages and benefits of $2.6 million and
contracted staffing for food, laundry and therapy services of
$0.5 million, totaling $3.1 million, or a 2.2%
increase, which included an average wage rate increase of 1.6%
in nursing operations
|
|
$ |
3.1 |
|
|
|
state assessments and bed taxes
|
|
|
1.6 |
|
|
|
drug expense due to higher resident census,
Medicare mix and drug prices
|
|
|
1.4 |
|
|
|
bad debt expense
|
|
|
0.8 |
|
|
|
other operating expenses
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
Total increase in same facility operating and
general and administrative costs
|
|
$ |
7.4 |
|
|
|
|
|
|
|
|
Lease Costs, Depreciation and
Amortization
Lease costs were unchanged at $2.3 million
for both the 2004 quarter and the 2003 quarter. Depreciation and
amortization decreased $0.5 million to $8.7 million in
the 2004 quarter compared to $9.2 million in the 2003
quarter. This decrease included a decrease of $0.6 million
as a result of the
58
discontinuation of depreciation on assets held
for divestiture as of January 1, 2004 offset by an increase
of $0.1 million from other items.
Interest
Interest expense, net of interest income,
decreased $1.2 million to $6.7 million for the 2004
quarter compared to $7.9 million for the 2003 quarter. The
weighted average interest rate of all long-term debt increased
to 7.79% during the 2004 quarter compared to approximately 7.74%
during the 2003 quarter. Interest income was $0.9 million
higher in the 2004 quarter than in the 2003 quarter primarily
due to $1.0 million in interest income from Greystone that
was previously not recognized. The average debt level decreased
to $384.7 million during the 2004 quarter compared to
$398.1 million during the 2003 quarter.
Loss on Impairment of Long-Lived
Assets
In March 2004, we concluded the evaluation of two
nursing facilities in Indiana and made a decision, subject to
State of Indiana approval, and after renovation to one of the
two facilities, to consolidate the two operations into one. As a
result of the decision to close the one facility, we have
recorded a provision of $1.6 million for impairment of
long-lived assets.
Loss on Early Retirement of Debt
The loss on the early retirement of debt in the
2004 quarter of $0.4 million was due to the extinguishment
in February 2004 of two industrial development revenue bonds
totaling $13.0 million.
Income Taxes
Income tax expense for the 2004 quarter was
$5.6 million compared to $1.5 million for the 2003
quarter. Our effective tax rate was 37.6% for the 2004 quarter
as compared to 40.2% for the 2003 quarter. The decrease in the
effective tax rate resulted from current and prior year state
deferred income tax benefits and the impact of permanent items
between the two years. 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 2004 quarter were
$9.3 million compared to $2.3 million for the 2003
quarter. The improvement in net earnings was due to the reasons
described in this section The 2004 Quarter Compared with
the 2003 Quarter.
Related Party Transactions
We insure certain risks, including comprehensive
general liability, property coverage, excess workers
compensation and employers liability insurance, with
Laurier Indemnity Company and Laurier Indemnity Ltd., affiliated
insurance subsidiaries of Extendicare Inc. We recorded
approximately $2.8 million and $2.6 million of
expenses for this purpose for the 2004 quarter and 2003 quarter,
respectively. Also, for the 2004 quarter, we recorded a credit
to expense of $1.0 million relating to prior year
workers compensation policies with Laurier Indemnity
Company.
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 $1.2 million and $1.7 million for the
2004 quarter and 2003 quarter, respectively.
59
Year Ended December 31, 2003 Compared
with Year Ended December 31, 2002
Revenues
Revenues in 2003 increased $55.3 million, or
6.8%, to $870.4 million from $815.1 million in 2002.
Outpatient therapy and other revenues decreased by
$0.7 million in 2003 due to lower rental income resulting
from the sale of facilities in 2002 that we previously leased to
a third party, partially offset by growth of our outpatient
therapy operations.
Revenues from skilled nursing and assisted living
facilities increased $56.0 million in 2003 compared to
2002. This increase was attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
(dollars in |
|
|
|
|
millions) |
|
|
|
|
|
|
|
an increase in Medicare residents from 13.4% of
total residents in 2002 to 15.5% in 2003
|
|
$ |
15.5 |
|
|
|
a 4.2% increase (excluding prior period
adjustments) in the average daily nursing Medicaid rate
(including cost-offset funding as a result of increased state
assessments and bed taxes of $4.4 million)
|
|
|
16.0 |
|
|
|
a 1.4% increase in nursing resident census from
an ADC of 12,727 in 2002 to 12,901 in 2003 increases in other
average daily nursing rates
|
|
|
11.1 |
|
|
|
increases in other average daily nursing rates
|
|
|
8.2 |
|
|
|
an increase in nursing ancillary revenues
|
|
|
6.8 |
|
|
|
an increase in Medicare revenues due to the
improvement in RUGs mix
|
|
|
4.5 |
|
|
|
an increase in Medicare revenues due to the 6.26%
increase in the Medicare Part A rate effective
October 1, 2003; and
|
|
|
3.5 |
|
|
|
an increase in assisted living revenues due to
increased occupancy and higher rates
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
67.9 |
|
These increases were offset and adjusted by:
|
|
|
|
|
|
|
|
|
a decrease due to the Medicare cliff, net of the
market basket increase, implemented on October 1, 2002
|
|
|
(12.8 |
) |
|
|
favorable prior year revenue adjustments recorded
in 2003 consisting of (1) a recovery of $4.2 million
in Medicaid revenues as the outcome of a favorable court
decision in Ohio relating to the recovery of alleged government
overpayments for adjudicated Medicaid cost report periods and
(2) revenue adjustments totaling $1.1 million for the
settlement of prior year state cost reports; offset by
(a) the recording in 2003 of a contractual revenue
adjustment totaling $2.7 million for prior year Medicare
settlement receivables and further offset by
(b) $1.7 million in favorable prior year adjustments
recorded in 2002 primarily for the settlement of prior year
state cost reports
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
Total increase in revenues from skilled nursing
and assisted living centers
|
|
$ |
56.0 |
|
|
|
|
|
|
|
|
60
Operating and General and Administrative
Costs
Operating and general and administrative costs
increased $38.0 million, or 5.2%, in 2003 compared to 2002.
This increase was attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
(dollars in |
|
|
|
|
millions) |
|
|
|
|
|
|
|
wages and benefits of $18.8 million and
contracted staffing for food, laundry and therapy services of
$4.5 million, totaling $23.3 million, or a 4.4%
increase, which included an average wage rate increase of 3.2%
in nursing operations
|
|
$ |
23.3 |
|
|
|
drug expense due to higher resident census,
Medicare mix and drug prices
|
|
|
3.9 |
|
|
|
state assessments and bed taxes
|
|
|
4.4 |
|
|
|
professional fees expense primarily due to legal
fees and nursing consulting
|
|
|
1.9 |
|
|
|
general liability expense primarily due to
premiums and accruals
|
|
|
1.7 |
|
|
|
other operating expenses
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
Total increase in operating and general and
administrative costs
|
|
$ |
38.0 |
|
|
|
|
|
|
|
|
Lease Costs, Depreciation and
Amortization
Lease costs decreased $1.5 million when
comparing years as a result of the purchase of previously leased
facilities in 2002. Depreciation and amortization decreased
$0.2 million to $37.4 million in 2003 compared to
$37.6 million in 2002.
Interest
Interest expense, net of interest income,
decreased $2.5 million to $29.8 million for 2003
compared to $32.3 million for 2002. The weighted average
interest rate of all long-term debt decreased to 7.76% during
2003 compared to approximately 7.81% during 2002. Interest
income was $2.8 million higher in 2003 than 2002, primarily
due to $1.3 million in interest income that was previously
not recognized and increased interest income from our interest
rate swap and cap agreements. The average debt level increased
to $397.7 million during 2003 compared to
$387.2 million during 2002.
Income Taxes
Income tax expense for 2003 was
$12.0 million compared to $3.2 million for 2002. Our
effective tax rate was 37.3% for 2003 as compared to 49.2% for
2002. The decrease in the effective tax rate resulted from the
reversal of current and prior year state deferred income tax
benefits, the non-recognition of tax benefits in certain states
in 2002 and the impact of permanent items between the two years.
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 2003 were $20.1 million
compared to $3.2 million for 2002. The improvement in net
earnings was due to the reasons described herein above.
Related Party Transactions
We insure certain risks, including comprehensive
general liability, property coverage, excess workers
compensation and employers liability insurance, with
Laurier Indemnity Company and Laurier Indemnity Ltd., affiliated
insurance subsidiaries of Extendicare Inc., our Canadian parent.
We recorded approximately $10.7 million and
$9.9 million of expenses for this purpose for 2003 and
2002, respectively.
61
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 $6.9 million and $7.9 million for 2003
and 2002, respectively.
Year Ended December 31, 2002 Compared
with Year Ended December 31, 2001
Revenues
Revenues in 2002 increased by $21.0 million,
or 2.6%, to $815.1 million, from $794.1 million in
2001. The increase in revenues included a $56.1 million
increase in revenues from skilled nursing and assisted living
facilities and other businesses operated during both 2002 and
2001, or same facility operations, and an increase of
$0.5 million from other revenue, partially offset by a
decrease of $35.6 million in revenues from divested skilled
nursing facilities.
Revenues from same-facility operations increased
$56.1 million due to:
|
|
|
|
|
|
|
|
|
|
|
(dollars in |
|
|
|
|
millions) |
|
|
|
|
|
|
|
an increase in the average daily Medicaid rate
from $121 in 2001 to $127 in 2002
|
|
$ |
19.2 |
|
|
|
an increase in Medicare residents from 11.4% of
total residents in 2001 to 13.4% in 2002
|
|
|
16.8 |
|
|
|
a 1.9% increase in resident census from an ADC of
13,928 in 2001 to 14,200 in 2002
|
|
|
14.3 |
|
|
|
other rate increases
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
59.2 |
|
These increases were offset and adjusted by:
|
|
|
a decrease due to the Medicare cliff, net of the
market basket increase, implemented on October 1, 2002
|
|
|
(3.9 |
) |
|
|
an increase in favorable prior year revenue
adjustments recorded in 2002 compared to 2001
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
Total increase in revenues from skilled nursing
and assisted living centers
|
|
$ |
56.1 |
|
|
|
|
|
|
|
|
Operating and General and Administrative
Costs
Operating and general and administrative costs
increased $6.8 million, or 1.0%, between years, of which
$11.6 million was a decrease in expenses for general
liability insurance and liability claims (primarily related to
our divestiture of our Texas skilled nursing facilities) and
$32.9 million related to reduced operating costs
attributable to skilled nursing facilities divested during 2001.
Operating and general and administrative costs on a same
facility basis increased $51.3 million, or a 7.8%, and
included increases of:
|
|
|
|
|
|
|
|
|
|
|
(dollars in |
|
|
|
|
millions) |
|
|
|
|
|
|
|
wages and benefits of $23.1 million and
contracted staffing for food and laundry services of
$10.4 million, totaling $33.5 million, or a 7.1%
increase
|
|
$ |
33.5 |
|
|
|
workers compensation due to prior year
actuarial adjustments recorded in 2001
|
|
|
4.6 |
|
|
|
drug expense due to higher resident census and
higher drug prices
|
|
|
3.4 |
|
|
|
outside therapy services primarily related to
increased use of therapy services and higher Medicare census
|
|
|
3.2 |
|
|
|
bad debt expense
|
|
|
2.7 |
|
|
|
supplies expense primarily due to higher occupancy
|
|
|
1.4 |
|
|
|
other operating and general and administrative
expenses
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
Total increase in operating and general and
administrative costs
|
|
$ |
51.3 |
|
|
|
|
|
|
|
|
62
Lease Costs, Depreciation and
Amortization
Depreciation and amortization decreased
$3.2 million to $37.6 million for 2002 compared to
$40.8 million for 2001. This decrease was primarily a
result of a $2.4 million decrease relating to the adoption
of SFAS No. 142, Goodwill and Other Intangible
Assets, which requires that goodwill no longer be
amortized to earnings. The remaining $0.8 million decrease
was primarily a result of divestitures.
Lease costs decreased $3.9 million when
comparing periods, including $2.0 million as a result of
divestitures, $0.5 million as a result of the purchase of
previously leased facilities and $1.4 million relating to
other facilities that we continue to operate.
Interest
Interest expense, net of interest income,
decreased $3.3 million to $32.3 million for 2002
compared to $35.6 million for 2001. This decrease was
primarily due to (1) net interest income of
$2.1 million from interest rate swaps and (2) lower
market interest rates during 2002 prior to the issuance, on
June 28, 2002, of our Senior Notes, the proceeds of which
were used to refinance floating-rate debt. The decrease was also
due to a reduction in the average debt level to
$387.2 million during 2002 compared to $406.5 million
during 2001, resulting from our use of divestiture proceeds and
an income tax refund during 2001 to reduce bank debt balances.
The weighted average interest rate of all long-term debt
decreased to 7.81% during 2002 compared to 8.44% during 2001.
Loss on Impairment of Long-lived
Assets
When our management commits us to a plan for
disposal of assets, we adjust assets held for disposal to the
lower of the assets carrying value or the fair value less
selling costs. In September 2001, we formally decided to lease
all owned, and sublease all leased, skilled nursing facilities
in Texas. As a result of the transaction, and based on the terms
of the lease with Senior Health-Texas, we recorded in 2001 a
provision of $1.7 million for impairment of Texas skilled
nursing properties in accordance with Statement of Financial
Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of.
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 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. The provision for
closure and exit costs related to an increase in the overall
disposition reserve for cost report and other settlements with
Florida and Texas and other Medicare fiscal intermediaries,
collection of receivables, and settlement of claims with
suppliers and employees.
For 2001, we recorded a loss on disposal of
assets of $1.0 million and a provision for closure and exit
costs and other items of $23.2 million. On
September 30, 2001, we transferred all Texas skilled
nursing facilities to Senior Health-Texas. As a result of the
Texas transaction, as well as the closure and sale of one
skilled nursing facility and two other properties in Wisconsin,
we provided $3.7 million for related disposal and closure
costs. We also made additional provisions of $20.5 million
relating to previously ceased operations, including
$19.0 million related to the skilled nursing facilities in
Florida. This $19.0 million consisted of an
$11.0 million provision related to Florida claims for years
prior to 2001 based upon an actuarial review of resident
liability costs, and an $8.0 million provision for Florida
closure and exit costs.
Loss on Early Retirement of Debt
The loss on early retirement of debt in 2002 of
$2.8 million was due to the early extinguishment in June
2002 of our debt using proceeds from the issuance of the Senior
Notes. The loss on early retirement
63
of debt in 2001 of $75,000 was related to the
write-off of deferred financing costs in connection with debt
reduction upon the sale of skilled nursing facilities.
Income Taxes
Income tax expense for 2002 was $3.1 million
compared to an income tax benefit of $12.5 million for
2001. Our effective tax rate was 49.2% for 2002 as compared to
31.3% for 2001. The increase in the effective tax rate results
from the impact of certain permanent adjustments that increased
the effective rate when applied to pre-tax earnings compared to
decreasing the effective rate when applied to pre-tax loss for
2001 and the reversal of current and prior year state deferred
income tax benefits. 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 (Loss)
Net earnings for 2002 were $3.2 million
compared to a net loss of $27.5 million for 2001. Net
earnings prior to loss (gain) on disposal of assets, provision
for closure and exit costs and other items, loss on early
retirement of debt and loss on impairment of long-lived assets,
after applicable income tax effect, was $5.6 million for
2002 compared to a net loss of $11.0 million for 2001. The
fluctuation was caused by the reasons noted above.
Related Party Transactions
We insure certain risks, including comprehensive
general liability, property coverage and excess workers
compensation/employers liability insurance, with Laurier
Indemnity Company and Laurier Indemnity Ltd., affiliated
insurance subsidiaries of Extendicare Inc., our Canadian parent.
We recorded approximately $9.9 million of expenses for this
purpose for 2002 and $5.7 million for 2001.
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 $7.9 million for 2002 and $6.6 million
for 2001.
Liquidity and Capital Resources
Sources and Uses of Cash.
Overview of Changes in Liquidity
Three Months Ended March 31, 2004 Compared to Three Months
Ended March 31, 2003
We had cash and cash equivalents of
$47.9 million at March 31, 2004 and $48.9 million
at December 31, 2003. We generated cash flow of
$18.5 million from operating activities for the 2004
quarter compared with $4.5 million in the 2003 quarter. We
used cash flow of $7.2 million for investing activities in
the 2004 quarter as compared to $4.4 million in the 2003
quarter. We used cash flow of $12.2 million for financing
activities in the 2004 quarter as compared to providing cash
flow of $0.4 million from financing activities in the 2003
quarter.
The increase in cash flow from operating
activities of $14.0 million in the 2004 quarter compared to
the 2003 quarter was primarily due to an improvement in
earnings, the collection in the 2004 quarter of
$6.1 million of Medicare settlement receivables, and a
reduction of $2.5 million in payments for self-insured
liabilities.
Our working capital decreased $0.7 million
from $55.8 million at December 31, 2003 to
$55.1 million at March 31, 2004.
64
Accounts receivable at March 31, 2004 were
$93.9 million compared with $95.3 million at
December 31, 2003, representing a decrease of
$1.4 million. The reduction in accounts receivable included
a $2.5 million decrease within the nursing operations
offset by an increase of $1.0 million in interest income
due from Greystone and a $0.1 million increase in
outpatient therapy receivables. Within the nursing operations,
billed patient care and other receivables increased
$2.6 million while, based on Medicare and Medicaid cost
reports, third-party payor settlement receivables decreased
$5.1 million.
The decrease in settlement receivables of
$5.1 million from December 31, 2003 to March 31,
2004 included decreases of $6.0 million from the collection
of Medicare settlements and $2.3 million from the
collection of Medicare co-insurance amounts. These decreases
were partially offset by an increase of $2.7 million
relating to revenue in the 2004 quarter for anticipated Medicare
reimbursement for uncollectible co-insurance amounts and an
increase of $0.5 million from Medicaid cost report
settlements.
Property and equipment increased
$0.9 million from December 31, 2003 to a total of
$449.6 million at March 31, 2004. The increase was the
result of (1) total capital expenditures of
$10.7 million, which included $3.8 million from
construction of new developments and $1.5 million from the
February 2004 acquisition of a previously-leased nursing
facility in Washington, plus (2) other items of
$0.2 million. This increase was partially offset by
depreciation expense of $8.4 million and a provision for
impairment of long-lived assets of $1.6 million.
Total long-term debt, including both current and
long-term maturities of debt, totaled $380.2 million at
March 31, 2004. This represents a decrease of
$12.7 million from December 31, 2003, including a
decrease of $13.0 million due to the prepayment of
Industrial Development Revenue Bonds.
Cash used in investing activities was
$7.2 million for the 2004 quarter compared to
$4.4 million for the 2003 quarter. The change of
$2.8 million was due to payments for acquisitions of
$2.1 million in the 2004 quarter, payments for new
construction projects of $3.8 million in the 2004 quarter,
an increase in the 2004 quarter compared to the 2003 quarter of
$0.6 million in purchases of property and equipment, and an
increase in other non-current assets of $0.7 million,
partially offset by the collection of note receivables of
$4.4 million.
Cash used in financing activities was
$12.2 million for the 2004 quarter compared to
$0.4 million provided from financing activities for the
comparable 2003 quarter. The change of $12.6 million
primarily related to a $13.0 million prepayment of
Industrial Development Revenue Bonds.
Overview of Changes in Liquidity
Year Ended December 31, 2003 Compared To Year Ended
December 31, 2002
We had cash and cash equivalents of
$48.9 million at December 31, 2003 and
$24.4 million at December 31, 2002. We generated cash
flow of $56.0 million from operating activities for the
year ended December 31, 2003 compared with
$38.8 million in the comparable 2002 period and
$82.6 million in 2001. We used cash flow of
$26.8 million for investing activities in 2003 as compared
to $22.4 million in 2002 and $16.8 million in 2001. We
used cash flow of $4.8 million for financing activities in
2003 as compared to providing cash flow of $7.5 million
from financing activities in 2002 and using cash flow of
$66.6 million for financing activities in 2001. The table
below sets forth a summary of the significant sources and uses
of cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
Cash provided by operating activities
|
|
$ |
56,033 |
|
|
$ |
38,832 |
|
|
$ |
82,626 |
|
Cash used in investing activities
|
|
|
(26,772 |
) |
|
|
(22,415 |
) |
|
|
(16,755 |
) |
Cash (used in) provided by financing activities
|
|
|
(4,766 |
) |
|
|
7,536 |
|
|
|
(66,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$ |
24,495 |
|
|
$ |
23,953 |
|
|
$ |
(695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
65
The increase in cash flow from operating
activities of $17.2 million in 2003 compared to 2002 was
primarily due to an improvement in earnings and changes in
working capital of $12.3 million and a reduction of
$4.9 million in payments for self-insured liabilities.
Our working capital increased $25.9 million
from $29.9 million at December 31, 2002 to
$55.8 million at December 31, 2003. The increase
included a $24.5 million increase in cash and a
$10.0 million decrease in the current portion of accrual
for self-insured liabilities. These increases in working capital
were partially offset by an $8.7 million decrease in
amounts due from our shareholder and affiliates.
Accounts receivable at December 31, 2003
were $95.3 million compared with $96.0 million at
December 31, 2002, representing a decrease of
$0.7 million. The reduction in accounts receivable included
a $1.7 million decrease in interest due from non-affiliated
long-term care operators, offset by an increase of
$0.6 million in outpatient therapy receivables and a
$0.5 million increase within the nursing operations. Within
the nursing operations, billed patient care and other
receivables increased $5.8 million while third-party payor
settlement receivables, based on Medicare and Medicaid cost
reports, decreased $5.3 million.
The decrease in settlement receivables of
$5.3 million from December 31, 2002 to
December 31, 2003 included decreases of $3.9 million
from collection of Medicare settlements, $7.6 million for
collections of Medicare co-insurance amounts and a
$4.3 million reclassification from Medicaid accrued
liabilities. These decreases were partially offset by an
increase of $10.5 million relating to revenue in the 2003
period for anticipated Medicare reimbursement for uncollectible
co-insurance amounts.
Property and equipment decreased
$4.4 million from December 31, 2002 to a total of
$448.7 million at December 31, 2003. The decrease was
the result of depreciation expense of $33.8 million and
asset disposals of $0.1 million. These decreases were
partially offset by total capital expenditures of
$29.5 million, including $4.3 million from
construction of new developments and $4.1 million from the
acquisition of a skilled nursing facility in Wisconsin in
December 2003.
Total long-term debt, including both current and
long-term maturities of debt, totaled $392.9 million at
December 31, 2003. This represents a decrease of
$5.2 million from December 31, 2002, due to repayments
of long-term debt.
Cash used in investing activities was
$26.8 million for 2003 compared to $22.4 million for
2002. The change of $4.4 million was due to proceeds in
2002 from the sale of property and equipment of
$14.3 million, a decrease in payments for acquisitions of
$13.8 million when comparing periods, payments for new
construction projects of $4.3 million in 2003, an increase
in 2003 of $2.4 million in purchases of property and
equipment and an increase in 2003 in the collection of other
non-current assets of $2.8 million.
Cash used in financing activities was
$4.8 million for 2003 compared to $7.5 million
provided from financing activities for 2002. The change of
$12.3 million primarily related to $4.5 million of
early debt repayments in 2003 and the payoff of debt in June
2002 using proceeds from the issuance of new debt as described
below.
66
Debt Instruments
Summary of Long-term Debt.
Long-term debt consisted of the following as of
the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2004 |
|
December 31, 2003 |
|
December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
Senior Notes due 2010
|
|
$ |
149,685 |
|
|
$ |
149,676 |
|
|
$ |
149,641 |
|
Senior Subordinated Notes due 2007
|
|
|
200,000 |
|
|
|
200,000 |
|
|
|
200,000 |
|
Industrial Development Revenue Bonds, variable
interest rates ranging from 1.00% to 6.25%, maturing through
2014, secured by certain facilities
|
|
|
20,160 |
|
|
|
33,160 |
|
|
|
33,355 |
|
Mortgage notes payable, interest rates ranging
from 3.0% to 10.5%, maturing through 2012
|
|
|
10,368 |
|
|
|
10,054 |
|
|
|
15,109 |
|
Other, primarily capital lease obligations
|
|
|
24 |
|
|
|
28 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt before current maturities
|
|
|
380,237 |
|
|
|
392,918 |
|
|
|
398,150 |
|
Less current maturities
|
|
|
1,276 |
|
|
|
1,223 |
|
|
|
716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$ |
378,961 |
|
|
$ |
391,695 |
|
|
$ |
397,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average interest rate of all of our
long-term debt (including the effects of the interest rate swap
and cap agreements discussed below) was 7.70%, 7.52% and 7.71%
as of March 31, 2004 and December 31, 2003 and
December 31, 2002, respectively. Our long-term debt
instruments have maturities ranging from 2004 to 2014.
2010 Senior Notes
On June 28, 2002, we refinanced all
outstanding indebtedness under our then existing credit facility
with the proceeds from the issuance of $150.0 million of
our 2010 Senior Notes.
The subsidiary guarantees of the 2010 Senior
Notes are full and unconditional, and joint and several, and any
of our subsidiaries that do not guarantee the 2010 Senior Notes
are minor. There are no significant restrictions on the ability
of us to obtain funds from our subsidiaries by loan or dividend.
The indenture governing the 2010 Senior Notes
contains customary covenants and events of default. Under this
indenture, we are also restricted from incurring indebtedness if
the fixed charge coverage ratio, determined on a pro forma
basis, is less than or equal to 2.0 to 1. Our fixed charge
coverage ratio is currently in excess of this minimum
requirement. The fixed charge coverage ratio is defined under
our 2010 Senior Notes agreement, and is represented by a ratio
of consolidated cash flow to fixed charges. In general, fixed
charges consist of interest expense, including capitalized
interest, amortization of fees related to debt financing and
rent expense deemed to be interest, and consolidated cash flow
is net income prior to the aforementioned fixed charges, and
prior to income taxes and losses on disposal of assets.
In October 2003, the 2010 Senior Notes were
upgraded by Standard & Poors Ratings Services, or
S&P, from B- to B, and the credit
facility was upgraded from BB- to BB. In
April 2004, the 2010 Senior Notes were upgraded by Moodys
Investors Service from B2 to B1.
2007 Notes
As of March 31, 2004, we had
$200.0 million of 2007 Notes outstanding. The 2007 Notes
are unsecured obligations subordinated in right of payment to
all of our existing and future senior indebtedness, which
includes all borrowings under our credit facility as well as all
indebtedness not refinanced by our credit facility.
As of March 31, 2004, Extendicare Inc., our
parent company, held $27.9 million of our 2007 Notes. These
2007 Notes were repaid on May 24, 2004. In October 2003,
the 2007 Notes were upgraded by S&P from CCC+ to
B-.
67
As discussed in Prospectus
Summary Recent Developments Tender
Offer/ Redemption and Sale and Issuance of 2014 Notes, in
connection with the sale and issuance of the 2014 Notes, we used
the net proceeds therefrom, together with borrowings under our
amended and restated credit facility to purchase for cash
approximately $104.9 million aggregate principal amount of
2007 Notes validly tendered in the tender offer and to redeem
any 2007 Notes not tendered in the tender offer or cancelled
prior to May 24, 2004.
Credit Facility
On June 28, 2002, we entered into a credit
facility that provides senior secured financing of up to
$105.0 million on a revolving basis. As of March 31,
2004, we did not have any borrowings outstanding under this
credit facility, but we had $33.7 million of letters of
credit outstanding thereunder. The credit facility will
terminate on June 28, 2007. As of December 31, 2003
and continuing through March 31, 2004, based upon financial
performance, borrowings drawn under the credit facility bear
interest, at our option, at an annual rate equal to:
|
|
|
|
|
LIBOR plus 3.25%; or
|
|
|
|
the Base Rate plus 2.25%.
|
Our obligations under the 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 under the credit facility 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 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 credit facility contains customary covenants and
events of default and is subject to various mandatory
prepayments and commitment reductions. The credit facility
requires that we comply with various financial covenants, on a
consolidated basis including:
|
|
|
|
|
a minimum fixed charge coverage ratio of 1.10
to 1 and increasing to 1.20 to 1 in 2005;
|
|
|
|
a minimum tangible net worth that started at 85%
of our tangible net worth at March 31, 2002 and increases
by 50% of our net income for each fiscal quarter plus 100% of
any additional equity we raise;
|
|
|
|
a maximum senior leverage ratio of 4.25 to 1 and
reducing to 4.00 to 1 in 2005; and
|
|
|
|
a maximum senior secured leverage ratio of 1.75
to 1 and reducing to 1.50 to 1 in 2005.
|
We were in compliance with these financial
covenants as of March 31, 2004.
As discussed in Prospectus
Summary Recent Developments Amendment
and Restatement of Credit Facility, in connection with the
sale and issuance of the 2014 Notes, we amended and restated our
current credit facility to, among other things, extend its term
by two years, until June 28, 2009, and provide an
additional $50.0 million of senior secured financing on a
revolving basis.
Interest Rate Swap and Cap
Agreements
To hedge our exposure to fluctuations in the
market value of the 2010 Senior Notes, we entered into a
five-year interest rate swap agreement with a notional amount of
$150.0 million. The agreement effectively converted up to
$150.0 million of our fixed interest rate indebtedness into
variable interest rate indebtedness. Under the terms of the
interest rate swap agreement, the counterparty can call the swap
upon 30 days notice.
68
Also in June 2002, we entered into a five-year
interest rate cap agreement with a notional amount of
$150.0 million. Under this cap agreement, 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 agreement 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 swap agreement, the counterparty can
call the swap upon 30 days notice. For additional
information regarding the termination of the interest rate swap
and cap agreements, and the two new interest rate swap and cap
agreements that we entered into, see Events of
2004 Subsequent to 2004 Quarter.
Off Balance Sheet Arrangements
As of March 31, 2004, we had no significant
off balance sheet arrangements.
Cash Management
As of March 31, 2004, we held cash and cash
equivalents of $47.9 million. The majority of excess cash
is held in Certificate of Deposits, or CDs, that are invested
for periods of less than 90 days. We forecast on a regular
basis monthly cash flows to determine the investment periods of
CDs and monitor daily the incoming and outgoing expenditures to
ensure available cash is invested on a daily basis.
Future Liquidity and Capital
Resources
We believe that our cash from operations and
anticipated growth, together with other available sources of
liquidity, including borrowings available under our 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 credit facility.
As of December 31, 2003, principal payments
on long-term debt due within the next five years and thereafter
are as follows:
|
|
|
|
|
|
|
(dollars in |
|
|
thousands) |
|
|
|
2004
|
|
$ |
1,223 |
|
2005
|
|
|
1,287 |
|
2006
|
|
|
1,313 |
|
2007
|
|
|
204,174 |
|
2008
|
|
|
1,221 |
|
After 2008
|
|
|
183,700 |
|
|
|
|
|
|
Total minimum payments
|
|
$ |
392,918 |
|
|
|
|
|
|
After giving effect to the April 2004 sale and
issuance of the 2014 Notes, the repurchase or redemption of our
2007 Notes and anticipated borrowings under our amended and
restated credit facility, long-term debt due in 2007 will
decrease to $4.2 million, and long-term debt due after 2008
will increase to $326.7 million.
69
At December 31, 2003, we were committed to
making the following minimum rental payments under
non-cancelable operating leases:
|
|
|
|
|
|
|
(dollars in |
|
|
thousands) |
|
|
|
2004
|
|
$ |
8,550 |
|
2005
|
|
|
8,174 |
|
2006
|
|
|
5,435 |
|
2007
|
|
|
3,863 |
|
2008
|
|
|
3,512 |
|
After 2008
|
|
|
17,402 |
|
|
|
|
|
|
Total minimum payments
|
|
$ |
46,936 |
|
|
|
|
|
|
Contractual Obligations
Set forth below is a table showing the estimated
timing of payments under the contractual obligations as of
December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
|
|
|
|
Less than |
|
|
|
More than |
|
|
Total |
|
1 Year |
|
1-3 Years |
|
3-5 Years |
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
Long-term debt
|
|
$ |
392,918 |
|
|
$ |
1,223 |
|
|
$ |
2,600 |
|
|
$ |
205,395 |
|
|
$ |
183,700 |
|
Operating lease commitments
|
|
|
46,936 |
|
|
|
8,550 |
|
|
|
13,609 |
|
|
|
7,375 |
|
|
|
17,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
439,854 |
|
|
$ |
9,773 |
|
|
$ |
16,209 |
|
|
$ |
212,770 |
|
|
$ |
201,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After giving effect to the April 2004 sale and
issuance of the 2014 Notes, the repurchase or redemption of our
2007 Notes and anticipated borrowings under our amended and
restated credit facility, contractual obligations due in three
to five years will decrease to $12.8 million, and
contractual obligations due in more than five years will
increase to $344.1 million.
At March 31, 2004, we made or were committed
to make capital expenditures in respect of seven new
developments, which will add 165 beds during 2004 and 2005. Two
of these projects, adding 32 beds, were completed during the
2004 quarter. The total expected cost of these seven projects is
$15.2 million, of which $4.3 million was expended in
2003, $3.6 million was expended 2004, and $6.8 million
is committed to be expended on these projects. Approximately
$0.5 million of the planned amounts for these projects has
not yet been committed.
We also approved eight new assisted living
facility developments that will add 329 units and have an
approximate cost of $36.3 million. As of March 31,
2004, $0.2 million has been expended and $1.5 million
is committed to be expended for these developments. These new
developments are scheduled to open in 2005 and later.
At March 31, 2004, we accrued provisions for
settlement of self-insured liabilities of $43.6 million in
respect of general and professional liability claims. Claim
payments were $3.1 million and $5.6 million for the
2004 quarter and 2003 quarter, respectively. The accrual for
self-insured liabilities includes estimates of the cost of both
reported claims and claims incurred but not yet reported. We
exited the skilled nursing facility markets of the highly
litigious States of Florida and Texas in 2000 and 2001,
respectively. As a result, accruals for general and professional
liabilities have declined significantly from the 2001 level. We
estimate that $18.0 million of the total $43.6 million
liability will be paid within the next fiscal year. The timing
of payments is not directly within our control, therefore
estimates are subject to change in the future. We believe we
have provided sufficient provisions as of March 31, 2004.
70
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.
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
March 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
After 2008 |
|
Total |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
LONG-TERM DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
$ |
1,007 |
|
|
$ |
1,465 |
|
|
$ |
1,492 |
|
|
$ |
204,346 |
|
|
$ |
1,221 |
|
|
$ |
151,706 |
|
|
$ |
361,237 |
|
|
$ |
386,745 |
|
Average Interest Rate
|
|
|
8.56 |
% |
|
|
7.85 |
% |
|
|
7.90 |
% |
|
|
9.31 |
% |
|
|
9.50 |
% |
|
|
9.51 |
% |
|
|
9.38 |
% |
|
|
|
|
Variable Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,000 |
|
|
$ |
19,000 |
|
|
$ |
19,000 |
|
Average Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.01 |
% |
|
|
1.01 |
% |
|
|
|
|
INTEREST RATE SWAPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(fixed to variable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
150,000 |
|
|
|
|
|
|
|
|
|
|
$ |
150,000 |
|
|
$ |
(3,800 |
) |
Average Pay Rate (variable rate)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.90 |
% |
|
|
|
|
|
|
|
|
|
|
5.90 |
% |
|
|
|
|
Average Receive Rate (fixed rate)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.35 |
% |
|
|
|
|
|
|
|
|
|
|
9.35 |
% |
|
|
|
|
INTEREST RATE CAPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
150,000 |
|
|
|
|
|
|
|
|
|
|
$ |
150,000 |
|
|
$ |
787 |
|
The above table incorporates only those exposures
that existed as of March 31, 2004 and does not consider
those exposures or positions that 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.
As a result of our April 2004 sale and issuance
of the 2014 Notes, our termination of our existing interest rate
swap and cap agreements, our entering into two new interest rate
swap agreement and two new interest rate cap agreements, and our
amending and restating our credit facility, the percentage of
fixed to variable rate debt will change.
Critical Accounting Policies and
Estimates
Our consolidated financial statements have been
prepared in conformity with GAAP. For a full discussion of our
accounting policies as required by GAAP, refer to the
accompanying notes to the consolidated financial statements. We
consider the accounting policies discussed below to be critical
to an understanding of our financial statements because their
application requires significant judgment and reliance on
estimations of matters that are inherently uncertain. Specific
risks related to these critical accounting policies are
described below.
71
Revenue Recognition and Accounts
Receivable
Revenues and Accounts
Receivable. We derive our revenues
primarily from providing long-term healthcare services in the
skilled nursing and assisted living facilities we operate.
Skilled nursing facility revenue results from the payment for
services and products from federal and state-funded cost
reimbursement programs as well as private pay residents. More
than 75% of our skilled nursing facility revenues are derived
from services provided under various federal or state medical
assistance programs. We derive assisted living facility revenue
primarily from private pay residents in the period in which we
provide services and at rates we establish based upon the
services provided and market conditions in the area of operation.
We recognize skilled nursing facility revenues in
the period in which we provide services and/or deliver products
at established rates less contractual adjustments. Contractual
adjustments include differences between our established billing
rates and amounts estimated by management as reimbursable under
various reimbursement formulas or contracts in effect.
Estimation differences between final settlements and amounts
recorded in previous years are reported as adjustments to
revenues in the period such settlements are determined. Due to
the complexity of the laws and regulations governing the federal
and state reimbursement programs, there is a possibility that
recorded estimates may change by a material amount.
We record accounts receivable at the net
realizable value we expect to receive from federal and state
reimbursement programs, other third-party payors or individual
residents. We also estimate which receivables may be collected
within one year and reflect those not expected to be collected
within one year as non-current. We continually monitor and
adjust our allowances associated with these receivables. We
record allowances for bad debts from other third-party payors or
from individual patients based upon a specific assessment of an
accounts collection risk and our historical experience by
payor type. If circumstances change, for instance due to
economic downturn, resulting in higher than expected defaults or
denials, our estimates of the recoverability of our receivables
could be reduced by a material amount. Our allowance for
doubtful accounts for current accounts receivable totaled
$12.2 million at March 31, 2004 and $11.7 and
$9.3 million at December 31, 2003 and 2002,
respectively.
Medicare and Medicaid Settlement
Receivables. For Medicare revenues
earned prior to the implementation of PPS and Medicaid programs
with a retrospective reimbursement system, differences between
revenues that we ultimately expect to realize and amounts
received are reflected as settlement accounts receivable, or as
accrued liabilities when payments have exceeded revenues that we
ultimately expect to realize.
The Medicare program, prior to January 1,
1999, was a cost-based reimbursement program under which skilled
nursing facilities received interim payments for each
facilitys respective reimbursable costs, which could be
subject to adjustment based upon the submission of a year-end
cost report and certain cost limits. The year-end cost report
would be subject to audit by our FI and could lead to ongoing
discussions with the FI, which are normally resolved during the
audit process, and therefore, no provisions are required. For
unresolved items involving differences of opinion, such items
can be settled through a formal appeal process, which results in
the provider filing an appeal with the PRRB of the CMS. Should
this occur, a general provision for Medicare receivables may be
provided for disagreements.
Similarly for states that operate under a
retrospective reimbursement system under which interim payments
are subject to audits, we have to evaluate and determine the
amount of potential settlement accounts receivable or payable.
We periodically review the settlement accounts
receivable and the general contractual allowance for settlement
of amounts in dispute and adjust the balances accordingly based
upon known facts at the time. An adjustment to settlement
receivable amount and recorded revenues would occur upon
resolution of issues in dispute or upon issues being settled at
the PRRB. Since certain issues are significant in amounts, the
resolution could have a material impact on our financial
statements. In addition, we estimate the portion of the Medicaid
and Medicare accounts receivable that are collectible within the
next 12 months
72
and classify this amount as a current asset.
Accounts receivable from both Medicare and Medicaid state
programs, net of a general contractual allowance, totaled
$32.1 million as of March 31, 2004 and
$37.2 million and $46.3 million as of
December 31, 2003 and 2002, respectively. Of the total net
Medicare and Medicaid settlement receivable balance as of
March 31, 2004, $6.2 million is expected to be
substantially collected within one year and included within
accounts receivable as a current asset. Our contractual
allowance for current and non-current Medicare and Medicaid
settlement accounts receivable totaled $14.0 million as of
March 31, 2004 and $14.0 million and
$15.4 million as of December 31, 2003 and 2002,
respectively.
Valuation of Assets and Asset
Impairment
We record property and equipment at cost less
accumulated depreciation and amortization. We depreciate and
amortize these assets using a straight-line method based upon
the estimated lives of the assets. Goodwill represents the cost
of the acquired net assets in excess of their fair market
values. Effective January 1, 2002, we adopted
SFAS No. 142 and no longer amortize goodwill and
intangible assets with indefinite useful lives. Instead, we test
for impairment at least annually, whereas prior to 2002, these
assets were amortized using a straight-line method over a period
of no more than 40 years. Other intangible assets,
consisting of the cost of leasehold rights, are deferred and
amortized over the term of the lease including renewal options.
We periodically assess the recoverability of long-lived assets,
including property and equipment, goodwill and other
intangibles, when there are indications of potential impairment
based upon the estimates of undiscounted future cash flows. The
amount of any impairment is calculated by comparing the
estimated fair market value with the carrying value of the
related asset. We consider such factors as current results,
trends and future prospects, current market value and other
economic and regulatory factors in performing these analyses.
A substantial change in the estimated future cash
flows for these assets could materially change the estimated
fair values of these assets, possibly resulting in an additional
impairment. Changes that may impact future cash flows include,
but are not limited to, competition in the marketplace, changes
in Medicare and Medicaid rates, increases in wages or other
operating costs, increased litigation and insurance costs and
increased operational costs resulting from changes in
legislation and regulatory scrutiny. As detailed in Note 14
to our consolidated financial statements, losses from asset
impairments and disposals and provisions for closure and exit
costs and other items have totaled $1.3 million and
$25.9 million in 2002 and 2001, respectively.
Self-Insured Liabilities
Insurance coverage for patient care liability and
other risks has become increasingly difficult to obtain. We
insure certain risks with affiliated insurance subsidiaries of
Extendicare Inc. and third-party insurers. The insurance
policies cover comprehensive general and professional liability,
property coverage, workers compensation and
employers liability insurance in amounts and with such
coverage and deductibles as we deem appropriate, based on the
nature and risks of our business, historical experiences,
availability and industry standards. We self-insure for health
and dental claims, in certain states for workers
compensation and employers liability, and since January
2000, for general and professional liability claims.
We accrue our self-insured liabilities based upon
past trends and information received from an independent
actuary. We regularly evaluate the appropriateness of the
carrying value of the self-insured liabilities through an
independent actuarial review. Our estimate of the accrual for
general and professional liability costs is significantly
influenced by assumptions, which are limited by the uncertainty
of predicting future events and assessments regarding
expectations of several factors. Such factors include, but are
not limited to: the frequency and severity of claims, which can
differ materially by jurisdiction; coverage limits of
third-party reinsurance; the effectiveness of the claims
management process; and the outcome of litigation.
Changes in our level of retained risk, and other
significant assumptions that underlie our estimate of
self-insured liabilities, could have a material effect on the
future carrying value of the self-insured
73
liabilities. For example, in 2000, we experienced
adverse claims development. In 2000, our per claim retained risk
increased significantly for general and professional liability
coverage mainly due to the level of risks associated with our
Florida and Texas operations. We no longer operate skilled
nursing or assisted living facilities in Florida or nursing
operations in Texas. However, as a result of the increase in the
frequency and severity of claims, in 2001, we recorded a
provision of $29.2 million for resident care liability
including an $11.0 million provision relating to disposed
operations. Our accrual for self-insured liabilities totaled
$43.6 million as of March 31, 2004 and
$45.1 million and $55.1 million as of
December 31, 2003 and 2002, respectively.
Deferred Tax Assets
Our results of operations are included in the
consolidated federal tax return of Extendicare Holdings, Inc.,
our U.S. parent company. Accordingly, federal current and
deferred income taxes payable (or receivable) are transferred to
our parent company. Deferred tax assets and liabilities are
recognized to reflect the expected future tax consequences
attributed to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. We measure deferred tax assets and liabilities
using enacted tax rates expected to apply to taxable income in
the years in which we expect those temporary differences to be
recovered or settled. We establish a valuation allowance based
upon our estimate of whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. 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 in
making this assessment. Our valuation allowance for net state
deferred tax assets totaled $19.0 million as of
March 31, 2004 and $19.0 million and
$21.0 million as of December 31, 2003 and 2002,
respectively.
74
BUSINESS
General
We are one of the largest providers of long-term
care and related services in the United States. Through our
subsidiary network of geographically clustered facilities, we
offer a continuum of healthcare services, including skilled
nursing care, assisted living and related medical specialty
services, such as subacute care and rehabilitative therapy. As
of March 31, 2004, we operated or managed 186 long-term
care facilities with 16,901 beds in 13 states, of which 147
were skilled nursing facilities with 15,030 beds and 39 were
assisted living and retirement facilities with 1,871 units.
We also provided consulting services to 72 facilities with 8,839
beds in five states. In addition, we operated 24 outpatient
rehabilitation clinics in four states. We receive payment for
our services from Medicare, Medicaid, private insurance, self
pay residents and other third-party payors.
We focus on our core skilled nursing facility
operations, while continuing to grow our complementary long-term
care services. By emphasizing quality care of patients and by
clustering several long-term care facilities together within the
geographic areas we serve, our goal is to build upon our
reputation as a leading provider of a full range of long-term
care services in our communities.
The Long-Term Care Industry
According to CMS, total healthcare spending is
expected to grow at an annual rate of 7.3% from 2002 through
2013. By these estimates, healthcare expenditures will account
for $3.4 trillion, or 18.4% of the gross domestic product by
2013. Skilled nursing facility expenditures were approximately
$103.7 billion in 2002, or 6.6% of total healthcare
spending, representing one of the largest components of national
healthcare spending. The spending related to skilled nursing
facilities is expected to grow at an annual rate of 7.4% through
2013.
The long-term care industry is changing as a
result of several fundamental factors, which we believe we can
capitalize on. These factors include:
Aging Population.
The aging of the U.S. population is a leading driver of
demand for long-term care services. According to the 2000 census
conducted by the U.S. Census Bureau, there were
approximately 34.4 million Americans aged 65 or older,
representing 12.6% of the total U.S. population. The
U.S. Census Bureau has forecasted that the population of
Americans aged 65 or older will increase to 53.2 million by
2020, representing 16.4% of the total U.S. population, and
78.8 million in 2050, representing 20% of the total
U.S. population. Based upon these projections, the annual
growth rate for persons over 65 will be 2.6% through 2020, and
1.8% through 2050, whereas the annual growth rate for persons
over 85 will be 2.6% through 2020, and 6.6% through 2050.
According to the August 2003 MetLife Market Survey of Nursing
Home Report, or MetLife report, in 2000, approximately
1.6 million, or 4.5%, of all persons aged 65 and over were
living in a skilled nursing facility. This number is expected to
increase to approximately 6.6 million, or 8.4%, of all
persons aged 65 by the year 2050.
Supply/ Demand
Imbalance. Acquisition and
construction of additional skilled nursing facilities are
subject to certain restrictions on supply, including legislation
moratoriums on new capacity or licensing restrictions limiting
the growth of services. Such restrictions on supply, coupled
with an aging population, are causing a decline in the
availability of long-term beds per person 85 years of age
and older. Additionally, advances in medical technology are
enabling the treatment of certain medical conditions outside the
hospital setting. As a result, patients requiring a higher
degree of monitoring, more intensive and specialized medical
care, 24-hour per day nursing and a comprehensive array of
rehabilitative therapies are increasing, resulting in a need for
long-term care. We believe that such specialty care can be
provided in skilled nursing facilities at a significantly lower
cost than in traditional acute care and rehabilitation hospitals.
Cost Containment
Pressures. According to the MetLife
Report, the remaining life expectancy of a male age 65 has
increased to 16.3 years in 2002 from 12.7 years in
1942, and the remaining life
75
expectancy of a female age 65 has increased
to 19.2 years in 2002 from 14.7 years in 1942. As the
number of people over age 65 continues to grow and as
advances in medicine and technology continue to increase life
expectancies, the likelihood of chronic conditions requiring
treatment, and the resulting healthcare costs, are expected to
rise faster than the availability of resources from
government-sponsored healthcare programs. In response to such
rising costs, governmental and private pay sources in the United
States have adopted cost containment measures that encourage
reduced lengths of stay in acute care hospitals. As a result,
average acute care hospital stays have been shortened, and many
patients are discharged despite a continuing need for nursing or
specialty healthcare services, including a higher degree of
monitoring, intensive and specialized medical care, 24-hour per
day nursing services and a comprehensive array of rehabilitative
therapies. This trend has increased demand for long-term care,
home healthcare, outpatient facilities, hospices and assisted
living facilities. We believe that long-term care companies with
information systems to process clinical and financial data, an
integrated network and a broad range of services will be in a
good position to contract with managed care or other payors.
Changing Family
Dynamics. As a result of the growing
number of two-income families, in our opinion the immediate
family has become less of a primary source of care-giving for
the elderly. Women, who under more traditional roles were viewed
as the primary caretakers of the family, have moved back into
the workforce in increasing numbers as evidenced through their
labor participation rates increasing from 38% in 1963 to 59% in
1998. At the same time, two-income families are better able to
provide financial support for elderly parents to receive the
care they need in a skilled nursing or assisted living facility.
Competitive Strengths
According to the May 2003 CMS Healthcare Industry
Market Update, the long-term care industry is fragmented, with
the 10 largest skilled nursing facility companies accounting for
15.5% of the total facility beds as of April 2003. There are
approximately 16,500 skilled nursing facilities certified under
the Medicare and/or Medicaid program with approximately
1.8 million available beds, and during 2002, approximately
3.5 million individuals lived in skilled nursing
facilities. Approximately 65% of skilled nursing facilities are
operated by for-profit companies, 28% are operated by non-profit
organizations and 7% are operated by local government.
Our major competitive strengths are:
Leading Provider of Long-Term Care
Services. We are among the largest
providers of long-term care services in the United States. As of
March 31, 2004, we operated or managed 186 long-term care
facilities with 16,901 beds, and we operated 24 outpatient
rehabilitation clinics, compared to 22 in 2002 and 20 in 2001.
We also opened two new rehabilitation clinics during 2003. Our
scope of operations allows us to achieve economies of scale in
purchasing and contracting with suppliers and customers. For
example, through our subsidiary, Extendicare Health Network,
Inc., we provide purchasing services for skilled nursing
facilities in numerous states in addition to the facilities we
operate or manage. Through our affiliate, Virtual Care Provider,
Inc., we also provide technology support services to
unaffiliated long-term care facilities. We continue to explore
opportunities to expand in states where we currently operate to
provide either full management, consulting or accounting
services.
Focus on Core
Business. In the past, we have
successfully identified and disposed of business segments that
did not fit within our core business or facilities located in
states with unacceptable litigation risks. From 1998 through
2001, in response to the implementation of the Medicare
Prospective Payment System, or PPS, increased litigation and
insurance costs in certain states and increased operational
costs resulting from changes in legislation and regulatory
scrutiny, we divested under-performing skilled nursing and
assisted living facilities and non-core healthcare assets. These
asset divestitures primarily included the sale of our pharmacy
to Omnicare, Inc. and the sales of facilities and/or the
transfer of all operations in the states of Florida and Texas in
1999, 2000 and 2001. We have more recently commenced development
projects, acquired facilities and undertaken management or
consulting contracts to grow in states that are attractive and
offer opportunities for us to expand our present base of
operations. In 2003, we commenced
76
the development of seven projects that will
expand several facilities (125 beds) and add one free-standing
assisted living facility (40 units), acquired one skilled
nursing facility (99 beds) and approved eight future development
projects that will expand or add to our assisted living
facilities (329 units). During the three months ended
March 31, 2004, we completed two of the seven projects that
we commenced in 2003, which increased our operational capacity
at one skilled nursing facility and one assisted living
facility. We intend to continue to focus on operating and
managing long-term care facilities. In addition, we plan to
continue to review the performance of our current facilities and
exit markets or sell facilities that do not meet our performance
goals. At the present time, we have no significant divestiture
plans.
Significant Facility
Ownership. We own rather than lease a
majority of our properties, unlike a number of other long-term
care providers. As of March 31, 2004, we owned 174
facilities, or 94.3% of the total number of facilities we
operated. We believe that owning properties increases our
operating flexibility by allowing us to:
|
|
|
|
|
refurbish facilities to meet changing consumer
demands;
|
|
|
|
add assisted living and retirement facilities
adjacent to our skilled nursing facilities;
|
|
|
|
adjust licensed capacity to avoid occupancy-based
rate penalties;
|
|
|
|
divest facilities and exit markets at our
discretion; and
|
|
|
|
more directly control our occupancy costs.
|
Dual Medicare and Medicaid
Certification. We have certified
substantially all of our beds for the provision of care to both
Medicare and Medicaid patients. We believe that dual
certification increases the potential for higher occupancy rates
by increasing the availability of beds to patients who require a
specific bed certification. In addition, dual certification
allows our facilities to easily shift patients from one level of
care and reimbursement to another without physically moving the
patient.
Experienced and Proven Management
Team. Our management team has
demonstrated competency in dealing with significant changes in
the reimbursement environment resulting from the shift to PPS,
and identifying the significant exposures and risks of operating
in the extremely litigious environments in Florida and Texas. We
executed a planned divestiture program that reduced our level of
debt and reduced our exposure to liability claims and increased
insurance costs. We have been successful in recruiting
experienced management staff from our competitors to further
strengthen our existing experienced executive and operating
management team.
Geographic
Diversity. We operate or manage
facilities located in specific markets across 13 states
primarily throughout the Northeast, Midwest and Northwest
regions of the United States. No state contains more than 19% of
our facilities or 20% of our beds. Each state is unique in terms
of its competitive dynamics as well as its political and
regulatory environment. Each state administers its own Medicaid
program, which constitutes a significant portion of our revenue.
Our diversified market scope limits our exposure to events or
trends that may occur in any individual state, including changes
in any states Medicaid reimbursement program and changes
in regional and local economic conditions and demographics.
Management Focus on Key Performance
Drivers. We believe that our senior
management, as well as our field personnel, are proficient at
focusing on the key areas that drive revenues, profits and cash
flows. Our senior management has identified the following four
critical drivers of operating and financial performance:
|
|
|
|
|
improving census, particularly increasing our
Medicare census;
|
|
|
|
increasing cash flow from operations through
expedited billing and collections and other initiatives;
|
|
|
|
improving earnings from operations through
control of labor and other costs; and
|
|
|
|
diversifying within the long-term care industry
through expansion of facilities under management and consulting
agreements and expansion of our rehabilitation clinics.
|
77
Every level of management, starting with our
Chief Executive Officer, devotes a significant portion of its
time to improving these key performance drivers. We believe that
this focused attention and commitment, along with the hard work
by our employees, have resulted in substantial improvement in
several of our key performance drivers.
For the three months ended March 31, 2004,
total average daily census, or ADC, was 12,880, resulting in an
occupancy rate of 91.2% for our skilled nursing facilities
compared to an ADC of 12,875 and a 91.3% occupancy rate for our
skilled nursing facilities for the same period in 2003, on a
same facility basis. For the year ended December 31, 2003,
total ADC increased to 12,901, resulting in an occupancy rate of
91.5% for our skilled nursing facilities. Total ADC was 1.4%
higher in 2003 than the total ADC in 2002 of 12,727 (occupancy
rate of 90.3%) and 3.5% higher than the total ADC in 2001 of
12,465 (occupancy rate of 87.8%), on a same facility basis. For
the three months ended March 31, 2004, our Medicare ADC
increased to 2,206, resulting in the percentage of Medicare
residents to total residents of 17.1%. Medicare ADC increased
12.2% from the 1966 Medicare ADC for the same period last year,
on a same facility basis. For 2003, Medicare ADC increased to
1,997, resulting in a percentage of Medicare to total residents
of 15.5%. Medicare ADC increased 17.5% in 2003 from 1,699 in
2002 and increased 39.9% from 1,427 in 2001, on a same facility
basis. Assisted living facilities occupancy increased to 86.7%
for the three months ended March 31, 2004, compared to
85.5% for the same period in 2003. Assisted living facilities
occupancy increased to 86.7% for the three months ended
March 31, 2004, compared to 85.5% for the same period in
2003. Assisted living facilities occupancy increased to 86.3% in
2003 compared to 83.9% in 2002 and 83.1% in 2001.
Cash flow from operations was $18.5 million
for the three months ended March 31, 2004 as compared to
$4.5 million for the same period in 2003. This increase was
primarily due to an improvement in earnings, the collection of
$6.1 million of Medicare settlement receivables and a
reduction of $2.5 million in payments for self-insured
liabilities. Cash flow from operations was $56.0 million
for the year ended December 31, 2003 as compared to
$38.8 million for the year ended December 31, 2002 and
$82.6 million for the year ended December 31, 2001.
Cash flow from operations in 2001 included an income tax
recovery of $22.5 million and a lower level of payments for
self-insured liability claims than in 2003 and 2002. Through
consistent emphasis on admissions protocols, attention to older
and larger account balances and proactive collection efforts at
regional and head offices, we have improved our accounts
receivable management. Average days of revenues outstanding
decreased to approximately 40 days in 2003, compared to
approximately 43 days in 2002 and approximately
45 days in 2001. As of March 31, 2004, average days of
revenues outstanding decreased to approximately 37 days
compared to approximately 40 days for the same period in
2003.
We monitor earnings from operations by focusing
on EBITDA (as defined in Summary Consolidated
Historical Financial and Operating Data) and EBITDA
expressed as a percentage of total revenues. EBITDA increased to
$32.3 million during the three months ended March 31,
2004 compared to $20.8 million during the three months
ended March 31, 2003. EBITDA increased to
$99.3 million during the year ended December 31, 2003,
compared to $80.4 million during the year ended
December 31, 2002 and $62.4 million during the year
ended December 31, 2001, and EBITDA as a percentage of
total revenues increased to 11.4% in 2003, compared to 9.9% in
2002 and 7.8% in 2001. The improvement in EBITDA resulted
primarily from the implementation of a variety of strategies to
control labor costs and minimize the use of temporary staff.
Regular wages as a percentage of total revenues decreased to
43.8% for the three months ended March 31, 2004 compared to
45.3% for the year ended December 31, 2003, 46.5% for the
year ended December 31, 2002 and 46.8% for the year ended
December 31, 2001, while temporary wages as a percentage of
total revenues decreased to 0.3% for the three months ended
March 31, 2004 compared to 0.4% for the year ended
December 31, 2003, 1.2% for the year ended
December 31, 2002 and 2.5% for the year ended
December 31, 2001. We also improved our level of Part B
Medicare revenues and increased Medicaid and Medicare rates
through the admission of residents with higher levels of acuity.
78
Business Strategy
The principal elements of our business strategy
are to:
Provide Quality, Clinically Based
Services. Our corporate clinical
services group monitors quality of care indicators and survey
results and drives continuous quality improvement processes at
the facility and regional levels. Focused review meetings are
held on a regular basis to monitor trends in facilities and to
communicate new protocols and issues within the industry. The
corporate clinical services group directs an internal team of
field-based quality validation specialists who are responsible
for mirroring the regulatory survey process and regularly
communicating with our clinical service specialists in our
corporate office. On-site data is integrated with clinical
indicators, facility human resource data and state regulatory
outcomes to provide a detailed picture of problems, challenges
and successes in achieving performance at all levels of our
organization. This information pool allows us to determine best
practices for duplication in similarly situated facilities. We
emphasize these programs when marketing our services to acute
care providers, community organizations and physicians in the
communities we serve.
Increase Medicare
Census. We continue to develop and
implement strategies and capabilities to attract residents, with
a focus on increasing Medicare census. For the three months
ended March 31, 2004, Medicare payments represented
approximately 30% of our total revenues, up from approximately
27% in the year ended December 31, 2003 and 22% in 1999.
Senior management continually works with our regional and local
management teams to develop strategies to continue to increase
this percentage. Strategies, such as focused marketing efforts,
standardized admissions protocols, streamlined admitting
procedures, dual certification of beds and improved management
communication have driven this improvement. In addition to
increasing the profitability of our skilled nursing facilities,
the increased Medicare census expands the market for our
service-related businesses as Medicare patients utilize
significant ancillary services.
Leverage Presence in Small Urban
Markets. We geographically cluster our
long-term care facilities and services in small urban markets in
order to improve operating efficiencies and to offer our
customers a broad range of long-term care and related health
services, including assisted living services. Future expansion
of our owned skilled nursing facility operations is anticipated
to be through the selective acquisition and construction of new
facilities in areas that are in close proximity to existing
facilities, where management is experienced in dealing with the
regulatory and reimbursement environments, where the facility
can participate as an active member of the skilled nursing
facility association and where the facilitys reputation is
established.
Expand Asset
Portfolio. We seek to expand our
portfolio of skilled nursing and assisted living facilities in
states where we currently operate or that offer attractive
reimbursement systems. We plan to expand through both
acquisitions and internal growth. Opportunities exist to add on
to existing facilities and to develop new assisted living
facilities in locations close to existing skilled nursing
facilities. We currently employ an internal design and
development team that is well-experienced in the design and
construction of new facilities.
Actively Manage Our Asset
Portfolio. We continually review our
asset portfolio in terms of facilities physical condition,
facilities meeting the needs of the marketplace,
facilities financial performance and long-term outlook.
When facilities do not meet our performance criteria, risks
within the marketplace increase or litigation risk increases
beyond acceptable limits, we exit the marketplace or sell
facilities. Over the past four years, we have disposed of a
number of facilities and exited two states, while improving the
performance of the balance of our asset portfolio.
Increase Facilities Under Management and
Consulting Services Agreements and Rehabilitation
Clinics. We seek to increase the
number of management and consulting contracts with third party
operators. We have knowledge and expertise in both the
operational and administrative aspects of the long-term care
sector. We believe that the increasingly complex and
administratively burdensome nature of the long-term care sector,
coupled with our commitment and reputation as a leading,
high-quality operator, will drive demand for new contracts. We
believe this strategy is a logical extension of our business
model and
79
competencies and will drive growth without
requiring substantial capital expenditures. In the year ended
December 31, 2003, we continued to increase the number of
facilities under management or consulting service agreements
bringing the total number of facilities under such agreements to
82, compared to 61 in the year ended December 31, 2002 and
58 in the year ended December 31, 2001. As of the three
months ended March 31, 2004, we had 84 facilities under
management or consulting service agreements.
Increase Operating
Efficiency. We are focused on reducing
operating costs by improving our communications systems,
streamlining documentation and strengthening the formalization
of procedures to approve expenditures. We have reduced the
duplication of roles at the corporate and regional levels and
continue to seek to improve our utilization of regional
resources by adding management and consulting contracts to our
existing regions, thereby enabling us to spread the overhead
costs of our regional structure over a wider base of operations.
Operations
Organizational Structure of
Operations
We have centralized various functions, which are
provided from our corporate office, and direct our operations
from five regional offices in close proximity to our facilities.
The regional office staff are responsible for overseeing all
operational aspects of our facilities, including resident care,
rehabilitative services, recruitment and personnel matters,
compliance with state regulatory requirements, marketing and
sales activities, internal control and accounting support and
participation in state associations. At our corporate offices,
staff members are responsible for the development and
implementation of corporate-wide policies pertaining to resident
care, employee hiring, training and retention, marketing
initiatives and strategies, accounting and finance functions,
including billing and collection, accounts payable, payroll,
general finance and accounting, tax planning and compliance, and
providing overall strategic direction.
Our operations are organized into a number of
different direct and indirect wholly owned subsidiaries.
Operating policies and procedures are substantially the same in
each subsidiary. Several of our subsidiaries own and operate a
significant number of our total portfolio of facilities. No
single facility generates more than 2% of total revenues. Our
skilled nursing facility operations represent the largest
portion of our business, comprising more than 92% of our
revenues. Below is a summary of each of our business operations.
The following chart shows how we and our active
subsidiaries are organized.
80
81
Nursing Care
We provide a broad range of long-term nursing
care, including skilled nursing services, subacute care and
rehabilitative therapy services, to assist patients in the
recovery from acute illness or injury. We provide nursing care
and therapy services to persons who do not require the more
extensive and specialized services of a hospital. Our skilled
nursing facilities employ registered nurses, licensed practical
nurses, therapists, certified nursing assistants and qualified
healthcare aides who provide care as prescribed by each
residents attending physician. All of our skilled nursing
facilities provide daily dietary services, social services and
recreational activities, as well as basic services such as
housekeeping and laundry.
Assisted Living and Retirement
Facilities
In our assisted living facilities, we provide
residential accommodations, activities, meals, security,
housekeeping and assistance in the activities of daily living to
seniors who require some support, but not the level of nursing
care provided in a skilled nursing facility. Our retirement
communities provide activities, security, transportation,
special amenities, comfortable apartments, housekeeping services
and meals. Our assisted living facilities enhance the value of
an existing skilled nursing facility in situations where the two
facilities operate side by side. This allows us to better serve
the communities in which we operate by providing a broader
continuum of services. Most of our assisted living facilities
are within close proximity to our skilled nursing facilities.
The term assisted living facility
encompasses a broad spectrum of senior living services and care
options, which include independent living, assisted living and
different levels of skilled nursing care. Independent living is
designed to meet the needs of seniors who choose to live in an
environment surrounded by their peers where they receive
services such as housekeeping, meals and activities but are not
reliant on assistance with activities of daily living (for
example, bathing, eating and dressing). Assisted living meets
the needs of seniors who seek housing with supportive care and
services or who are receiving rehabilitative services. We offer
both independent living and assisted living services in our
assisted living facilities.
Management and Selected Consulting
Services
We apply our operating expertise and knowledge in
long-term care by providing either full management services or
selected consulting services to third parties.
Through our wholly owned subsidiary, Partners
Health Group, LLC, we provide full management services utilizing
our experienced professionals who have considerable knowledge
and expertise in both the operational and administrative aspects
of the long-term care industry. Under our full management
contracts, we consult on all aspects of operating a long-term
care facility, including the areas of nursing, dietary, laundry
and housekeeping. Contracts are generally structured on a
fee-for-service basis and generally have terms ranging from one
to five years.
Through our wholly owned subsidiary, Fiscal
Services Group, LLC, we provide selected consulting services,
which include selected accounting or cost reimbursement
services. Accounting services can include billing, accounts
receivable tracking, payroll, invoice processing, financial
reporting, tax and cost reimbursement services. Contracts are
generally structured on a fee-for-service basis and generally
have terms ranging from one to five years.
In addition, Virtual Care Provider, Inc., a
wholly owned subsidiary of our Canadian parent, Extendicare Inc.
provides information technology services to us and unrelated
third parties on a fee-for-services basis.
Group Purchasing
Through Extendicare Health Network, Inc., one of
our wholly owned subsidiaries, we provide purchasing services
for skilled nursing facilities in numerous states, as well as to
the facilities we own or manage. We offer substantial cost
reductions for members of the purchasing group through the
contractual
82
volume-based arrangements made with a variety of
industry suppliers of food, supplies and capital equipment. As
of March 31, 2004, our group purchasing operations provided
purchasing services for 3,106 facilities in 41 states.
Rehabilitative Therapy Outpatient
and Inpatient Services
We operate rehabilitative therapy clinics within
three wholly owned subsidiaries, The Progressive Step
Corporation, Health Poconos, Inc. and Adult Services Unlimited,
Inc. As of March 31, 2004, we operated 24 outpatient
rehabilitation clinics: 12 in Pennsylvania, one in Ohio, two in
Texas and nine in Wisconsin. These clinics provide services to
outpatients requiring physical, occupational and/or
speech-language therapy. In addition, our Pennsylvania clinics
provide respiratory and psychological and social services.
We provide rehabilitative therapy services on
both an inpatient and outpatient basis. We have expanded all of
our skilled nursing facilities therapy units, with some
facilities offering 1,500 to 5,000 square feet of therapy
space. We have developed therapy programs to provide
patient-centered, outcome-oriented subacute and rehabilitative
care. At the majority of our facilities, we employ physical,
occupational and/or speech-language therapists who provide
rehabilitative therapy services to both inpatient and outpatient
clients.
Expansion
Plans for expanding our operations are developed
from sources such as:
|
|
|
|
|
personal contacts that we have in the long-term
care industry;
|
|
|
|
information made available to us and that we make
available to others through state and nationally-based
associations; and
|
|
|
|
investment and financing firms and brokers.
|
All acquisitions and undertakings of new
contracts for management and consulting services involve a
process of due diligence in which the operational, building and
financial aspects of the transactions are investigated.
Sources of Revenue
Skilled Nursing Facilities
We estimate that, for skilled nursing facilities
only, Medicare and Medicaid accounted for approximately 32.7%
and 49.5% of our revenues, respectively, for the 2004 quarter
compared to 28.8% and 52.6% of revenues for the 2003 quarter.
These payors have set maximum reimbursement levels for payments
for nursing services and products. The healthcare policies and
programs of these agencies have been subject to changes in
payment methodologies during the past several years. There can
be no assurance that future changes will not reduce
reimbursements for nursing services from these payors. Below is
a description of each of the major payors.
Medicaid. Medicaid
is a state-administered program financed by state funds and
matching federal funds, providing health insurance coverage for
certain persons in financial need, regardless of age, and that
may supplement Medicare benefits for financially needy persons
aged 65 and older. Medicaid reimbursement formulas are
established by each state with the approval of the federal
government in accordance with federal guidelines. Generally, 50%
of the funds available under these programs are provided by the
federal government under a matching program. Medicaid programs
currently exist in all of the states in which we operate skilled
nursing facilities. These programs vary in certain respects from
state to state.
In August 1997, the Budget Act was signed into
law and broadened the authority of states to develop their own
standards for the establishment of rates. The law requires each
state to use a public process for establishing proposed rates
whereby the methodology and justification of rates used are
available for public review and comment. Due to the economic
slowdown and costs attributable to September 11, 2001, many
states have had to restrain their budgets, of which Medicaid
represents a significant portion.
83
The states in which we operate currently use
cost-based or price-based reimbursement systems. Under
cost-based reimbursement systems, the facility is reimbursed for
the reasonable direct and indirect allowable costs it incurs in
providing routine resident care services as defined by the
program. In certain states, efficiency incentives are provided
and facilities may be subject to cost ceilings. Reasonable costs
normally include certain allowances for administrative and
general costs, as well as the cost of capital or investment in
the facility, which may be transformed into a fair rental or
cost of capital charge for property and equipment. The
price-based or modified price-based systems pay a provider at a
certain payment rate irrespective of the providers cost to
deliver the care. Price-based or modified price-based systems
may use various methods, such as state averages from a specific
base year, to determine the base cost, which could be subject to
inflationary increases.
The reimbursement formulas employed by the state
may be categorized as prospective or retrospective in nature.
Under a prospective cost-based system, per diem rates are
established based upon the historical cost of providing services
during a prior year, adjusted to reflect factors such as
inflation and any additional service required to be performed.
Many of the prospective payment systems under which we operate
contain an acuity measurement system, which adjusts rates based
on the care needs of the resident. Retrospective systems operate
similar to the pre-PPS Medicare program where skilled nursing
facilities are paid on an interim basis for services provided,
subject to adjustments based on allowable costs, which are
generally submitted on an annual basis.
Medicare Part A and Part
B. Medicare is a federally funded
health-insurance program providing health insurance coverage for
persons aged 65 and older, who have been disabled for at least
two consecutive years or who have end-stage renal disease.
Medicare provides health insurance benefits in two parts:
|
|
|
|
|
Part A
Hospital insurance, which provides reimbursement for inpatient
services for hospitals, skilled nursing facilities and certain
other healthcare providers and patients requiring daily
professional skilled nursing and other rehabilitative care.
Coverage in a skilled nursing facility is limited for a period
up to 100 days, if medically necessary, after a qualifying
hospital stay. Medicare pays for the first 20 days of stay
in a skilled nursing facility in full and the next 80 days
above a daily coinsurance amount, after the individual has
qualified for Medicare coverage by a three-day hospital stay.
|
|
|
|
Part B
Supplemental Medicare insurance, which requires the beneficiary
to pay monthly premiums will cover physician services and other
outpatient services, such as physical, occupational and speech
therapy services, enteral nutrition, certain medical items and
X-ray services received outside of a Part A covered inpatient
stay.
|
Under Medicare Part A, the
skilled nursing facility is reimbursed based upon the acuity
level of the Medicare resident. Acuity is determined by
classifying the resident into one of 44 resource utilization
grouping categories based upon the nature of the residents
condition and services needed. CMS adjusts the Medicare rates
for the 44 resource utilization grouping categories on an annual
basis on October 1 each year and inflates the resource
utilization grouping rates based upon an inflation factor
referred to as the market basket. Whereas under
Medicare Part B, the skilled nursing facility
is reimbursed based upon defined fees screen rates
established by CMS.
Private Pay and
Other. Private pay and other sources
consist of individuals or parties with contractual obligations
to the residents such as private insurance companies, HMOs,
PPOs, other charge-based payment sources, HMO Medicare risk
plans, Blue Cross and the Department of Veterans Affairs.
Assisted Living Facilities
Assisted living facility revenue is primarily
derived from private pay residents at rates we establish based
upon the services we provide and market conditions in the area
of operation. Approximately 40 states provide or have
approval to provide Medicaid reimbursement for board and care
services provided in assisted living facilities.
84
Rehabilitation Therapy and Other
Revenues
We derive outpatient therapy revenues by
providing rehabilitation therapy services to outside third
parties at our clinics. The revenue sources are primarily
HMOs and commercial insurance (31%), workers compensation
(24%), Medicare (21%), Medicaid (10%) and other sources,
including self-pay clients (14%).
Management and consulting fees are paid directly
from the long-term care organizations with which we contract to
provide services.
Quality of Care and Employee
Training
Quality of Care
Our Commitment to Residents
emphasizes our corporate-wide philosophy of treating residents
with dignity and respect, a philosophy that we implement and
monitor through rigorous standards that we periodically assess
and update.
We have established a Medical Advisory Board,
which is comprised of a medical director representing each of
our regions. The purpose of the Medical Advisory Board is to
review and attest to our key clinical protocols, to review and
clarify roles and responsibilities of medical directors at our
facilities and to improve communication between medical
directors and our facilities.
Our corporate clinical services department
establishes corporate nursing and quality of life standards,
monitors issues and trends in the industry and implements our
policies and procedures. Training programs are developed at the
corporate level and implemented throughout the company as
required. In addition, the corporate clinical services
department conducts, as required, periodic pre-survey and
post-survey reviews.
At a regional level, our area directors of care
management lead a department that is primarily responsible for
establishing care and service standards, policies and procedures
and auditing care and service delivery systems. They also
provide direction and training for all levels of the staff
within the skilled nursing facilities and assisted living
facilities. Our area directors of care management develop
programs and standards for all professional disciplines and
services provided to our customers, including nursing, dietary,
social services, activities, ethical practices, mental health
services, behavior management, quality validation and continuous
quality improvement.
We participate on a national level in the Quality
First Initiative, which is voluntary national program whose
members include major long-term care providers. The objectives
of the Quality First Initiative are to discuss and promote
awareness to assist members adhere to current regulations,
promote clinical outcomes and improve consumer satisfaction and
publicly demonstrate our commitment to quality care.
Employee Training
Employee training at all levels is an integral
part of our on-going efforts to improve and maintain our service
quality. Each new skilled nursing facility administrator and
assisted living facility manager or director of nursing is
required to attend a week of company-provided training to ensure
that he or she understands all aspects of skilled nursing
facility operations, including clinical, management and business
operations. We conduct additional training for these individuals
and all other staff on a regional or local basis. For department
heads and senior professional nursing staff, we provide a
modular based supervisory training program, which is taken over
a twelve-month period and is conducted within each of our
facilities.
Employees
As of March 31, 2004, we employed
approximately 18,500 people, including approximately 3,600
registered and licensed practical nurses, 7,300 nursing
assistants, 2,000 therapists, 4,200 dietary, domestic,
maintenance and other staff and 1,400 administrative employees
who work at our corporate offices and facilities. As one of the
largest employers within the long-term care industry, we have
been subject to the organizational efforts of certain unions. As
of March 31, 2004, approximately 11% of our employees
located in 33 of our skilled nursing and assisted living
facilities are represented by various labor unions.
85
We have approximately 36 collective bargaining
agreements, 25 of which expire within 12 months of
June 1, 2004, among seven unions covering approximately
2,100 employees. To date, our facilities have never experienced
any material work stoppage, and we believe that we have a good
relationship with all of our employees. However, we cannot
predict the effect continued union representation or
organization activities will have on our future operations.
The national shortage of nurses and other trained
personnel have required us to adjust our wage and benefits
packages to compete in the healthcare marketplace. We compete
for such employees with other healthcare providers within the
long-term care industry and the broader healthcare sector. We
also compete with various industries for certified nursing
assistants and other lower-wage employees. We have been
successful in reducing the level of temporary staff, for which
we have to pay a premium and may reduce the quality of care.
However, we continue to face challenges in recruiting and
retaining qualified personnel. We also are subject to increasing
levels of reference checks and criminal background checks on our
hired staff to ensure that they are suitable for the functions
they will perform within our facilities. Our inability to
control labor availability and costs could have a material
adverse effect on our future operating results.
Marketing
Most of our long-term care facilities are located
in smaller urban communities. We focus our marketing efforts
predominantly at the local level. We believe that residents
selecting a long-term care facility are strongly influenced by
word-of-mouth and referrals from physicians, hospital discharge
planners, community leaders, neighbors and family members. The
administrator of each long-term care facility is, therefore, a
key element of our marketing strategy. Each administrator is
responsible for developing relationships with potential referral
sources. Administrators are supported by a regional team of
marketing personnel who establish the overall marketing
strategy, develop relationships with HMO and PPO organizations
and provide marketing direction with training and community
specific promotional materials. Our goal is to be the provider
of choice in the communities we serve.
Competition
The long-term care industry in the United States
is highly competitive with companies offering a variety of
similar services. We face local and regional competition from
other healthcare providers, including for-profit and
not-for-profit organizations, hospital-based nursing units,
rehabilitation hospitals, home health agencies, medical supplies
and services agencies and rehabilitative therapy providers.
Newer assisted living facilities may attract potential and
existing residents. Significant competitive factors affecting
the placement of residents in skilled nursing and assisted
living facilities include quality of care, services offered,
reputation, physical appearance, location and, in the case of
private-pay residents, cost of the services.
Our group purchasing and management and
consulting services groups compete with similar operations in
the long-term care industry.
We also compete with other providers in the
acquisition and development of additional facilities. Other
competitors may accept a lower rate of return, and therefore,
present significant price competition. Also, tax-exempt
not-for-profit organizations may finance acquisitions and
capital expenditures on a tax-exempt basis or receive charitable
contributions unavailable to us.
Properties
At March 31, 2004, we operated 174 long-term
care facilities with 15,932 beds in 13 states, of which 140
were skilled nursing facilities with 14,217 beds and 34 were
assisted living facilities with 1,715 units. We also
managed 12 long-term care facilities with 969 beds, of which 7
were skilled nursing facilities with 813 beds and five were
assisted living facilities with 156 units. In addition, we
provided consulting services for 72 long-term care facilities
with 8,839 beds. We also owned long-term care properties of
which 10 were skilled nursing properties with 1,065 beds that
were leased and operated by unrelated skilled nursing facility
providers. We also retained an interest in, but did not operate,
11 nursing properties with 1,435 beds and four assisted living
properties with 135 units. At March 31, 2004, we also
operated 24
86
rehabilitative therapy clinics: 12 in
Pennsylvania, one in Ohio, two in Texas and nine in Wisconsin.
The following table lists by state, the skilled nursing,
assisted living and retirement facilities that we operated or
managed at March 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities |
|
|
|
|
Leased |
|
Total Facilities |
|
|
|
Under |
|
|
Owned Facilities |
|
Facilities(1) |
|
Under Operations |
|
Managed Facilities |
|
Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident |
|
|
|
Resident |
|
|
|
Resident |
|
|
|
Resident |
|
|
|
Resident |
|
|
Number |
|
Capacity |
|
Number |
|
Capacity |
|
Number |
|
Capacity |
|
Number |
|
Capacity |
|
Number |
|
Capacity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania
|
|
|
21 |
|
|
|
2,224 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
2,224 |
|
|
|
12 |
|
|
|
969 |
|
|
|
33 |
|
|
|
3,193 |
|
Ohio
|
|
|
24 |
|
|
|
2,434 |
|
|
|
7 |
|
|
|
770 |
|
|
|
31 |
|
|
|
3,204 |
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
3,204 |
|
Wisconsin
|
|
|
35 |
|
|
|
2,802 |
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
2,802 |
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
2,802 |
|
Indiana
|
|
|
19 |
|
|
|
1,785 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
1,785 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
1,785 |
|
Washington
|
|
|
20 |
|
|
|
1,589 |
|
|
|
3 |
|
|
|
319 |
|
|
|
23 |
|
|
|
1,908 |
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
1,908 |
|
Kentucky
|
|
|
19 |
|
|
|
1,561 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
1,561 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
1,561 |
|
Minnesota
|
|
|
11 |
|
|
|
1,334 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
1,334 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
1,334 |
|
Oregon
|
|
|
5 |
|
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
296 |
|
Arkansas
|
|
|
4 |
|
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
277 |
|
Idaho
|
|
|
2 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
191 |
|
Delaware
|
|
|
1 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
120 |
|
West Virginia
|
|
|
1 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
120 |
|
Texas
|
|
|
2 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
110 |
|
Massachusetts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
164 |
|
|
|
14,843 |
|
|
|
10 |
|
|
|
1,089 |
|
|
|
174 |
|
|
|
15,932 |
|
|
|
12 |
|
|
|
969 |
|
|
|
186 |
|
|
|
16,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing
|
|
|
131 |
|
|
|
13,191 |
|
|
|
9 |
|
|
|
1,026 |
|
|
|
140 |
|
|
|
14,217 |
|
|
|
7 |
|
|
|
813 |
|
|
|
147 |
|
|
|
15,030 |
|
Assisted living
|
|
|
33 |
|
|
|
1,652 |
|
|
|
1 |
|
|
|
63 |
|
|
|
34 |
|
|
|
1,715 |
|
|
|
5 |
|
|
|
156 |
|
|
|
39 |
|
|
|
1,871 |
|
Consulting services(2):
|
|
|
|
|
|
|
|
|
Florida
|
|
|
42 |
|
|
|
5,409 |
|
Texas
|
|
|
18 |
|
|
|
1,695 |
|
Massachusetts
|
|
|
5 |
|
|
|
606 |
|
Pennsylvania
|
|
|
4 |
|
|
|
564 |
|
Louisiana
|
|
|
3 |
|
|
|
565 |
|
|
|
|
|
|
|
|
|
|
Total consulting services
|
|
|
72 |
|
|
|
8,839 |
|
|
|
|
|
|
|
|
|
|
Total, including consulting services |
|
|
258 |
|
|
|
25,740 |
|
|
|
|
|
|
|
|
|
|
Breakdown by type of facility:
|
|
|
|
|
|
|
|
|
Skilled nursing
|
|
|
217 |
|
|
|
23,683 |
|
Assisted living
|
|
|
41 |
|
|
|
2,057 |
|
|
|
|
|
|
|
|
|
|
Total, including consulting services |
|
|
258 |
|
|
|
25,740 |
|
|
|
|
|
|
|
|
|
|
OTHER PROPERTIES OWNED: |
|
|
|
|
|
|
|
|
Skilled nursing facilities under lease(3)
|
|
|
10 |
|
|
|
1,065 |
|
Properties under divestiture agreement(4):
|
|
|
|
|
|
|
|
|
Skilled nursing
|
|
|
11 |
|
|
|
1,435 |
|
Assisted living
|
|
|
4 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
Total properties under divestiture agreement
|
|
|
15 |
|
|
|
1,570 |
|
|
|
|
|
|
|
|
|
|
Total other properties |
|
|
25 |
|
|
|
2,635 |
|
|
|
|
|
|
|
|
|
|
Breakdown by type of facility:
|
|
|
|
|
|
|
|
|
Skilled nursing
|
|
|
21 |
|
|
|
2,500 |
|
Assisted living
|
|
|
4 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
Total other properties |
|
|
25 |
|
|
|
2,635 |
|
|
|
|
|
|
|
|
|
|
87
|
|
(1) |
Options exercisable solely by us range from one
to nine years, the average being four years. We retain an option
to purchase the leased property for five of the 11 leased
properties. For lease payment information, please see
Note 15 to our consolidated financial statements.
|
|
(2) |
Consulting services provided to the facilities
listed include billing, accounts receivable tracking, invoice
processing, payroll, financial reporting and cost reimbursements
services.
|
|
(3) |
We own 10 skilled nursing properties held under
lease arrangements with two unrelated long-term care operators
whose terms include an option to purchase the properties. Senior
Health Properties South, Inc. leases six properties
whose terms mature on December 31, 2006. Senior Health
Properties Texas, Inc. leases four properties whose
terms mature on September 30, 2006. In addition, Senior
Health Properties Texas, Inc. subleases 12 leased
facilities whose terms mature in February 2012. The facilities
we lease to Senior Health Properties South, Inc. and
Senior Health Properties Texas, Inc. are included in
the facilities for which we provide consulting services.
|
|
(4) |
As of March 31, 2004, we retained an
interest in 11 skilled nursing facilities with 1,435 beds and
four assisted living facilities with 135 units in Florida
pursuant to the Greystone divestiture agreement. Pursuant to
this agreement we retain contingent consideration in the form of
a $10.0 million Vendor Take Back Note and two other
contingent interest bearing notes, which have an aggregate
potential value of up to $30.0 million plus interest. See
Note 5 to our consolidated financial statements.
|
The number of skilled nursing beds and assisted
living units identified in the above table and throughout this
report represents the approximate number of operational beds and
units that we currently use. The number of operational beds and
units is subject to periodic changes and can be less than the
licensed number of beds approved by the state due to market and
other factors.
Government Regulation
Various federal, state and local governmental
authorities in the United States regulate the provision of
institutional care and healthcare services. Though we believe
our operations comply with the laws governing our industry, we
cannot guarantee that we will be in absolute compliance with all
regulations at all times. Failure to comply may result in
significant penalties, including exclusion from the Medicare and
Medicaid programs, which could have a material adverse effect on
our business. We cannot assure you that governmental authorities
will not impose additional restrictions on our activities that
might adversely affect our business. In addition to the
information presented below, see Risk Factors.
General Regulatory Requirements
Skilled nursing facilities, assisted living
facilities and other healthcare businesses are subject to
licensure and other state and local regulatory requirements. In
addition, in order for a skilled nursing facility to be approved
for payment under the Medicare and Medicaid reimbursement
programs, it must meet the participation requirements of the
Social Security Act and related regulations. The regulatory
requirements for skilled nursing facility licensure and
participation in Medicare and Medicaid generally prescribe
standards relating to provision of services, resident rights,
staffing, employee training, physical environment and
administration. Skilled nursing and assisted living facilities
are generally subject to unannounced annual inspections by state
or local authorities for purposes of licensure and in the case
of skilled nursing facilities, for purposes of certification
under Medicare and Medicaid. These surveys will also confirm
whether a skilled nursing facility continues to meet Medicare
and Medicaid participation standards. As of March 31, 2004,
all of our skilled nursing facilities are licensed under
applicable state laws and all of our skilled nursing facilities
are certified to participate in either the Medicare program, the
Medicaid program or both. For subsequent developments, see
Prospectus Summary Recent Developments.
Skilled Nursing Facility
Regulation. CMS has established
regulations to implement survey, certification and enforcement
procedures. The survey process is intended to review the actual
provision of care and services, with an emphasis on resident
outcomes, to determine whether the care provided meets
88
the assessed needs of the individual residents.
Surveys are generally conducted on an unannounced annual basis
by state survey agencies. Remedies are assessed for cited
deficiencies based upon the scope and severity of the cited
deficiencies. The regulations specify that the remedies are
intended to motivate facilities to return to compliance and to
facilitate the removal of chronically poor performing facilities
from the Medicare or Medicaid programs. Remedies range from:
|
|
|
|
|
directed plans of correction, directed in-service
training and state monitoring for minor deficiencies;
|
|
|
|
denial of Medicare or Medicaid reimbursement for
existing residents or new admissions and civil money penalties
up to $3,000 per day for deficiencies that do not
immediately jeopardize resident health and safety; and
|
|
|
|
appointment of temporary management, termination
from the program and civil monetary penalties of up to $10,000
for one or more deficiencies that immediately jeopardize
resident health or safety.
|
The regulations allow state survey agencies to
identify alternative remedies that must be approved by CMS prior
to implementation.
Facilities with acceptable regulatory histories
generally are given an opportunity to correct deficiencies by a
date certain, usually within six months. CMS will continue
payments and refrain from imposing sanctions within the
correction period, unless the facility does not return to
compliance within the specified time period. Facilities with
deficiencies that immediately jeopardize resident health and
safety and those that are classified as poor performing
facilities are not given an opportunity to correct their
deficiencies prior to the assessment of remedies. From time to
time, we receive notices from federal and state regulatory
agencies alleging deficiencies for failing to comply with
components of the regulations. While we do not always agree with
the positions taken by the agencies, we review all such notices
and take corrective action when appropriate. Due to the fact
that the regulatory process provides us with limited appeal
rights, many alleged deficiencies are not challenged even if we
do not agree with the allegation.
While we try to comply with all applicable
regulatory requirements, from time to time some of our skilled
nursing facilities have been sanctioned as a result of
deficiencies cited by the CMS or state survey agencies. In
November 2000, we operated one facility in Indiana that lost its
certification under the Medicare and Medicaid programs, but that
facility has since been recertified under both programs. We
cannot assure you that we will not be sanctioned in the future.
Federal law requires each state to have a
Medicaid Fraud Control Unit, which is responsible for
investigating provider fraud and resident abuse in Medicaid
funded facilities. We are aware of investigations by these units
in Kentucky and Wisconsin. The investigations have not been
sufficiently developed to enable us to predict an outcome.
The CMS Nursing Home Quality
Initiative. In April 2002, CMS
launched the Nursing Home Quality Initiative to provide
consumers with comparative information about nursing home
quality measures, which rates every skilled nursing facility on
nine quality of care indicators. These quality of care
indicators include such measures as percentages of patients with
infections, bedsores and unplanned weight loss, and this
comparative data is available to the public on the CMS web site.
We believe that, though the information is important to share
with the public and can drive improvements in quality of care in
the long-term care industry, the data can be influenced by the
level of care and nature of admissions that a particular
facility may admit, in addition to the quality of care. Based
upon the success of the pilot program conducted in Colorado,
Florida, Maryland, Ohio, Rhode Island and Washington, CMS
expanded the program nationwide to all other states in November
2002.
Restrictions on Acquisitions and
Construction
Acquisition and construction of additional
skilled nursing facilities are subject to state regulation. Most
of the states in which we currently operate have adopted laws to
regulate expansion of skilled nursing facilities. Certificate of
need laws generally require that a state agency approve certain
acquisitions or physical plant changes and determine that a need
exists prior to the addition of beds or services, the
89
implementation of the physical plant changes or
the incurrence of capital expenditures exceeding a prescribed
amount. Some states also prohibit, restrict or delay the
issuance of certificates of need or have moratoriums on the
addition of licensed bed capacity. In addition, in most states
the reduction of beds or the closure of a facility requires
approval by the appropriate state regulatory agency. Our skilled
nursing facility expansions comply with all state regulations
regarding expansion. Prior to engaging in any regulated
expansion project, we obtain certificates of need, if required
by law. If we decide to reduce beds or close a facility, we
could be adversely affected by a failure to obtain or a delay in
obtaining required regulatory approval. To the extent that a
certificate of need or other similar approvals are required for
expansion of our operations either through facility
acquisitions, construction of new facilities, additions to
existing facilities, expansion or provision of new services or
other changes or to the extent expansion in licensed bed
capacity is otherwise restricted, our expansion proposals could
be adversely affected by an inability to obtain the necessary
approvals, changes in the standards applicable to such approvals
and possible delays and expenses associated with obtaining such
approvals.
Acquisition, construction and operation of
assisted living facilities are subject to less stringent
regulation than skilled nursing facilities, and, in the absence
of uniform federal regulations, states develop their own
regulations. The majority of states have implemented regulations
regarding the acquisition, construction and operation of
assisted living facilities. Virtually every state has a
licensure process, registration process or some other form of
regulation that may apply to assisted living providers.
Depending on the level of services that an assisted living
provider supplies, the provider may be required to obtain a
license. Licensure regulations may be based on admission and
discharge criteria and the variety and type of services
provided. Many states require that potential operators submit
building plans and receive state approval prior to construction
of an assisted living facility. The approval process when
certificates of need are involved is more of a clearance
process, however, assisted living facilities must meet a
stringent set of building construction and design regulations
including the Life Safety Code (NFPA101). State regulators
conduct inspections of assisted living facilities on a periodic
basis that are similar to their inspections of skilled nursing
facilities in most cases. As of March 31, 2004, our
assisted living facilities are compliant in all material
respects with applicable state licensure, building construction
and design regulations.
Regulation of Fraud and Related
Matters
Because we participate in federal and state
healthcare programs, we are subject to a variety of federal and
state laws that are intended to prevent healthcare fraud and
abuse. These laws are punishable by criminal and/or civil
sanctions, including, in some instances, exclusion from
participation in federal health programs, including Medicare,
Medicaid and Department of Veterans Affairs health programs.
These laws, which include, but are not limited to, anti-kickback
laws, false claims laws, physician self-referral laws and
federal criminal healthcare fraud laws are discussed in further
detail below. Management believes that we have been and continue
to be in substantial compliance with all of these laws as they
apply to us.
We believe our billing practices, operations and
compensation and financial arrangements with referral sources
and others materially comply with applicable federal and state
requirements. However, we cannot assure you that a governmental
authority will not interpret such requirements in a manner
inconsistent with our interpretation and application. If we fail
to comply, even inadvertently, with any of these requirements,
we could be required to alter our operations and/or refund
payments to the government. In addition, we could be subject to
significant penalties. Even if we successfully defend against
any action against us for violating these laws or regulations,
we would likely be forced to incur significant legal expenses
and divert our managements attention from the operation of
our business. Any of these actions, individually or in the
aggregate, could have a material adverse effect on our business
and financial results. We cannot reasonably predict whether
enforcement activities will increase at the federal or state
level or the effect of any such increase on our business.
The illegal remuneration provisions of the Social
Security Act make it a felony to solicit, receive, offer to pay
or pay any kickback, bribe or rebate in return for referring a
resident for any item or service or in return for purchasing,
leasing, ordering, recommending or arranging for any good,
facility, service or item for which payment may be made under
the federal healthcare programs. A violation of the illegal
90
remuneration statute may result in the imposition
of criminal penalties, including imprisonment for up to five
years, the imposition of a fine of up to $25,000, civil
penalties and exclusion from participating in federal health
programs.
Recognizing that the law is broad and may
technically prohibit beneficial arrangements, the Office of
Inspector General of the Department of Health and Human Services
developed regulations addressing those types of business
arrangements that will not be subject to scrutiny under the law.
These safe harbors describe activities that may technically
violate the act but are not to be considered illegal when
carried on in conformance with the regulations. For example, the
safe harbors cover activities such as contracting with
physicians or other individuals that have the potential to refer
business to us that would ultimately be billed to a federal
health program. Failure to qualify for safe harbor protection
does not mean that an arrangement is illegal. Rather, the
arrangement must be analyzed under the anti-kickback statute to
determine whether there is an intent to pay or receive
remuneration in return for referrals. Conduct and business
arrangements that do not fully satisfy one of the safe harbors
may result in increased scrutiny by government enforcement
authorities. In addition, some states have anti-kickback laws
that may apply regardless of whether a federal healthcare
program is involved. Although our business arrangements may not
always satisfy all the criteria of a safe harbor, we believe
that as of March 31, 20034 our operations are in material
compliance with federal and state anti-kickback laws.
Under the federal Stark II law,
physicians are prohibited from making a referral to an entity
for the furnishing of designated health services, including
therapy services for which Medicare or Medicaid may pay, if the
physician, or an immediate family member of the physician, has a
financial relationship, including ownership interests and
compensation arrangements, with that entity and the relationship
fails to meet a statutory or regulatory exception to the rule.
The penalties for violating this act include denial of payment,
additional financial penalties and exclusion from participating
in federal health programs. In addition, a number of states have
enacted their own versions of self-referral laws.
The Federal False Claims Act and similar state
statutes prohibit presenting a false or misleading claim for
payment under a federal program. Violations can result in
significant civil penalties, treble damages and exclusion from
participation in federal programs. Liability arises, primarily,
when an entity knowingly submits a false claim for reimbursement
to the federal government. However, enforcement over the past
few years has expanded the traditional scope of this act to
cover quality of care issues, especially in the skilled nursing
facility industry. In addition to the civil provisions of the
False Claims Act, the federal government may use several other
criminal statutes to prosecute persons who submit false or
fraudulent claims for payment to the federal government.
Federal law provides that practitioners,
providers and related persons may not participate in most
federal healthcare programs, including the Medicare and Medicaid
programs, if the individual or entity has been convicted of a
criminal offense related to the delivery of an item or service
under these programs or if the individual or entity has been
convicted under state or federal law, of a criminal offense
relating to neglect or abuse of residents in connection with the
delivery of a healthcare item or service. Other individuals or
entities may be, but are not required to be, excluded from such
programs under certain circumstances, including the following:
|
|
|
|
|
conviction related to fraud;
|
|
|
|
conviction relating to obstruction of an
investigation;
|
|
|
|
conviction relating to a controlled substance;
|
|
|
|
licensure revocation or suspension;
|
|
|
|
exclusion or suspension from state or other
federal healthcare programs;
|
|
|
|
filing claims for excessive charges or
unnecessary services or failure to furnish medically necessary
services;
|
91
|
|
|
|
|
ownership or control by an individual who has
been excluded from the Medicaid and/or Medicare programs,
against whom a civil monetary penalty related to the Medicaid
and/or Medicare programs has been assessed or who has been
convicted of the crimes; and
|
|
|
|
the transfer of ownership or control interest in
an entity to an immediate family or household member in
anticipation of, or following, a conviction, assessment or
exclusion from the Medicare or Medicaid programs.
|
Office of the Inspector
General. The Office of Inspector
General, or OIG, amongst other priorities, identifies and
eliminates fraud, abuse and waste in certain federal healthcare
programs. The OIG has implemented a nationwide program of
audits, inspections and investigations and from time to time
issues fraud alerts to segments of the healthcare
industry on particular practices that are vulnerable to abuse.
The fraud alerts inform healthcare providers of potentially
abusive practices or transactions that are subject to criminal
activity and reportable to the OIG.
An increasing level of resources have been
devoted to investigation of allegations of fraud and abuse in
the Medicare and Medicaid programs, and federal and state
regulatory authorities are taking an increasingly strict view of
the requirements imposed on healthcare providers by the Social
Security Act and Medicare and Medicaid programs.
A major anti-fraud demonstration project,
Operation Restore Trust, or ORT, was announced in
1995 by the OIG, which guaranteed funding for fraud and abuse
activities and coordinated efforts among multiple federal and
state agencies. A primary purpose for ORT is to scrutinize the
activities of healthcare providers who are reimbursed under the
Medicare and Medicaid programs. Initial investigation efforts
have focused on skilled nursing facilities, home health and
hospice agencies and durable medical equipment suppliers in
Texas, Florida, New York, Illinois and California. In May 1997,
the Department of Health and Human Services announced that ORT
would be expanded in the future to include several other types
of healthcare services and several additional states, with the
intent that it will ultimately be a nationwide operation. Over
the longer term, ORTs enforcement actions could include
criminal prosecutions, suit for civil penalties and/or Medicare,
Medicaid or federal healthcare program exclusions. Prior to our
November 1997 acquisition of Arbor Healthcare Company, one of
its subsidiarys facilities was charged with inadequately
documented therapy services. Following this investigation, Arbor
adopted measures to strengthen its documentation relating to
reimbursable services. While we do not believe that we are the
target of any such investigation under ORT, we cannot assure you
that we will not become the target of such an investigation in
the future, and if we are investigated, that we will not expend
substantial amounts to cooperate with any such investigation or
to defend allegations that may arise from such investigation. If
a government agency finds that any of our practices fail to
comply with the anti-fraud provisions, our business could be
materially adversely affected.
Cross Decertification and
De-Licensure. In some circumstances,
if one facility is convicted of abusive or fraudulent behavior,
then other facilities under common control or ownership may be
decertified from participating in Medicaid or Medicare programs.
Executive Order 12549 prohibits any corporation or facility from
participating in federal contracts if it or its principals have
been barred, suspended, ineligible or have been voluntarily
excluded from participating in federal contracts. In addition,
some state regulations provide that all facilities under common
control or ownership licensed within a state may be de-licensed
if any one or more of the facilities are de-licensed. To date,
neither we nor our subsidiaries have experienced any
cross-decertifications and none of our subsidiaries
facilities have been de-licensed.
New Initiatives
There are ongoing initiatives at the federal and
state levels for comprehensive reforms affecting the payment for
and availability of healthcare services. Aspects of some of
these healthcare initiatives, such as the termination of
Medicare funding improvements and limitations on Medicare
coverage, other pressures to contain healthcare costs by
Medicare, Medicaid and other payors, as well as increased
operational requirements in the administration of Medicaid,
could adversely affect us. We cannot predict the ultimate
92
content, timing or effect of any healthcare
reform legislation, nor can we estimate the impact of potential
legislation on us.
Environmental Laws and Regulations
Some federal and state laws govern the handling
and disposal of medical, infectious and hazardous waste. If an
entity fails to comply with those laws or the related
regulations, the entity could be subject to fines, criminal
penalties and other enforcement actions. Federal regulations
established by the Occupational Safety and Health Administration
impose additional requirements on us with regard to protecting
employees from exposure to blood borne pathogens. We have
developed policies for the handling and disposal of medical,
infectious and hazardous waste to assure that each of our
facilities complies with those laws and regulations. We incur
ongoing operational costs to comply with environmental laws and
regulations. However, we have not had to make any material
capital expenditures to comply with such laws and regulations.
As of March 31, 2004, we believe that we substantially
comply with applicable laws and regulations governing these
requirements.
As a result of fires in long-term care facilities
in recent years, states are reconsidering the laws governing the
requirement for facilities to have sprinklers systems. In
February 2004, the American Health Care Association reaffirmed
its position taken in October 2003 that skilled nursing
facilities nationwide be required to implement sprinkler
systems, provided that federal funding and/or low-cost financing
is made available for the installation of such systems. We
currently have approximately 20 facilities without sprinkler
systems, and in November 2003, we announced our intention to
implement sprinkler systems in the remaining facilities by
December 2005 at an estimated cost of $3.0 million.
Health Insurance Portability and
Accountability Act
The Health Insurance Portability and
Accountability Act of 1996, or HIPAA, requires us to comply with
standards for the exchange of health information within our
company and with third parties and protect the confidentiality
and security of health data. More specifically, HIPAA calls for:
|
|
|
|
|
standardization of electronic patient health,
administrative and financial data;
|
|
|
|
unique health identifiers for individuals,
employers, health plans and healthcare providers;
|
|
|
|
privacy standards protecting the privacy of
individually identifiable health information; and
|
|
|
|
security standards protecting the confidentiality
and integrity of individually identifiable health information.
|
The Department of Health and Human Services has
released three rules to date mandating the use of new standards
with respect to certain healthcare transactions and health
information.
The first rule established privacy standards and
was released in December 2000 and then further revised in August
2002. Most entities covered under HIPAA were required to
implement the privacy standards by April 2003. The privacy
standards are designed to protect the privacy of certain
individually identifiable health information. As a result, we
have updated our policies and procedures, conducted training for
our employees on the new standards and implemented procedures to
report violations of the new policies. We believe we are in
compliance with the privacy standards.
The second rule established standards for
electronic data transactions and code sets, as were outlined in
the final regulations of August 2000. These standards are
designed to allow entities to exchange medical, billing and
other information and to process transactions in a more
effective manner electronically. Originally, the new
transactions and code sets standards were required to be
implemented in October 2002, however for providers filing an
extension, the implementation date became October 2003. Due to a
number of fiscal intermediaries and states not being ready to
implement the rule, CMS announced in September 2003 that
providers could have a further extension to the implementation
date, provided that they were working toward implementation, and
directed all fiscal intermediaries and states not to impair the
processing of claims and payments to healthcare providers
working toward the directive.
93
We have implemented the new transaction and code
sets with fiscal intermediaries and the states that are
currently ready to accept the new transaction and code sets. In
the states where we have not implemented the new transaction and
code sets, we are currently in the testing stages and continue
to process and receive payments on a timely basis. We believe we
are in compliance with the transaction and code sets standards.
The third rule, issued in 2003, governs the
security of health information. Compliance with the security
regulations is required by April 21, 2005. The security
regulations apply only to electronic protected health
information, and have four main objectives to:
|
|
|
|
|
ensure the confidentiality, integrity and
availability of protected health information that a covered
entity creates, receives, maintains or transmits electronically;
|
|
|
|
protect against any reasonably anticipated
hazards that might threaten the security or integrity of
electronic protected health information;
|
|
|
|
protect against any unauthorized use or
disclosure of electronic protected health information that can
be reasonably anticipated; and
|
|
|
|
ensure that the covered entitys workforce
complies with the full range of security measures.
|
Although HIPAA was intended to ultimately reduce
administrative expenses and burdens faced within the healthcare
industry, it is generally agreed that the implementation of this
law will result in additional costs to all healthcare
organizations in the short term. We established a HIPAA task
force consisting of clinical, legal, financial and information
services professionals to work on the project and monitor the
implementation and compliance to the standards and procedural
changes within our organization. At this time, we believe we
fully comply with the HIPAA privacy and transactions standards
and will be successful in the implementation of the security
rules by the required implementation dates.
Corporate Compliance Program
Our Corporate Compliance Program was developed to
ensure that we achieve our goal of providing a level of service
in a manner consistent with all applicable state and federal
laws and regulations and our internal standards of conduct. Our
Corporate Compliance Program incorporates the elements included
in the OIG guidance. As part of our Corporate Compliance
Program, our employees must acknowledge their responsibility to
comply with relevant laws, regulations and policies, including
our Corporate Compliance Program. We have a Corporate Compliance
Officer responsible for administering our Corporate Compliance
Program who reports to the Board of Extendicare Inc. and our
Chief Executive Officer.
Insurance
We currently maintain insurance policies for
property coverage, workers compensation and
employers liability insurance in amounts and with such
coverage and deductibles as we believe adequate based on
availability, the nature and risks of our business, historical
experience and industry standards. These policies are obtained
through both affiliated subsidiaries of Extendicare Inc. and
third-party insurers. We self-insure for health and dental
claims, workers compensation and employers liability
in certain states. Management believes that as of March 31,
2004 our skilled nursing facilities, assisted living facilities
and rehabilitation therapy clinics were adequately insured.
As a result of limited availability from
third-party insurers or availability at an excessive cost or
deductible, since January 2000, we generally self insure for
comprehensive general and professional liability (including
malpractice insurance for our health providers, assistants and
other staff, as it relates to their respective duties performed
on our behalf) up to a certain amount per incident. In January
2000, our retained risk for general and professional liability
coverage increased significantly resulting in us providing
accruals based upon past claims and actuarial estimates of the
ultimate cost to settle claims. Those risks were significantly
reduced when we ceased operation of all Florida facilities in
2000 and Texas skilled nursing facilities in the fourth quarter
of 2001. As of March 31, 2004, we have provided for
$43.6 million
94
in accruals for known or potential general and
professional liability claims based on claims experience and an
independent actuarial review. Based upon such claims experience
and independent actuarial review, we believe that our accrual is
adequate to cover any losses from general and professional
liability claims. General and professional liability claims are
the most volatile and significant of the risks that we
self-insure.
Legal Proceedings
We are defendants in actions against us from time
to time in connection with our operations and due to the nature
of our business. These actions may include civil or criminal
actions from personal injury and wrongful death suits arising
out of allegation of professional malpractice brought against
us, one or more of our facilities or the individuals who work at
particular facilities. We are unable to predict the ultimate
outcome of pending litigation and other investigations. We
cannot assure you that claims will not arise that are in excess
of our insurance coverage, are not covered by our insurance
coverage or result in punitive damages being assessed against
us. In addition, we cannot assure you that the
U.S. Department of Justice, CMS or other regulatory
agencies will not initiate investigations related to our
businesses in the future. A successful claim against us that is
not covered by, or is in excess of, our insurance could have a
material adverse effect on our financial condition and results
of operations. Claims against us, regardless of their merit or
eventual outcome, would require management to devote time to
matters unrelated to the operation of our business and, due to
publicity, may also have a material adverse effect on our
ability to attract residents or expand our operations.
We have experienced an increasing trend in the
number and severity of litigation claims asserted against us. We
believe that this trend is endemic to the long-term care
industry and is a result of the increasing number of large
judgments, including large punitive damage awards, against
long-term care providers in recent years resulting in an
increased awareness by plaintiffs lawyers of potentially
large recoveries. This has been particularly the case in Florida
and Texas, where we have operated skilled nursing facilities. As
a result of the litigious environment, insurance coverage for
general and professional liability claims has increased and in
certain states become unavailable to operators where insurance
companies have refrained from providing insurance. There can be
no assurance that we will not be liable for claims in excess of
the amounts provided or for punitive damages awarded in such
litigation cases. We also believe that there has been, and will
continue to be, an increase in governmental investigations of
long-term care providers, particularly in the area of Medicare/
Medicaid false claims as well as an increase in enforcement
actions resulting from these investigations. Adverse
determinations in legal proceedings or governmental
investigations, whether currently asserted or arising in the
future, could have a material adverse effect on us.
As referred to in the Managements
Discussion and Analysis of Financial Condition and Results of
Operations, pursuant to the disposition of our pharmacy
operations in 1998, we entered into a preferred provider
agreement with Omnicare, Inc., or Omnicare. The terms of the
preferred provider agreement enabled Omnicare to execute
pharmacy service agreements and consulting service agreements
with all of our skilled nursing facilities. In 2001, we and
Omnicare brought a matter to arbitration involving per
diem pricing rates billed for managed care residents. This
matter was subsequently settled, and the settlement amount is
reflected within our financial results. We are currently
negotiating the pricing of drugs for Medicare residents and
should this matter not be settled, the matter will be taken to
arbitration. In addition, in connection with its agreements to
provide pharmacy services, Omnicare has requested arbitration
for an alleged lost profits claim related to our disposition of
assets, primarily in Florida. Damage amounts, if any, cannot be
reasonably estimated based on information available to us at
this time. We and Omnicare continue to discuss the claim, and
should we fail to resolve the matter, the claim will be taken to
an arbitration hearing. An arbitration hearing has not been
scheduled. We believe that we have interpreted correctly and
complied with the terms of the agreement, however, there can be
no assurance that we will prevail at any arbitration hearing, or
that other claims will not be made with respect to the agreement.
95
MANAGEMENT
Directors and Officers
The following table sets forth information
with respect to our executive officers and directors:
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
|
|
|
|
|
Mel Rhinelander
|
|
|
54 |
|
|
Chairman of the Board and Chief Executive Officer
and Director
|
Mark W. Durishan
|
|
|
55 |
|
|
Vice President, Chief Financial Officer,
Treasurer and Director
|
Philip W. Small
|
|
|
47 |
|
|
Executive Vice President, Chief Operating Officer
and Director
|
Richard L. Bertrand
|
|
|
55 |
|
|
Senior Vice President, Development
|
Roch Carter
|
|
|
65 |
|
|
Vice President, General Counsel and Assistant
Secretary
|
Douglas J. Harris
|
|
|
48 |
|
|
Vice President and Controller
|
L. William Wagner
|
|
|
55 |
|
|
Vice President, Human Resources
|
Mel Rhinelander is
our Chairman and Chief Executive Officer and one of our
directors. He has been with us and our affiliated companies
since 1977 and has served in a number of senior management
positions. Mr. Rhinelander has been President of
Extendicare Inc. since August 1999, a director since May 2000
and its Chief Executive Officer since August 2000. He has been
an officer of our company since 1989 and a director since 1998.
He has been our Chief Executive Officer since December 1999 and
Chairman of our Board of Directors since August 2000.
Mark W. Durishan has
been our Chief Financial Officer, Treasurer and one of our Vice
Presidents and directors since joining us in August 1999. At
that time he also joined Extendicare Inc. Prior to joining us,
Mr. Durishan was Senior Vice-President of Finance and
Operations for Blue Cross and Blue Shield of Minnesota where he
served in such capacity from 1995 to 1998. From 1991 to 1995,
Mr. Durishan was Chief Financial Officer of Graduate Health
System of Philadelphia, a healthcare corporation encompassing
seven hospitals, a 100,000-member HMO, a captive insurance
company and a home health agency. During his career,
Mr. Durishan was a partner at Coopers & Lybrand
responsible for the Philadelphia and Washington healthcare
consulting offices. Mr. Durishan has over 34 years of
experience in the healthcare industry.
Philip W. Small was
appointed Executive Vice President and Chief Operating Officer
on February 19, 2004. He joined us and Extendicare Inc. in
June 2001 as our Senior Vice President, Strategic Planning. He
was appointed to our Board of Directors on December 31,
2001. Prior to joining us, Mr. Small served 15 years
at Beverly Enterprises Corporation, Fort Smith, Arkansas,
in various financial capacities, the most recent being Executive
Vice President, Strategic Planning and Operations Support and
acting Chief Financial Officer. His prior experience includes
serving as Director, Reimbursement for HCA Management Company of
Atlanta, Georgia. Mr. Small has over 22 years of
experience in the healthcare industry.
Richard L. Bertrand
is our Senior Vice President,
Development. Mr. Bertrand joined us in 1983 as our Vice
President of Finance and has over 28 years of experience in
the healthcare industry. From 1983 to 1995 he served as our Vice
President of Finance and later as our Senior Vice President of
Finance and Chief Financial Officer. Beginning in 1995,
Mr. Bertrand served as our Senior Vice President,
Reimbursement and later as our Senior Vice President,
Development. Prior to joining us, Mr. Bertrand served as
Vice President and Controller of Extendicare from 1977 to 1983.
Prior to that, he was a staff accountant and supervisor with the
accounting firm of Thorne Riddell from 1972 to 1976.
Roch Carter was
appointed our Vice President, General Counsel and Assistant
Secretary in January 1998. He joined us in 1974 as Legal Counsel
and he was subsequently appointed our General Counsel in 1985.
Prior to joining us, Mr. Carter was an attorney with the
U.S. Attorneys office in Milwaukee.
96
Mr. Carter was also an attorney with the
City of Milwaukee and was in practice with Young and McManus,
S.C. Mr. Carter has over 29 years of experience in
healthcare law and practice.
Douglas J. Harris
joined us in December 1999 as our Vice
President and Controller and has over 23 years of
experience in the healthcare industry. From 1994 through 1999,
Mr. Harris was the Managing Director of Extendicare (U.K.)
Limited. Mr. Harris has been with us and Extendicare
Inc.s affiliated companies since 1981 and has held
positions in various financial capacities. Prior to joining us,
Mr. Harris was an audit supervisor with KPMG.
L. William Wagner
joined us in 1987 as Vice President of
Human Resources. Prior to joining us, Mr. Wagner was Vice
President of Human Resources for ARA Living Centers and Director
of Personnel for General Foods Corp. Mr. Wagner has
20 years of experience in the healthcare industry and over
26 years of human resources experience.
97
EXECUTIVE COMPENSATION
Compensation of Named Executive
Officers
The following summary compensation table details
compensation information for the three fiscal years ended
December 31, 2003, 2002 and 2001 for each of our Chief
Executive Officer and the four other most highly compensated
executive officers (collectively, the named executive
officers).
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
|
|
|
|
|
|
|
Compensation |
|
|
|
|
|
|
Annual Compensation |
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
|
|
Other Annual |
|
Under Options |
|
All Other |
Name and Principal |
|
|
|
Salary |
|
Bonus |
|
Compensation(1) |
|
Granted |
|
Compensation(2) |
Position with EHSI |
|
Year |
|
($) |
|
($) |
|
($) |
|
(#) |
|
($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
M.A. Rhinelander
|
|
|
2003 |
|
|
|
650,000 |
|
|
|
950,000 |
|
|
|
44,512 |
|
|
|
100,000 |
|
|
|
11,632 |
|
President and Chief Executive
|
|
|
2002 |
|
|
|
500,000 |
|
|
|
500,000 |
|
|
|
34,585 |
|
|
|
100,000 |
|
|
|
8,447 |
|
Officer of Extendicare Inc.;
|
|
|
2001 |
|
|
|
400,000 |
|
|
|
200,000 |
|
|
|
38,420 |
|
|
|
100,000 |
|
|
|
9,073 |
|
Chairman and Chief Executive Officer of
Extendicare Health Services, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M.W. Durishan
|
|
|
2003 |
|
|
|
265,000 |
|
|
|
150,000 |
|
|
|
|
|
|
|
30,000 |
|
|
|
41,750 |
|
Vice-President, Finance and
|
|
|
2002 |
|
|
|
258,000 |
|
|
|
116,100 |
|
|
|
|
|
|
|
30,000 |
|
|
|
47,212 |
|
Chief Financial Officer of
|
|
|
2001 |
|
|
|
250,000 |
|
|
|
80,000 |
|
|
|
|
|
|
|
20,000 |
|
|
|
38,845 |
|
Extendicare Inc.; Vice President, Chief Financial
Officer and Treasurer of Extendicare Health Services, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P.W. Small(3)
|
|
|
2003 |
|
|
|
310,000 |
|
|
|
174,500 |
|
|
|
|
|
|
|
30,000 |
|
|
|
40,381 |
|
Executive Vice President and
|
|
|
2002 |
|
|
|
275,500 |
|
|
|
115,000 |
|
|
|
|
|
|
|
30,000 |
|
|
|
33,228 |
|
Chief Operating Officer of
|
|
|
2001 |
|
|
|
145,833 |
|
|
|
55,000 |
|
|
|
|
|
|
|
50,000 |
|
|
|
12,500 |
|
Extendicare Health Services, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R.L. Bertrand
|
|
|
2003 |
|
|
|
240,000 |
|
|
|
120,000 |
|
|
|
|
|
|
|
30,000 |
|
|
|
36,768 |
|
Senior Vice President,
|
|
|
2002 |
|
|
|
230,000 |
|
|
|
92,000 |
|
|
|
|
|
|
|
30,000 |
|
|
|
37,663 |
|
Development, Extendicare Health
|
|
|
2001 |
|
|
|
215,000 |
|
|
|
80,000 |
|
|
|
|
|
|
|
15,000 |
|
|
|
40,282 |
|
Services, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.K. Howe
|
|
|
2003 |
|
|
|
227,000 |
|
|
|
100,000 |
|
|
|
|
|
|
|
15,000 |
|
|
|
38,824 |
|
Senior Area Vice President,
|
|
|
2002 |
|
|
|
200,000 |
|
|
|
70,000 |
|
|
|
|
|
|
|
10,000 |
|
|
|
35,977 |
|
Extendicare Health Services, Inc.
|
|
|
2001 |
|
|
|
180,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
10,000 |
|
|
|
24,276 |
|
Notes:
|
|
(1) |
The aggregate amount of perquisites and other
benefits for each named executive officer is less than the
lesser of $50,000 or 10% of total annual salary and bonus. In
the case of M.A. Rhinelander, the amount is comprised of car
allowance and flexible account.
|
|
(2) |
For M.A. Rhinelander these amounts reflect
premiums paid by EHSI for term life insurance and long-term
disability. All other compensation, in the case of M.W.
Durishan, R.L. Bertrand, P.W. Small and D.K. Howe, includes
payments for life insurance and long-term disability premiums
and contributions to a deferred compensation plan and a defined
contribution retirement plan. The amount of salary and/or bonus
deferred by the named executive officer is included within the
figures set forth in the Salary and/or
Bonus columns in the above table. EHSIs
contribution is included within
|
98
|
|
|
the All Other Compensation column.
The amounts contributed by the officer and EHSIs matching
portion contributed to the deferred compensation plan are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officer |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
M.W. Durishan
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer contribution
|
|
$ |
26,500 |
|
|
$ |
25,800 |
|
|
$ |
21,354 |
|
Officer interest
|
|
|
4,325 |
|
|
|
3,502 |
|
|
|
3,273 |
|
EHSI contribution
|
|
|
13,250 |
|
|
|
12,900 |
|
|
|
10,677 |
|
EHSI interest
|
|
|
2,163 |
|
|
|
1,751 |
|
|
|
1,637 |
|
R.L. Bertrand
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer contribution
|
|
$ |
|
|
|
$ |
3,833 |
|
|
$ |
21,500 |
|
Officer interest
|
|
|
7,922 |
|
|
|
8,576 |
|
|
|
11,298 |
|
EHSI contribution
|
|
|
|
|
|
|
1,916 |
|
|
|
10,750 |
|
EHSI interest
|
|
|
3,961 |
|
|
|
4,288 |
|
|
|
5,649 |
|
|
|
(3) |
P.W. Small was appointed Executive Vice President
and Chief Operating Officer on February 19, 2004.
Mr. Small commenced employment with EHSI in June 2001, and
his compensation for the years 2001 through 2003 was received in
connection with his position as Senior Vice President, Strategic
Planning held during that time.
|
Deferred Compensation Plan
We maintain a non-qualified, deferred
compensation plan (consisting of individual agreements), which
is offered to all highly compensated employees as prescribed by
the Internal Revenue Service. The maximum amount of annual
compensation that may be deferred is 10% of the employees
base salary, excluding any bonus. We match up to 50% of the
amount deferred, and the combined amount earns interest at the
prime rate. Our matching payment, plus interest, vests to the
employee over eight years. Amounts deferred and vested matching
amounts are payable upon the death, disability or termination of
the employee. Amounts deferred are not guaranteed, are at
risk and are subject to our ability to make the scheduled
payments. Our deferred compensation liabilities are unfunded and
unsecured.
Executive Retirement Plan
We provide an executive retirement program for
certain of our key officers and executives. Under the program we
contribute 10% of the participants base salary into an
account to be invested in certain mutual funds at the
participants discretion. The amounts in the executive
retirement program vest upon certain events which are specified
in the participants executive retirement program plan, and
by discretionary actions by the board of directors of
Extendicare Inc. A graduated vesting schedule applies for some
program participants if we terminate the participant. Any funds
that we invest or assets that we acquire pursuant to the program
continue to be a part of our general funds. No party, other than
EHSI, has any interest in such funds. To the extent that any
participant acquires a right to receive payment from us under
the executive retirement program, such right shall be no greater
than the right of any unsecured general creditor of ours. We
expense the amounts we fund into the executive retirement
program on a monthly basis. Amounts held within this executive
retirement program accounts are not guaranteed, are at
risk and are subject to our ability to make the scheduled
payments. Our executive retirement program liability is unfunded
and unsecured.
Stock Option Plan
Extendicare Inc.s stock option plan
provides for the grant, from time to time, at the discretion of
Extendicare Inc.s board of directors, to certain
directors, officers and employees of the Extendicare Inc. group
of companies, of options to purchase subordinate voting shares
of Extendicare Inc. for cash. The plan provides that the
exercise price of any options granted not be less than the
closing price (or, if there is no closing price, the simple
average of the bid and ask price) for the subordinate voting
shares as quoted on the Toronto Stock Exchange on the trading
day prior to the date of grant. It also permits
99
options to be exercised for a period not to
exceed either five or ten years from the date of grant, as
determined by the Extendicare Inc. board of directors at the
time the option is granted. The options vest equally over the
first four years and the plan contains provisions for
appropriate adjustments in the event of corporate
reorganizations of Extendicare Inc.
At December 31, 2003, a total of 4,382,975
subordinate voting shares of Extendicare Inc. were reserved
under the plan, of which 2,297,250 subordinate voting shares
were subject to outstanding options and 2,085,725 were available
for grant.
The following table summarizes stock options
granted during 2003 to our named executive officers under the
Extendicare Inc. stock option plan:
Option/SAR Grants in Fiscal Year
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Realizable |
|
|
|
|
Number of |
|
Percent of |
|
|
|
Value at Assumed |
|
|
|
|
Securities |
|
Total |
|
|
|
Annual Rates of Stock |
|
|
|
|
Underlying |
|
Options/SARs |
|
Exercise or |
|
Price Appreciation for |
|
|
|
|
Options/ |
|
Granted to |
|
Base Price |
|
Option Term (Cdn $) |
|
|
|
|
SARs |
|
Employees in |
|
(Cdn $ |
|
|
|
|
Name |
|
Granted |
|
Fiscal Year |
|
Per Share) |
|
5% |
|
10% |
|
Expiration Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
M.A. Rhinelander
|
|
|
100,000 |
|
|
|
21.83% |
|
|
$ |
3.45 |
|
|
$ |
95,317 |
|
|
$ |
210,626 |
|
|
|
May 7, 2008 |
|
M.W. Durishan
|
|
|
30,000 |
|
|
|
6.55 |
|
|
|
3.45 |
|
|
|
28,595 |
|
|
|
63,188 |
|
|
|
May 7, 2008 |
|
P.W. Small
|
|
|
30,000 |
|
|
|
6.55 |
|
|
|
3.45 |
|
|
|
28,595 |
|
|
|
63,188 |
|
|
|
May 7, 2008 |
|
R.L. Bertrand
|
|
|
30,000 |
|
|
|
6.55 |
|
|
|
3.45 |
|
|
|
28,595 |
|
|
|
63,188 |
|
|
|
May 7, 2008 |
|
D.K. Howe
|
|
|
15,000 |
|
|
|
3.28 |
|
|
|
3.45 |
|
|
|
14,298 |
|
|
|
31,594 |
|
|
|
May 7, 2008 |
|
These amounts do not represent the present value
of the options. The amounts shown represent what would be
received upon exercise five years after the date of grant,
assuming certain rates of stock price appreciation during the
entire period. Actual gains, if any, on stock option exercises
are dependent on future performance of the Extendicare Inc.
common stock and overall market conditions. In addition, actual
gains depend upon whether, and the extent to which, the options
actually vest.
The following table summarizes options exercised
during 2003 and option values at December 31, 2003 for our
named executive officers.
Aggregated Option/SAR Exercised in Fiscal Year
2003
and Fiscal Year End Option/SAR
Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
|
|
Underlying |
|
Value of Unexercised |
|
|
|
|
|
|
Unexercised Options |
|
In-The-Money Options/SAR |
|
|
Shares |
|
|
|
at Fiscal Year-End |
|
at Fiscal Year-End |
|
|
Acquired |
|
Value |
|
(#) |
|
(Cdn $) |
|
|
on Exercise |
|
Realized |
|
|
|
|
Name |
|
(#) |
|
(Cdn $) |
|
Exercisable |
|
Unexercisable |
|
Exercisable |
|
Unexercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
M.A. Rhinelander
|
|
|
|
|
|
|
|
|
|
|
181,250 |
|
|
|
243,750 |
|
|
|
1,743,813 |
|
|
|
2,323,938 |
|
M.W. Durishan
|
|
|
82,500 |
|
|
|
724,425 |
|
|
|
|
|
|
|
67,500 |
|
|
|
|
|
|
|
642,775 |
|
P.W. Small
|
|
|
|
|
|
|
|
|
|
|
32,500 |
|
|
|
77,500 |
|
|
|
255,425 |
|
|
|
682,775 |
|
R.L. Bertrand
|
|
|
|
|
|
|
|
|
|
|
31,250 |
|
|
|
63,750 |
|
|
|
296,363 |
|
|
|
605,588 |
|
D.K. Howe
|
|
|
15,000 |
|
|
|
58,275 |
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
288,625 |
|
|
|
Note: |
The closing price of the Extendicare Inc.
subordinate voting shares on the Toronto Stock Exchange on
December 31, 2003 was Cdn $13.25.
|
Effective 2003, the fair value of the options
granted of subordinate voting shares of Extendicare Inc. to our
executives of are expensed as a payroll cost on our records. In
2003, the amount of the payroll costs associated with the
options granted was $48,000.
100
Retirement Arrangements
M.A. Rhinelander and R.L. Bertrand are
covered by retirement arrangements established by Extendicare
Inc. The arrangements provide for a benefit of 4% of the best
three consecutive years of base salary for each year of service
to a maximum of 15 years and 1% per year thereafter.
These arrangements provide a maximum benefit guarantee of 60% of
base salary after 15 years of service and 70% after
25 years of service. Normal retirement age is
60 years, or 55 years with our consent. We have
consented to Mr. Rhinelander retiring with full benefits at
age 55. Retirement benefits are payable as an annuity over
the lifetime of the executive with a portion continuing to be
paid to the executives spouse after the death of the
executive. As of December 31, 2002, projected years of
credited service at retirement for each of
Messrs. Rhinelander and Bertrand is 35 years.
Estimated annual benefits payable upon retirement
of the specified compensation and years of credited service
classifications are as shown in the following table:
Pension Plan Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years of Service As An Executive |
|
|
|
Remuneration ($) |
|
15 |
|
20 |
|
25 |
|
30 |
|
35 |
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
120,000 |
|
|
|
130,000 |
|
|
|
140,000 |
|
|
|
140,000 |
|
|
|
140,000 |
|
250,000
|
|
|
150,000 |
|
|
|
162,500 |
|
|
|
175,000 |
|
|
|
175,000 |
|
|
|
175,000 |
|
300,000
|
|
|
180,000 |
|
|
|
195,000 |
|
|
|
210,000 |
|
|
|
210,000 |
|
|
|
210,000 |
|
350,000
|
|
|
210,000 |
|
|
|
227,500 |
|
|
|
245,000 |
|
|
|
245,000 |
|
|
|
245,000 |
|
400,000
|
|
|
240,000 |
|
|
|
260,000 |
|
|
|
280,000 |
|
|
|
280,000 |
|
|
|
280,000 |
|
450,000
|
|
|
270,000 |
|
|
|
292,500 |
|
|
|
315,000 |
|
|
|
315,000 |
|
|
|
315,000 |
|
500,000
|
|
|
300,000 |
|
|
|
325,000 |
|
|
|
350,000 |
|
|
|
350,000 |
|
|
|
350,000 |
|
550,000
|
|
|
330,000 |
|
|
|
357,500 |
|
|
|
385,000 |
|
|
|
385,000 |
|
|
|
385,000 |
|
600,000
|
|
|
360,000 |
|
|
|
390,000 |
|
|
|
420,000 |
|
|
|
420,000 |
|
|
|
420,000 |
|
650,000
|
|
|
390,000 |
|
|
|
422,500 |
|
|
|
455,000 |
|
|
|
455,000 |
|
|
|
455,000 |
|
700,000
|
|
|
420,000 |
|
|
|
455,000 |
|
|
|
490,000 |
|
|
|
490,000 |
|
|
|
490,000 |
|
750,000
|
|
|
450,000 |
|
|
|
487,500 |
|
|
|
525,000 |
|
|
|
525,000 |
|
|
|
525,000 |
|
800,000
|
|
|
480,000 |
|
|
|
520,000 |
|
|
|
560,000 |
|
|
|
560,000 |
|
|
|
560,000 |
|
M.W. Durishan, P.W. Small and
D.K. Howe are not participants in these arrangements, but
rather, are participants in a money purchase, 401(K) plan and a
deferred compensation plan established for U.S. executives.
Termination of Employment
Arrangements
M.A. Rhinelander has a termination of
employment arrangement with Extendicare Inc. that provides for
one month of salary for each year of service up to a maximum of
24 months severance.
Compensation Committee Interlocks &
Insider Participation
Our board of directors is comprised solely of
certain of our executive officers. The human resources committee
of the Extendicare Inc. board of directors performs the
functions of a compensation committee for Extendicare Inc. and
its subsidiaries, including us. The following six outside and
unrelated directors served as members of the committee: Derek
H.L. Buntain, Sir Graham Day, David M. Dunlap,
Michael J.L. Kirby, Frederick B. Ladly and
J. Thomas MacQuarrie, Q.C. None of these committee members
are our directors or officers, or directors or officers of any
of our subsidiaries.
101
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
We are an indirect wholly owned subsidiary of
Extendicare Inc. Certain operating expenses are allocated
between Extendicare Inc. and its subsidiaries. We insure certain
risks, including comprehensive general liability, property
coverage and excess workers compensation/employers
liability insurance, with Laurier Indemnity Company and Laurier
Indemnity Ltd., affiliated insurance subsidiaries of Extendicare
Inc. We recorded approximately $2.8 million and
$2.6 million of expenses for this purpose in the three
months ended March 31, 2004 and 2003, respectively. Also in
the three months ended March 31, 2004, we recorded a credit
to expense of $1.0 million relating to prior year
workers compensation policies with Laurier Indemnity
Company.
In January 2001, we established an arrangement
for computer hardware and software support services with Virtual
Care Provider, Inc., or VCP, an affiliated subsidiary of
Extendicare Inc. Expenses related to these services were
$1.2 million and $1.7 million for the three months
ended March 31, 2004 and 2003, respectively, and at
March 31, 2004 and December 31, 2003 and 2002, we had
a non-interest bearing loan payable to Extendicare Holdings,
Inc., our immediate parent, in the amount of approximately
$3.5 million with no specific due date. We used the
proceeds of the loan for working capital.
For federal tax purposes we file as part of a
consolidated group of companies, of which Extendicare Holdings
is the parent. Extendicare Holdings (a subsidiary of Extendicare
Inc.) holds all of Extendicare Inc.s U.S. operations,
including EHSI. We have a tax sharing arrangement with
Extendicare Holdings pursuant to which we had payables of
$10.2 million and $7.8 million at March 31, 2004
and December 31, 2003, respectively. Under this tax sharing
arrangement, a U.S. consolidated income tax return is filed
by Extendicare Holdings and, for purposes of determining each
members share of the tax liability in such return, each
member of the affiliated group computes its separate
U.S. income tax liability for regular income tax purposes
(but not for alternative minimum tax purposes) as if it had
filed a separate U.S. income tax return. Such amount is
reflected as a federal income tax expense and as an intercompany
payable to Extendicare Holdings on each members separate
financial statements. If a member incurs a net operating loss,
such net operating loss is tax benefited (for regular tax
purposes only) in the year the net operating loss is incurred.
Such amount is reflected as a reduction in federal income tax
expense and as an intercompany receivable from Extendicare
Holdings on each members separate financial statements.
Similarly, the federal income tax receivable and payable is
recorded on the separate financial statement of Extendicare
Holdings. Each members separate intercompany balances are
transferred to Extendicare Holdings through the intercompany
payable and receivable account.
In addition to the amounts discussed in the
preceding two paragraphs, we had non-interest bearing current
amounts due to (from) affiliates as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
|
|
|
|
|
Affiliate |
|
Purpose |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
Extendicare Inc.
|
|
Intercompany operating expenses
|
|
$ |
234 |
|
|
$ |
(47 |
) |
|
$ |
|
|
Crown Properties, Inc.
|
|
Working capital advances
|
|
|
|
|
|
|
|
|
|
|
1,946 |
|
The Northern Group, Inc.
|
|
Intercompany operating expenses
|
|
|
(27 |
) |
|
|
84 |
|
|
|
|
|
Virtual Care Provider, Inc.
|
|
Working capital advances
|
|
|
(6,738 |
) |
|
|
(6,970 |
) |
|
|
(6,436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6,531 |
) |
|
$ |
(6,933 |
) |
|
$ |
(4,490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2004, Extendicare Inc.
and/or one of its wholly owned subsidiaries held
$27.9 million, or 14.0%, of our outstanding 2007 Notes.
These 2007 Notes were repaid on May 24, 2004. On
May 25, 2004, Extendicare Inc. purchased at market value
all 125,000 shares of Omnicare, Inc. stock held by us for
$4.9 million. In addition, Extendicare Inc. and VCP
transferred $22.9 million to us as an intercompany loan and
payment of intercompany accounts.
102
DESCRIPTION OF OTHER INDEBTEDNESS
Credit Facility
Our credit facility is governed by a credit
agreement among us, Extendicare Holdings, Inc., Lehman
Commercial Paper Inc., as administrative agent, and the several
lenders from time to time party to the credit agreement. Our
credit facility is a senior secured revolving credit facility
providing for loans of up to $105.0 million. The credit
facility will terminate on June 28, 2007. As a senior
obligation, the credit facility is senior in right of payment to
the notes. The credit facility will be used for our working
capital needs and other general corporate purposes. The
following description is a summary of the material provisions of
our current credit facility. It does not include all of the
provisions of the credit agreement and the ancillary agreements
required thereby.
Amendment and Restatement
In connection with the sale and issuance of the
2014 Notes, we amended and restated the credit facility to,
among other things, extend its term by two years, until
June 28, 2009, and provide an additional $50.0 million
of senior secured financing on a revolving basis. Some of the
other principal terms of the amended and restated credit
facility are described under Prospectus
Summary Recent Developments Amendment
and Restatement of Credit Facility.
Interest Rate and Fees
As of September 30, 2003, and continuing
through December 31, 2003, based upon financial
performance, the annual interest rate was:
|
|
|
|
|
LIBOR plus 3.25%; or
|
|
|
|
the Base Rate, as defined in the credit facility
(generally the published prime rate), plus 2.25%.
|
These rates are subject to adjustments based on
our senior leverage ratio. The spread over LIBOR ranges from
3.00% per annum to 4.00% per annum, and the spread
over the Base Rate ranges from 2.00% per annum to
3.00% per annum.
In addition to paying interest on outstanding
principal under the credit facility, we are required to pay a
commitment fee to the lenders in respect of the unutilized
commitments under the facility. The commitment fee is payable
quarterly in arrears at a rate ranging from 0.50% per annum
to 0.75% per annum, depending on the extent to which we
make use of the credit facility.
In connection with the amendment and restatement
of our credit facility and based upon our adjusted
capitalization and EBITDA for the three months ended
March 31, 2004, all borrowings to be drawn under the
amended and restated credit facility after April 22, 2004
will initially bear interest at a rate per annum equal to:
|
|
|
|
|
the Eurodollar rate plus 2.75%; or
|
|
|
|
the Base Rate, as defined in the credit facility
(generally the published prime rate), plus 1.75%.
|
For additional information regarding the interest
rate under our amended and restated credit facility see
Prospectus Summary Recent
Developments Amendment and Restatement of Credit
Facility.
Guarantees and Security
Our obligations under the credit facility are
fully, unconditionally and irrevocably guaranteed on a joint and
several basis by:
|
|
|
|
|
Extendicare Holdings, Inc., our direct parent;
|
|
|
|
each of our current and future domestic
subsidiaries, excluding certain inactive subsidiaries; and
|
103
|
|
|
|
|
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.
|
In addition, the credit facility is secured by a
perfected first priority security interest in certain of our
tangible and intangible assets, including substantially all of
our personal property such as accounts receivable, inventory,
equipment and intangibles; by mortgages on the real estate
associated with 105 of our facilities; and by all of our and our
subsidiary guarantors capital stock. The credit facility
is also secured by a pledge of 65% of the voting stock of our
and our subsidiary guarantors foreign subsidiaries, if any.
Repayment
All or any portion of the outstanding loans under
the credit facility may be prepaid at any time, and commitments
may be terminated in whole or in part at our option without
premium or penalty. The credit facility is subject to mandatory
prepayments from the net cash proceeds received by us in
connection with the incurrence of other indebtedness, from net
cash proceeds of some asset sales, from amounts recovered by us
in connection with casualty losses and condemnation events, and
from purchase price refunds received by us in connection with
acquisitions.
Financial Covenants
The 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.
|
In connection with the amendment and restatement
of our credit facility, our maximum senior leverage ratio after
April 22, 2004 starts at 2.25 to 1 and reduces to 2.00
to 1 in 2005.
Certain Covenants
The credit facility contains a number of
covenants that, among other things, restrict our ability and
that of our parent and certain of our subsidiaries to:
|
|
|
|
|
dispose of assets;
|
|
|
|
incur additional indebtedness;
|
|
|
|
incur guarantee obligations;
|
|
|
|
repay or amend certain terms of other
indebtedness, including the Senior Notes and the 2014 Notes;
|
|
|
|
pay certain restricted payments and dividends;
|
|
|
|
create liens on assets;
|
|
|
|
make investments, loans or advances;
|
|
|
|
engage in mergers or consolidations;
|
|
|
|
make capital expenditures;
|
|
|
|
enter into new lines of business; or
|
104
|
|
|
|
|
engage in some transactions with subsidiaries and
affiliates and otherwise restrict corporate activities.
|
The credit facility also contains other usual and
customary negative and affirmative covenants.
Events of Default
The credit facility contains events of default
including, subject to customary cure periods and materiality
thresholds:
|
|
|
|
|
failure to make payments when due;
|
|
|
|
material inaccuracies of representations and
warranties;
|
|
|
|
breach of covenants;
|
|
|
|
certain cross-defaults and cross-accelerations;
|
|
|
|
events of insolvency, bankruptcy or similar
events;
|
|
|
|
certain judgments against us;
|
|
|
|
certain occurrences with respect to employee
benefit plans;
|
|
|
|
failure to remain eligible or participate in
Medicaid or Medicare programs;
|
|
|
|
failure of guarantees to remain in effect;
|
|
|
|
failure of certain liens and security documents
to remain enforceable;
|
|
|
|
the occurrence of an event of default under any
mortgage;
|
|
|
|
the 2007 Notes or guarantees of the 2007 Notes
cease to be subordinated to the obligations under the credit
facility and the credit facility guarantees; and
|
|
|
|
the occurrence of a change in control.
|
If such a default occurs, the lenders under the
credit facility would be entitled to take various actions,
including all actions permitted to be taken by a secured
creditor, the acceleration of amounts due under the credit
facility and requiring that all such amounts be immediately paid
in full.
2007 Notes
We issued $200.0 million aggregate principal
amount of 2007 Notes under an indenture dated as of
December 2, 1997 among us, the guarantors (as defined in
the indenture) and The Bank of Nova Scotia Trust Company of New
York, as trustee, in connection with our acquisition of Arbor
Health Care Company. The 2007 Notes mature on December 15,
2007 and are callable on or after December 15, 2003 at
103.117% of par. Interest on the 2007 Notes accrues at the rate
of 9.35% per year and is payable semiannually on each
June 15 and December 15 to the persons who are
registered holders at the close of business on the May 31
or November 30 preceding the applicable interest payment
date.
In connection with sale and issuance of the 2014
Notes, we used the net proceeds from such sale and issuance,
which were approximately $117.4 million, net of a
$3.1 million discount and fees and expenses of
$4.5 million, together with borrowings under our amended
and restated credit facility to purchase for cash approximately
$104.9 million aggregate principal amount of 2007 Notes
validly tendered in the tender offer and to redeem any 2007
Notes not tendered in the tender offer or cancelled prior to
May 24, 2004.
Senior Notes
We issued $150.0 million aggregate principal
amount of Senior Notes under an indenture dated as of
June 28, 2002 among us, the subsidiary guarantors (as
defined in the indenture) and U.S. Bank, N.A., as trustee.
The Senior Notes mature on July 1, 2010. Interest on the
Senior Notes accrues at the rate of
105
9.5% per year and is payable semiannually on
each January 1 and July 1 to the persons who are
registered holders at the close of business on the
December 15 or June 15 preceding the applicable
interest payment date.
Redemption
On or prior to July 1, 2005, we may redeem
up to 35% of the aggregate principal amount of Senior Notes
issued under the indenture at a redemption price of 109.500% of
par, plus accrued and unpaid interest on the Senior Notes to the
redemption date, with the net cash proceeds of certain equity
offerings.
On or after July 1, 2006, we may redeem all
or a part of the Senior Notes at the redemption prices
(expressed as percentages of principal amount) set forth below,
plus accrued and unpaid interest on the Senior Notes redeemed to
the applicable redemption date, if redeemed during the
twelve-month period beginning on July 1 of the years
indicated below:
|
|
|
|
|
Year |
|
Percentage |
|
|
|
2006
|
|
|
104.750 |
% |
2007
|
|
|
102.375 |
% |
2008 and thereafter
|
|
|
100.000 |
% |
Change of Control
If we experience a change of control, as defined
in the indenture governing the Senior Notes, each holder of the
Senior Notes has the right to require that we purchase all or
any part of such holders Senior Notes at a purchase price
equal to 101% of par, plus accrued and unpaid interest on the
Senior Notes purchased to the date of purchase.
Covenants
The indenture governing the Senior Notes
contains, among other things, covenants limiting the incurrence
of indebtedness, the issuance of preferred stock, the payment of
certain dividends and other restricted payments, certain sales
of assets, restrictions on the payment of dividends and certain
other payments by certain subsidiaries, the issuance and sale of
capital stock of certain subsidiaries, the creation of liens,
certain transactions with affiliates, certain sale and leaseback
transactions and certain mergers and consolidations.
Events of Default
The following events would constitute an event of
default under the indenture governing the Senior Notes:
|
|
|
|
|
the failure for 30 days to pay interest when
due on the Senior Notes;
|
|
|
|
the failure to pay principal of or premium, if
any, when due on the Senior Notes;
|
|
|
|
the failure to comply with the covenants
contained in the indenture governing the Senior Notes within the
time periods specified;
|
|
|
|
default under any mortgage, indenture or
instrument under which there may be issued or by which there may
be secured or evidenced any indebtedness for money borrowed by
us or any of our restricted subsidiaries (or the payment of
which is guaranteed by us or any of our restricted subsidiaries)
if that default:
|
|
|
|
|
|
is caused by a payment default on such
indebtedness prior to the expiration of the grace period
provided in such indebtedness on the date of such
default; or
|
|
|
|
results in the acceleration of such indebtedness
prior to its express maturity,
|
106
and, in each case, the principal amount of any
such indebtedness, together with the principal amount of any
other such indebtedness under which there has been a payment
default or the maturity of which has been so accelerated,
aggregates $20.0 million or more;
|
|
|
|
|
failure to pay final judgments (to the extent not
fully covered by insurance) aggregating in excess of
$20.0 million, which judgments are not paid, discharged or
stayed for a period of 60 consecutive days;
|
|
|
|
except as permitted by the indenture governing
the Senior Notes, any subsidiary guarantee of the Senior Notes
is held in any judicial proceeding to be unenforceable or
invalid or ceases for any reason to be in full force and effect
or any subsidiary guarantor, or any person acting on behalf of
any subsidiary guarantor, denies or disaffirms its obligations
under its subsidiary guarantee of the Senior Notes; and
|
|
|
|
certain events of bankruptcy or insolvency
described in the indenture governing the Senior Notes.
|
Industrial Development Revenue Bonds
In connection with some of our acquisitions and
related improvements, we have borrowed the proceeds of
industrial development revenue bonds issued by various cities in
Minnesota and one city in Pennsylvania that cover the purchase
price of such acquired businesses. As of March 31, 2004,
approximately $20.2 million of these bonds were outstanding
and senior to our outstanding long-term indebtedness, including
the 2014 Notes and our Senior Notes. In February 2004, we
prepaid two industrial development revenue bonds totaling
$13.0 million. The bonds mature between 2008 and 2014 and
have interest rates between 1.15% and 6.25%. Two of the bonds
with principal amounts aggregating $19.0 million are
secured by irrevocable letters of credit totaling
$19.6 million.
Other Debt
As of March 31, 2004, we had
$10.4 million of other senior debt, including mortgage
notes that are senior to our outstanding long-term indebtedness,
including the 2014 Notes and the Senior Notes. The mortgage
notes have interest rates ranging from 3.00% to 10.50% and
mature from 2004 through 2012. The remaining indebtedness is
related to capital leases, promissory notes and other
obligations.
107
DESCRIPTION OF THE NEW NOTES
We issued the old and we will issue the new notes
under an indenture among us, the Subsidiary Guarantors and
U.S. Bank, N.A., as trustee. We refer to the old notes and
the new notes collectively as the notes. The terms of the notes
include those stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act of 1939.
The following description is a summary of the
material provisions of the indenture. It does not include all of
the provisions of the indenture. We urge you to read the
indenture because it, and not this description, define your
rights as Holders of the notes. Copies of the indenture are
available as set forth below under Additional
Information. Certain defined terms used in this
description but not defined below under
Certain Definitions have the meanings
assigned to them in the indenture. In this description,
we, us and our refer only to
Extendicare Health Services, Inc. and not to any of its
subsidiaries.
The registered Holder of a note will be treated
as its owner for all purposes. Only registered Holders will have
rights under the indenture.
Brief Description of the Notes and the
Subsidiary Guarantees
The Notes
The old notes are, and the new notes will be:
|
|
|
|
|
our general unsecured obligations;
|
|
|
|
subordinated in right of payment to all of our
existing and any future Senior Debt, including Indebtedness
outstanding under our Credit Agreement and the Senior Notes;
|
|
|
|
pari passu in right
of payment with all of our existing and any of our future senior
subordinated Indebtedness;
|
|
|
|
senior in right of payment to any of our future
Subordinated Indebtedness; and
|
|
|
|
guaranteed by all of our existing and future
domestic Significant Subsidiaries, all of our existing and
future Domestic Subsidiaries that guarantee or incur any
Indebtedness and any other existing and future Significant
Subsidiaries or Restricted Subsidiaries that guarantee or
otherwise provide direct credit support for Indebtedness of ours
or any of our Domestic Subsidiaries.
|
The Subsidiary Guarantees
Each Subsidiary Guarantee of the notes is, and
each subsidiary guarantee of the new notes will be:
|
|
|
|
|
a general unsecured obligation of that Subsidiary
Guarantor;
|
|
|
|
subordinated in right of payment to all existing
and any future Senior Debt of that Subsidiary Guarantor,
including Guarantees of the Credit Agreement and the Senior
Notes;
|
|
|
|
pari passu in right
of payment with all existing and any future senior subordinated
Indebtedness of that Subsidiary Guarantor; and
|
|
|
|
senior in right of payment to any future
Subordinated Indebtedness of that Subsidiary Guarantor.
|
As of the date of the indenture, all of our
existing subsidiaries will be Restricted
Subsidiaries. However, under the circumstances described
below under Certain Covenants
Designation of Restricted and Unrestricted Subsidiaries,
we will be permitted to designate certain of our subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries
will not be subject to many of the restrictive covenants in the
indenture and will not guarantee the notes.
As of March 31, 2004, we had approximately
$179.0 million of Senior Debt outstanding on a consolidated
basis, approximately $29.3 million of which was secured. As
of March 31, 2004, we had
108
available borrowings under our credit facility of
$105.0 million and $33.7 million of letters of credit
outstanding under our credit facility. As indicated above and as
discussed in detail below under
Subordination, payments on the old notes
and under the old Subsidiary Guarantees is, and payments on the
new notes and under the new Subsidiary Guarantees will be,
subordinated to the prior payment in full of Senior Debt. The
indenture will permit us and the Subsidiary Guarantors to incur
additional Senior Debt, subject to the covenant described under
Certain Covenants Incurrence of
Indebtedness and Issuance of Preferred Stock.
Principal, Maturity and Interest
We will initially issue $125.0 million in
aggregate principal amount of new notes in exchange for a like
amount of old notes. We may issue additional notes from time to
time after this offering. Any offering of additional notes is
subject to the covenant described under
Certain Covenants Incurrence of
Indebtedness and Issuance of Preferred Stock. The notes
and any additional notes subsequently issued under the indenture
will be treated as a single class for all purposes under the
indenture, including, without limitation, waivers, amendments,
redemptions and offers to purchase. We will issue notes in
denominations of $1,000 and integral multiples of $1,000. The
notes will mature on May 1, 2014.
Interest on the notes will accrue at the rate of
6 7/8% per annum and will be payable semi-annually in
arrears on May 1 and November 1, commencing on
November 1, 2004. We will make each interest payment to the
Holders of record on the immediately preceding April 15 and
October 15.
Interest on the notes will accrue from the date
of original issuance of the old notes or, if interest has
already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Methods of Receiving Payments on the
Notes
If a Holder has given wire transfer instructions
to us, we will pay all principal, interest and premium, if any,
on that Holders notes in accordance with those
instructions. All other payments on notes will be made at the
office or agency of the paying agent and registrar within the
City and State of New York unless we elect to make interest
payments by check mailed to the Holders at their address set
forth in the register of Holders.
Paying Agent and Registrar for the
Notes
The trustee will initially act as paying agent
and registrar. We may change the paying agent or registrar
without prior notice to the Holders of the notes, and we or any
of our Subsidiaries may act as paying agent or registrar.
Transfer and Exchange
A Holder may transfer or exchange notes in
accordance with the indenture. The registrar and the trustee may
require a Holder to furnish appropriate endorsements and
transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes due on transfer. We
are not required to transfer or exchange any note selected for
redemption. Also, we are not required to transfer or exchange
any note for a period of 15 days before a selection of
notes to be redeemed.
Subsidiary Guarantees
The old notes are, and the new notes will be,
guaranteed by all of our existing and future domestic
Significant Subsidiaries, all of our existing and future
Domestic Subsidiaries that guarantee or incur any Indebtedness
and any other existing and future Significant Subsidiaries or
Restricted Subsidiaries that guarantee or otherwise provide
direct credit support for Indebtedness of ours or any of our
Domestic Subsidiaries. These Subsidiary Guarantees are and will
be joint and several obligations of the Subsidiary Guarantors.
Each Subsidiary Guarantee is and will be subordinated to the
prior payment in full of all
109
Senior Debt of that Subsidiary Guarantor. The
obligations of each Subsidiary Guarantor under its Subsidiary
Guarantee and will be limited as necessary to prevent that
Subsidiary Guarantee from constituting a fraudulent conveyance
under applicable law, after giving effect to all other
obligations of that Subsidiary Guarantor including its guarantee
of all obligations under the Credit Agreement and the Senior
Notes. See Risk Factors Risks Relating to the
Offering A court may void the guarantees of the
notes or further subordinate the guarantees to other obligations
of our subsidiary guarantors.
A Subsidiary Guarantor may not sell or otherwise
dispose of all or substantially all of its assets to, or
consolidate with or merge with or into (whether or not such
Subsidiary Guarantor is the surviving Person), another Person,
other than us or another Subsidiary Guarantor, unless:
|
|
|
(1) immediately after giving effect to that
transaction, no Default or Event of Default exists; and
|
|
|
(2) either:
|
|
|
|
(a) the Person acquiring the property in any
such sale or disposition or the Person formed by or surviving
any such consolidation or merger assumes all the obligations of
that Subsidiary Guarantor under the indenture, its Subsidiary
Guarantee and the registration rights agreement pursuant to
agreements satisfactory to the trustee; or
|
|
|
(b) the Net Proceeds of such sale or other
disposition are applied in accordance with the provisions of the
indenture relating to Asset Sales.
|
The Subsidiary Guarantee of a Subsidiary
Guarantor will be released:
|
|
|
(1) in connection with any sale or other
disposition of all or substantially all of the assets of that
Subsidiary Guarantor (including by way of merger or
consolidation) to a Person that is not (either before or after
giving effect to such transaction) a Subsidiary of ours, if the
sale or other disposition complies with the provisions of the
indenture relating to Asset Sales;
|
|
|
(2) in connection with any sale of all of
the Capital Stock of a Subsidiary Guarantor to a Person that is
not (either before or after giving effect to such transaction) a
Subsidiary of ours, if the sale complies with the provisions of
the indenture relating to Asset Sales; or
|
|
|
(3) if we designate any Restricted
Subsidiary that is a Subsidiary Guarantor as an Unrestricted
Subsidiary in accordance with the applicable provisions of the
indenture.
|
See Repurchase at the Option of
Holders Asset Sales.
Subordination
The payment of principal, interest and premium,
if any, on the notes and the Subsidiary Guarantees will be
subordinated to the prior payment in full in cash of all of our
and the Subsidiary Guarantors Senior Debt, as the case may
be, including Senior Debt incurred after the date of the
indenture.
The holders of Senior Debt will be entitled to
receive payment in full in cash of all Obligations due in
respect of Senior Debt (including interest after the
commencement of any bankruptcy proceeding at the rate specified
in the applicable Senior Debt) before the Holders of notes will
be entitled to receive any payment with respect to the notes
(except that Holders of notes may receive and retain Permitted
Junior Securities and payments made from the trust described
under Legal Defeasance and Covenant
Defeasance), in the event of any distribution to creditors
of us or the relevant Subsidiary Guarantor:
|
|
|
(1) in a liquidation or dissolution of us or
the relevant Subsidiary Guarantor;
|
|
|
(2) in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to us or
the relevant Subsidiary Guarantor or our or its respective
property;
|
|
|
(3) in an assignment for the benefit of
creditors; or
|
|
|
(4) in any marshaling of our or the relevant
Subsidiary Guarantors assets and liabilities.
|
110
We also may not make any payment in respect of
the notes (except in Permitted Junior Securities or from the
trust described under Legal Defeasance and
Covenant Defeasance) if:
|
|
|
(1) a payment default on Designated Senior
Debt occurs and is continuing beyond any applicable grace
period; or
|
|
|
(2) any other default occurs and is
continuing on any series of Designated Senior Debt that permits
holders of that series of Designated Senior Debt to accelerate
its maturity and the trustee receives a notice of such default
(a Payment Blockage Notice) from us or (a) with
respect to Designated Senior Debt arising under the Credit
Agreement, from the agent for the lenders thereunder,
(b) with respect to Designated Senior Debt arising under
the Senior Notes, from the trustee for the holders thereof or
(c) with respect to any other Designated Senior Debt, from
the holders of any such Designated Senior Debt.
|
Payments on the notes may and will be resumed:
|
|
|
(1) in the case of a payment default, upon
the earlier of the date on which such default is cured or waived
or such Designated Senior Debt has been discharged or paid in
full in cash; and
|
|
|
(2) in the case of a nonpayment default,
upon the earliest of (a) the date on which such nonpayment
default is cured or waived, (b) 179 days after the
date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Designated Senior Debt has
been accelerated, (c) the date on which such payment
blockage period shall have been terminated by written notice to
the trustee by the party initiating such payment blockage period
or (d) the date on which such Designated Senior Debt has
been discharged or paid in full in cash.
|
No new Payment Blockage Notice may be delivered
unless and until:
|
|
|
(1) 360 days have elapsed since the
delivery of the immediately prior Payment Blockage
Notice; and
|
|
|
(2) all scheduled payments of principal,
interest and premium and Liquidated Damages, if any, on the
notes that have come due have been paid in full in cash.
|
No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage
Notice to the trustee will be, or can be made, the basis for a
subsequent Payment Blockage Notice unless such default has been
cured or waived for a period of not less than 90 days.
If the trustee or any Holder of the notes
receives a payment in respect of the notes (except in Permitted
Junior Securities or from the trust described under
Legal Defeasance and Covenant
Defeasance) when:
|
|
|
(1) the payment is prohibited by these
subordination provisions; and
|
|
|
(2) the trustee or the Holder has actual
knowledge that the payment is prohibited;
|
the trustee or the Holder, as the ease may be,
will hold the payment in trust for the benefit of the holders of
Senior Debt. Upon the proper written request of the holders of
Senior Debt, the trustee or the Holder, as the case may be, will
deliver the amounts in trust to the holders of Senior Debt or
their proper representative.
We or the trustee must promptly notify holders of
Senior Debt if payment of the notes is accelerated because of an
Event of Default.
The old Subsidiary Guarantee of each Subsidiary
Guarantor is, and the new Subsidiary Guarantee of each
Subsidiary Guarantor will be, subordinated to Senior Debt of
such Subsidiary Guarantor to the same extent and in the same
manner as the notes are subordinated to our Senior Debt.
Payments under the old Subsidiary Guarantee of each Subsidiary
Guarantor are, and payments under the new Subsidiary Guarantee
of each Subsidiary Guarantor will be, subordinated to the prior
payment in full in cash of all Indebtedness under the Credit
Agreement, the Senior Notes and all other Senior Debt of such
Guarantor,
111
including Senior Debt incurred after the date of
the indenture, on the same basis as provided above with respect
to the subordination of payments on the notes by us to the prior
payment in full in cash of our Senior Debt.
As a result of the subordination provisions
described above, in the event of our bankruptcy, liquidation or
reorganization, Holders of notes may recover less ratably than
creditors of us or the Subsidiary Guarantors who are holders of
Senior Debt. See Risk Factors Risks Relating
to the Offering The notes and the subsidiary
guarantees will be subordinated to our and our subsidiary
guarantors senior indebtedness.
Optional Redemption
On or prior to May 1, 2007, we may on one or
more occasions redeem up to 35% of the aggregate principal
amount of notes issued under the indenture at a redemption price
of 106.875% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, to the
redemption date, with the net cash proceeds of any Qualified
Equity Offering; provided that:
|
|
|
(1) at least 65% of the aggregate principal
amount of notes issued under the indenture remains outstanding
immediately after the occurrence of such redemption (excluding
notes held by us and our Subsidiaries); and
|
|
|
(2) the redemption occurs within
120 days of the date of the closing of such Qualified
Equity Offering.
|
Except pursuant to the preceding paragraph, the
notes will not be redeemable at our option prior to May 1,
2009.
On or after May 1, 2009, we may redeem all
or a part of the notes upon not less than 30 nor more than
60 days notice, at the redemption prices (expressed
as percentages of principal amount) set forth below plus accrued
and unpaid interest, if any, on the notes redeemed, to the
applicable redemption date, if redeemed during the twelve-month
period beginning on May 1 of the years indicated below:
|
|
|
|
|
Year |
|
Percentage |
|
|
|
2009
|
|
|
103.438 |
% |
2010
|
|
|
102.292 |
% |
2011
|
|
|
101.146 |
% |
2012 and thereafter
|
|
|
100.000 |
% |
Mandatory Redemption
We are not required to make mandatory redemption
or sinking fund payments with respect to the notes.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder of
notes will have the right to require us to repurchase all or any
part (equal to $1,000 or an integral multiple of $1,000) of that
Holders notes pursuant to a Change of Control Offer on the
terms set forth in the indenture. In the Change of Control
Offer, we will Offer a Change of Control Payment in cash equal
to 101% of the aggregate principal amount of notes repurchased
plus accrued and unpaid interest and Liquidated Damages, if any,
on the notes repurchased, to the date of purchase. Subject to
compliance with the provisions of the third succeeding
paragraph, within 30 days following any Change of Control,
we will mail a notice to the trustee and each Holder describing
the transaction or transactions that constitute the Change of
Control and offering to repurchase notes on the Change of
Control Payment Date specified in the notice, which date will be
no earlier than 30 days and no later than 60 days from
the date such notice is mailed, pursuant to the procedures
required by the indenture and described in such notice. We will
comply with the requirements of Rule 14e-1 under
112
the Exchange Act and any other securities laws
and regulations thereunder to the extent those laws and
regulations are applicable in connection with the repurchase of
the notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict
with the Change of Control provisions of the indenture, we will
comply with the applicable securities laws and regulations and
will not be deemed to have breached our obligations under the
Change of Control provisions of the indenture by virtue of such
conflict.
On the Change of Control Payment Date, we will,
to the extent lawful:
|
|
|
(1) accept for payment all notes or portions
of notes properly tendered and not withdrawn pursuant to the
Change of Control Offer;
|
|
|
(2) deposit with the paying agent an amount
equal to the Change of Control Payment in respect of all notes
or portions of notes properly tendered and not
withdrawn; and
|
|
|
(3) deliver or cause to be delivered to the
trustee the notes properly accepted together with an
officers certificate stating the aggregate principal
amount of notes or portions of notes being purchased by us.
|
The paying agent will promptly mail to each
Holder of notes properly tendered and not withdrawn the Change
of Control Payment for such notes, and the trustee will promptly
authenticate and mail (or cause to be transferred by book entry)
to each Holder a new note equal in principal amount to any
unpurchased portion of the notes surrendered, if any;
provided that each new note will be in a principal amount
of $1,000 or an integral multiple of $1,000.
Prior to complying with any of the provisions of
this Change of Control covenant, but in any event
within 90 days following a Change of Control, we will
either repay all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding
Senior Debt to permit the repurchase of notes required by this
covenant. We will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The provisions described above that require us to
make a Change of Control Offer following a Change of Control
will be applicable whether or not any other provisions of the
indenture are applicable. Except as described above with respect
to a Change of Control, the indenture does not contain
provisions that permit the Holders of the notes to require that
we repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
We will not be required to make a Change of
Control Offer upon a Change of Control if a third party makes
the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by us and
purchases all notes properly tendered and not withdrawn under
the Change of Control Offer.
The definition of Change of Control includes a
phrase relating to the direct or indirect sale, lease, transfer,
conveyance or other disposition of all or substantially
all of our properties or assets and the properties or
assets of our Subsidiaries taken as a whole. Although there is a
limited body of case law interpreting the phrase
substantially all, there is no precise established
definition of the phrase under applicable law. Accordingly, the
ability of a Holder of notes to require us to repurchase its
notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of our assets and the assets
of our Subsidiaries taken as a whole to another Person or group
may be uncertain.
Asset Sales
We will not, and will not permit any of our
Restricted Subsidiaries to, consummate an Asset Sale unless:
|
|
|
(1) we (or the Restricted Subsidiary, as the
case may be) receive consideration at the time of the Asset Sale
at least equal to the fair market value of the assets sold or
otherwise disposed of
|
113
|
|
|
(evidenced by a resolution of our Board of
Directors set forth in an officers certificate delivered
to the trustee);
|
|
|
(2) if we (or the Restricted Subsidiary, as
the case may be) receive consideration at the time of the Asset
Sale greater than $7.5 million, the fair market value of
the assets sold or otherwise disposed of is determined by
Parents Board of Directors (such determination to be
evidenced by a resolution set forth in an officers
certificate delivered to the trustee) or in a written opinion
issued by an independent appraisal firm or financial advisor of
national standing; and
|
|
|
(3) at least 75% of the consideration
received in the Asset Sale by us or such Restricted Subsidiary
is in the form of cash, Cash Equivalents or Replacement Assets.
|
For purposes of this provision only, each of the
following will be deemed to be cash:
|
|
|
(a) any liabilities of ours or any of our
Restricted Subsidiaries, as shown on our or such Restricted
Subsidiarys most recent balance sheet (other than
contingent liabilities and liabilities that are by their terms
subordinated to the notes or any Restricted Subsidiarys
Subsidiary Guarantee), that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that
releases us or such Restricted Subsidiary from further liability;
|
|
|
(b) any securities, notes or other
obligations received by us or any such Restricted Subsidiary
from such transferee that are contemporaneously, subject to
ordinary settlement periods, converted by us or such Restricted
Subsidiary into cash, to the extent of the cash received in that
conversion; and
|
|
|
(c) any Designated Non-Cash Consideration
received by us or any of our Restricted Subsidiaries in the
Asset Sale.
|
Within 365 days after the receipt of any Net
Proceeds from an Asset Sale, we and our Restricted Subsidiaries
may apply those Net Proceeds at our option:
|
|
|
(1) to repay our or any Restricted
Subsidiarys Indebtedness (other than Subordinated
Indebtedness);
|
|
|
(2) to acquire all or substantially all of
the assets of, or a majority of the Voting Stock of, another
Permitted Business (or enter into a definitive agreement
committing us or one of our Restricted Subsidiaries to make such
purchase within six months of the date of such agreement;
provided that if such agreement is terminated, we or such
Restricted Subsidiary may invest such Net Proceeds prior to the
end of such 365-day period, or if later, prior to the end of the
six-month period referred to in this clause (2)); or
|
|
|
(3) to acquire other long-term assets or to
make a capital expenditure, in each case, that are used or
useful in a Permitted Business (or enter into a definitive
agreement committing us or one of our Restricted Subsidiaries to
make such acquisition or expenditure within six months of the
date of such agreement; provided that if such agreement is
terminated, we or such Restricted Subsidiary may invest such Net
Proceeds prior to the end of such 365-day period, or if later,
prior to the end of the six-month period referred to in this
clause (3)).
|
Pending the final application of any Net
Proceeds, we may temporarily reduce revolving credit borrowings
or otherwise invest the Net Proceeds in any manner that is not
prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not
applied or invested within such 365-day period will constitute
Excess Proceeds. When the aggregate amount of Excess
Proceeds exceeds $15.0 million, not later than 30 days
after such date, we will make an offer (which offer may be made
at any time within such 365 or 30-day periods) to all Holders of
notes and Additional Notes, if any, and all holders of other
Indebtedness that is pari passu with the notes containing
provisions similar to those set forth in the indenture with
respect to offers to purchase or redeem with the proceeds of
sales of assets (an Asset Sale Offer), to purchase,
on a pro rata basis, the maximum principal amount of notes and
Additional Notes, if any, and such other pari passu Indebtedness
equal in amount to the Excess Proceeds remaining after an asset
sale offer required to be commenced prior to the Asset Sale
Offer (and not just the amount thereof
114
that exceeds $15.0 million). The offer price
in any Asset Sale Offer will be equal to 100% of the principal
amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase, in accordance with the
procedures set forth in the indenture, and will be payable in
cash. If any Excess Proceeds remain after consummation of an
Asset Sale Offer, we may use those Excess Proceeds for any
purpose not otherwise prohibited by the indenture. If the
aggregate principal amount of notes and Additional Notes, if
any, and other pari passu Indebtedness surrendered by holders
thereof exceeds the amount of Excess Proceeds remaining after an
asset sale offer required to be commenced prior to the Asset
Sale Offer, the trustee will select the notes and Additional
Notes, if any, and other pari passu Indebtedness to be purchased
as described below under Selection and Notice. Upon
completion of each Asset Sale Offer, the amount of Excess
Proceeds will be reset at zero.
We will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent those laws and
regulations are applicable in connection with each repurchase of
notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with
the Asset Sale provisions of the indenture, we will comply with
the applicable securities laws and regulations and will not be
deemed to have breached our obligations under the Asset Sale
provisions of the indenture by virtue of such conflict.
The agreements governing our outstanding Senior
Debt currently prohibit us from purchasing any notes, and also
provide that certain change of control or asset sale events with
respect to us would constitute a default under these agreements.
Any future credit agreements or other agreements relating to
Senior Debt to which we become a party may contain similar
restrictions and provisions. In the event a Change of Control or
Asset Sale occurs at a time when we are prohibited from
purchasing notes, we could seek the consent of our senior
lenders to the purchase of notes or could attempt to refinance
the borrowings that contain such prohibition. If we do not
obtain such a consent or repay such borrowings, we will remain
prohibited from purchasing notes. In such case, our failure to
purchase tendered notes would constitute an Event of Default
under the indenture which would, in turn, constitute a default
under such Senior Debt. In such circumstances, the subordination
provisions in the indenture would likely restrict payments to
the Holders of notes. See Risk Factors Risks
Related to the Offering We may be unable to purchase
the notes and the Senior Notes if we experience a change of
control.
Selection and Notice
If less than all of the notes are to be redeemed
or purchased at any time, the trustee will select notes for
redemption or purchase as follows:
|
|
|
(1) if the notes are listed on any national
securities exchange, in compliance with the requirements of the
principal national securities exchange on which the notes are
listed; or
|
|
|
(2) if the notes are not listed on any
national securities exchange, on a pro rata basis, by lot or by
such method as the trustee deems fair and appropriate.
|
No notes of $1,000 or less can be redeemed in
part. Notices of redemption will be mailed by first class mail
at least 30 but not more than 60 days before the redemption
date to each Holder of notes to be redeemed at its registered
address, except that redemption notices may be mailed more than
60 days prior to a redemption date if the notice is issued
in connection with a defeasance of the notes or a satisfaction
and discharge of the indenture. Notices of redemption may not be
conditional.
If any note is to be redeemed in part only, the
notice of redemption that relates to that note will state the
portion of the principal amount of that note that is to be
redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the
Holder of notes upon cancellation of the original note. Notes
called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
115
Certain Covenants
Restricted Payments
We will not, and will not permit any of our
Restricted Subsidiaries to, directly or indirectly:
|
|
|
(1) declare or pay any dividend or make any
other payment or distribution on account of our Equity Interests
(including, without limitation, any payment in connection with
any merger or consolidation in which we are involved) or to the
direct or indirect holders of our Equity Interests in their
capacity as such (other than dividends or distributions payable
solely in our Equity Interests (other than Disqualified Stock)
or to us);
|
|
|
(2) purchase, redeem or otherwise acquire or
retire for value (including, without limitation, in connection
with any merger or consolidation in which we are involved) any
of our Equity Interests;
|
|
|
(3) make any payment on or with respect to,
or purchase, redeem, defease or otherwise acquire or retire for
value any Subordinated Indebtedness, except (A) a payment
of interest or principal at the Stated Maturity thereof or (B)
Subordinated Indebtedness acquired in anticipation of satisfying
a sinking fund obligation, principal installment or payment of
principal upon final maturity of such Subordinated Indebtedness,
in each case acquired within one year of the date of the sinking
fund obligation, principal installment or payment of principal
upon maturity; or
|
|
|
(4) make any Restricted Investment
|
(all such payments and other actions set forth in
these clauses (1) through (4) above being collectively
referred to as Restricted Payments), unless, at the
time of and after giving effect to such Restricted Payment:
|
|
|
(a) no Default or Event of Default has
occurred and is continuing or would occur as a consequence of
such Restricted Payment;
|
|
|
(b) we would, at the time of such Restricted
Payment and after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the
applicable four-quarter period, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of
the Incurrence of Indebtedness and Issuance of Preferred
Stock covenant; and
|
|
|
(c) such Restricted Payment, together with
the aggregate amount of all other Restricted Payments made by us
and our Restricted Subsidiaries after the date of the indenture
(excluding Restricted Payments permitted by clauses (2) and
(3) of the next paragraph), is less than the sum, without
duplication, of:
|
|
|
|
(I) 50% of our Consolidated Net Income for
the period (taken as one accounting period) from April 1,
2002 to the end of our most recently ended fiscal quarter for
which internal financial statements are available at the time of
such Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit), plus
|
|
|
(II) 100% of the aggregate net cash proceeds
received by us (including the fair market value of any Permitted
Business or assets used or useful in a Permitted Business to the
extent acquired in consideration of Equity Interests of ours
(other than Disqualified Stock)) since the date of the indenture
as a contribution to our common equity capital or from the issue
or sale of Equity Interests of ours (other than Disqualified
Stock) or from the issue or sale of convertible or exchangeable
Disqualified Stock or convertible or exchangeable debt
securities of ours that have been converted into or exchanged
for such Equity Interests (other than Equity Interests (or
Disqualified Stock or debt securities) sold to a Subsidiary of
ours); plus
|
|
|
(III) to the extent that any Restricted
Investment that was made after the date of the indenture is sold
for cash or otherwise liquidated or repaid for cash, the lesser
of (A) the cash
|
116
|
|
|
return of capital with respect to such Restricted
Investment (less the cost of disposition, if any) and
(B) the initial amount of such Restricted Investment.
|
So long as no Default has occurred and is
continuing or would be caused thereby, the preceding provisions
will not prohibit:
|
|
|
(1) the payment of any dividend within
60 days after the date of declaration of the dividend, if
at the date of declaration the dividend payment would have
complied with the provisions of the indenture;
|
|
|
(2) the redemption, repurchase, retirement,
defeasance or other acquisition of any Subordinated Indebtedness
or of any of our Equity Interests by conversion into, or by an
exchange for, shares of our Equity Interests (other than
Disqualified Stock), or in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to any
of our Restricted Subsidiaries) of, our Equity Interests (other
than Disqualified Stock); provided that the amount of any such
net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition will be
excluded from clause (c)(II) of the preceding paragraph;
|
|
|
(3) the defeasance, redemption, repurchase
or other acquisition of Subordinated Indebtedness with the net
cash proceeds from an incurrence of Permitted Refinancing
Indebtedness;
|
|
|
(4) the payment of any dividend by a
Restricted Subsidiary of ours to the holders of its Equity
Interests on a pro rata basis;
|
|
|
(5) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of
ours or any Restricted Subsidiary of ours held by any member of
our (or any of our Restricted Subsidiaries) management
pursuant to any management equity subscription agreement, stock
option agreement or similar agreement; provided that the
aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests may not exceed
$2.5 million in any twelve-month period; and
|
|
|
(6) other Restricted Payments in an
aggregate amount since the date of the indenture not to exceed
$25.0 million.
|
The amount of all Restricted Payments (other than
cash) will be the fair market value on the date of the
Restricted Payment of the asset(s) or securities proposed to be
transferred or issued by us or such Restricted Subsidiary, as
the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be
valued by this covenant will be determined by our Board of
Directors, whose resolutions with respect thereto will be
delivered to the trustee. The Board of Directors
determination must be based upon an opinion or appraisal issued
by an accounting, appraisal or investment banking firm of
national standing if the fair market value exceeds
$5.0 million. Not later than the date of making any
Restricted Payment, we will deliver to the trustee an
officers certificate stating that such Restricted Payment
is permitted and setting forth the basis upon which the
calculations required by this Restricted Payments
covenant were computed, together with a copy of any fairness
opinion or appraisal required by the indenture.
Incurrence of Indebtedness and Issuance of
Preferred Stock
We will not, and will not permit any of our
Restricted Subsidiaries to, directly or indirectly, create,
incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to
(collectively, incur) any Indebtedness (including
Acquired Debt), and we will not issue any Disqualified Stock and
will not permit any of our Restricted Subsidiaries to issue any
shares of preferred stock; provided, however, that we may incur
Indebtedness (including Acquired Debt) or issue Disqualified
Stock, and any of our Subsidiary Guarantors may incur
Indebtedness (including Acquired Debt), if the Fixed Charge
Coverage Ratio for our most recently ended four full fiscal
quarters for which internal financial statements are available
immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued
would have been at least 2.00 to 1,
117
determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred or the preferred stock
or Disqualified Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The first paragraph of this covenant will not
prohibit the incurrence of any of the following items of
Indebtedness (collectively, Permitted Debt):
|
|
|
(1) our incurrence of additional
Indebtedness and letters of credit under Credit Facilities and
Guarantees thereof by the Subsidiary Guarantors; provided that
the aggregate principal amount of all Indebtedness of ours and
our Subsidiary Guarantors incurred pursuant to this
clause (1) (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of us
and our Subsidiary Guarantors thereunder) does not exceed an
amount equal to $200.0 million;
|
|
|
(2) the incurrence by us and our Restricted
Subsidiaries of the Existing Indebtedness;
|
|
|
(3) the incurrence by us of Indebtedness
represented by the notes to be issued on the date of the
indenture (and the related exchange notes to be issued pursuant
to the Registration Rights Agreement) and the incurrence by the
Subsidiary Guarantors of the Subsidiary Guarantees of those
notes (and the related exchange notes);
|
|
|
(4) the incurrence by us or any of our
Subsidiary Guarantors of Indebtedness represented by Capital
Lease Obligations, mortgage financings or purchase money
obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in our business
or the business of such Subsidiary Guarantor, in an aggregate
principal amount, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (4), not to
exceed 5.0% of Consolidated Tangible Assets at any time
outstanding;
|
|
|
(5) the incurrence by us or any of our
Restricted Subsidiaries of Permitted Refinancing Indebtedness in
exchange for, or the net proceeds of which are used to refund,
refinance or replace Indebtedness (other than intercompany
Indebtedness) that was incurred under the first paragraph of
this covenant or clauses (2), (3) or (10) of this
paragraph;
|
|
|
(6) the incurrence by us or any of our
Restricted Subsidiaries of intercompany Indebtedness owed to us
or any of the Subsidiary Guarantors; provided, however, that:
|
|
|
|
(a) if we are the obligor on such
Indebtedness, such Indebtedness must be expressly subordinated
to the prior payment in full in cash of all Obligations with
respect to the notes;
|
|
|
(b) if a Subsidiary Guarantor is the obligor
on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of such
Subsidiary Guarantors Subsidiary Guarantee; and
|
|
|
(c) (i) any subsequent issuance or
transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than us or a
Subsidiary Guarantor and (ii) any sale or other transfer of
any such Indebtedness to a Person that is not either us or a
Subsidiary Guarantor will be deemed, in each case, to constitute
an incurrence of such Indebtedness by us or such Subsidiary
Guarantor, as the case may be, that was not permitted by this
clause (6);
|
|
|
|
(7) the incurrence by us or any of our
Restricted Subsidiaries of Hedging Obligations that are incurred
in the normal course of business for the purpose of fixing or
hedging currency, commodity or interest rate risk (including
with respect to any floating rate Indebtedness that is permitted
by the terms of the indenture to be outstanding in connection
with the conduct of our respective businesses and not for
speculative purposes);
|
|
|
(8) the guarantee by us or any of the
Subsidiary Guarantors of our Indebtedness or Indebtedness of one
of our Restricted Subsidiaries that was permitted to be incurred
by another provision of this covenant;
|
118
|
|
|
(9) the incurrence by our Unrestricted
Subsidiaries of Non-recourse Debt; provided, however, that if
any such Indebtedness ceases to be Non-recourse Debt of an
Unrestricted Subsidiary, such event will be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of ours
that was not permitted by this clause (9); and
|
|
|
(10) the incurrence by us or any of our
Restricted Subsidiaries of additional Indebtedness in an
aggregate principal amount (or accreted value, as applicable) at
any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (10), not to
exceed $35.0 million (which amount may be incurred, in
whole or in part, under any of the Credit Facilities); provided
that no more than $15.0 million of such additional
Indebtedness shall be incurred by Restricted Subsidiaries that
are not Subsidiary Guarantors.
|
Our Indebtedness currently outstanding under the
Credit Agreement is incurred pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of this
covenant.
For purposes of determining compliance with this
covenant, in the event that an item of proposed Indebtedness
meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through
(10) above as of the date of incurrence thereof or is
entitled to be incurred pursuant to the first paragraph of this
covenant, we will, in our sole discretion, at the time the
proposed Indebtedness is incurred, (x) classify all or a
portion of that item of Indebtedness on the date of its
incurrence under either the first paragraph of this covenant or
under any category of Permitted Debt, (y) reclassify at a later
date all or a portion of that or any other item of Indebtedness
as being or having been incurred in any manner that complies
with this covenant and (z) elect to comply with this
covenant and the applicable definitions in any order.
For purposes of determining compliance with any
dollar-denominated restriction on the incurrence of Indebtedness
denominated in a foreign currency, the dollar-equivalent
principal amount of such Indebtedness incurred pursuant thereto
shall be calculated based on the relevant currency exchange rate
in effect on the date that such Indebtedness was incurred.
We will not incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that
is subordinate or junior in right of payment to any Senior Debt
of ours and senior in any respect in right of payment to the
notes; provided, however, that no Indebtedness of ours will be
deemed to be contractually subordinated in right of payment
solely by virtue of being unsecured. No Subsidiary Guarantor
will incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in
right of payment to the Senior Debt of such Subsidiary Guarantor
and senior in any respect in right of payment to such Subsidiary
Guarantors Subsidiary Guarantee; provided, however, that
no Indebtedness of a Subsidiary Guarantor will be deemed to be
contractually subordinated in right of payment solely by virtue
of being unsecured.
Indebtedness will be deemed to have been incurred
by the survivor of a merger, at the time of such merger and,
with respect to an acquired Subsidiary, at the time of such
acquisition.
Liens
We will not, and will not permit any of our
Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien of any kind securing
Indebtedness, Attributable Debt or trade payables on any asset
now owned or hereafter acquired or any proceeds therefrom, or
assign or convey any right to receive income therefrom, except
Permitted Liens; provided, however, that:
|
|
|
(1) in the case of Liens securing
Subordinated Indebtedness, the notes must be secured by a Lien
on such property (including Capital Stock of a Restricted
Subsidiary), assets, proceeds, income or profit that is senior
in priority to such Liens; and
|
119
|
|
|
(2) in the case of Liens securing Senior
Subordinated Indebtedness, the notes must be equally and ratably
secured by a Lien on such property (including Capital Stock of a
Restricted Subsidiary), assets, proceeds, income or profit.
|
Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries
We will not, and will not permit any of our
Restricted Subsidiaries to, directly or indirectly, create or
permit to exist or become effective any consensual encumbrance
or restriction on the ability of any Restricted Subsidiary to:
|
|
|
(1) pay dividends or make any other
distributions on or in respect of its Capital Stock to us or any
of our Restricted Subsidiaries, or with respect to any other
interest or participation in, or measured by, its profits, or
pay any Indebtedness owed to us or any other of our Restricted
Subsidiaries;
|
|
|
(2) make any loans or advances to us or any
other of our Restricted Subsidiaries; or
|
|
|
(3) sell, lease or transfer any of its
properties or assets to us or any other of our Restricted
Subsidiaries; or
|
|
|
(4) guarantee our obligations.
|
However, the preceding restrictions will not
apply to encumbrances or restrictions existing under or by
reason of:
|
|
|
(1) agreements as in effect on the date of
the indenture or subsequent agreements relating to our
Indebtedness or Indebtedness of any Subsidiary Guarantor and any
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings of those
agreements; provided that the amendments, modifications,
restatements, renewals, increases, supplements, refundings,
replacement or refinancings are not materially more restrictive,
taken as a whole, with respect to such dividend and other
payment restrictions than those contained in those agreements on
the date of the indenture;
|
|
|
(2) the indenture, the notes and the
Subsidiary Guarantees;
|
|
|
(3) applicable law;
|
|
|
(4) any instrument governing Indebtedness or
Capital Stock of a Person acquired by us or any of our
Restricted Subsidiaries as in effect at the time of such
acquisition, which encumbrance or restriction is not applicable
to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so
acquired; provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the indenture to be
incurred;
|
|
|
(5) customary non-assignment provisions in
leases entered into in the ordinary course of business;
|
|
|
(6) purchase money obligations for property
acquired in the ordinary course of business that impose
restrictions on that property of the nature described in
clause (3) of the preceding paragraph;
|
|
|
(7) any agreement for the sale or other
disposition of a Restricted Subsidiary that restricts
distributions by that Restricted Subsidiary pending its sale or
other disposition;
|
|
|
(8) Permitted Refinancing Indebtedness;
provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are not
materially more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being
refinanced;
|
|
|
(9) Liens securing Indebtedness otherwise
permitted to be incurred under the provisions of the
Liens covenant that limit the right of the debtor to
dispose of the assets subject to such Liens; and
|
120
|
|
|
(10) provisions with respect to the
disposition or distribution of assets or property in joint
venture agreements, asset sale agreements, stock sale agreements
and other similar agreements entered into in the ordinary course
of business.
|
Merger, Consolidation or Sale of
Assets
We may not, directly or indirectly:
(1) consolidate or merge with or into another Person
(whether or not we are the surviving corporation) or
(2) sell, assign, transfer, convey or otherwise dispose of
all or substantially all of our properties or assets and the
properties or assets of our Restricted Subsidiaries taken as a
whole, in one or more related transactions, to another Person;
unless:
|
|
|
(a) either: (x) we are the surviving
corporation; or (y) the Person formed by or surviving any
such consolidation or merger (if other than us) or to which such
sale, assignment, transfer, conveyance or other disposition has
been made is a corporation organized or existing under the laws
of the United States, any state of the United States or the
District of Columbia;
|
|
|
(b) the Person formed by or surviving any
such consolidation or merger (if other than us) or the Person to
which such sale, assignment, transfer, conveyance or other
disposition has been made assumes all of our obligations under
the notes and the indenture pursuant to a supplemental indenture
reasonably satisfactory to the trustee;
|
|
|
(c) immediately after such transaction no
Default or Event of Default exists;
|
|
|
(d) we or the Person formed by or surviving
any such consolidation or merger (if other than us), or to which
such sale, assignment, transfer, conveyance or other disposition
has been made will, on the date of such transaction after giving
pro forma effect thereto and any related financing transactions
as if the same had occurred at the beginning of the applicable
four-quarter period, (i) be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the Incurrence of
Indebtedness and Issuance of Preferred Stock covenant or
(ii) our Fixed Charge Coverage Ratio, or the Fixed Charge
Coverage Ratio of the surviving Person if we are not the
continuing obligor under the indenture, shall not be less than
our Fixed Charge Coverage Ratio immediately prior to such
transaction and any related financing transactions; and
|
|
|
(e) we, or the Person formed by or surviving
any such consolidation or merger (if other than us), or to which
such sale, assignment, transfer, conveyance or other disposition
has been made, will have delivered to the trustee an
officers certificate and an opinion of counsel, each
stating that such transaction and any supplemental indenture
entered into in connection therewith complies with all of the
terms of this covenant and that all conditions precedent
provided for in this covenant relating to such transaction or
series of transactions have been complied with.
|
In addition, we may not, directly or indirectly,
lease all or substantially all of our properties or assets, in
one or more related transactions, to any other Person.
The Person formed by or surviving any
consolidation or merger (if other than us) will succeed to, and
be substituted for, and may exercise every right and power of
ours under the indenture, but, in the case of a lease of all or
substantially all our assets, we will not be released from the
obligation to pay the principal of and interest on the notes.
Designation of Restricted and Unrestricted
Subsidiaries
Our Board of Directors may designate any
Restricted Subsidiary to be an Unrestricted Subsidiary if that
designation would not cause a Default. If a Restricted
Subsidiary is designated as an Unrestricted Subsidiary, the
aggregate fair market value of all outstanding Investments owned
by us and our Restricted Subsidiaries in the Subsidiary properly
designated will be deemed to be an Investment made as of the
time of the designation and will reduce the amount available for
Restricted Payments under the first paragraph of the
Restricted Payments covenant or Permitted
Investments, as determined by us. That designation will only be
permitted if the Investment would be permitted at that time and
if the Restricted
121
Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary. Our Board of Directors may redesignate
any Unrestricted Subsidiary to be a Restricted Subsidiary if the
redesignation would not cause a Default.
Transactions with Affiliates
We will not, and will not permit any of our
Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of our or our Restricted
Subsidiaries respective properties or assets to, or
purchase any property or assets from, or enter into or make or
amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate
(each, an Affiliate Transaction), unless:
|
|
|
(1) the Affiliate Transaction is on terms
that are no less favorable to us or the relevant Restricted
Subsidiary than those that would have been obtained in a
comparable transaction by us or such Restricted Subsidiary with
a Person that is not an Affiliate; and
|
|
|
(2) we deliver to the trustee:
|
|
|
|
(a) with respect to any Affiliate
Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of
$15.0 million, a resolution of our Board of Directors set
forth in an officers certificate certifying that such
Affiliate Transaction complies with this covenant and that such
Affiliate Transaction has been approved by a majority of the
disinterested members of our Board of Directors or Parents
Board of Directors, or, if there are no disinterested members of
the approving Board of Directors at the time, a written opinion
issued by an independent appraisal firm or financial advisor of
national standing that such Affiliate Transaction is fair to us
or such Restricted Subsidiary, as the case may be, from a
financial point of view; and
|
|
|
(b) with respect to any Affiliate
Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of
$25.0 million, a written opinion issued by an independent
financial advisor of national standing that such Affiliate
Transaction is fair to us or such Restricted Subsidiary, as the
case may be, from a financial point of view.
|
The following items will not be deemed to be
Affiliate Transactions and, therefore, will not be subject to
the provisions of the prior paragraph:
|
|
|
(1) transactions between or among us and/or
our Restricted Subsidiaries;
|
|
|
(2) transactions with a Person that is an
Affiliate of ours solely because we own an Equity Interest in
such Person;
|
|
|
(3) advances to our officers or officers of
any of our Restricted Subsidiaries in the ordinary course of
business to provide for the payment of reasonable expenses
incurred by such persons in the performance of their
responsibilities to us or such Restricted Subsidiary or in
connection with any relocation;
|
|
|
(4) sales of Equity Interests (other than
Disqualified Stock) to Affiliates of ours;
|
|
|
(5) fees and compensation paid to and
indemnity provided on behalf of directors, officers or employees
of the Company or any Restricted Subsidiary of ours in the
ordinary course of business;
|
|
|
(6) any employment agreement that is in
effect on the date of the indenture and any such employment
agreement entered into by us or any of our Restricted
Subsidiaries after the date of the indenture in the ordinary
course of our business or the business of such Restricted
Subsidiary;
|
|
|
(7) any Restricted Payment that is not
prohibited by the Restricted Payments covenant;
|
|
|
(8) any sale, conveyance or other transfer
of accounts receivable and other related assets customarily
transferred in a Securitization Transaction;
|
122
|
|
|
(9) payment of premiums to and the receipt
of proceeds of insurance from, Laurier Indemnity Company and
Laurier Indemnity Company, Ltd.;
|
|
|
(10) payments to or receipts from
Extendicare Holdings, Inc. pursuant to any tax sharing agreement
entered into for the purpose of preparing a consolidated tax
return of Extendicare Holdings, Inc.;
|
|
|
(11) payments to or receipts from Virtual
Care Provider, Inc. in connection with the provision of
technology services to third parties pursuant to the terms of
management, consulting or other similar agreements; and
|
|
|
(12) transactions pursuant to the services
agreement between us and Virtual Care Provider, Inc. relating to
certain services provided by us and Virtual Care Provider, Inc.
to each other as in effect on the date the notes are first
issued.
|
Additional Subsidiary Guarantees
If we or any of our Restricted Subsidiaries
acquires or creates another domestic Significant Subsidiary or
any other Domestic Subsidiary that guarantees or incurs any
Indebtedness or any other Significant Subsidiary or Restricted
Subsidiary that guarantees or otherwise provides direct credit
support for Indebtedness of ours or any of our Domestic
Subsidiaries after the date of the indenture, then that newly
acquired or created Significant Subsidiary, Domestic Subsidiary
or other Restricted Subsidiary will execute and deliver to the
trustee a supplemental indenture providing for a Subsidiary
Guarantee and deliver an opinion of counsel satisfactory to the
trustee within 10 business days of the date on which it was
acquired or created; provided, however, that the foregoing will
not apply to Subsidiaries that have properly been designated as
Unrestricted Subsidiaries in accordance with the indenture for
so long as they continue to constitute Unrestricted Subsidiaries.
Business Activities
We will not, and will not permit any Restricted
Subsidiary to, engage in any business other than Permitted
Businesses, except to such extent as would not be material to us
and our Subsidiaries taken as a whole.
Reports
Whether or not required by the SEC, so long as
any notes are outstanding, we will furnish to the trustee and
Holders of notes, within the time periods specified in the
SECs rules and regulations:
|
|
|
(1) all quarterly and annual financial
information that would be required to be contained in a filing
with the SEC on Forms 10-Q and 10-K if we were required to file
such Forms, including a Managements Discussion and
Analysis of Financial Condition and Results of Operations
and, with respect to the annual information only, a report on
the annual financial statements by our certified independent
accountants; and
|
|
|
(2) all current reports that would be
required to be filed with the SEC on Form 8-K if we were
required to file such reports.
|
If we have designated any of our Subsidiaries as
Unrestricted Subsidiaries, then the quarterly and annual
financial information required by the preceding paragraph will
include a reasonably detailed presentation, either on the face
of the financial statements or in the footnotes thereto, and in
Managements Discussion and Analysis of Financial
Condition and Results of Operations, of the financial
condition and results of operations of us and our Restricted
Subsidiaries separate from the financial condition and results
of operations of our Unrestricted Subsidiaries.
In addition, following the consummation of the
exchange Offer contemplated by the registration rights
agreement, whether or not required by the SEC, we will file a
copy of all of the information and reports referred to in
clauses (1) and (2) above with the SEC for public
availability within the time periods
123
specified in the SECs rules and regulations
(unless the SEC will not accept such a filing) and make such
information available to securities analysts and prospective
investors upon request. In addition, we and the Subsidiary
Guarantors have agreed that, for so long as any notes remain
outstanding, we will furnish to the Holders and to securities
analysts and prospective investors, upon their request, the
information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act.
We will be deemed to have furnished such reports
to the trustee and Holders of notes if we have filed such
reports with the SEC via the EDGAR filing system and such
reports are publicly available.
Events of Default and Remedies
Each of the following is an Event of
Default:
|
|
|
(1) default for 30 days in the payment
when due of interest on, or Liquidated Damages, if any, with
respect to, the notes (whether or not prohibited by the
subordination provisions of the indenture);
|
|
|
(2) default in payment when due of the
principal of or premium, if any, on the notes (whether or not
prohibited by the subordination provisions of the indenture);
|
|
|
(3) failure by us or any of our Restricted
Subsidiaries to comply with the Restricted Payments,
Incurrence of Indebtedness and Issuance of Preferred
Stock or Merger, Consolidation or Sale of
Assets covenants;
|
|
|
(4) failure by us or any of our Restricted
Subsidiaries for 30 days after notice to comply with the
provisions described under the headings Repurchase at the
Option of Holders Asset Sales and
Repurchase at the Option of Holders Change of
Control;
|
|
|
(5) failure by us or any of our Restricted
Subsidiaries for 60 days after notice to comply with any
other covenant or agreement in the indenture or the notes;
|
|
|
(6) default under any mortgage, indenture or
instrument under which there may be issued or by which there may
be secured or evidenced any Indebtedness for money borrowed by
us or any of our Restricted Subsidiaries (or the payment of
which is guaranteed by us or any of our Restricted Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created
after the date of the indenture, if that default:
|
|
|
|
(a) is caused by a failure to pay principal
of, or interest or premium, if any, on such Indebtedness prior
to the expiration of the grace period provided in such
Indebtedness on the date of such default (a Payment
Default); or
|
|
|
(b) results in the acceleration of such
Indebtedness prior to its express maturity,
|
and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any
other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated,
aggregates $20.0 million or more;
|
|
|
(7) failure by us or any of our Restricted
Subsidiaries to pay final judgments (to the extent not fully
covered by insurance) aggregating in excess of
$20.0 million, which judgments are not paid, discharged or
stayed for a period of 60 consecutive days;
|
|
|
(8) except as permitted by the indenture,
any Subsidiary Guarantee is held in any judicial proceeding to
be unenforceable or invalid or ceases for any reason to be in
full force and effect or any Subsidiary Guarantor, or any Person
acting on behalf of any Subsidiary Guarantor, denies or
disaffirms its obligations under its Subsidiary
Guarantee; and
|
|
|
(9) certain events of bankruptcy or
insolvency described in the indenture with respect to us or any
of our Significant Subsidiaries.
|
124
In the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to us,
any Subsidiary that is a Significant Subsidiary or any group of
Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding notes will become due
and payable immediately without further action or notice. If any
other Event of Default occurs and is continuing, the trustee or
the Holders of at least 25% in principal amount of the then
outstanding notes may declare all the notes to be due and
payable immediately.
Holders of the notes may not enforce the
indenture or the notes except as provided in the indenture.
Subject to certain limitations, Holders of a majority in
principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power. The trustee may
withhold from Holders of the notes notice of any continuing
Default or Event of Default if it determines that withholding
notes is in their interest, except a Default or Event of Default
relating to the payment of principal or interest or Liquidated
Damages, if any.
The Holders of a majority in aggregate principal
amount of the notes then outstanding by notice to the trustee
may on behalf of the Holders of all of the notes waive any
existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in
the payment of interest or Liquidated Damages, if any, on, or
the principal of, the notes.
In the case of any Event of Default occurring by
reason of any willful action or inaction taken or not taken by
us or on our behalf with the intention of avoiding payment of
the premium that we would have had to pay if we then had elected
to redeem the notes pursuant to the optional redemption
provisions of the indenture, an equivalent premium will also
become and be immediately due and payable to the extent
permitted by law upon the acceleration of the notes. If an Event
of Default occurs prior to May 1, 2009 by reason of any
willful action (or inaction) taken (or not taken) by us or on
our behalf with the intention of avoiding the prohibition on
redemption of the notes prior to May 1, 2009, then the
premium specified in the indenture will also become immediately
due and payable to the extent permitted by law upon the
acceleration of the notes.
We are required to deliver to the trustee
annually a statement regarding compliance with the indenture.
Upon becoming aware of any Default or Event of Default, we are
required to deliver to the trustee a statement specifying such
Default or Event of Default.
No Personal Liability of Directors, Officers,
Employees and Stockholders
No director, Officer, employee, incorporator or
stockholder of ours or of any Subsidiary Guarantor, as such,
will have any liability for any obligations of ours or of the
Subsidiary Guarantors under the notes, the indenture, the
Subsidiary Guarantees, or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each Holder
of notes by accepting a note waives and releases all such
liability. The waiver and release are part of the consideration
for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
Legal Defeasance and Covenant
Defeasance
We may, at our option and at any time, elect to
have all of our obligations discharged with respect to the
outstanding notes and all obligations of the Subsidiary
Guarantors discharged with respect to their Subsidiary
Guarantees (Legal Defeasance) except for:
|
|
|
(1) the rights of Holders of outstanding
notes to receive payments in respect of the principal of, or
interest or premium and Liquidated Damages, if any, on such
notes when such payments are due from the trust referred to
below;
|
|
|
(2) our obligations with respect to the
notes concerning issuing temporary notes, registration of notes,
mutilated, destroyed, lost or stolen notes and the maintenance
of an office or agency for payment and money for security
payments held in trust;
|
125
|
|
|
(3) the rights, powers, trusts, duties and
immunities of the trustee, and our and the Subsidiary
Guarantors obligations in connection therewith; and
|
|
|
(4) the Legal Defeasance provisions of the
indenture.
|
In addition, we may, at our option and at any
time, elect to have our obligations and the obligations of the
Subsidiary Guarantors released with respect to certain covenants
that are described in the indenture (Covenant
Defeasance) and thereafter any omission to comply with
those covenants will not constitute a Default or Event of
Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events)
described under Events of Default and
Remedies will no longer constitute an Event of Default
with respect to the notes.
In order to exercise either Legal Defeasance or
Covenant Defeasance:
|
|
|
(1) we must irrevocably deposit with the
trustee, in trust, for the benefit of the Holders of the notes,
cash in U.S. dollars, non-callable Government Securities,
or a combination of cash in U.S. dollars and non-callable
Government Securities, in amounts as will be sufficient, in the
opinion of a nationally recognized Firm of independent public
accountants, to pay the principal of, or interest and premium
and Liquidated Damages, if any, on the outstanding notes on the
Stated Maturity or on the applicable redemption date, as the
case may be, and we must specify whether the notes are being
defeased to maturity or to a particular redemption date;
|
|
|
(2) in the case of Legal Defeasance, we must
deliver to the trustee an opinion of counsel reasonably
acceptable to the trustee confirming that (a) we have
received from, or there has been published by, the Internal
Revenue Service a ruling or (b) since the date of the
indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based
thereon such opinion of counsel will confirm that, the Holders
of the outstanding notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred;
|
|
|
(3) in the case of Covenant Defeasance, we
must deliver to the trustee an opinion of counsel reasonably
acceptable to the trustee confirming that the Holders of the
outstanding notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
|
|
|
(4) no Default or Event of Default has
occurred and is continuing on the date of such deposit (other
than a Default or Event of Default resulting from the borrowing
of funds to be applied to such deposit);
|
|
|
(5) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or
constitute a default under, any material agreement or instrument
(excluding the indenture) to which we or any of our Subsidiaries
is a party or by which we or any of our Subsidiaries is bound;
|
|
|
(6) we must deliver to the trustee an
officers certificate stating that the deposit was not made
by us with the intent of preferring the Holders of notes over
our other creditors with the intent of defeating, hindering,
delaying or defrauding our creditors or others; and
|
|
|
(7) we must deliver to the trustee an
officers certificate and an opinion of counsel, each
stating that all conditions precedent relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
|
Amendment, Supplement and Waiver
Except as provided in the next two succeeding
paragraphs, the indenture or the notes may be amended or
supplemented with the consent of the Holders of at least a
majority in principal amount of the
126
notes, including Additional Notes, if any, then
outstanding voting as a single class (including, without
limitation, consents obtained in connection with a purchase of,
or tender Offer or exchange Offer for notes), and any existing
Default or Event of Default except a continuing Default or Event
of Default in the payment of interest or Liquidated Damages, if
any, on, or the principal of, the notes or compliance with any
provision of the indenture or the notes may be waived with the
consent of the Holders of a majority in principal amount of the
notes, including Additional Notes, if any, then outstanding
voting as a single class (including, without limitation,
consents obtained in connection with a purchase of, or tender
Offer or exchange Offer for notes).
Without the consent of each Holder affected, an
amendment or waiver may not (with respect to any notes held by a
non-consenting Holder):
|
|
|
(1) reduce the principal amount of notes
whose Holders must consent to an amendment, supplement or waiver;
|
|
|
(2) reduce the principal of or change the
fixed maturity of any note or alter the provisions with respect
to the redemption of the notes;
|
|
|
(3) make any change in the provisions of the
indenture described above under the heading
Repurchase at the Option of Holders;
|
|
|
(4) reduce the rate of or change the time
for payment of interest on any note;
|
|
|
(5) waive a Default or Event of Default in
the payment of principal of, or interest or premium, or
Liquidated Damages, if any, on the notes (except a rescission of
acceleration of the notes by the Holders of at least a majority
in aggregate principal amount of the notes and a waiver of the
payment default that resulted from such acceleration);
|
|
|
(6) make any note payable in money other
than that stated in the notes;
|
|
|
(7) make any change in the provisions of the
indenture relating to waivers of past Defaults or the rights of
Holders of notes to receive payments of principal of, or
interest or premium or Liquidated Damages, if any, on the notes;
|
|
|
(8) waive a redemption payment with respect
to any note;
|
|
|
(9) release any Subsidiary Guarantor from
any of its obligations under its Subsidiary Guarantee or the
indenture, except in accordance with the terms of the indenture;
|
|
|
(10) make any change to the subordination
provisions of the indenture (including applicable definitions)
that would adversely affect the Holders of the notes; or
|
|
|
(11) make any change in the preceding
amendment and waiver provisions.
|
Notwithstanding the preceding, without the
consent of any Holder of notes, we, the Subsidiary Guarantors
and the trustee may amend or supplement the indenture or the
notes:
|
|
|
(1) to cure any ambiguity, defect or
inconsistency;
|
|
|
(2) to provide for uncertificated notes in
addition to or in place of certificated notes;
|
|
|
(3) to provide for the assumption by a
successor corporation of our obligations under the indenture in
the case of a merger or consolidation or sale of all or
substantially all of our assets;
|
|
|
(4) to make any change that would provide
any additional rights or benefits to the Holders of notes or
that does not adversely affect the legal rights under the
indenture of any such Holder; or
|
|
|
(5) to make any change to comply with any
requirement of the SEC in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act.
|
127
The Credit Agreement restricts our ability to
modify or amend the terms of the notes, except for amendments
that would extend the dates for payment or reduce the amount of
principal or rate of interest on the notes.
Satisfaction and Discharge
The indenture will be discharged and will cease
to be of further effect as to all notes issued thereunder, when:
|
|
|
(a) all notes that have been authenticated,
except lost, stolen or destroyed notes that have been replaced
or paid and notes for whose payment money has been deposited in
trust and thereafter repaid to us, have been delivered to the
trustee for cancellation; or
|
|
|
(b) all notes that have not been delivered
to the trustee for cancellation have become due and payable by
reason of the mailing of a notice of redemption or otherwise or
will become due and payable within one year, and we have
irrevocably deposited or caused to be deposited with the trustee
as trust funds in trust solely for the benefit of the Holders,
cash in U.S. dollars, noncallable Government Securities, or
a combination of cash in U.S. dollars and non-callable
Government Securities, in such amounts as will be sufficient
without consideration of any reinvestment of interest, to pay
and discharge the entire indebtedness on the notes not delivered
to the trustee for cancellation for principal, premium and
Liquidated Damages, if any, and accrued interest to the date of
maturity or redemption;
|
|
|
|
(2) no Default or Event of Default has
occurred and is continuing on the date of the deposit or will
occur as a result of the deposit and the deposit will not result
in a breach or violation of, or constitute a default under, any
other instrument to which we or any Subsidiary Guarantor is a
party or by which we or any Subsidiary Guarantor is bound;
|
|
|
(3) we have paid or caused to be paid all
sums payable by us under the indenture; and
|
|
|
(4) we have delivered irrevocable
instructions to the trustee under the indenture to apply the
deposited money and/or proceeds from non-callable Government
Securities toward the payment of the notes at maturity or the
redemption date, as the case may be.
|
In addition, we must deliver an officers
certificate and an opinion of counsel to the trustee stating
that all conditions precedent to satisfaction and discharge have
been satisfied.
Concerning the Trustee
If the trustee becomes a creditor of ours or of
any Subsidiary Guarantor, the indenture limits its right to
obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as
security or otherwise. The trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting
interest, it must (i) eliminate such conflict within
90 days, (ii) apply to the SEC for permission to
continue or (iii) resign.
The Holders of a majority in principal amount of
the then outstanding notes will have the right to direct the
time, method and place of conducting any proceeding for
exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event
of Default occurs and is continuing, the trustee will be
required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the
request of any Holder of notes, unless such Holder has Offered
to the trustee security and indemnity satisfactory to it against
any loss, liability or expense.
128
Additional Information
Anyone who receives this prospectus may obtain a
copy of the indenture without charge by writing to us at the
address set forth in the Prospectus Summary section
of this prospectus.
Book-Entry, Delivery and Form
The new notes will be issued in fully registered
book entry form, and will be represented by one or more global
notes in minimum denominations of $1,000 and integral multiples
of $1,000 in excess of $1,000. All Holders of new notes who
exchanged their old notes in the exchange offer will hold their
interests through the global notes regardless of whether they
purchased their interests pursuant to Rule 144A under the
Securities Act or Regulation S.
The global notes will be deposited upon issuance
with the trustee as custodian for The Depository Trust Company
(DTC), in New York, New York, and registered
in the name of Cede & Co., as nominee of DTC (such
nominee being referred to herein as the Global
Note Holder), in each case for credit to an
account of a direct or indirect participant in DTC as described
below.
Except as set forth below, the global notes may
be transferred, in whole and not in part, only to another
nominee of DTC or to a successor of DTC or its nominee.
Beneficial interests in the global notes may not be exchanged
for notes in certificated form except in the limited
circumstances described below. See Exchange of
Global Notes for Certificated Notes. Except in the limited
circumstances described below, owners of beneficial interests in
the global notes will not be entitled to receive physical
delivery of notes in certificated form.
Transfers of beneficial interests in the global
notes will be subject to the applicable rules and procedures of
DTC and its direct or indirect participants (including, if
applicable, those of the Euroclear System
(Euroclear) and Clearstream Banking S.A.
(Clearstream) through which Holders of the
old notes issued pursuant to Regulation S initially held
such notes), which may change from time to time.
Depository Procedures
The following description of the operations and
procedures of DTC, Euroclear and Clearstream are provided solely
as a matter of convenience. These operations and procedures are
solely within the control of the respective settlement systems
and are subject to changes by them. We take no responsibility
for these operations and procedures and urge investors to
contact the system or their participants directly to discuss
these matters.
DTC has advised us that DTC is a limited-purpose
trust company created to hold securities for its participating
organizations (collectively, the Participants) and
to facilitate the clearance and settlement of transactions in
those securities between Participants through electronic
book-entry changes in accounts of its Participants. The
Participants include securities brokers and dealers (including
the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to
DTCs system is also available to other entities such as
banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either
directly or indirectly (collectively, the Indirect
Participants). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The
ownership interests in, and transfers of ownership interests in,
each security held by or on behalf of DTC are recorded on the
records of the Participants and Indirect Participants.
DTC has also advised us that, pursuant to
procedures established by it:
|
|
|
(1) upon deposit of the Global Notes, DTC
will credit the accounts of Participants designated by the
initial purchasers with portions of the principal amount of the
Global Notes; and
|
|
|
(2) ownership of these interests in the
Global Notes will be shown on, and the transfer of ownership of
these interests will be effected only through, records
maintained by DTC (with respect
|
129
|
|
|
to the Participants) or by the Participants and
the Indirect Participants (with respect to other owners of
beneficial interest in the Global Notes).
|
Investors in the Rule 144A Global Notes who
are Participants in DTCs system may hold their interests
therein directly through DTC. Investors in the Rule 144A
Global Notes who are not Participants may hold their interests
therein indirectly through organizations (including Euroclear
and Clearstream) which are Participants in such system.
Investors in the Regulation S Global Notes must initially
hold their interests therein through Euroclear or Clearstream,
if they are participants in such systems, or indirectly through
organizations that are participants in such systems. After the
expiration of the Restricted Period (but not earlier), investors
may also hold interests in the Regulation S Global Notes
through Participants in the DTC system other than Euroclear and
Clearstream. Euroclear and Clearstream will hold interests in
the Regulation S Global Notes on behalf of their
participants through customers securities accounts in
their respective names on the books of their respective
depositories, which are Morgan Guaranty Trust Company of New
York, Brussels Office, as operator of Euroclear, and Citibank,
N.A., as operator of Clearstream. All interests in a Global
Note, including those held through Euroclear or Clearstream, may
be subject to the procedures and requirements of DTC. Those
interests held through Euroclear or Clearstream may also be
subject to the procedures and requirements of such systems. The
laws of some states require that certain Persons take physical
delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a
Global Note to such Persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants, the ability of a
Person having beneficial interests in a Global Note to pledge
such interests to Persons that do not participate in the DTC
system, or otherwise take actions in respect of such interests,
may be affected by the lack of a physical certificate evidencing
such interests.
Except as described below, owners of interest in
the Global Notes will not have notes registered in their names,
will not receive physical delivery of notes in certificated form
and will not be considered the registered owners or
Holders thereof under the indenture for any purpose.
Payments in respect of the principal of, and
interest and premium and Liquidated Damages, if any, on a Global
Note registered in the name of DTC or its nominee will be
payable to DTC in its capacity as the registered Holder under
the indenture. Under the terms of the indenture, we and the
trustee will treat the Persons in whose names the notes,
including the Global Notes, are registered as the owners of the
notes for the purpose of receiving payments and for all other
purposes. Consequently, neither we, the trustee nor any agent of
ours or the trustee has or will have any responsibility or
liability for:
|
|
|
(1) any aspect of DTCs records or any
Participants or Indirect Participants records
relating to or payments made on account of beneficial ownership
interest in the Global Notes or for maintaining, supervising or
reviewing any of DTCs records or any Participants or
Indirect Participants records relating to the beneficial
ownership interests in the Global Notes; or
|
|
|
(2) any other matter relating to the actions
and practices of DTC or any of its Participants or Indirect
Participants.
|
DTC has advised us that its current practice,
upon receipt of any payment in respect of securities such as the
notes (including principal and interest), is to credit the
accounts of the relevant Participants with the payment on the
payment date unless DTC has reason to believe it will not
receive payment on such payment date. Each relevant Participant
is credited with an amount proportionate to its beneficial
ownership of an interest in the principal amount of the relevant
security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial
owners of notes will be governed by standing instructions and
customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the
responsibility of DTC, the trustee or us. Neither we nor the
trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the notes,
and we and the trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for
all purposes.
130
Subject to the transfer restrictions set forth
under Notice to Investors, transfers between
Participants in DTC will be effected in accordance with
DTCs procedures, and will be settled in same-day funds,
and transfers between participants in Euroclear and Clearstream
will be effected in accordance with their respective rules and
operating procedures.
Subject to compliance with the transfer
restrictions applicable to the notes described herein,
crossmarket transfers between the Participants in DTC, on the
one hand, and Euroclear or Clearstream participants, on the
other hand, will be effected through DTC in accordance with
DTCs rules on behalf of Euroclear or Clearstream, as the
case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions
to Euroclear or Clearstream, as the case may be, by the
counterparty in such system in accordance with the rules and
procedures and within the established deadlines (Brussels time)
of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements,
deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or
receiving interests in the relevant Global Note in DTC, and
making or receiving payment in accordance with normal procedures
for same-day funds settlement applicable to DTC. Euroclear
participants and Clearstream participants may not deliver
instructions directly to the depositories for Euroclear or
Clearstream.
DTC has advised us that it will take any action
permitted to be taken by a Holder of notes only at the direction
of one or more Participants to whose account DTC has
credited the interests in the Global Notes and only in respect
of such portion of the aggregate principal amount of the notes
as to which such Participant or Participants has or have given
such direction. However, if there is an Event of Default under
the notes, DTC reserves the right to exchange the Global Notes
for legended notes in certificated form, and to distribute such
notes to its Participants.
Although DTC, Euroclear and Clearstream have
agreed to the foregoing to facilitate transfers of interests in
the Rule 144A Global Notes and the Regulation S Global
Notes among participants in DTC, Euroclear and Clearstream, they
are under no obligation to perform or to continue to perform
such procedures, and may discontinue such procedures at any
time. Neither we nor the trustee nor any of their respective
agents will have any responsibility for the performance by DTC,
Euroclear or Clearstream or their respective participants or
indirect participants of their respective obligations under the
rules and procedures governing their operations.
Exchange of Global Notes for Certificated
Notes
A Global Note is exchangeable for definitive
notes in registered certificated form (Certificated
Notes) if:
|
|
|
(1) DTC (a) notifies us that it is
unwilling or unable to continue as depositary for the Global
Notes and we fail to appoint a successor depositary or
(b) has ceased to be a clearing agency registered under the
Exchange Act; or
|
|
|
(2) there has occurred and is continuing a
Default or Event of Default with respect to the notes.
|
In addition, beneficial interests in a Global
Note may be exchanged for Certificated Notes upon prior written
notice given to the trustee by or on behalf of DTC in accordance
with the indenture. In all cases, Certificated Notes delivered
in exchange for any Global Note or beneficial interests in
Global Notes will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures) and
will bear the applicable restrictive legend referred to in
Notice to Investors, unless that legend is not
required by applicable law.
Exchange of Certificated Notes for Global
Notes
Certificated Notes may not be exchanged for
beneficial interests in any Global Note unless the transferor
first delivers to the trustee a written certificate (in the form
provided in the indenture) to the effect that such transfer will
comply with the appropriate transfer restrictions applicable to
such notes. See Notice to Investors.
131
Exchanges Between Regulation S Notes and
Rule 144A Notes
Prior to the expiration of the Restricted Period,
beneficial interests in the Regulation S Global Note may be
exchanged for beneficial interests in the Rule 144A Global
Note only if:
|
|
|
(1) such exchange occurs in connection with
a transfer of the notes pursuant to Rule 144A; and
|
|
|
(2) the transferor first delivers to the
trustee a written certificate (in the form provided in the
indenture) to the effect that the notes are being transferred to
a Person:
|
|
|
|
(a) who the transferor reasonably believes
to be a qualified institutional buyer within the meaning of
Rule 144A;
|
|
|
(b) purchasing for its own account or the
account of a qualified institutional buyer in a transaction
meeting the requirements of Rule 144A; and
|
|
|
(c) in accordance with all applicable
securities laws of the states of the United States and other
jurisdictions.
|
Beneficial interest in a Rule 144A Global
Note may be transferred to a Person who takes delivery in the
form of an interest in the Regulation S Global Note,
whether before or after the expiration of the Restricted Period,
only if the transferor first delivers to the trustee a written
certificate (in the form provided in the indenture) to the
effect that such transfer is being made in accordance with
Rule 903 or 904 of Regulation S or Rule 144 (if
available) and that, if such transfer occurs prior to the
expiration of the Restricted Period, the interest transferred
will be held immediately thereafter through Euroclear or
Clearstream.
Transfers involving exchanges of beneficial
interests between the Regulation S Global Notes and the
Rule 144A Global Notes will be effected in DTC by means of
an instruction originated by the trustee through the DTC
Deposit/ Withdrawal at Custodian System. Accordingly, in
connection with any such transfer, appropriate adjustments will
be made to reflect a decrease in the principal amount of the
Regulation S Global Note and a corresponding increase in
the principal amount of the Rule 144A Global Note or vice
versa, as applicable. Any beneficial interest in one of the
Global Notes that is transferred to a Person who takes delivery
in the form of an interest in the other Global Note will, upon
transfer, cease to be an interest in such Global Note and will
become an interest in the other Global Note and, accordingly,
will thereafter be subject to all transfer restrictions and
other procedures applicable to beneficial interest in such other
Global Note for so long as it remains such an interest. The
policies and practices of DTC may prohibit transfers of
beneficial interests in the Regulation S Global Note prior
to the expiration of the Restricted Period.
Same Day Settlement and Payment
We will make payments in respect of the notes
represented by the Global Notes (including principal, premium,
if any, interest and Liquidated Damages, if any) by wire
transfer of immediately available funds to the accounts
specified by the Global Note Holder. We will make all
payments of principal, interest and premium and Liquidated
Damages, if any, with respect to Certificated Notes by wire
transfer of immediately available funds to the accounts
specified by the Holders of Certificated Notes or, if no such
account is specified, by mailing a check to each such
Holders registered address. The notes represented by the
Global Notes are expected to be eligible to trade in the PORTAL
MarketSM and to trade in DTCs Same-Day Funds
Settlement System, and any permitted secondary market trading
activity in such notes will, therefore, be required by DTC to be
settled in immediately available funds. We expect that secondary
trading in any Certificated Notes will also be settled in
immediately available funds.
Certain Definitions
Set forth below are certain defined terms used in
the indenture. Reference is made to the indenture for a full
disclosure of all such terms, as well as any other capitalized
terms used herein for which no definition is provided.
132
Acquired
Debt means, with respect to any
specified Person:
|
|
|
(1) Indebtedness of any other Person
existing at the time such other Person is merged with or into or
became a Subsidiary of such specified Person, whether or not
such Indebtedness is incurred in connection with, or in
contemplation of, such other Person merging with or into, or
becoming a Subsidiary of, such specified Person; and
|
|
|
(2) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
|
Affiliate
of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For purposes
of this definition, control, as used with respect to
any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting
securities, by agreement or otherwise; provided that beneficial
ownership of 10% or more of the Voting Stock of a Person will be
deemed to be control. For purposes of this definition, the terms
controlling, controlled by and
under common control with have correlative meanings.
Asset
Sale means the sale, lease,
conveyance or other disposition of any assets or rights
(including, without limitation, (x) a sale and leaseback,
(y) the issuance, sale or other transfer of any Equity
Interests in any of our Unrestricted Subsidiaries, and
(z) the receipt of proceeds of insurance paid on account of
the loss of or damage to any asset and awards of compensation
for any asset taken by condemnation, eminent domain or similar
proceeding, and including the receipt of proceeds of business
interruption insurance) in each case, in one or a series of
related transactions that have a fair market value in excess of
$2.0 million or for Net Proceeds in excess of
$2.0 million; provided that the sale, conveyance or other
disposition of all or substantially all of the assets of us and
our Restricted Subsidiaries taken as a whole will be governed by
the provisions of the indenture described above under
Repurchase at the Option of
Holders Change of Control and/or the
provisions described above under Merger,
Consolidation or Sale of Assets and not by the provisions
of the Asset Sales covenant.
Notwithstanding the preceding, the following
items will not be deemed to be Asset Sales:
|
|
|
(1) the sale, lease or other disposition of
equipment, inventory, accounts receivable or other assets or
rights in the ordinary course of business;
|
|
|
(2) a transfer of assets or rights by us to
a Subsidiary Guarantor or by a Subsidiary Guarantor of ours to
us or to another Subsidiary Guarantor of ours;
|
|
|
(3) an issuance of Equity Interests by a
Subsidiary Guarantor to us or to another Subsidiary Guarantor of
ours;
|
|
|
(4) a Restricted Payment or Permitted
Investment that is permitted by the Restricted
Payments covenant;
|
|
|
(5) the sale of property or equipment that
has become worn out, obsolete or damaged;
|
|
|
(6) the sale or other disposition of Cash
Equivalents;
|
|
|
(7) the sale of accounts receivable pursuant
to a Securitization Transaction; or
|
|
|
(8) the designation of any Restricted
Subsidiary as an Unrestricted Subsidiary or the contribution to
the capital of any Unrestricted Subsidiary in accordance with
the provisions described under Designation of Restricted
and Unrestricted Subsidiaries.
|
Attributable
Debt in respect of a sale and
leaseback transaction means, at the time of determination, the
greater of (a) the fair value of the property subject to
such arrangement (as determined in good faith by our Board of
Directors) or (b) the present value (discounted at the
interest rate borne by the notes, compounded annually) of the
total obligations of the lessee for rental payments during the
remaining term of the lease included in such sale and leaseback
transaction, including any period for which such lease has been
extended or may, at the option of the lessor, be extended.
133
Board of
Directors means:
|
|
|
(1) with respect to a corporation, the board
of directors of the corporation;
|
|
|
(2) with respect to a partnership, the board
of directors of the general partner of the partnership; and
|
|
|
(3) with respect to any other Person, the
board or committee of such Person serving a similar function.
|
Capital Lease
Obligation means, at the time
any determination is to be made, the amount of the liability in
respect of a capital lease that would at that time be required
to be capitalized on a balance sheet in accordance with GAAP.
Capital
Stock means:
|
|
|
(1) in the case of a corporation, any and
all shares, including common stock and preferred stock;
|
|
|
(2) in the case of an association or
business entity, any and all shares, interests, participations,
rights or other equivalents (however designated) of corporate
stock;
|
|
|
(3) in the case of a partnership or limited
liability company, partnership or membership interests (whether
general or limited); and
|
|
|
(4) any other interest or participation that
confers on a Person the right to receive a share of the profits
and losses of, or distributions of assets of, the issuing Person.
|
Cash
Equivalents means:
|
|
|
(1) United States dollars;
|
|
|
(2) securities issued or directly and fully
guaranteed or insured by the United States government or any
agency or instrumentality of the United States government
(provided that the full faith and credit of the United States is
pledged in support of those securities) having maturities of not
more than six months from the date of acquisition;
|
|
|
(3) certificates of deposit and eurodollar
time deposits with maturities of six months or less from the
date of acquisition, bankers acceptances with maturities
not exceeding six months and overnight bank deposits, in each
case, with any lender party to the Credit Agreement or with any
domestic commercial bank having capital and surplus in excess of
$500.0 million and a Thomson Bank Watch Rating of
B or better;
|
|
|
(4) repurchase obligations with a term of
not more than seven days for underlying securities of the types
described in clauses (2) and (3) above entered into
with any financial institution meeting the qualifications
specified in clause (3) above;
|
|
|
(5) commercial paper having the highest
rating obtainable from Moodys Investors Service, Inc. or
Standard & Poors Rating Services and in each case
maturing within six months after the date of acquisition; and
|
|
|
(6) money market funds at least 95% of the
assets of which constitute Cash Equivalents of the kinds
described in clauses (1) through (5) of this
definition.
|
Change of
Control means the occurrence of
any of the following:
|
|
|
(1) any sale, lease, exchange or other
transfer (in one transaction or a series of related
transactions) of all or substantially all of our assets to any
Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a Group),
together with any Affiliates thereof (whether or not otherwise
in compliance with the provisions of the indenture);
|
|
|
(2) the approval by the holders of our
Capital Stock of any plan or proposal for the liquidation or
dissolution of us (whether or not otherwise in compliance with
the provisions of the indenture);
|
134
|
|
|
(3) any Person or Group (other than Parent
or any direct or indirect wholly owned Subsidiary of Parent)
becomes the owner, directly or indirectly, beneficially or of
record, of shares representing more than 35% of the aggregate
ordinary voting power represented by our issued and outstanding
Capital Stock on a fully-diluted basis;
|
|
|
(4) the replacement of a majority of
Parents or our Board of Directors over a two-year period
from the directors who constituted Parents or our Board of
Directors, as applicable, at the beginning of such period, and
such replacement shall not have been approved by a vote of at
least a majority of Parents or our Board of Directors, as
applicable, then still in Office who either were members of such
Board of Directors at the beginning of such period or whose
election as a member of such Board of Directors was previously
so approved; or
|
|
|
(5) we consolidate with, or merge with or
into, any Person, or any Person consolidates with, or merges
with or into, us, in any such event pursuant to a transaction in
which any of our outstanding Voting Stock or the outstanding
Voting Stock of such other Person is converted into or exchanged
for cash, securities or other property, other than any such
transaction where our Voting Stock outstanding immediately prior
to such transaction is converted into or exchanged for Voting
Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee
Person (immediately after giving effect to such issuance).
|
Consolidated Cash
Flow means, with respect to any
specified Person for any period, the Consolidated Net Income of
such Person for such period plus:
|
|
|
(1) an amount equal to any extraordinary
loss plus any net loss realized by such Person or any of its
Subsidiaries in connection with an Asset Sale, to the extent
such losses were deducted in computing such Consolidated Net
Income; plus
|
|
|
(2) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such
period, to the extent that such provision for taxes was deducted
in computing such Consolidated Net Income; plus
|
|
|
(3) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether
paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers acceptance
financings, and net of the effect of all payments made or
received pursuant to Hedging Obligations), to the extent that
any such expense was deducted in computing such Consolidated Net
Income; plus
|
|
|
(4) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior
period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period) of such Person
and its Restricted Subsidiaries for such period to the extent
that such depreciation, amortization and other non-cash expenses
were deducted in computing such Consolidated Net Income; minus
|
|
|
(5) non-cash items increasing such
Consolidated Net Income for such period, other than the accrual
of revenue in the ordinary course of business,
|
in each case, on a consolidated basis and
determined in accordance with GAAP.
135
Consolidated Net
Income means, with respect to
any specified Person for any period, the aggregate of the Net
Income of such Person and its Restricted Subsidiaries for such
period, on a consolidated basis, determined in accordance with
GAAP; provided that:
|
|
|
(1) the Net Income (but not loss) of any
Person that is not a Restricted Subsidiary or that is accounted
for by the equity method of accounting will be included only to
the extent of the amount of dividends or distributions paid in
cash to the specified Person or a Restricted Subsidiary of the
Person;
|
|
|
(2) the Net Income of any Restricted
Subsidiary will be excluded to the extent that the declaration
or payment of dividends or similar distributions by that
Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary
or its stockholders; and
|
|
|
(3) the cumulative effect of a change in
accounting principles will be excluded.
|
In addition, notwithstanding the foregoing, for
the purposes of the covenant described under
Certain Covenants Restricted
Payments only, there shall be excluded from Consolidated
Net Income any nonrecurring charges relating to any premium or
penalty paid, write off or deferred finance costs or other
charges in connection with redeeming or retiring any
Indebtedness at or prior to its Stated Maturity.
Consolidated Tangible
Assets means the total assets,
less goodwill and other intangibles, shown on our most recent
consolidated balance sheet, determined on a consolidated basis
in accordance with GAAP less all write-ups (other than write-ups
in connection with acquisitions) subsequent to the date of the
indenture in the book value of any asset (except any such
intangible assets) owned by us or any of our Restricted
Subsidiaries.
Credit
Agreement means that certain
Second Amended and Restated Credit Agreement, dated as of the
date of the indenture, by and among us, the Subsidiary
Guarantors, Lehman Commercial Paper Inc., as administrative
agent, and the lenders party thereto, including any related
notes, guarantees, security and collateral documents,
instruments and agreements executed in connection therewith.
Credit
Facilities means one or more
debt facilities or agreements (including, without limitation,
the Credit Agreement) or commercial paper facilities, in each
case with banks or other lenders providing for revolving credit
loans, term loans, notes, receivables Financing (including
through the sale of receivables to such lenders or to special
purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced, restructured,
restated or refinanced (including any agreement to extend the
maturity thereof and adding additional borrowers or guarantors)
in whole or in part from time to time under the same or any
other agent, lender or group of lenders and including increasing
the amount of available borrowings thereunder; provided that
such increase is permitted by the Incurrence of
Indebtedness and Issuance of Preferred Stock covenant
above.
Default
means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
Designated Non-Cash
Consideration means the fair
market value of total consideration received by us or any of our
Restricted Subsidiaries in connection with an Asset Sale that is
so designated as Designated Non-Cash Consideration pursuant to
an officers certificate, setting forth the basis of such
valuation, executed by our principal executive Officer and
principal financial Officer, less the amount of cash or Cash
Equivalents received in connection with the Asset Sale;
provided, however, the total amount of Designated Non-Cash
Consideration outstanding at one time does not exceed the
greater of $15.0 million and 2.5% of Consolidated Tangible
Assets.
136
Designated Senior
Debt means (i) any
Indebtedness outstanding under the Credit Agreement,
(ii) any Indebtedness represented by the Senior Notes and
(iii) any other Senior Debt permitted by the indenture, the
principal amount of which is $25.0 million or more and that
has been designated by us as Designated Senior Debt.
Disqualified
Stock means any Capital Stock
that, by its terms (or by the terms of any security into which
it is convertible, or for which it is exchangeable, in each case
at the option of the holder of the Capital Stock), or upon the
happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or
redeemable at the option of the holder of the Capital Stock, in
whole or in part, on or prior to the date that is 91 days
after the date on which the notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would constitute
Disqualified Stock solely because the holders of the Capital
Stock have the right to require us to repurchase such Capital
Stock upon the occurrence of a change of control or an asset
sale will not constitute Disqualified Stock if the terms of such
Capital Stock provide that we may not repurchase or redeem any
such Capital Stock pursuant to such provisions unless such
repurchase or redemption complies with the Restricted
Payments covenant.
Domestic
Subsidiary means any Restricted
Subsidiary of ours that was formed under the laws of the United
States or any state of the United States or the District of
Columbia.
Equity
Interests means Capital Stock
and all warrants, options or other rights to acquire Capital
Stock (but excluding any debt security that is convertible into,
or exchangeable for, Capital Stock).
Existing
Indebtedness means Indebtedness
of us and our Subsidiaries (other than Indebtedness under the
Credit Agreement) in existence on the date of the indenture,
until such amounts are repaid.
Fixed
Charges means, with respect to
any specified Person for any period, the sum, without
duplication, of:
|
|
|
(1) the consolidated interest expense of
such Person and its Restricted Subsidiaries for such period,
whether paid or accrued, including, without limitation,
amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed
interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of
letter of credit or bankers acceptance financings, and net
of the effect of all payments made or received pursuant to
Hedging Obligations; plus
|
|
|
(2) the consolidated interest of such Person
and its Restricted Subsidiaries that was capitalized during such
period; plus
|
|
|
(3) any interest expense on Indebtedness of
another Person that is Guaranteed by such Person or secured by a
Lien on assets of such Person, whether or not such Guarantee or
Lien is called upon; plus
|
|
|
(4) the product of (a) all dividends,
whether paid or accrued and whether or not in cash, on any
series of preferred stock of such Person or any of its
Restricted Subsidiaries other than dividends on Equity Interests
payable solely in Equity Interests of such Person (other than
Disqualified Stock) or to such Person or one of its Restricted
Subsidiaries, times (b) a fraction, the numerator of which
is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
|
Fixed Charge Coverage
Ratio means, with respect to any
specified Person for any period, the ratio of the Consolidated
Cash Flow of such Person and its Restricted Subsidiaries for
such period to the Fixed Charges of such Person and its
Restricted Subsidiaries for such period. In the event that the
specified Person or any of its Restricted Subsidiaries incurs,
assumes, Guarantees, repays, repurchases or redeems any
Indebtedness (other than ordinary working capital borrowings) or
issues, repurchases or redeems preferred stock subsequent to the
commencement of the reference period for which the Fixed Charge
137
Coverage Ratio is being calculated and on or
prior to the date on which the event for which the calculation
of the Fixed Charge Coverage Ratio is made (the
Calculation Date), then the Fixed Charge Coverage
Ratio will be calculated giving pro forma effect to such
incurrence, assumption, Guarantee, repayment, repurchase or
redemption of Indebtedness, or such issuance, repurchase or
redemption of preferred stock, and the use of the proceeds
therefrom as if the same had occurred at the beginning of the
applicable four-quarter reference period; provided, however,
that the Fixed Charges of such Person attributable to interest
on any Indebtedness under a revolving credit facility computed
on a pro forma basis will be computed based on the average daily
balance of such Indebtedness during the four-quarter reference
period and using the interest rate in effect at the end of such
period.
In addition, for purposes of calculating the
Fixed Charge Coverage Ratio:
|
|
|
(1) acquisitions that have been made by the
specified Person or any of its Restricted Subsidiaries,
including through mergers or consolidations and including any
related financing transactions, subsequent to the commencement
of the applicable four-quarter reference period and on or prior
to the Calculation Date will be given pro forma effect as if
they had occurred on the first day of such period, including any
Consolidated Cash Flow and any pro forma expense and cost
reductions that have occurred or are reasonably expected to
occur, in the reasonable judgment of our chief financial officer
(regardless of whether those cost savings or operating
improvements could then be reflected in pro forma financial
statements in accordance with Regulation S-X promulgated
under the Securities Act or any other regulation or policy of
the SEC related thereto);
|
|
|
(2) the Consolidated Cash Flow attributable
to discontinued operations as determined in accordance with
GAAP, and operations or businesses disposed of prior to the
Calculation Date will be excluded; and
|
|
|
(3) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the
Calculation Date, will be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be
obligations of the specified Person or any of its Restricted
Subsidiaries following the Calculation Date.
|
GAAP
means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity
as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
Guarantee
means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business,
direct or indirect, in any manner including, without limitation,
by way of a pledge of assets or through letters of credit or
reimbursement agreements in respect thereof, of all or any part
of any Indebtedness.
Hedging
Obligations means, with respect
to any specified Person, the obligations of such Person under:
|
|
|
(1) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements;
|
|
|
(2) other agreements or arrangements
designed to protect such Person against fluctuations in interest
rates; and
|
|
|
(3) foreign exchange contracts, currency
swap agreements or other agreements or arrangements designed to
protect such Person against fluctuations in currency values.
|
Holder
means a Person in whose name a note is registered.
138
Indebtedness
means, with respect to any specified Person, any indebtedness of
such Person, whether or not contingent:
|
|
|
(1) in respect of borrowed money;
|
|
|
(2) evidenced by bonds, notes, debentures or
similar instruments or letters of credit (or reimbursement
agreements in respect thereof);
|
|
|
(3) in respect of bankers acceptances;
|
|
|
(4) representing Capital Lease Obligations;
|
|
|
(5) representing the balance deferred and
unpaid of the purchase price of any property, except any such
balance that constitutes an accrued expense or trade
payable; or
|
|
|
(6) representing any Hedging Obligations;
|
if and to the extent any of the preceding items
(other than letters of credit and Hedging Obligations) would
appear as a liability upon a balance sheet of the specified
Person prepared in accordance with GAAP. In addition, the term
Indebtedness includes all Indebtedness of others
secured by a Lien on any asset of the specified Person (whether
or not such Indebtedness is assumed by the specified Person)
and, to the extent not otherwise included, the Guarantee by the
specified Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of
any date will be:
|
|
|
(1) the accreted value of the Indebtedness,
in the case of any Indebtedness issued with original issue
discount; and
|
|
|
(2) the principal amount of the
Indebtedness, together with any interest on the Indebtedness
that is more than 30 days past due, in the case of any
other Indebtedness.
|
Investments
means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including
Affiliates) in the forms of loans (including Guarantees or other
obligations), advances or capital contributions (excluding
commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are
or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided that Investments
shall not be deemed to include extensions of trade credit by us
or any of our Restricted Subsidiaries on commercially reasonable
terms in accordance with normal trade practices. If we or any of
our Subsidiaries sells or otherwise disposes of any Equity
Interests of any direct or indirect Subsidiary of ours such
that, after giving effect to any such sale or disposition, such
Person is no longer a Subsidiary of ours, we will be deemed to
have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the
Restricted Payments covenant. The acquisition by us
or any of our Subsidiaries of a Person that holds an Investment
in a third Person will be deemed to be an Investment by us or
such Subsidiary in such third Person in an amount equal to the
fair market value of the Investment held by the acquired Person
in such third Person in an amount determined as provided in the
final paragraph of the Restricted Payments covenant.
Lien
means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect
of such asset, whether or not filed, recorded or otherwise
perfected under applicable law, including any conditional sale
or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any
Financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction.
139
Net
Income means, with respect to
any specified Person, the net income (loss) of such Person,
determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
|
|
|
(1) any gain (but not loss), together with
any related provision for taxes on such gain (but not loss),
realized in connection with: (a) any Asset Sale or
(b) the disposition of any securities by such Person or any
of its Restricted Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Restricted
Subsidiaries; and
|
|
|
(2) any extraordinary gain (but not loss),
together with any related provision for taxes on such
extraordinary gain (but not loss).
|
Net
Proceeds means the aggregate
cash proceeds received by us or any of our Restricted
Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition
of any non-cash consideration, including Designated Non-Cash
Consideration, deemed to be cash pursuant to the provisions of
Repurchase at the Option of Holders Asset
Sales, received in any Asset Sale), net of the direct
costs relating to such Asset Sale, including, without
limitation, legal, accounting and investment banking fees, and
sales commissions, and any relocation expenses incurred as a
result of the Asset Sale, taxes paid or payable as a result of
the Asset Sale, in each case, after taking into account any
available tax credits or deductions and any tax sharing
arrangements, and amounts required to be applied to the
repayment of Indebtedness, other than Senior Debt, secured by a
Lien on the asset or assets that were the subject of such Asset
Sale, and any reserve for adjustment in respect of the sale
price of such asset or assets established in accordance with
GAAP.
Non-recourse
Debt means Indebtedness:
|
|
|
(1) as to which neither we nor any of our
Restricted Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that
would constitute Indebtedness), (b) is directly or
indirectly liable as a guarantor or otherwise, or
(c) constitutes the lender;
|
|
|
(2) no default with respect to which
(including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would
permit upon notice, lapse of time or both any holder of any
other Indebtedness (other than the notes) of ours or any of our
Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and
|
|
|
(3) as to which the lenders have been
notified in writing that they will not have any recourse to our
stock or assets or the stock or assets of any of our Restricted
Subsidiaries.
|
Obligations
means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
Parent
means Extendicare, Inc., a corporation organized under the laws
of Canada.
Permitted
Business means the lines of
business conducted by us and our Restricted Subsidiaries on the
date of the indenture and the businesses reasonably related
thereto within the healthcare services sector.
Permitted
Investments means:
|
|
|
(1) any Investment in us or in one of our
Wholly Owned Restricted Subsidiaries;
|
|
|
(2) any Investment outstanding as of the
date hereof;
|
|
|
(3) any Investment in Cash Equivalents;
|
|
|
(4) loans and advances to employees and
officers of us and our Restricted Subsidiaries in the ordinary
course of business for bona fide business purposes not in excess
of $2.5 million at any one time outstanding;
|
140
|
|
|
(5) Investments in prepaid expenses,
negotiable instruments held for collection and lease, utility
and workers compensation, performance and other similar
deposits;
|
|
|
(6) any Investment by us or any of our
Restricted Subsidiaries in a Person engaged in a Permitted
Business, if as a result of such Investment:
|
|
|
|
(a) such Person becomes one of our Wholly
Owned Restricted Subsidiaries; or
|
|
|
(b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, us or one of our
Wholly Owned Restricted Subsidiaries;
|
|
|
|
(7) any Investment made as a result of the
receipt of non-cash consideration (including Designated Non-Cash
Consideration) from an Asset Sale that was made pursuant to and
in compliance with the covenant described above under
Repurchase at the Option of
Holders Asset Sales;
|
|
|
(8) any acquisition of assets, Equity
Interests or other securities solely in exchange for the
issuance of our Equity Interests (other than Disqualified Stock);
|
|
|
(9) any Investments received in compromise
of obligations of such Persons incurred in the ordinary course
of trade creditors or customers that were incurred in the
ordinary course of business, including pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or
insolvency of any trade creditor or customer;
|
|
|
(10) Hedging Obligations;
|
|
|
(11) any Investment made in a Special
Purpose Vehicle in connection with a Securitization Transaction
or to provide adequate capital to a Special Purpose Vehicle in
anticipation of one or more Securitization Transactions; and
|
|
|
(12) other Investments in any Person having
an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent
changes in value), when taken together with all other
Investments made pursuant to this clause (12) that are at
the time outstanding, not to exceed $25.0 million.
|
Permitted Junior
Securities means:
|
|
|
(1) Equity Interests in us or any Subsidiary
Guarantor; or
|
|
|
(2) debt securities that are subordinated
(to substantially the same extent as, or to a greater extent
than, the notes and the Subsidiary Guarantees are subordinated
to Senior Debt under the indenture) to all Senior Debt and any
debt securities issued in exchange for Senior Debt.
|
Permitted
Liens means:
|
|
|
(1) Liens securing Senior Debt, where such
Indebtedness was permitted by the terms of the indenture to be
incurred;
|
|
|
(2) Liens in favor of us or the Subsidiary
Guarantors;
|
|
|
(3) Liens on property of a Person existing
at the time such Person is merged with or into or consolidated
with us or any Restricted Subsidiary of ours; provided that such
Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other
than those of the Person merged into or consolidated with us or
such Restricted Subsidiary;
|
|
|
(4) Liens on property existing at the time
of acquisition of the property by us or any of our Restricted
Subsidiaries; provided that such Liens were in existence prior
to the contemplation of such acquisition;
|
|
|
(5) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds
or other obligations of a like nature;
|
141
|
|
|
(6) Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (4) of the
second paragraph of the Incurrence of Indebtedness and
Issuance of Preferred Stock covenant covering only the
assets acquired with such Indebtedness;
|
|
|
(7) Liens existing on the date of the
indenture;
|
|
|
(8) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as is
required in conformity with GAAP has been made therefor;
|
|
|
(9) pledges or deposits in the ordinary
course of business to secure lease obligations or nondelinquent
obligations under workers compensation, unemployment
insurance or similar legislation;
|
|
|
(10) easements, rights-of-way, restrictions,
minor defects or irregularities in title and other similar
charges or encumbrances not interfering in any material respect
with our business or assets or the business or assets of any of
our Subsidiaries incurred in the ordinary course of business;
|
|
|
(11) Liens to secure Hedging Obligations; and
|
|
|
(12) Liens incurred by us or any Restricted
Subsidiary of ours with respect to obligations that do not
exceed $20.0 million at any one time outstanding.
|
Permitted Refinancing
Indebtedness means any
Indebtedness of ours or any of our Restricted Subsidiaries
issued in exchange for, or the net proceeds of which are used to
extend, refinance, renew, replace, defease or refund other
Indebtedness of ours or any of our Restricted Subsidiaries
(other than intercompany Indebtedness); provided that:
|
|
|
(1) the principal amount (or accreted value,
if applicable) of such Permitted Refinancing Indebtedness does
not exceed the principal amount (or accreted value, if
applicable) of the Indebtedness extended, refinanced, renewed,
replaced, defeased or refunded (plus all accrued interest on the
Indebtedness and the amount of all expenses and premiums
incurred in connection therewith);
|
|
|
(2) such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater
than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or
refunded;
|
|
|
(3) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the notes, such Permitted
Refinancing Indebtedness has a final maturity date later than
the final maturity date of, and is subordinated in right of
payment to, the notes on terms at least as favorable to the
Holders of notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and
|
|
|
(4) such Indebtedness is incurred either by
us or by the Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or
refunded.
|
Notwithstanding the foregoing, any Indebtedness
incurred under Credit Facilities pursuant to the covenant
described under Certain Covenants
Incurrence of Indebtedness and Issuance of Preferred Stock
shall be subject only to the refinancing provision in the
definition of Credit Facilities and not pursuant to the
requirements set forth in the definition of Permitted
Refinancing Indebtedness.
Person
means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated
organization, limited liability company or government or other
entity.
Qualified Equity
Offering means any underwritten
public or any private Offering of our Capital Stock (excluding
Disqualified Stock) or any of Parents Capital Stock
(excluding Disqualified Stock), in the latter case, only to the
extent that the net cash proceeds therefrom are contributed to
our common or non-redeemable preferred equity capital.
142
Replacement
Assets means any properties or
assets used or useful in a Permitted Business.
Restricted
Investment means an Investment
other than a Permitted Investment.
Restricted
Subsidiary of a Person means any
Subsidiary of the referent Person that is not an Unrestricted
Subsidiary.
SEC
means the Securities and Exchange Commission.
Securitization
Transaction means any sale,
conveyance or other disposition by us or any of our Restricted
Subsidiaries of any accounts receivable or any interest therein
to a Special Purpose Vehicle.
Senior
Debt means:
|
|
|
(1) all Indebtedness of ours or of any
Subsidiary Guarantor outstanding under Credit Facilities and all
Hedging Obligations with respect thereto;
|
|
|
(2) any Indebtedness represented by the
Senior Notes;
|
|
|
(3) any other Indebtedness of ours or of any
Subsidiary Guarantor permitted to be incurred under the terms of
the indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a
parity with or subordinated in right of payment to the notes or
any Subsidiary Guarantee; and
|
|
|
(4) all Obligations with respect to the
items listed in the preceding clauses (1), (2) and (3).
|
Notwithstanding anything to the contrary in the
preceding, Senior Debt will not include:
|
|
|
(1) any liability for federal, state, local
or other taxes owed or owing by us;
|
|
|
(2) any Indebtedness of ours to any of our
Subsidiaries or other Affiliates;
|
|
|
(3) any trade payables; or
|
|
|
(4) the portion of any Indebtedness that is
incurred in violation of the indenture.
|
Senior
Notes means our
9 1/2% Senior Notes due 2010.
Senior Subordinated
Indebtedness means (i) with
respect to us, the notes and any other Indebtedness of ours that
specifically provides that such Indebtedness is to have the same
rank as the notes in right of payment and is not subordinated by
its terms in right of payment to any Indebtedness or other
obligation of ours which is not Senior Debt and (ii) with
respect to any Subsidiary Guarantor, the Subsidiary Guarantees
and any other Indebtedness of such Subsidiary Guarantor that
specifically provides that such Indebtedness is to have the same
rank as the Subsidiary Guarantees in right of payment and is not
subordinated by its terms in right of payment to any
Indebtedness or other obligation of such Subsidiary Guarantor
which is not Senior Debt.
Significant
Subsidiary means any Subsidiary
that would be a significant subsidiary as defined in
Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation
is in effect on the date of the indenture.
Special Purpose
Vehicle means a
bankruptcy-remote entity or trust or other special purpose
entity which is formed by us, any Subsidiary of ours or any
other Person for the purpose of, and engages in no material
business other than, acting as a buyer in a Securitization
Transaction or other similar transactions of accounts receivable
or other similar assets, Financing the purchases it makes as
such a buyer and realizing, directly or indirectly, on such
accounts receivable or other similar assets.
Stated
Maturity means, with respect to
any installment of interest or principal on any series of
Indebtedness (including, without limitation, a scheduled
repayment or a scheduled sinking fund payment), the date on
which the payment of interest or principal was scheduled to be
paid in the original documentation governing such Indebtedness,
and will not include any contingent obligations to repay,
143
redeem or repurchase any such interest or
principal prior to the date originally scheduled for the payment
thereof.
Subordinated
Indebtedness means any
Indebtedness (whether outstanding on the Issue Date or
thereafter incurred) that is subordinated or junior in right of
payment to the notes or the Subsidiary Guarantees pursuant to a
written agreement, executed by the Person to whom such
Indebtedness is owed, to that effect.
Subsidiary
means, with respect to any specified Person:
|
|
|
(1) any corporation, association or other
business entity of which more than 50% of the total voting power
of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of
directors, managers or trustees of the corporation, association
or other business entity is at the time owned or controlled,
directly or indirectly, by that Person or one or more of the
other Subsidiaries of that Person (or a combination thereof); and
|
|
|
(2) any partnership (a) the sole
general partner or the managing general partner of which is such
Person or a Subsidiary of such Person or (b) the only
general partners of which are that Person or one or more
Subsidiaries of that Person (or any combination thereof).
|
Subsidiary
Guarantee means the Guarantee of
the notes by each of the Subsidiary Guarantors pursuant to the
indenture and any additional Guarantee of the notes to be
executed by any Subsidiary of ours pursuant to the covenant
described above under Certain
Covenants Additional Subsidiary Guarantees.
Subsidiary
Guarantors means all of our
existing and future domestic Significant Subsidiaries, all of
our existing and future Domestic Subsidiaries that guarantee or
incur any Indebtedness and any other existing and future
Significant Subsidiaries or Restricted Subsidiaries that
guarantee or otherwise provide direct credit support for
Indebtedness of ours or any of our Domestic Subsidiaries.
Unrestricted
Subsidiary means any Subsidiary
of ours (or any successor to any of them) that is designated by
our Board of Directors as an Unrestricted Subsidiary pursuant to
a board resolution, but only to the extent that such Subsidiary:
|
|
|
(1) has no Indebtedness other than
Non-Recourse Debt;
|
|
|
(2) is not party to any agreement, contract,
arrangement or understanding with us or any Restricted
Subsidiary of ours unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to
us or such Restricted Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of ours;
|
|
|
(3) is a Person with respect to which
neither we nor any of our Restricted Subsidiaries has any direct
or indirect obligation (a) to subscribe for additional
Equity Interests or (b) to maintain or preserve such
Persons Financial condition or to cause such Person to
achieve any specified levels of operating results;
|
|
|
(4) has not guaranteed or otherwise directly
or indirectly provided credit support for any Indebtedness of
ours or any of our Restricted Subsidiaries; and
|
|
|
(5) has at least one director on its Board
of Directors that is not a director or executive Officer of ours
or any of our Restricted Subsidiaries and has at least one
executive Officer that is not a director or executive Officer of
ours or any of our Restricted Subsidiaries.
|
Any designation of a Subsidiary of ours as an
Unrestricted Subsidiary will be evidenced to the trustee by
filing with the trustee a certified copy of the board resolution
giving effect to such designation and an officers
certificate certifying that such designation complied with the
preceding conditions and was permitted by the Restricted
Payments covenant. If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it will thereafter cease to be an
Unrestricted Subsidiary for purposes of the indenture and any
Indebtedness of such Subsidiary will be
144
deemed to be incurred by a Restricted Subsidiary
of ours as of such date and, if such Indebtedness is not
permitted to be incurred as of such date under the
Incurrence of Indebtedness and Issuance of Preferred
Stock covenant, we will be in default of such covenant.
Our Board of Directors may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation will be deemed to be an incurrence of
Indebtedness by one of our Restricted Subsidiaries of any
outstanding Indebtedness of such Unrestricted Subsidiary and
such designation will only be permitted if (1) such
Indebtedness is permitted under the Incurrence of
Indebtedness and Issuance of Preferred Stock covenant,
calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period;
(2) no Default or Event of Default would be in existence
following such designation; and (3) such Subsidiary
executes and delivers to the trustee a supplemental indenture
providing for a Subsidiary Guarantee.
Voting
Stock of any Person as of any
date means the Capital Stock of such Person that is at the time
entitled to vote in the election of the Board of Directors of
such Person.
Weighted Average Life to
Maturity means, when applied to
any Indebtedness at any date, the number of years obtained by
dividing:
|
|
|
(1) the sum of the products obtained by
multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment; by
|
|
|
(2) the then outstanding principal amount of
such Indebtedness.
|
145
CERTAIN U.S. FEDERAL INCOME TAX
CONSIDERATIONS
THIS SUMMARY IS OF A GENERAL NATURE AND IS
INCLUDED HEREIN SOLELY FOR INFORMATIONAL PURPOSES. IT IS NOT
INTENDED TO BE, NOR SHOULD IT BE CONSTRUED AS BEING, LEGAL OR
TAX ADVICE. NO REPRESENTATION WITH RESPECT TO THE CONSEQUENCES
TO ANY PARTICULAR PURCHASER OF THE NEW NOTES IS MADE.
PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.
The following is a summary of certain material
U.S. federal income tax consequences of the exchange offer
to holders of the old notes. The discussion does not consider
the aspects of the ownership and disposition of the old notes or
the new notes. A discussion of the U.S. federal income tax
consequences of holding and disposing of the notes is contained
in the offering memorandum with respect to the old notes.
The following summary deals only with notes held
as capital assets by purchasers at the issue price who are
U.S. holders and not with special classes of holders, such
as dealers in securities or currencies, financial institutions,
partnerships or other entities treated as partnerships for
U.S. federal income tax purposes, life insurance companies,
tax-exempt entities, persons holding old notes as part of a
hedge, conversion, constructive sale transaction, straddle or
other risk reduction strategy, and persons whose functional
currency is not the U.S. dollar. Persons considering
exchanging old notes for new notes should consult their own tax
advisors concerning these matters and as to the tax treatment
under foreign, state and local tax laws and regulations. We
cannot provide any assurance that the Internal Revenue Service
will not challenge the conclusions stated below. We have not
sought and will not seek a ruling from the Internal Revenue
Service on any of the matters discussed below.
This summary is based upon the Internal Revenue
Code of 1986, Treasury Regulations, Internal Revenue Service
rulings and pronouncements and judicial decisions now in effect,
all of which are subject to change at any time. Changes in this
area of law may be applied retroactively in a manner that could
cause the income tax consequences to vary substantially from the
consequences described below, possibly adversely affecting a
U.S. holder. The authorities on which this discussion is
based are subject to various interpretations, and it is
therefore possible that the federal income tax treatment of the
purchase, ownership and disposition of the notes may differ from
the treatment described below.
The exchange of old notes for the new notes under
the terms of the exchange offer should not constitute a taxable
exchange. As a result:
|
|
|
|
|
A holder should not recognize taxable gain or
loss as a result of exchanging old notes for the new notes under
the terms of the exchange offer;
|
|
|
|
The holders holding period of the new notes
should include the holding period of the old notes exchanged for
the new notes; and
|
|
|
|
A holders adjusted tax basis in the new
notes should be the same as the adjusted tax basis, immediately
before the exchange, of the old notes exchanged for the new
notes.
|
146
PLAN OF DISTRIBUTION
If you are a broker-dealer and hold old notes for
your own account as a result of market-making activities or
other trading activities and you receive new notes in exchange
for old notes in the exchange offer, then you may be a statutory
underwriter and must acknowledge that you will deliver a
prospectus in connection with any resale of these new notes.
This prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with
resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making
activities or other trading activities. We acknowledge and,
unless you are a broker-dealer, you must acknowledge that you
are not engaged in, do not intend to engage in, and have no
arrangement or understanding with any person to participate in a
distribution of new notes. We have agreed that we will make this
prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
Neither we nor any subsidiary guarantor will
receive any proceeds in connection with the exchange offer or
any sale of new notes by broker-dealers. New notes received by
broker-dealers for their own account pursuant to the exchange
offer may be sold from time to time in one or more transactions
in the over-the-counter market, in negotiated transactions,
through the writing of options on the new notes or a combination
of these methods of resale, at market prices prevailing at the
time of resale, at prices related to such prevailing market
prices or negotiated prices. Any resale may be made directly to
purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any
such broker-dealers or the purchasers of any such new notes. Any
broker-dealer that resells new notes that were received by it
for its own account pursuant to the exchange offer and any
broker-dealer that participates in a distribution of such new
notes may be deemed to be an underwriter within the
meaning of the Securities Act and any profit on any such resale
of new notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under
the Securities Act. The letter of transmittal states that by
acknowledging that it will deliver, and by delivering, a
prospectus, a broker-dealer will not be deemed to admit that it
is an underwriter within the meaning of the
Securities Act. See The Exchange Offer Resales
of New Notes.
LEGAL MATTERS
Foley & Lardner LLP, Milwaukee,
Wisconsin, will issue an opinion about some legal matters with
respect to the new notes and the new guarantees.
EXPERTS
The consolidated financial statements of
Extendicare Health Services, Inc. and subsidiaries as of
December 31, 2003 and 2002, and for each of the years in
the three-year period ended December 31, 2003 and the
related financial statement schedule have been included herein
in reliance upon the reports of KPMG LLP, independent registered
public accounting firm, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
The KPMG reports refer to the Companys change in its
method of accounting for goodwill effective January 1, 2002.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports and
other information with the Commission. You may read and copy any
document we file at the Commissions public reference room
at 450 Fifth Street, N.W., Washington, D.C. Please
call the Commission at 1-800-SEC-0330 for further information on
the public reference room. Our Commission filings are also
available to the public at the Commissions web site at
http://www.sec.gov.
Our parent company, Extendicare Inc., maintains a
website at www.extendicare.com. Our annual report on
Form 10-K, our quarterly reports on Form 10-Q and
certain other of our Commission filings are available free of
charge from the Extendicare website. You can also contact our
Communications
147
Department at the address or phone number listed
below, for a copy, free of charge, of our annual report on
Form 10-K, quarterly reports on Form 10-Q and certain
other of our Commission filings.
Extendicare Health Services, Inc.,
Attn: Communications Department
111 West Michigan Street
Milwaukee, Wisconsin 53203
(414) 908-8000
We are not including the information contained
on, or available through, Extendicares website, as part
of, or incorporating such information by reference into, this
prospectus.
148
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
Page |
|
|
Number |
|
|
|
Extendicare Health Services, Inc. Unaudited
Condensed Consolidated Financial Statements
|
|
|
|
|
Condensed Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003
|
|
|
F-2 |
|
Condensed Consolidated Statements of Earnings for
the Three Months Ended March 31, 2004 and 2003
|
|
|
F-3 |
|
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2004 and 2003
|
|
|
F-4 |
|
Notes to Condensed Consolidated Financial
Statements
|
|
|
F-5 |
|
Extendicare Health Services, Inc. Audited
Consolidated Financial Statements
|
|
|
|
|
Report of Independent Registered Public
Accounting Firm
|
|
|
F-18 |
|
Consolidated Balance Sheets as of
December 31, 2003 and 2002
|
|
|
F-19 |
|
Consolidated Statements of Operations for the
Years Ended December 31, 2003, 2002 and 2001
|
|
|
F-20 |
|
Consolidated Statements of Shareholders
Equity
|
|
|
F-21 |
|
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2003, 2002 and 2001
|
|
|
F-22 |
|
Notes to Consolidated Financial Statements
|
|
|
F-23 |
|
F-1
EXTENDICARE HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
March 31, 2004 and December 31,
2003
(In thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2004 |
|
2003 |
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
47,893 |
|
|
$ |
48,855 |
|
|
Accounts receivable, less allowances of $12,157
and $11,692, respectively
|
|
|
93,859 |
|
|
|
95,338 |
|
|
Assets held under Divestiture Agreement
|
|
|
33,723 |
|
|
|
33,723 |
|
|
Supplies, inventories and other current assets
|
|
|
8,692 |
|
|
|
7,436 |
|
|
Deferred state income taxes
|
|
|
5,017 |
|
|
|
4,260 |
|
|
Due from shareholder and affiliates:
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes receivable
|
|
|
3,017 |
|
|
|
8,121 |
|
|
|
Deferred federal income taxes
|
|
|
25,614 |
|
|
|
22,584 |
|
|
|
Other
|
|
|
6,534 |
|
|
|
7,010 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
224,349 |
|
|
|
227,327 |
|
Property and equipment, net
|
|
|
449,638 |
|
|
|
448,743 |
|
Goodwill and other intangible assets, net
|
|
|
75,407 |
|
|
|
75,193 |
|
Other assets
|
|
|
78,291 |
|
|
|
82,086 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
827,685 |
|
|
$ |
833,349 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$ |
1,276 |
|
|
$ |
1,223 |
|
|
Accounts payable
|
|
|
17,235 |
|
|
|
20,672 |
|
|
Accrued liabilities
|
|
|
101,215 |
|
|
|
101,614 |
|
|
Deposits held under Divestiture Agreement
|
|
|
30,000 |
|
|
|
30,000 |
|
|
Current portion of accrual for self-insured
liabilities
|
|
|
18,000 |
|
|
|
18,000 |
|
|
Income taxes payable
|
|
|
1,500 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
169,226 |
|
|
|
171,532 |
|
Accrual for self-insured liabilities
|
|
|
25,601 |
|
|
|
27,063 |
|
Long-term debt
|
|
|
378,961 |
|
|
|
391,695 |
|
Deferred state income taxes
|
|
|
7,365 |
|
|
|
7,343 |
|
Other long-term liabilities
|
|
|
11,573 |
|
|
|
11,082 |
|
Due to shareholder and affiliates:
|
|
|
|
|
|
|
|
|
|
Deferred federal income taxes
|
|
|
38,853 |
|
|
|
38,490 |
|
|
Other
|
|
|
3,484 |
|
|
|
3,484 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
635,063 |
|
|
|
650,689 |
|
|
|
|
|
|
|
|
|
|
Shareholders 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 income
|
|
|
1,600 |
|
|
|
985 |
|
|
Accumulated deficit
|
|
|
(17,766 |
) |
|
|
(27,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
192,622 |
|
|
|
182,660 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$ |
827,685 |
|
|
$ |
833,349 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of
these condensed consolidated financial statements.
F-2
EXTENDICARE HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS
For the Three Months Ended March 31, 2004
and 2003
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
Nursing and assisted living facilities
|
|
$ |
224,426 |
|
|
$ |
204,805 |
|
|
Outpatient therapy
|
|
|
2,665 |
|
|
|
2,644 |
|
|
Other
|
|
|
4,410 |
|
|
|
3,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
231,501 |
|
|
|
211,426 |
|
COSTS AND EXPENSES (INCOME):
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
189,456 |
|
|
|
180,496 |
|
|
General and administrative
|
|
|
7,490 |
|
|
|
7,838 |
|
|
Lease costs
|
|
|
2,264 |
|
|
|
2,251 |
|
|
Depreciation and amortization
|
|
|
8,681 |
|
|
|
9,161 |
|
|
Interest expense
|
|
|
8,200 |
|
|
|
8,495 |
|
|
Interest income
|
|
|
(1,542 |
) |
|
|
(643 |
) |
|
Loss on impairment of long-lived assets
|
|
|
1,612 |
|
|
|
|
|
|
Loss on early retirement of debt
|
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,515 |
|
|
|
207,598 |
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES
|
|
|
14,986 |
|
|
|
3,828 |
|
|
Income tax expense
|
|
|
5,639 |
|
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$ |
9,347 |
|
|
$ |
2,288 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of
these condensed consolidated financial statements.
F-3
EXTENDICARE HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
For the Three Months Ended March 31, 2004
and 2003
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
9,347 |
|
|
$ |
2,288 |
|
Adjustments to reconcile net earnings to net cash
provided by operating activities Depreciation and amortization
|
|
|
8,681 |
|
|
|
9,161 |
|
|
Amortization of deferred financing costs
|
|
|
377 |
|
|
|
378 |
|
|
Provision for uncollectible accounts receivable
|
|
|
3,184 |
|
|
|
2,335 |
|
|
Provision for self-insured liabilities
|
|
|
1,650 |
|
|
|
1,500 |
|
|
Payment for self-insured liability claims
|
|
|
(3,112 |
) |
|
|
(5,617 |
) |
|
Deferred income taxes
|
|
|
(3,811 |
) |
|
|
569 |
|
|
Loss on impairment of long-lived assets
|
|
|
1,612 |
|
|
|
|
|
|
Loss on early retirement of debt
|
|
|
354 |
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,557 |
) |
|
|
625 |
|
|
|
Supplies, inventories and other current assets
|
|
|
(1,255 |
) |
|
|
(1,866 |
) |
|
|
Accounts payable
|
|
|
(3,437 |
) |
|
|
1,589 |
|
|
|
Accrued liabilities
|
|
|
(606 |
) |
|
|
(6,214 |
) |
|
|
Income taxes payable/ receivable
|
|
|
1,477 |
|
|
|
147 |
|
|
|
Current due to shareholder and affiliates
|
|
|
5,580 |
|
|
|
(370 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
18,484 |
|
|
|
4,525 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions
|
|
|
(2,129 |
) |
|
|
|
|
|
Payments for new construction projects
|
|
|
(3,800 |
) |
|
|
(31 |
) |
|
Payments for purchase of property and equipment
|
|
|
(5,345 |
) |
|
|
(4,709 |
) |
|
Proceeds from sale of property and equipment
|
|
|
4 |
|
|
|
17 |
|
|
Changes in other non-current assets
|
|
|
4,031 |
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(7,239 |
) |
|
|
(4,350 |
) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Payments of long-term debt
|
|
|
(13,397 |
) |
|
|
(129 |
) |
|
Proceeds from issuance of long-term debt
|
|
|
706 |
|
|
|
|
|
|
Other long-term liabilities
|
|
|
484 |
|
|
|
506 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(12,207 |
) |
|
|
377 |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(962 |
) |
|
|
552 |
|
Cash and cash equivalents, beginning of period
|
|
|
48,855 |
|
|
|
24,360 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
47,893 |
|
|
$ |
24,912 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of
these condensed consolidated financial statements.
F-4
EXTENDICARE HEALTH SERVICES, INC.
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 months ended March 31,
2004 and 2003 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 accounting
principles generally accepted 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, 2003 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.
Managements most significant estimates include the
recoverability of long-lived assets, and provisions for bad
debts, Medicaid and Medicare revenue rate settlements,
self-insured general and professional liability claims, facility
closure accruals, workers compensation accruals, self-insured
health and dental claims and income taxes. 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, 2003 contained in the Companys Annual
Report on Form 10-K. Certain reclassifications have been
made to the 2003 condensed consolidated financial statements to
conform to the presentation for 2004.
|
|
2. |
Acquisitions and New Developments |
On February 12, 2004, the Company acquired a
skilled nursing facility in Washington, which was previously
leased, for $1.4 million.
The Company completed two development projects
involving additions to existing facilities. In February 2004,
the Company opened 16 units in an assisted living facility
in Kentucky and in March 2004, opened 20 nursing beds in a
skilled nursing facility in Wisconsin.
On December 31, 2003 the Company acquired
one skilled nursing facility (99 beds) in Wisconsin for
$4.1 million in cash.
|
|
3. |
Assets (and Deposits Held) Under Divestiture
Agreement |
Assets Held Under Divestiture
Agreement
In September 2000, the Company disposed of eleven
Florida nursing facilities (1,435 beds) and four Florida
assisted living facilities (135 units) to Greystone Tribeca
Acquisition, L.L.C. (Greystone) for
F-5
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
initial cash proceeds of $30.0 million and
contingent consideration in the form of a $10.0 million
Vendor Take Back note and two other contingent and interest
bearing notes. The three notes have an aggregate potential value
of up to $30.0 million plus interest. The notes were due in
March 2004 and would have been retired out of the proceeds from
the sale or refinancing of the facilities by Greystone. For the
period September 2000 through March 2004, the Company retained
the right of first refusal to repurchase the facilities. The
Company also retained an option to repurchase the facilities
until March 2003; however, the Company elected not to place an
offer to repurchase the facilities. Upon maturity of the notes
in March 2004, unless the facilities were sold or refinanced,
the Company was entitled to receive the $10.0 million
Vendor Take Back note and accrued interest pursuant to the terms
of the Vendor Take Back and other contingent notes.
In 2000, the option to repurchase along with the
significant portion of the sales price being contingent,
resulted in the disposition being accounted for as a deferred
sale in accordance with SFAS No. 66 and, accordingly,
there was no gain or loss recorded on the initial transaction.
The fixed assets have been classified as Assets held under
Divestiture Agreement, and as of March 31, 2004, had
a net book value of $33.7 million. As of December 31,
2003 the Company anticipated the final consideration to be
received in 2004, and therefore the Assets held under
Divestiture Agreement have been classified as a current
asset as of December 31, 2003, and the Company ceased
depreciating these assets as of January 1, 2004. Upon
receipt of the final consideration, the Company will record the
disposition of the assets and a gain based upon the difference
between the total consideration received and the net book value
of the Assets Held under the Divestiture Agreement.
Deposits Held Under Divestiture
Agreement
The initial cash proceeds of $30.0 million
have been classified in the balance sheet as Deposits held
under Divestiture Agreement. Consistent with the
reclassification of the Assets Held under Divestiture Agreement,
the Deposits held under Divestiture Agreement have been
classified as a current liability as of December 31, 2003
and March 31, 2004.
Subsequent Events
For additional information pertaining to Assets
(and Deposits Held) Under Divestiture Agreement, refer to
Note Subsequent Events.
Medicare and Medicaid Settlement
Receivables
For Medicare revenues earned prior to the
implementation of Medicare Prospective Payment System
(PPS) on January 1, 1999 and for Medicaid
programs with a retrospective reimbursement system, differences
between revenues that the Company ultimately expects to realize
from these programs and amounts received are reflected as
accounts receivable, or as accrued liabilities when payments
have exceeded revenues that the Company ultimately expects to
realize. At March 31, 2004, accounts receivable from both
Medicare and Medicaid state programs, net of a general
contractual allowance, totaled $32.1 million
(December 31, 2003 $37.2 million). This
amount includes $6.2 million (December 31,
2003 $11.3 million), that is expected to be
substantially collected within one year and is included within
accounts receivable as a current asset. The remaining balance of
$25.9 million (December 31, 2003
$25.9 million) is reported within Other Assets.
The Company is pursuing collection of a number of outstanding
Medicare and Medicaid settlement issues.
For a specific staffing cost issue, a settlement
of the first year of seven specific claim years was reached
prior to the January 2003 Provider Reimbursement Review Board
(PRRB) hearing, and during
F-6
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2003 the Company continued to negotiate the
remaining years in dispute with the Fiscal Intermediary
(FI). In January 2004, the Company negotiated and
subsequently received a cash settlement of $5.6 million.
The settlement did not result in a significant adjustment from
the recorded receivable balance.
For another specific Medicare receivable issue
involving the allocation of overhead costs, the first of three
specific claim years was presented to the PRRB at a hearing in
January 2003. The hearing procedures were discontinued after the
parties negotiated a methodology for resolution of the claim for
one of the years in dispute. The negotiated settlement for this
and other issues relating to the 1996 cost report year, resulted
in no adjustment to the recorded receivable balance, and the
Company subsequently collected $3.0 million from the FI.
For the remaining two specific claim years, the Company
continued to negotiate with the FI and failing a negotiated
settlement, was prepared to proceed to a PRRB hearing scheduled
in April 2004.
The Company has a hearing scheduled in September
2004 for another Medicare receivable issue in dispute involving
a Director of Nursing staff cost issue in the amount of
$3.8 million.
Notes Receivable
The Company holds $21.4 million in notes
receivable due from Tandem Health Care Inc.
(Tandem). For $17.4 million of the notes that
resulted from the sale of properties in 2001 and 2002, the notes
are due between April 2006 and May 2007. In February 2004,
Tandem refinanced two of its nursing facilities and the Company
subsequently received prepayment in full of $4.4 million of
the notes receivable held in respect of these properties. The
Company also holds a $4.0 million note from Tandem that,
along with the $3.7 indemnification escrow funds, is due in
December 2007.
Subsequent Events
For additional information pertaining to Medicare
and Medicaid Settlement Receivables, refer to
Note 8 Subsequent Events.
|
|
5. |
Line of Credit and Long-Term Debt |
Summary of Long-Term Debt
Long-term debt consisted of the following as of
March 31, 2004 and December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Senior Notes due 2010
|
|
$ |
149,685 |
|
|
$ |
149,676 |
|
Senior Subordinated Notes due 2007
|
|
|
200,000 |
|
|
|
200,000 |
|
Industrial Development Revenue Bonds, variable
interest rates ranging from 1.00% to 6.25%, maturing through
2014, secured by certain facilities
|
|
|
20,160 |
|
|
|
33,160 |
|
Mortgage notes payable, interest rates ranging
from 3.0% to 10.5%, maturing through 2012
|
|
|
10,368 |
|
|
|
10,054 |
|
Other, primarily capital lease obligations
|
|
|
24 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
Long-term debt before current maturities
|
|
|
380,237 |
|
|
|
392,918 |
|
Less current maturities
|
|
|
1,276 |
|
|
|
1,223 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$ |
378,961 |
|
|
$ |
391,695 |
|
|
|
|
|
|
|
|
|
|
F-7
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On June 28, 2002, the Company completed a
private placement of $150 million of its 9.5% Senior
Notes due July 1, 2010 (the 2010 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 2010 Senior Notes are identical to the
terms of the 2010 Senior Notes issued in June 2002 and are
guaranteed by all existing and future active subsidiaries of the
Company. Also on June 28, 2002, the Company entered into an
interest rate swap agreement and an interest rate cap agreement.
See Note 6 for the terms of the swap and cap agreements.
Concurrent with the sale of the 2010 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 Companys option, at the Eurodollar
rate or the prime rate, plus applicable margins, depending upon
the Companys leverage ratio. As of March 31, 2004 and
December 31, 2003, the Company had no borrowings from the
Credit Facility. The unused portion of the Credit Facility, that
is available for working capital and corporate purposes, after
reduction for outstanding letters of credit of
$33.7 million, was $71.3 million as of March 31,
2004.
The Credit Facility is secured by a perfected,
first priority security interest in certain tangible and
intangible assets and all of the Companys capital stock
and the capital stock of the Companys subsidiary
guarantors. The Credit Facility is also secured by a pledge of
65% of the voting shares of the voting stock of the Company and
the Companys subsidiary guarantors foreign
subsidiaries, if any. The credit facility contains customary
covenants and events of default and is subject to various
mandatory prepayment and commitment reductions.
The 2010 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 Companys
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
2010 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 all of the
financial covenants as of March 31, 2004.
The Company has no independent assets or
operations, the guarantees of the 2010 Senior Notes are full and
unconditional, and joint and several, and any of the
Companys subsidiaries that do not guarantee the 2010
Senior Notes are minor. There are no significant restrictions on
the ability of the Company to obtain funds from its subsidiaries
by loan or dividend.
In December 1997, the Company issued
$200 million of 9.35% Senior Subordinated Notes due
2007 (the 2007 Notes). The 2007 Notes are unsecured
senior subordinated obligations of the Company subordinated in
right of payment to all existing and future senior indebtedness
of the Company, which includes all borrowings under the Credit
Facility as well as all indebtedness not refinanced by the Credit
F-8
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Facility. At March 31, 2004, Extendicare
Inc. held $27.9 million of the 2007 Notes. The 2007 Notes
mature on December 15, 2007. Interest on the 2007 Notes is
payable semi-annually.
The 2007 Notes are redeemable at the option of
the Company. The redemption prices, if redeemed during the
12-month period beginning on December 15 of the year
indicated, are as follows:
|
|
|
|
|
Year |
|
Percentage |
|
|
|
2003
|
|
|
103.117 |
% |
2004
|
|
|
101.558 |
% |
2005 and thereafter
|
|
|
100.000 |
% |
Subsequent Events
For additional information pertaining to the
Companys line of credit and long-term debt, refer to
Note 8 Subsequent Events.
|
|
6. |
Accounting for Derivative Instruments and
Hedging Activities |
Objectives and Strategies
After the issuance of the 2010 Senior Notes in
June 2002, all but $32 million of the Companys
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) (1.09% as of March 31, 2004),
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 2003 or 2004.
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 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 $19 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 $131 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.
The Company does not speculate using derivative
instruments.
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
Shareholders 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 March 31, 2004,
the fair value of the interest rate swap designated as a fair
value hedge is an asset of $3.8 million and is offset by a
liability of $3.8 million relating to the change in market
value of the hedged item (long-term debt obligations). The fair
value of
F-9
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the cash-flow hedges is a liability recorded in
other long-term liabilities, which was $0.1 million as of
March 31, 2004. A gain of $40,000 (net of income tax
effect) was credited to AOCI for the three months ended
March 31, 2004. 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, which was
$0.7 million as of March 31, 2004. 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.
Subsequent Events
For additional information pertaining to the
Companys accounting for derivative instruments and hedging
activities, refer to Note 8 Subsequent Events.
|
|
7. |
Gain on Disposal of Assets, Provision for
Closure and Exit Costs, and Impairment of Long-Lived
Assets |
The Company operates two nursing facilities that
are adjacent to each other in Indiana, both of which require
capital renovations. After evaluation of the respective
operations, in March 2004 the Company made a decision, subject
to State of Indiana approval, to consolidate the two operations
into one renovated facility. Upon completion of the renovations,
the refurbished facility will accommodate all residents within
both facilities, however, the total available beds will be
decreased by 46. The consolidation of the two operations is
expected to be complete by March 2005. As a result of the
decision to close the one facility, the Company recorded a
provision of $1.6 million for impairment of long-lived
assets.
Reserves for divested operations and facility
closures primarily relate to provisions for the settlement of
Medicare and Medicaid claims and other amounts with third
parties. The settlement of such amounts depends on actions by
those third parties and negotiations by the Company, and
therefore may not be resolved within the next or several years.
Below is a summary of activity of the accrued liabilities
balance relating to divested operations and facility closures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare, |
|
|
|
|
|
|
|
|
Medicaid |
|
Resident |
|
|
|
|
|
|
and |
|
and |
|
|
|
|
|
|
Supplier |
|
Employee |
|
|
|
|
|
|
Claims |
|
Claims |
|
Other |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Balance December 31, 2001
|
|
$ |
1,896 |
|
|
$ |
2,305 |
|
|
$ |
3,801 |
|
|
$ |
8,002 |
|
|
Cash Payments
|
|
|
(863 |
) |
|
|
(1,051 |
) |
|
|
(2,777 |
) |
|
|
(4,691 |
) |
|
Provisions(1)
|
|
|
7,066 |
|
|
|
64 |
|
|
|
(723 |
) |
|
|
6,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2002
|
|
|
8,099 |
|
|
|
1,318 |
|
|
|
301 |
|
|
|
9,718 |
|
|
Cash Payments
|
|
|
(565 |
) |
|
|
(824 |
) |
|
|
(141 |
) |
|
|
(1,530 |
) |
|
Provisions(2)
|
|
|
(897 |
) |
|
|
|
|
|
|
|
|
|
|
(897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
$ |
6,637 |
|
|
$ |
494 |
|
|
$ |
160 |
|
|
$ |
7,291 |
|
|
Cash Payments
|
|
|
(264 |
) |
|
|
|
|
|
|
|
|
|
|
(264 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2004
|
|
$ |
6,373 |
|
|
$ |
494 |
|
|
$ |
160 |
|
|
$ |
7,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In 2002, provisions include a provision for
closure and exit costs of $5.3 million and selling expenses
of $1.2 million relating to the sale of Florida assets.
|
|
(2) |
In 2003, provisions include the write-off of
$1.3 million of previously accrued Medicare claims
receivable relating to discontinued operations.
|
F-10
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Issuance of New 2014 Notes and Repayment of
2007 Notes
On April 5, 2004, the Company commenced a
tender offer to purchase any and all of its outstanding
$200 million 2007 Notes. Approximately 61% of the 2007
Notes (which represents the percentage of 2007 Notes not owned
by Extendicare Inc.) were tendered in the tender offer and
repaid on April 22, 2004. The Company intends to redeem the
2007 Notes not tendered in the tender offer on May 24, 2004.
On April 22, 2004, the Company issued
$125 million aggregate principal amount of
6.875% Senior Subordinated Notes due May 1, 2014 (the
2014 Notes), pursuant to Rule 144A and
Regulation S under the Securities Act of 1933, as amended.
The 2014 Notes were issued at a price of 97.5001% of par to
yield 7.23%.
The net proceeds from the issuance of the 2014
Notes were approximately $117.4 million (net of a discount
of $3.1 million and fees and expenses of
$4.5 million). The Company used a portion of these net
proceeds to purchase for cash approximately $104.9 million
aggregate principal amount of the 2007 Notes tendered in the
tender offer and it intends to use the remaining net proceeds,
to, among other things, redeem any 2007 Notes not tendered in
the tender offer and to pay related fees and expenses of the
tender offer and redemption.
The 2014 Notes are fully and unconditionally
guaranteed on a senior subordinated basis by all of the
Companys existing and future domestic significant
subsidiaries, all of the Companys existing and future
domestic subsidiaries that guarantee or incur any indebtedness
and any other existing and future significant subsidiaries or
restricted subsidiaries that guarantee or otherwise provide
direct credit support for indebtedness of the Company or any of
its domestic subsidiaries. The 2014 Notes and guarantees are
general unsecured obligations of the Company and the
Companys subsidiaries.
On or after May 1, 2009, the Company may
redeem all or part of the 2014 Notes, at the redemption prices
(expressed as percentages of principal amount) listed below,
plus accrued and unpaid interest, if any, to the date of
redemption, if redeemed during the twelve-month period
commencing on May 1 of the years set forth below:
|
|
|
|
|
Year |
|
Redemption Price |
|
|
|
2009
|
|
|
103.438 |
% |
2010
|
|
|
102.292 |
% |
2011
|
|
|
101.146 |
% |
2012 and thereafter
|
|
|
100.000 |
% |
Subject to the conditions of the tender offer,
the holders of the 2007 Notes who validly tendered their 2007
Notes or whose 2007 Notes were redeemed by the Company are
entitled to the premium that, in the aggregate, amounts to
approximately $6.6 million. As a result of the tender
offer, redemption and repayment of the 2007 Notes, in the second
quarter of 2004, the Company will write-off deferred finance
charges of approximately $2.4 million related to the 2007
Notes and incur legal costs estimated at $0.3 million. In
addition, pursuant to termination of the Companys existing
interest rate swap and cap agreements (discussed below), the
Company will record a gain of approximately $3.3 million
which will be recognized in the second quarter of 2004. The net
after tax impact to Accumulated Deficit is a loss of
F-11
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approximately $3.9 million. Below is a
summary of the adjustment to the Companys
Accumulated Deficit account:
|
|
|
|
|
|
|
(Dollars in |
|
|
thousands) |
|
|
|
Tender premium
|
|
$ |
(3,670 |
) |
Call premium
|
|
|
(2,966 |
) |
Write-off of deferred finance charges
|
|
|
(2,359 |
) |
Estimated legal expenses
|
|
|
(250 |
) |
Gain on termination of interest rate swap and cap
agreements
|
|
|
3,302 |
|
|
|
|
|
|
Total before income taxes
|
|
|
(5,943 |
) |
Income taxes
|
|
|
2,080 |
|
|
|
|
|
|
Net impact to accumulated deficit
|
|
$ |
(3,863 |
) |
|
|
|
|
|
Amendment and Restatement of Credit
Facility
In connection with the offering of the 2014
Notes, the Company amended and restated its current credit
facility. The terms of the amended and restated credit facility
included the following changes, among other things:
|
|
|
|
|
a two year maturity extension, to June 28,
2009;
|
|
|
|
an additional $50.0 million of senior
secured financing on a revolving basis, resulting in total
borrowing capacity of $155.0 million;
|
|
|
|
an interest rate spread which ranges from the
Eurodollar rate plus 2.50% per annum to 3.25% per
annum or the base rate plus 1.50% per annum to
2.25% per annum, subject, in each case, to adjustments
based on the Companys senior leverage ratio;
|
|
|
|
a commitment fee of 0.50% per annum on the
undrawn capacity regardless of utilization;
|
|
|
|
a requirement that the Company maintain a maximum
senior leverage ratio starting at 4.25 to 1 and reducing to 4.00
to 1 in 2007;
|
|
|
|
a requirement that the Company maintain a maximum
senior secured leverage ratio starting at 2.25 to 1 and reducing
to 2.00 to 1 in 2007; and
|
|
|
|
changes to the collateral securing the facility
to permit the Company to substitute certain assets with other
assets.
|
The Company expects to borrow approximately
$30.0 million under the amended and restated credit
facility to partially fund the redemption of any and all of the
outstanding $200.0 million 2007 Notes. Under the credit
facility, EBITDA is defined as net income (loss)
before income taxes, interest expense net of interest income,
depreciation and amortization, and non-cash, non-recurring
(gains) and losses, including disposal of assets, provision
for closure and exit costs and other items, early retirement of
debt and impairment of long-lived assets. Based on the
Companys adjusted capitalization and EBITDA for the
quarter ended March 31, 2004, all borrowings to be drawn
under the amended and restated credit facility will initially
bear interest at a rate per annum equal to:
|
|
|
|
|
the Eurodollar rate plus 2.75%; or
|
|
|
|
the Base Rate plus 1.75%,
|
and thereafter, in each case, subject to
adjustments based on our senior leverage ratio.
F-12
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Interest Rate Swap and Cap
Agreements
In April 2004, coterminous with the issuance of
the 2014 Notes, the Company terminated its existing interest
rate swap and cap agreements for an aggregate gain of
approximately $3.3 million to be recognized in the second
quarter of 2004. This swap was a hedge against the 2007 Notes.
In addition, to hedge the Companys exposure to
fluctuations in market value, on April 22, 2004, the
Company entered into two new interest rate swap agreements and
two new interest rate cap agreements relating to the 2010 Senior
Notes and the 2014 Notes.
With respect to the 2010 Senior Notes, the
Company entered into an interest rate swap agreement expiring
July 1, 2010 with a notional amount of $150.0 million.
This agreement effectively converted up to $150.0 million
of fixed interest rate indebtedness into variable interest rate
indebtedness. Under the terms of this interest rate swap
agreement, the counterparty can call the swap at any time on or
after July 1, 2006 with payments as determined under the
agreement. The Company also entered into an interest rate cap
agreement expiring July 1, 2010 with a notional amount of
$150.0 million. Under this cap agreement, the Company paid
on April 22, 2004 an upfront fee of $3.5 million to
the counterparty that will be amortized to interest expense over
the term of the cap. The Company will receive a variable rate of
interest equal to the excess, if any, of the six-month LIBOR
rate, adjusted semi-annually, over the cap rate of 7%. The
Company uses the interest rate cap to offset possible increases
in interest payments under the interest rate swap agreement
expiring July 1, 2010 caused by increases in market
interest rates over a certain level. Under the terms of the
interest rate cap agreement, the counterparty can call the cap
if the interest rate swap agreement expiring July 1, 2010
is terminated.
With respect to the 2014 Notes, on April 22,
2004, the Company entered into an interest rate swap agreement
expiring May 1, 2014 with a notional amount of
$125.0 million. This agreement effectively converted up to
$125.0 million of fixed interest rate indebtedness into
variable interest rate indebtedness. Under the terms of this
interest rate swap agreement, the counterparty can call the swap
at any time on or after May 1, 2009 with payments as
determined under the agreement. The Company also entered into an
interest rate cap agreement expiring May 1, 2014 with a
notional amount of $125.0 million. Under this cap
agreement, the Company pays a fixed rate of interest equal to
0.75% to the counterparty and receives a variable rate of
interest equal to the excess, if any, of the six-month LIBOR
rate, adjusted semi-annually, over the cap rate of 7%. The
Company uses the interest rate cap to offset possible increases
in interest payments under the interest rate swap agreement
expiring May 1, 2014 caused by increases in market interest
rates over a certain level. Under the terms of the interest rate
cap agreement, the counterparty can call the cap if the interest
rate swap agreement expiring May 1, 2014 is terminated.
Refinancing of Loan Resulting From 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 price included cash
of $7.4 million and a $10.5 million interest bearing
10-year note. The interest rate on the note was subject to
negotiation and failing an agreement would have been settled
through arbitration. In the latter part of 2003, the Company
prepaid $4.5 million against the note and agreed to
refinance the balance of the 10-year note. On April 15,
2004 the Company refinanced the facilities with mortgages whose
interest rates vary with LIBOR, and repaid the remaining balance
of the note due to the seller.
Settlement of Medicare Receivable
Issue
In April 2004, we reached a negotiated settlement
with the Fiscal Intermediary in respect of the remaining two
years regarding an issue involving the allocation of overhead
costs. The settlement will result in the payment of
approximately $7.7 million to the Company, of which
$6.5 million will be received in May 2004 and the balance
upon conclusion of resolution of other matters concerning the
cost
F-13
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
report years under appeal. There are certain
matters related to the settlement and cost report years that
were appealed that have to be resolved with the FI, which could
influence the financial impact of the settlement. The Company
anticipates that the resolution of these matters and the
determination of the financial impact of the settlement, if any,
will be recorded within the second quarter of 2004 financial
results.
Settlement on Greystone Transaction
In April 2004, the Company concluded negotiations
with Greystone and as a result will receive the final
consideration of $10.0 million on the Vendor Take Back note
plus $2.6 million of interest, and therefore complete the
September 2000 Divestiture Agreement. The interest payment was
received on April 29, 2004 and the $10.0 million note
payment will be received in June 2004. The initial transaction
in 2000 was treated as a deferred sale, as a significant portion
of the proceeds was contingent, and the Company held an option
to repurchase the facilities. The finalization of this
transaction will result in the recognition in the second quarter
of 2004 of a pre-tax gain from the sale of assets of
$4.8 million and interest income of $1.6 million.
Opening of New Assisted Living
Facility
On May 1, 2004, the Company opened a new
assisted living facility (40 units) in Chippewa Falls,
Wisconsin.
Comprehensive Income is as follows for the
periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
|
Ended |
|
Ended |
|
|
March 31, 2004 |
|
March 31, 2003 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
NET EARNINGS
|
|
$ |
9,347 |
|
|
$ |
2,288 |
|
OTHER COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, before tax
|
|
|
958 |
|
|
|
1,123 |
|
|
Gain on cash flow hedges, before tax
|
|
|
67 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, before tax
|
|
|
1,025 |
|
|
|
1,137 |
|
|
Income tax provision related to items of other
comprehensive income
|
|
|
(410 |
) |
|
|
(445 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
615 |
|
|
|
692 |
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
$ |
9,962 |
|
|
$ |
2,980 |
|
|
|
|
|
|
|
|
|
|
|
|
10. |
Commitments and Contingencies |
As of March 31, 2004, the Company had
capital expenditure purchase commitments outstanding of
approximately $8.6 million. During the first quarter of
2004, the Company completed and opened an addition to a nursing
facility (20 beds) and an addition to an assisted living
facility (16 units) with a total cost of approximately
$3.5 million. In addition, the Company has entered into
construction agreements for additions to one nursing facility
(18 beds), additions to three assisted living facilities
(71 units) and the construction of one free-standing
assisted living facility (40 units), which was opened on
May 1, 2004. The Company expects one of the remaining four
projects to be completed in 2004 and the other three projects
F-14
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in early 2005. The total cost of these five
projects is approximately $11.7 million and purchase
commitments of $6.8 million are outstanding.
The Company has also approved eight additional
development projects, which are expected to be completed in 2005
or later, that will expand or add to our assisted living
facilities (329 units). The total cost of these eight
projects is approximately $36.3 million and
$1.5 million of purchase commitments are outstanding.
Insurance and Self-insured
Liabilities
The Company insures certain risks with affiliated
insurance subsidiaries of Extendicare Inc. and third-party
insurers. The insurance policies cover comprehensive general and
professional liability (including malpractice insurance) for the
Companys health providers, assistants and other staff as
it relates to their respective duties performed on the
Companys 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 diligent to address these regulatory
efforts.
Omnicare Preferred Provider
Agreement
In 1998, the Company disposed of its pharmacy
operations to Omnicare, Inc. Subsequently, the Company entered
into a Preferred Provider Agreement, the terms of which enabled
Omnicare to execute Pharmacy Service Agreements and Consulting
Service Agreements with all of the Companys 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 that 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 PPS rates. Omnicare
has 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 for the years 2001 and 2002, and
should this matter not be settled, the matter will be taken to
arbitration. Provisions for settlement of this claim are
included within the financial statements.
In 2002, in connection with its agreements to
provide pharmacy services to the Company, Omnicare, Inc. has
requested arbitration for an alleged lost profits claim related
to the Companys disposition of
F-15
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Regulatory Risks
All providers are subject to surveys and
inspections by state and federal authorities to ensure
compliance with applicable laws and licensure requirements of
the Medicare and Medicaid programs. The survey process is
intended to review the actual provision of care and services,
and remedies for assessed deficiencies can be levied based upon
the scope and severity of the cited deficiencies. Remedies range
from the assessment of fines to the withdrawal of payments under
the Medicare and Medicaid programs. Should a deficiency not be
addressed through a plan of correction, a facility can be
decertified from the Medicare and Medicaid program. As of
March 31, 2004, the Company has certain facilities under
plans of correction. While it is not possible to estimate the
final outcome of the required corrective action, the Company has
accrued for known costs.
|
|
11. |
Uncertainties and Certain Significant
Risks |
Revenues
The Companys earnings are highly contingent
on Medicare and Medicaid funding rates, and the effective
management of staffing and other costs of operations that 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.
Prior to October 1, 2002, the incremental
Medicare relief packages received from the Balanced Budget
Refinement Act (BBRA) and the Benefits Improvement
and Protection Act (BIPA) provided a total of
$2.7 billion in temporary Medicare funding enhancements 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 the 4% base
adjustment. On September 30, 2002, the Legislative Add-ons
expired, or Medicare Cliff, resulting in a reduction
in Medicare rates for all long-term care providers and a
reduction of approximately $16.7 million per annum in
Medicare funding for the Company.
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. In April 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 until
September 30, 2003. In May 2003, CMS released a rule to
maintain the current RUGs classification until October 1,
2004. Further to, but independent of this, Congress enacted
legislation directing CMS to conduct a study on the RUGs
classification system and report its recommendations by January
2005. The implementation of a RUGs Refinement change, where all
or part of the enhancement is discontinued, could have a
significant impact on the Company. Based upon the Medicare case
mix and census for the quarter ended March 31, 2004, the
Company estimates that it received an average $25.27 per
resident day, which on an annualized basis amounts to
$20.5 million related to the RUGs Refinements.
F-16
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. Under the plan
announced by CMS, the reimbursement level would be reduced to
70% over a three year period 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 Part A co-insurance reimbursement plan applicable
to hospitals. CMS did not implement the rule change effective
October 1, 2003, and continues to review the proposed plan.
The Company estimates that should this plan be implemented, the
negative impact on net earnings would be $1.3 million in
2004, increasing to $3.3 million in 2006.
As of March 31, 2004, the States of
Pennsylvania, Indiana, Oregon and Washington have proposed state
plan amendments and waivers pertaining to the fiscal year
commencing July 1, 2003 that are awaiting review and
approval by CMS. As the state plan amendments and waivers have
not been approved, the Company has recorded revenues based upon
amounts received. Based upon the final and CMS approved state
plan amendments and waivers, changes in Medicaid rates and any
associated provider taxes could result in adjustments to
earnings for the period from July 1, 2003 to March 31,
2004.
Interests in Unrelated Long Term Care
Providers
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 March 31, 2004, the Company had
$17.0 million in notes and $7.0 million in non-current
amounts receivable due from unrelated long-term care providers
in Florida and Texas; and owns $15.4 million in nursing
home properties in Texas and Florida. For the three months
ended March 31, 2004 and 2003, the Company earned
$1.6 million and $1.4 million, respectively, in
management and consulting fees, and $0.6 million and
$0.4 million, respectively, in rental revenue from
unrelated long-term care operators that were operating in
properties owned by the Company as of March 31, 2004. As a
result, the earnings and cash flow of the Company can be
influenced by the financial stability of these unrelated
long-term operators.
Medicare and Medicaid Receivables
The Company is attempting to settle a number of
outstanding Medicare and Medicaid receivables. Normally such
items are resolved during an annual audit process and no
provision is required. However, where differences exist between
the Company and the FI, the Company may record a general
provision. The Company continues to negotiate on the remaining
issues and when appropriate seek resolution from the PRRB. No
adjustment to the receivable amount can be determined until
negotiations are concluded on a majority of issues that are
involved in the cost reporting years under appeal. Though the
Company remains confident that it will successfully settle the
issues, an unsuccessful conclusion could negatively impact the
Companys earnings and cash flow. As of March 31, 2004
and December 31, 2003 the Company had $46.1 million
and $51.2 million, respectively, of gross Medicare and
Medicaid settlement receivables with a related contractual
allowance of $14.0 million at both dates. The net amount
receivable represents the Companys estimate of the amount
collectible on Medicare and Medicaid prior period cost reports.
Accrual for Self-Insured Liabilities
The Company had $43.6 million and
$45.1 million in accruals for self-insured liabilities as
of March 31, 2004 and December 31, 2003, respectively.
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.
F-17
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors
Extendicare Health Services, Inc.:
We have audited the accompanying consolidated
balance sheets of Extendicare Health Services, Inc. and
subsidiaries (the Company) as of December 31, 2003 and
2002, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2003. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Extendicare Health Services,
Inc. and subsidiaries as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2003
in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2 of the consolidated
financial statements, the Company changed its method of
accounting for goodwill effective January 1, 2002.
/s/ KPMG
Milwaukee, Wisconsin
February 6, 2004
F-18
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(In thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
48,855 |
|
|
$ |
24,360 |
|
|
Accounts receivable, less allowances of $11,692
and $9,309, respectively
|
|
|
95,338 |
|
|
|
95,996 |
|
|
Assets held under Divestiture Agreement
(Note 5)
|
|
|
33,723 |
|
|
|
|
|
|
Supplies, inventories and other current assets
|
|
|
7,436 |
|
|
|
7,226 |
|
|
Income taxes receivable
|
|
|
|
|
|
|
518 |
|
|
Deferred state income taxes
|
|
|
4,260 |
|
|
|
5,810 |
|
|
Due from shareholder and affiliates:
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes receivable
|
|
|
8,121 |
|
|
|
12,292 |
|
|
|
Deferred federal income taxes
|
|
|
22,584 |
|
|
|
29,647 |
|
|
|
Other
|
|
|
7,010 |
|
|
|
4,493 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
227,327 |
|
|
|
180,342 |
|
Property and equipment (Note 6)
|
|
|
448,743 |
|
|
|
453,119 |
|
Goodwill and other intangible assets (Note 7)
|
|
|
75,193 |
|
|
|
76,339 |
|
Other assets (Note 8)
|
|
|
82,086 |
|
|
|
120,478 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
833,349 |
|
|
$ |
830,278 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt (Note 9)
|
|
$ |
1,223 |
|
|
$ |
716 |
|
|
Accounts payable
|
|
|
20,672 |
|
|
|
20,850 |
|
|
Accrued liabilities (Note 10)
|
|
|
101,614 |
|
|
|
100,879 |
|
|
Deposits held under Divestiture Agreement
(Note 5)
|
|
|
30,000 |
|
|
|
|
|
|
Current portion of accrual for self-insured
liabilities (Note 11)
|
|
|
18,000 |
|
|
|
28,000 |
|
|
Income taxes payable
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
171,532 |
|
|
|
150,445 |
|
Accrual for self-insured liabilities
(Note 11)
|
|
|
27,063 |
|
|
|
27,089 |
|
Long-term debt (Note 9)
|
|
|
391,695 |
|
|
|
397,434 |
|
Deferred state income taxes
|
|
|
7,343 |
|
|
|
8,495 |
|
Other long-term liabilities (Note 12)
|
|
|
11,082 |
|
|
|
40,749 |
|
Due to shareholder and affiliates:
|
|
|
|
|
|
|
|
|
|
Deferred federal income taxes
|
|
|
38,490 |
|
|
|
43,381 |
|
|
Other
|
|
|
3,484 |
|
|
|
3,484 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
650,689 |
|
|
|
671,077 |
|
|
|
|
|
|
|
|
|
|
Shareholders 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 gain (loss)
|
|
|
985 |
|
|
|
(2,388 |
) |
|
Accumulated deficit
|
|
|
(27,113 |
) |
|
|
(47,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
182,660 |
|
|
|
159,201 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$ |
833,349 |
|
|
$ |
830,278 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
F-19
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
For the Years Ended December 31, 2003,
2002 and 2001
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nursing and assisted living facilities
(Note 13)
|
|
$ |
843,414 |
|
|
$ |
787,419 |
|
|
$ |
766,952 |
|
|
Outpatient therapy
|
|
|
11,524 |
|
|
|
10,280 |
|
|
|
9,515 |
|
|
Other
|
|
|
15,494 |
|
|
|
17,352 |
|
|
|
17,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
870,432 |
|
|
|
815,051 |
|
|
|
794,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES (INCOME):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
731,134 |
|
|
|
691,094 |
|
|
|
684,814 |
|
|
General and administrative
|
|
|
30,871 |
|
|
|
32,947 |
|
|
|
32,387 |
|
|
Lease costs
|
|
|
9,113 |
|
|
|
10,642 |
|
|
|
14,575 |
|
|
Depreciation and amortization
|
|
|
37,448 |
|
|
|
37,575 |
|
|
|
40,772 |
|
|
Interest expense
|
|
|
33,981 |
|
|
|
33,654 |
|
|
|
37,857 |
|
|
Interest income
|
|
|
(4,166 |
) |
|
|
(1,379 |
) |
|
|
(2,297 |
) |
|
Loss (gain) on disposal of assets (Note 14)
|
|
|
|
|
|
|
(3,961 |
) |
|
|
1,054 |
|
|
Provision for closure and exit costs and other
items (Note 14)
|
|
|
|
|
|
|
5,293 |
|
|
|
23,192 |
|
|
Loss on early retirement of debt (Note 9)
|
|
|
|
|
|
|
2,849 |
|
|
|
75 |
|
|
Loss on impairment of long-lived assets
(Note 14)
|
|
|
|
|
|
|
|
|
|
|
1,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838,381 |
|
|
|
808,714 |
|
|
|
834,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES
|
|
|
32,051 |
|
|
|
6,337 |
|
|
|
(40,007 |
) |
|
Income tax expense (benefit) (Note 19)
|
|
|
11,965 |
|
|
|
3,117 |
|
|
|
(12,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS)
|
|
$ |
20,086 |
|
|
$ |
3,220 |
|
|
$ |
(27,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
F-20
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
(In thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
|
Accumulated |
|
Earnings |
|
|
|
|
Common Stock |
|
Additional |
|
Other |
|
(Accumulated |
|
Total |
|
|
|
|
Paid-In |
|
Comprehensive |
|
Shareholders |
|
Shareholders |
|
|
Shares |
|
Amount |
|
Capital |
|
Income (Loss) |
|
Deficit) |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES at DECEMBER 31, 2000
|
|
|
947 |
|
|
|
1 |
|
|
$ |
208,787 |
|
|
$ |
(1,703 |
) |
|
$ |
(22,924 |
) |
|
$ |
184,161 |
|
|
Comprehensive income (loss) (Note 20):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
441 |
|
|
|
|
|
|
|
441 |
|
|
|
Unrealized loss on cash flow hedges, net of
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,105 |
) |
|
|
|
|
|
|
(1,105 |
) |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,495 |
) |
|
|
(27,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(664 |
) |
|
|
(27,495 |
) |
|
|
(28,159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES at DECEMBER 31, 2001
|
|
|
947 |
|
|
|
1 |
|
|
|
208,787 |
|
|
|
(2,367 |
) |
|
|
(50,419 |
) |
|
|
156,002 |
|
|
Comprehensive income (loss) (Note 20):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments, net of income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(995 |
) |
|
|
|
|
|
|
(995 |
) |
|
|
Unrealized gain on cash flow hedges, net of
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
974 |
|
|
|
|
|
|
|
974 |
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,220 |
|
|
|
3,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21 |
) |
|
|
3,220 |
|
|
|
3,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES at DECEMBER 31, 2002
|
|
|
947 |
|
|
|
1 |
|
|
|
208,787 |
|
|
|
(2,388 |
) |
|
|
(47,199 |
) |
|
|
159,201 |
|
|
Comprehensive income (Note 20):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,341 |
|
|
|
|
|
|
|
3,341 |
|
|
|
Unrealized gain on cash flow hedges, net of
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
32 |
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,086 |
|
|
|
20,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,373 |
|
|
|
20,086 |
|
|
|
23,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES at DECEMBER 31, 2003
|
|
|
947 |
|
|
$ |
1 |
|
|
$ |
208,787 |
|
|
$ |
985 |
|
|
$ |
(27,113 |
) |
|
$ |
182,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
F-21
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
For the Years Ended December 31, 2003,
2002 and 2001
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$ |
20,086 |
|
|
$ |
3,220 |
|
|
$ |
(27,495 |
) |
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
37,448 |
|
|
|
37,575 |
|
|
|
40,772 |
|
|
Amortization of deferred financing costs
|
|
|
1,496 |
|
|
|
1,722 |
|
|
|
2,083 |
|
|
Provision for self-insured liabilities
(Note 11)
|
|
|
6,000 |
|
|
|
5,250 |
|
|
|
29,177 |
|
|
Payment for self-insured liability claims
|
|
|
(16,026 |
) |
|
|
(20,877 |
) |
|
|
(8,924 |
) |
|
Provision for uncollectible accounts receivable
|
|
|
11,038 |
|
|
|
10,937 |
|
|
|
8,945 |
|
|
Loss (gain) on disposal of assets
(Note 14)
|
|
|
|
|
|
|
(3,961 |
) |
|
|
1,054 |
|
|
Provision for closure and exit costs and other
items (Note 14)
|
|
|
|
|
|
|
5,293 |
|
|
|
12,228 |
|
|
Loss on impairment of long-lived assets
(Note 14)
|
|
|
|
|
|
|
|
|
|
|
1,685 |
|
|
Deferred income taxes
|
|
|
1,820 |
|
|
|
11,351 |
|
|
|
(13,056 |
) |
|
Loss on early retirement of debt
|
|
|
|
|
|
|
2,849 |
|
|
|
75 |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(10,551 |
) |
|
|
(11,515 |
) |
|
|
23,509 |
|
|
Other assets
|
|
|
3,793 |
|
|
|
6,680 |
|
|
|
804 |
|
|
Supplies, inventories and other current assets
|
|
|
(211 |
) |
|
|
(638 |
) |
|
|
2,531 |
|
|
Accounts payable
|
|
|
(178 |
) |
|
|
(2,322 |
) |
|
|
962 |
|
|
Accrued liabilities
|
|
|
604 |
|
|
|
14,569 |
|
|
|
(13,843 |
) |
|
Income taxes payable/receivable
|
|
|
526 |
|
|
|
(80 |
) |
|
|
212 |
|
|
Current due to shareholder and affiliates
|
|
|
188 |
|
|
|
(21,221 |
) |
|
|
21,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
56,033 |
|
|
|
38,832 |
|
|
|
82,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
34 |
|
|
|
14,315 |
|
|
|
7,599 |
|
|
Payments for acquisitions (Note 4)
|
|
|
(4,124 |
) |
|
|
(17,930 |
) |
|
|
|
|
|
Payments for new construction projects
|
|
|
(4,304 |
) |
|
|
|
|
|
|
|
|
|
Payments for purchases of property and equipment
|
|
|
(21,029 |
) |
|
|
(18,659 |
) |
|
|
(16,348 |
) |
|
Changes in other non-current assets
|
|
|
2,651 |
|
|
|
(141 |
) |
|
|
(8,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(26,772 |
) |
|
|
(22,415 |
) |
|
|
(16,755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
(Note 9)
|
|
|
|
|
|
|
171,122 |
|
|
|
|
|
|
Payments of deferred financing costs (Note 9)
|
|
|
|
|
|
|
(7,090 |
) |
|
|
|
|
|
Payments of long-term debt (Note 9)
|
|
|
(5,267 |
) |
|
|
(158,335 |
) |
|
|
(65,797 |
) |
|
Other long-term liabilities
|
|
|
501 |
|
|
|
1,839 |
|
|
|
(769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(4,766 |
) |
|
|
7,536 |
|
|
|
(66,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
24,495 |
|
|
|
23,953 |
|
|
|
(695 |
) |
Cash and cash equivalents, beginning of year
|
|
|
24,360 |
|
|
|
407 |
|
|
|
1,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$ |
48,855 |
|
|
$ |
24,360 |
|
|
$ |
407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
F-22
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Extendicare Health Services, Inc. and its
subsidiaries (hereafter referred to as the Company)
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.
At December 31, 2003, the Company operated
or managed 154 nursing facilities with capacity for
15,945 beds and 39 assisted living facilities with
1,865 units. Through its nursing centers, the Company
provides nursing, rehabilitative and other specialized medical
services and, in the assisted living facilities, the Company
provides varying levels of assistance with daily living
activities to residents. The Company also provides consulting
services to 61 nursing facilities (7,483 beds) and two
assisted living facilities (186 units).
In addition, at December 31, 2003, the
Company owned 10 nursing facilities (1,065 beds), which were
leased to and operated by two unrelated nursing home providers,
and retained an interest in (but did not operate) 11 nursing
facilities (1,435 beds) and 4 assisted living facilities
(135 units) under a Divestiture Agreement (see Note 5).
|
|
2. |
Summary of Significant Accounting
Policies |
a) Principles of Consolidation
The consolidated financial statements of the
Company have been prepared in accordance with accounting
principles generally accepted in the United States of America.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Managements most significant estimates include
provision for bad debts, provision for Medicaid and Medicare
revenue rate settlements, recoverability of long-lived assets,
provision for general liability, facility closure accruals,
workers compensation accruals and self-insured health and
dental claims. Actual results could differ from those estimates.
The consolidated financial statements include
those of the Company and subsidiaries the Company controls. All
significant intercompany accounts and transactions with
subsidiaries have been eliminated from the consolidated
financial statements.
b) Cash and Cash Equivalents
Cash and cash equivalents include unrestricted
cash and short-term investments less bank overdrafts and
outstanding checks. Short-term investments, comprised of money
market instruments, have a maturity of 90 days or less from
their date of purchase and are stated at cost, which
approximates net realizable value. For purposes of the
Consolidated Statements of Cash Flows, the Company considers all
cash and highly liquid investments that have a maturity of
90 days or less to be cash equivalents.
c) Accounts Receivable
Accounts receivable are recorded at the net
realizable value expected to be received from federal and state
assistance programs, other third-party payors or from individual
residents. Receivables from government agencies represent the
only concentrated group of accounts receivable for the Company.
The Company had approximately 23%, 24% and 25% as
of December 31, 2003, 2002 and 2001, respectively, in
accounts receivable derived from services provided under various
federal (Medicare) programs and 40%, 41% and 38% as of the same
dates derived from services provided under various state
F-23
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
medical assistance programs (Medicaid).
Management does not believe there are any credit risks
associated with these government agencies other than possible
funding delays. Accounts receivable other than from government
agencies consist of receivables from various payors that are
subject to differing economic conditions and do not represent
any concentrated credit risks to the Company.
The Company periodically evaluates the adequacy
of its allowance for doubtful accounts by conducting a specific
account review of amounts in excess of predefined target amounts
and aging thresholds, which vary by payor type. Provisions are
considered based upon the evaluation of the circumstances for
each of these specific accounts. In addition, the Company has
established a standard allowance requirement percentage which is
based upon historical collection trends for each payor type, and
its understanding of the nature and collectibility of these
receivables. Accounts receivable that the Company specifically
estimates to be uncollectible, based upon the above process, are
fully reserved for in the allowance for doubtful accounts until
they are written-off or collected.
d) Property and Equipment
Property and equipment are stated at cost less
accumulated depreciation and amortization. Provisions for
depreciation and amortization are computed using the
straight-line method at rates based upon the following estimated
useful lives:
|
|
|
Land improvements
|
|
10 to 25 years
|
Buildings
|
|
30 to 40 years
|
Building improvements
|
|
5 to 30 years
|
Furniture and equipment
|
|
Varying periods not exceeding 15 years
|
Leasehold improvements
|
|
The shorter of the term of the applicable leases
or the useful life of the improvement
|
Construction in progress includes pre-acquisition
costs and other direct costs related to acquisition, development
and construction of properties, including interest, which are
capitalized until the facility is opened. Depreciation of the
facility, including interest capitalized, is commenced the month
after the facility is opened and based upon the useful life of
the asset, as outlined above. Leased nursing facility assets
held under Option Agreements are stated at cost less accumulated
depreciation. Provisions for depreciation of leased facilities
are computed as outlined above.
Computer software is included within furniture
and equipment and amortized over a five-year period.
Approximately $118,000, $739,000 and $1,118,000 of costs
included in furniture and equipment associated with developing
or obtaining internal-use software were capitalized during the
years ended December 31, 2003, 2002 and 2001, respectively,
and are being amortized over three years.
Maintenance and repairs are charged to expense as
incurred. When property or equipment is retired or disposed, the
cost and related accumulated depreciation and amortization are
removed from the accounts and the resulting gain or loss is
included in the results of operations.
e) Leases
Leases that substantially transfer all of the
benefits and risks of ownership of property to the Company, or
otherwise meet the criteria for capitalizing a lease under
accounting principles generally accepted in the United States of
America, are accounted for as capital leases. An asset is
recorded at the time a capital lease is entered into together
with its related long-term obligation to reflect its purchase
and financing. Property and equipment recorded under capital
leases are depreciated on the same basis as previously
described. Rental payments under operating leases are expensed
as incurred.
F-24
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
f) Goodwill and Other Intangible
Assets
Goodwill represents the cost of acquired net
assets in excess of their fair market values. As of
January 1, 2002, the Company adopted the Statement of
Financial Accounting Standards (SFAS) issued by the
Financial Accounting Standards Board (FASB)
No. 142, Goodwill and Other Intangible Assets
which requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized but instead
tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. As a result, the
amortization of goodwill and intangible assets with an
indefinite life ceased upon adoption of the Statement.
SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with
SFAS No. 144. If an intangible asset is identified as
having an indefinite useful life, the Company is required to
test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 (see paragraph (g)
below for more information).
Prior to January 2002, goodwill and other
intangible assets were amortized using the straight-line method
over a period of no more than forty years in connection with the
acquisitions of long-term care facilities. As of January 1,
2002 the Company had unamortized goodwill in the amount of
$72.1 million (cost of $83.3 million less accumulated
amortization of $11.2 million), which were subject to the
provisions of SFAS No. 142. Upon adoption of
SFAS No. 142 and in December 2003, the Company
reviewed goodwill for impairment and these tests indicated that
no impairment existed. No assurance can be given that impairment
will not exist in the future.
The following table shows what net income would
have been had SFAS No. 142 been applied in the
comparable prior year periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Net income (loss) as reported
|
|
$ |
20,086 |
|
|
$ |
3,220 |
|
|
$ |
(27,495 |
) |
Add back: goodwill amortization
|
|
|
|
|
|
|
|
|
|
|
2,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss)
|
|
$ |
20,086 |
|
|
$ |
3,220 |
|
|
$ |
(25,047 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets, consisting of the costs
of acquiring leasehold rights are deferred and amortized over
the term of the lease including renewal options.
g) Long-lived Assets
The Company periodically assesses the
recoverability of long-lived assets, including property and
equipment, in accordance with the provisions of
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement requires
that all long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by comparison of the carrying value
of an asset to the undiscounted future cash flows expected to be
generated by the asset. If the carrying value of an asset
exceeds its estimated undiscounted future cash flows, an
impairment provision is recognized to the extent of the excess
amount. Assets to be disposed of are reported at the lower of
the carrying amount or the fair value of the asset, less all
associated costs of disposition. In addition,
SFAS No. 144 requires companies to separately report
discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by
sale, abandonment, or in a distribution to owners) or is
classified as held for sale. Management considers such factors
as current results, trends and future prospects, current market
value, and other economic and regulatory factors, in performing
these analyses.
F-25
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
h) Other Assets and Assets under
Divestiture Agreement
Assets held under Divestiture Agreement (see
Note 5) are stated at cost less accumulated depreciation.
Provisions for depreciation are computed as outlined above in
Note 2(d).
The Company has settlement accounts receivable
due from the federal Medicare program, and certain state
Medicare programs with retrospective reimbursement systems. The
Medicare program, prior to the implementation of the Prospective
Payment System (PPS) on January 1, 1999, was a
cost-based reimbursement program under which nursing facilities
received interim payments for each facilitys respective
reimbursable costs, which could be subject to adjustment based
upon the submission of a year-end cost report and certain cost
limits. The year-end cost report would be subject to audit by
the Companys Fiscal Intermediary (FI) and
could lead to ongoing discussions with the FI regarding the
treatment of various items related to prior years cost
reports. Normally items are resolved during the audit process
and no provisions are required. For items involving differences
of opinion between the Company and the FI regarding cost report
methods, such items can be settled through a formal appeal
process. Should this occur, a general provision for Medicare
receivables may be provided for disagreements, which result in
the provider filing an appeal with the Provider Reimbursement
Review Board (PRRB) of the Centers for Medicare and
Medicaid Services (CMS). Similarly, for states that
operate under a retrospective reimbursement system under which
interim payments are subject to audits, the Company evaluates
and determines the amount of potential settlement accounts
receivable or payable. The Company periodically reviews the
accounts receivable and the general contractual allowance for
settlement of amounts in dispute, and adjusts its balances
accordingly based upon known facts at the time. An adjustment to
settlement receivable amount and recorded revenues would occur
upon, resolution of issues in dispute, or upon issues being
settled at the PRRB. In addition, the Company estimates the
portion of the Medicaid and Medicare settlement accounts
receivable that are estimated to be collectible within the next
12 months and classifies this amount as a current asset.
Notes receivables are stated at the face value of
the note. The Company monitors the payment of interest due on
the notes and, where provided within the terms of the notes,
reviews the financial statements of the company owing the amount
to assess the ultimate collectibility of the notes. Should
circumstances arise that the collectibility of the note is
doubtful, an allowance will be reflected against the note
receivable.
Direct loan origination costs are recorded as
deferred financing costs and amortized over the life of the
related debt using the effective interest method.
Debt service and capital expenditure trust funds
and other investment holdings, which are comprised of fixed
interest securities, equity securities, and liquid money market
investments, are considered to be available-for-sale and
accordingly, are reported at fair value. Fair values are based
on quoted market prices. Unrealized gains and losses, net of
related tax effects, are reported within Accumulated Other
Comprehensive Income (AOCI) as a separate component
of shareholders equity. A decline in the market value of
any security below cost that is deemed other than temporary is
charged to earnings, resulting in the establishment of a new
cost basis for the security. The cost basis of the debt service
trust funds approximates fair value. Realized gains and losses
for securities classified as available-for-sale are included in
the results of operations and are derived using the specific
identification method for determining the cost of securities
sold. Interest income is recognized when earned.
i) Revenue Recognition
Nursing facility revenue results from the payment
for services and products from federal and state-funded cost
reimbursement programs as well as private pay residents.
Revenues are recorded in the period in which services and
products are provided at established rates less contractual
adjustments. Contractual
F-26
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
adjustments include differences between the
Companys established billing rates and amounts estimated
by management as reimbursable under various reimbursement
formulas or contracts in effect. Estimation differences between
final settlements and amounts recorded in previous years are
reported as adjustments to revenues in the period such
settlements are determined. Refer also to Note 13.
Assisted living facility revenue is primarily
derived from private pay residents in the period in which the
services are provided and at rates established by the Company
based upon the services provided and market conditions in the
area of operation.
j) Derivative Instruments and Hedging
Activities
All derivative instruments are recorded on the
balance sheet at their respective fair values in accordance with
SFAS No. 133 and SFAS No. 138. On the date
the derivative contract is entered into, the Company designates
the derivative as either a hedge of the fair value of a
recognized asset or liability (fair value hedge) or
a hedge of the variability of cash flows to be received or paid
related to a recognized asset or liability (cash flow
hedge). The Company assesses, both at the hedges
inception and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedge items.
When it is determined that a derivative is not highly effective
as a hedge or that it has ceased to be a highly effective hedge,
the Company discontinues the hedge accounting prospectively.
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 a derivative that is highly effective and that is
designated and qualifies as a cash-flow hedge are recorded in
other comprehensive income, until earnings are affected by the
variability in cash flows of the designated hedged item.
The Company discontinues hedge accounting
prospectively when it is determined that the derivative is no
longer effective in offsetting changes in the fair value or cash
flows of the hedged item, the derivative expires or is sold,
terminated, or exercised, or because management determines that
designation of the derivative as a hedging instrument is no
longer appropriate. When hedge accounting is discontinued
because it is determined that the derivative no longer qualifies
as an effective fair-value hedge, the Company continues to carry
the derivative on the balance sheet at its fair value, and no
longer adjusts the hedged asset or liability for changes in fair
value. In all other situations in which hedge accounting is
discontinued, the Company continues to carry the derivative at
its fair value on the balance sheet, and recognizes any changes
in its fair value in earnings.
k) Income Taxes
Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the expected future tax consequences attributable
to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
l) Reclassifications
Certain reclassifications have been made to the
2002 and 2001 consolidated financial statements to conform to
the presentation for 2003.
F-27
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
3. |
New Accounting Pronouncements |
In December 2003, the FASB issued revised
SFAS No. 132, which revised employers
disclosures about pension plans and other postretirement plans.
The disclosures required by SFAS No. 132 are included
in Note 12.
In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45),
Guarantors 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 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 are effective for exit or disposal
activities initiated after December 31, 2002. The Company
has not initiated any exit or disposal activities after
December 31, 2002 and thus SFAS No. 146 has had
no impact on the Companys financial statements.
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 beginning on January 1, 2003 and has modified the
presentation of its year 2002 and 2001 results by recording the
loss on early retirement of debt in earnings before income taxes.
On December 31, 2003 the Company acquired
one skilled nursing facility (99 beds) in Wisconsin for
$4.1 million in cash. The Company has a letter of intent to
purchase an adjacent parcel of land for $0.3 million, which
is anticipated to be purchased in the first quarter of 2004.
On October 1, 2002 the Company completed a
transaction, which 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 of the interest rate continues with
the seller who holds the note and failing any agreement will be
settled through arbitration. In the latter part of 2003, the
Company prepaid $4.5 million against the note and agreed to
refinance the 10-year note. As of December 31, 2003, should
the Company not proceed to refinance the facilities, the
interest rate would be settled through the re-opening of
arbitration with the seller.
|
|
5. |
Assets (and Deposits held) Under Divestiture
Agreement |
Assets Held Under Divestiture
Agreement
In September 2000, the Company disposed of eleven
Florida nursing facilities (1,435 beds) and four Florida
assisted living facilities (135 units) to Greystone Tribeca
Acquisition, L.L.C. (Greystone) for initial cash
proceeds of $30.0 million and contingent consideration in
the form of a $10.0 million Vendor Take Back note and two
other contingent and interest bearing notes. The three notes
have an aggregate
F-28
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
potential value of up to $30.0 million plus
interest. The notes are due in March 2004 and may be retired at
any time out of the proceeds from the sale or refinancing of the
facilities by Greystone. For the period September 2000 through
March 2004, the Company retained the right of first refusal to
repurchase the facilities. The Company also retained an option
to repurchase the facilities until March 2003; however, the
Company elected not to place an offer to repurchase the
facilities. Upon maturity of the notes in March 2004, unless the
facilities are sold or refinanced, the Company is entitled to
receive the $10.0 million Vendor Take Back note and accrued
interest pursuant to the terms of the Vendor Take Back and other
contingent notes.
In 2000, the option to repurchase along with the
significant portion of the sales price being contingent,
resulted in the disposition being accounted for as a deferred
sale in accordance with SFAS No. 66. There was no gain
or loss recorded on the initial transaction, and the Company
continues to depreciate the fixed assets on its records, which
as of December 31, 2003 had a net book value of
$33.7 million and have been classified as Assets held
under Divestiture Agreement.
As at December 31, 2003 the Company
anticipated the final consideration to be received in 2004, and
therefore the Assets held under Divestiture
Agreement have been classified as a current asset as of
December 31, 2003. Upon receipt of the final consideration,
the Company will record the disposition of the assets and a gain
based upon difference of the total consideration received and
net book value of the Assets Held under the Divestiture
Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Assets held under Divestiture Agreement:
|
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$ |
3,083 |
|
|
$ |
3,083 |
|
|
Building
|
|
|
55,526 |
|
|
|
55,527 |
|
|
Furniture and equipment
|
|
|
8,872 |
|
|
|
9,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
67,481 |
|
|
|
67,795 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
33,758 |
|
|
|
31,568 |
|
|
|
|
|
|
|
|
|
|
Assets held under Divestiture Agreement
|
|
$ |
33,723 |
|
|
$ |
36,227 |
|
|
|
|
|
|
|
|
|
|
Deposits Held Under Divestiture
Agreement
The initial cash proceeds of $30.0 million
have been classified in the balance sheet as Deposits held
under Divestiture Agreement (refer to Note 12).
Consistent to the reclassification of the Assets Held under
Divestiture Agreement, the Deposits held under Divestiture
Agreement have been classified as a current liability as of
December 31, 2003.
F-29
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
6. |
Property and Equipment |
Property and equipment and related accumulated
depreciation and amortization as of December 31 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Land and land improvements
|
|
$ |
40,576 |
|
|
$ |
38,539 |
|
Buildings and improvements
|
|
|
578,531 |
|
|
|
556,461 |
|
Furniture and equipment
|
|
|
68,432 |
|
|
|
63,200 |
|
Leasehold improvements
|
|
|
11,393 |
|
|
|
7,487 |
|
Construction in progress (Note 17)
|
|
|
5,952 |
|
|
|
2,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
704,884 |
|
|
|
668,313 |
|
Less accumulated depreciation and amortization
(Note 2(d))
|
|
|
256,141 |
|
|
|
215,194 |
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$ |
448,743 |
|
|
$ |
453,119 |
|
|
|
|
|
|
|
|
|
|
Included within property and equipment are
properties leased to unrelated operators (refer to Note 15).
|
|
7. |
Goodwill and Other Intangible Assets |
Goodwill and other intangible assets consisted of
the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Goodwill
|
|
$ |
81,916 |
|
|
$ |
81,916 |
|
Leasehold rights
|
|
|
10,016 |
|
|
|
10,853 |
|
|
|
|
|
|
|
|
|
|
Total goodwill and intangible assets before
accumulated amortization (Note 2(f))
|
|
|
91,932 |
|
|
|
92,769 |
|
Less accumulated amortization
|
|
|
16,739 |
|
|
|
16,430 |
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets, net
|
|
$ |
75,193 |
|
|
$ |
76,339 |
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense for leasehold
rights for the years ended December 31, 2003 and 2002 was
$1.1 million and $1.3 million, respectively. Estimated
amortization expense for the next five years is
$1.1 million in 2004, $1.1 million in 2005, $577,000
in 2006, $194,000 in 2007 and $21,000 in 2008.
F-30
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Other assets consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Assets held under Divestiture Agreement (see
Note 5)
|
|
$ |
|
|
|
$ |
36,227 |
|
Non-current accounts receivable from Medicare and
Medicaid programs, less contractual allowance of $8,470 and
$15,419 in 2003 and 2002, respectively (see Note 13)
|
|
|
25,938 |
|
|
|
29,731 |
|
Notes receivable
|
|
|
21,402 |
|
|
|
21,569 |
|
Deferred financing costs, net
|
|
|
10,562 |
|
|
|
11,947 |
|
Non-current accounts receivable from facilities
under consulting agreements
|
|
|
6,901 |
|
|
|
8,068 |
|
Common shares held for investment
|
|
|
5,810 |
|
|
|
3,590 |
|
Warrants held for investment
|
|
|
4,375 |
|
|
|
1,027 |
|
Indemnification escrow
|
|
|
3,700 |
|
|
|
3,700 |
|
Security deposits
|
|
|
363 |
|
|
|
1,227 |
|
Debt service and capital expenditure trust funds
|
|
|
308 |
|
|
|
899 |
|
Other
|
|
|
2,727 |
|
|
|
2,493 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
82,086 |
|
|
$ |
120,478 |
|
|
|
|
|
|
|
|
|
|
Medicare and Medicaid Settlement
Receivables
For Medicare revenues earned prior to the
implementation of PPS, and Medicaid programs with a
retrospective reimbursement system, differences between revenues
that the Company ultimately expects to realize from these
programs and amounts received are reflected as accounts
receivable; or as accrued liabilities when payments have
exceeded revenues that the Company ultimately expects to
realize. Accounts receivable from both Medicare and Medicaid
state programs, net of a general contractual allowance, at
December 31, 2003 totaled $37.2 million
(2002 $46.3 million). Of the total net Medicare
and Medicaid settlement receivable balance, $11.3 million
(2002 $16.6 million) is expected to be
substantially collected within one year and included within
accounts receivable as a current asset. The balance of
$25.9 million (2002 $29.7 million), is
reported within Other Assets. The Company is
pursuing collection of a number of outstanding Medicaid and
Medicare settlement issues.
For one specific Medicare receivable issue, which
concerns fiscal years prior to the implementation of the PPS and
involves the allocation of overhead costs, the first of three
specific claim years was presented to the Provider Reimbursement
Review Board (PRRB) at a hearing in January 2003.
The hearing procedures were discontinued after the parties
negotiated a methodology for resolution of the claim for one of
the years in dispute. The negotiated settlement for this and
other issues relating to the 1996 cost report year, resulted in
no adjustment to the recorded receivable balance, and the
Company subsequently collected $3.0 million from the FI.
For the remaining two specific claim years, the Company
continues to negotiate with the FI for the recovery of
$11.5 million. Failing a negotiated settlement, the Company
will proceed to file an appeal with the PRRB. A PRRB hearing has
been scheduled in April 2004, for one of the two remaining years
under appeal.
For another specific issue involving a staffing
cost matter, a settlement of the first year of seven specific
claim years was reached prior to the January 2003 PRRB hearing,
and during 2003 the Company continued to negotiate the remaining
years in dispute with the FI. In January 2004, the Company
negotiated all remaining years that resulted in a cash
settlement of $5.6 million to be received in the first
F-31
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
quarter of 2004. The settlement will result in no
significant adjustment from the recorded receivable balance.
The Company also has a hearing scheduled in
September 2004 on a Director of Nursing staff cost issue
involving a claim for $3.8 million.
In the third and fourth quarters of 2003, the
Company made a provision for $2.2 million and
$1.8 million, respectively, pertaining to individual claims
in dispute with the FI for the cost report years 1996 through
1998. Of the $1.8 million fourth quarter provision,
$1.3 million pertains to discontinued operations, and
therefore, was applied to the previously accrued divested
operations liability balance (refer to Note 10). The net
adjustment of $2.7 million resulted in a reduction of
revenues during 2003.
Notes Receivable
The Company holds $21.4 million in notes
receivable due from Tandem Health Care, Inc.
(Tandem). For $17.4 million of the notes that
resulted from the sale of properties in 2001 and 2002, the notes
are due between April 2006 and May 2007. A $4.0 million
note, along with the $3.7 million indemnification escrow
funds (included in Other Assets and Other Long-term Liabilities)
is due on December 2007. All interest payments remain current.
Other Investment Holdings
The Company holds 1.5 million in Omnicare
Inc. (Omnicare) warrants, which are valued in
accordance with the Black-Scholes method and had an original
attributed cost of $4.0 million pursuant to the Omnicare
divestiture in 1998. The warrants have an option price of
$48.00 per share and expire in September 2005. The market
value of an Omnicare share as of December 31, 2003 was
$40.39.
Accumulated amortization of deferred financing
costs as of December 31, 2003 and 2002 was
$5.9 million and $4.5 million, respectively.
|
|
9. |
Line of Credit and Long-Term Debt |
Long-term debt consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Senior Notes
|
|
$ |
149,676 |
|
|
$ |
149,641 |
|
Senior Subordinated Notes
|
|
|
200,000 |
|
|
|
200,000 |
|
Industrial Development Bonds, variable interest
rates ranging from 1.15% to 6.25%, maturing through 2014,
secured by certain facilities
|
|
|
33,160 |
|
|
|
33,355 |
|
Promissory notes payable, interest rates ranging
from 3.0% to 10.5%, maturing through 2012
|
|
|
6,476 |
|
|
|
11,356 |
|
Mortgages, interest rates ranging from 7.25% to
13.61% maturing through 2007
|
|
|
3,578 |
|
|
|
3,753 |
|
Other, primarily capital lease obligations
|
|
|
28 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
Long-term debt before current maturities
|
|
|
392,918 |
|
|
|
398,150 |
|
Less current maturities
|
|
|
1,223 |
|
|
|
716 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$ |
391,695 |
|
|
$ |
397,434 |
|
|
|
|
|
|
|
|
|
|
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
F-32
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
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 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 16 for the terms of the swap and cap 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 Companys option, at the Eurodollar
rate or the prime rate, plus applicable margins, depending upon
the Companys leverage ratio. As of December 31, 2003
the Company had no borrowings from 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
$45.3 million, was $59.7 million as of
December 31, 2003.
The Credit Facility is secured by a perfected,
first priority security interest in certain tangible and
intangible assets and all of the Company and the Companys
subsidiary capital stock. The Credit Facility is also secured by
a pledge of 65% of the voting shares of the voting stock of the
Company and the Companys subsidiary guarantors
foreign subsidiaries, if any. The credit facility contains
customary covenants and events of default and is subject to
various mandatory prepayments and commitment reductions.
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 Companys 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 all of the
financial covenants as of December 31, 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
Companys subsidiaries that do not guarantee the Senior
Notes are minor. There are no significant restrictions on the
ability of the Company to obtain funds from its subsidiaries by
loan or dividend.
In December 1997, the Company issued
$200 million of 9.35% Senior Subordinated Notes due
2007 (the Senior Subordinated Notes). The Senior
Subordinated Notes are unsecured senior subordinated obligations
of the Company subordinated in right of payment to all existing
and future senior indebtedness of the Company, which includes
all borrowings under the Credit Facility as well as all
indebtedness not
F-33
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
refinanced by the Credit Facility. At
December 31, 2003, Extendicare Inc. held $27.9 million
of the Senior Subordinated Notes. The Senior Subordinated Notes
mature on December 15, 2007. Interest on the Senior
Subordinated Notes is payable semi-annually.
The Senior Subordinated Notes are redeemable at
the option of the Company. The redemption prices, if redeemed
during the 12-month period beginning on December 15 of the
year indicated, are as follows:
|
|
|
|
|
Year |
|
Percentage |
|
|
|
2003
|
|
|
103.117 |
% |
2004
|
|
|
101.558 |
% |
2005 and thereafter
|
|
|
100.000 |
% |
Principal payments on long-term debt due within
the next five years and thereafter are as follows (dollars in
thousands):
|
|
|
|
|
2004
|
|
$ |
1,223 |
|
2005
|
|
|
1,287 |
|
2006
|
|
|
1,313 |
|
2007
|
|
|
204,174 |
|
2008
|
|
|
1,221 |
|
After 2008
|
|
|
183,700 |
|
|
|
|
|
|
|
|
$ |
392,918 |
|
|
|
|
|
|
Interest paid in 2003, 2002 and 2001 was
$32.7 million, $26.2 million and $35.5 million,
respectively.
Accrued liabilities consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Salaries and wages, fringe benefits and payroll
taxes
|
|
$ |
41,620 |
|
|
$ |
40,660 |
|
Workers compensation
|
|
|
18,957 |
|
|
|
13,425 |
|
Other claims
|
|
|
11,245 |
|
|
|
12,401 |
|
Interest and financing
|
|
|
7,970 |
|
|
|
8,601 |
|
Reserves for divested operations and facility
closures
|
|
|
7,291 |
|
|
|
9,718 |
|
Real estate, utilities and other taxes
|
|
|
6,702 |
|
|
|
7,331 |
|
Other operating expense
|
|
|
3,366 |
|
|
|
2,072 |
|
State bed fees and other assessments
|
|
|
2,718 |
|
|
|
1,326 |
|
Medicaid accrued liabilities
|
|
|
1,745 |
|
|
|
5,345 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
101,614 |
|
|
$ |
100,879 |
|
|
|
|
|
|
|
|
|
|
Reserves for divested operations and facility
closures primarily relate to provisions for the settlement of
Medicare and Medicaid claims and other amounts with third
parties. The settlement of such amounts are dependent on actions
by those third parties and negotiations by the Company, and
therefore may not be resolved within the next or several years.
F-34
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Below is a summary of activity of the accrued
liabilities balance relating to divested operations and facility
closures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare, |
|
|
|
|
|
|
|
|
Medicaid and |
|
Resident and |
|
|
|
|
|
|
Supplier Claims |
|
Employee Claims |
|
Other |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Balance December 31, 2000
|
|
$ |
736 |
|
|
$ |
233 |
|
|
$ |
2,545 |
|
|
$ |
3,514 |
|
|
Cash Payments
|
|
|
(463 |
) |
|
|
(2,490 |
) |
|
|
(4,787 |
) |
|
|
(7,740 |
) |
|
Provisions
|
|
|
1,623 |
|
|
|
4,562 |
|
|
|
6,043 |
|
|
|
12,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2001
|
|
|
1,896 |
|
|
|
2,305 |
|
|
|
3,801 |
|
|
|
8,002 |
|
|
Cash Payments
|
|
|
(863 |
) |
|
|
(1,051 |
) |
|
|
(2,777 |
) |
|
|
(4,691 |
) |
|
Provisions(1)
|
|
|
7,066 |
|
|
|
64 |
|
|
|
(723 |
) |
|
|
6,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2002
|
|
|
8,099 |
|
|
|
1,318 |
|
|
|
301 |
|
|
|
9,718 |
|
|
Cash Payments
|
|
|
(565 |
) |
|
|
(824 |
) |
|
|
(141 |
) |
|
|
(1,530 |
) |
|
Provisions(2)
|
|
|
(897 |
) |
|
|
|
|
|
|
|
|
|
|
(897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
$ |
6,637 |
|
|
$ |
494 |
|
|
$ |
160 |
|
|
$ |
7,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In 2002, provisions include a provision for
closure and exit costs of $5.3 million and selling expenses
of $1.2 million relating to the sale of assets to Tandem.
|
|
(2) |
In 2003, provisions include the write-off of
$1.3 million of previously accrued Medicare claims
receivable relating to discontinued operations (refer to
Note 13(c)).
|
|
|
11. |
Accrual For Self-Insured Liabilities |
The Company insures certain risks with affiliated
insurance subsidiaries of Extendicare, and certain third-party
insurers. The insurance policies cover comprehensive general and
professional liability, workers compensation and
employers liability insurance in amounts and with such
coverage and deductibles as the Company deems appropriate, based
on the nature and risks of its business, 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. As a
result of limited availability from third party insurers or
availability at an excessive cost or deductible, since January
2000, the Company self-insures for comprehensive general and
professional liability (including malpractice exposure arising
from duties performed on the Companys behalf by
professional staff, assistants and other staff) up to a certain
amount per incident. Self-insured liabilities with respect to
general and professional liability claims are included within
the Accrual for Self-insured Liabilities. The Companys
accrual for self-insured health and dental claims, and
workers compensation are included in accrued liabilities
(see Note 10).
Management regularly evaluates the
appropriateness of the carrying value of the self-insured
liability through an independent actuarial review. General and
professional liability claims are the most volatile and
significant of the risks for which the Company self-insures.
Managements estimate of the accrual for general and
professional liability costs is significantly influenced by
assumptions, which are limited by the uncertainty of predicting
future events, and assessments regarding expectations of several
factors. Such factors include, but are not limited to: the
frequency and severity of claims, which can differ materially by
jurisdiction; coverage limits of third-party reinsurance; the
effectiveness of the claims management process; and the outcome
of litigation. In addition, the Company estimates the amount of
general and professional liability claims it will pay in the
subsequent year and classifies this amount as a current
liability.
In 2000, the Company experienced adverse claims
development resulting in an increase in the accrual for
self-insured liabilities. Consequently, as of January 1,
2000 the Companys per claim retained risk increased
significantly for general and professional liability coverage
mainly due to the level of risk
F-35
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
associated with Florida and Texas operations. As
of January 1, 2001, the Company no longer operated nursing
and assisted living facilities in Florida and as of
October 1, 2001 ceased nursing operations in Texas, thereby
reducing the level of exposure to future litigation in these
litigious states. However, as a result of an increase in the
frequency and severity of claims the Company recorded an
additional $11.0 million provision (refer to
Note 14) to increase its accrual for resident care
liability in the third quarter of 2001. This additional accrual
was based upon an independent actuarial review and was largely
attributable to potential claims for incidents in Florida and
Texas prior to the Companys cessation of operations in
those states. Changes in the Companys level of retained
risk, and other significant assumptions that underlie
managements estimates of self-insured liabilities, could
have a material effect on the future carrying value of the
self-insured liabilities as well as the Companys operating
results and liquidity.
Following is a summary of activity in the accrual
for self-insured liabilities:
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Balances at beginning of year
|
|
$ |
55,089 |
|
|
$ |
70,341 |
|
Cash payments
|
|
|
(16,026 |
) |
|
|
(20,877 |
) |
Provisions
|
|
|
6,000 |
|
|
|
5,250 |
|
Reclassification from accrued liability relating
to divested operations
|
|
|
|
|
|
|
375 |
|
|
|
|
|
|
|
|
|
|
Balances at end of year
|
|
$ |
45,063 |
|
|
$ |
55,089 |
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$ |
18,000 |
|
|
$ |
28,000 |
|
Long-term portion
|
|
|
27,063 |
|
|
|
27,089 |
|
|
|
|
|
|
|
|
|
|
Balances at end of year
|
|
$ |
45,063 |
|
|
$ |
55,089 |
|
|
|
|
|
|
|
|
|
|
|
|
12. |
Other Long-Term Liabilities |
Other long-term liabilities consisted of the
following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Deposits held under Divestiture Agreement (see
Note 5)
|
|
$ |
|
|
|
$ |
30,000 |
|
Deferred compensation
|
|
|
6,391 |
|
|
|
5,787 |
|
Indemnification escrow relating to sold
facilities (see Note 8)
|
|
|
3,700 |
|
|
|
3,700 |
|
Other
|
|
|
991 |
|
|
|
1,262 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,082 |
|
|
$ |
40,749 |
|
|
|
|
|
|
|
|
|
|
As noted in Note 5, the Company disposed of
eleven Florida nursing facilities (1,435 beds) and four Florida
assisted living facilities (135 units) to Greystone for
initial cash proceeds of $30.0 million and contingent
consideration in the form of a Vendor Take Back Note and two
other contingent and interest-bearing notes. The three notes
have an aggregate potential value of up to $30.0 million
plus interest. The disposition is being accounted for as a
deferred sale in accordance with SFAS 66 and therefore, the
initial cash proceeds have been classified as Deposits
held under the Divestiture Agreement.
The Company maintains an unfunded deferred
compensation plan offered to all corporate employees defined as
highly compensated by the Internal Revenue Service Code in which
participants may defer up to 10% of their base salary. The
Company will match up to 50% of the amount deferred. The Company
also maintains non-qualified deferred compensation plans
covering certain executive employees. Expense incurred for
Company contributions under such plans were $609,000, $361,000
and $278,000 in 2003, 2002 and 2001, respectively.
F-36
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The Company maintains defined contribution
retirement 401(k) savings plans, which are made available to
substantially all of the Companys employees. The Company
pays a matching contribution of 25% of every qualifying dollar
contributed by plan participants, net of any forfeitures.
Expenses incurred by the Company related to the 401(k) savings
plans were $0.8 million, $1.3 million and
$1.3 million in 2003, 2002 and 2001, respectively. The
Company also maintains a money purchase plan for two facilities
in which the Company pays amounts based upon the plan
participants worked hours and an agreed fixed hourly rate.
Expenses incurred by the Company related to the money purchase
plan were $90,000, $96,000 and $54,000 in 2003, 2002 and 2001,
respectively.
Effective April 2003, the Company participates in
a multi-employer defined-benefit pension plan for its employees
in three facilities. The Company made contributions of $32,000
to this plan in 2003.
The Company derived approximately 27%, 26% and
24% of its revenues from services provided under various federal
(Medicare) and approximately 49%, 50% and 51% of its revenues
from services provided under various state medical assistance
programs (Medicaid) in 2003, 2002 and 2001, respectively. The
Medicare program and most state Medicaid programs pay each
participating facility on a prospectively-set per diem rate for
each resident, which is based on the residents acuity.
Most Medicaid programs fund participating facilities using a
case-mix system, paying prospectively set rates.
a) Balanced Budget Act and the
Prospective Payment System
The Balanced Budget Act (BBA) that
was signed into law in August 1997 resulted in the
implementation of a Prospective Payment System (PPS)
for skilled nursing facility funding certified under the
Medicare program effective January 1, 1999. The PPS
establishes a federal per diem rate for virtually all covered
services. The provisions of the BBA provided that for skilled
nursing facilities in operation prior to 1996, the federal per
diem rate would be phased in over a four-year period ending
January 1, 2002. In November 1999, the Balanced Budget
Relief Act (BBRA) was passed to allow each skilled
nursing facility to apply to adopt the full federal rate
effective January 1, 2000 or to continue to phase in to the
federal rate over the next three years. Effective January 2002,
all skilled nursing facilities are reimbursed at the full
federal rate.
With respect to the Medicaid program, the BBA
repealed the federal payment standard that required state
Medicaid programs to pay rates that were reasonable and adequate
to meet the costs necessary to efficiently and economically
operate skilled nursing facilities. As a result, states have
considerable flexibility in establishing payment rates for
Medicaid services provided after October 1, 1997.
b) Balanced Budget Refinement Act of 1999
(BBRA) and Benefits Improvement and Protection Act
of 2000 (BIPA)
As a result of the industry coming under
financial pressure due to the implementation of PPS and other
BBA of 1997 provisions, Congress passed two acts to provide some
relief to the industry, namely the BBRA of 1999 and the BIPA of
2000. These laws contained additional funding provisions to
assist providers as they adjusted to PPS for an interim period.
The BBRA of 1999 increased the rate by 20% for 15 Resource
Utilization Groups III (RUGs) categories
identified as having intensity non-therapy ancillary services
deemed to be underfunded. The BBRA of 1999 also provided for a
4% increase to all RUGs categories on October 1, 2000. The
BIPA of 2000 increased the nursing component of the federal rate
by 16.66% and replaced the 20% add-on to the three RUGs
categories with a 6.7% add-on for all 14 rehabilitative RUGs
categories.
F-37
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
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 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, hereafter referred to as the Medicare
Cliff, resulting in a reduction in Medicare funding for
all skilled nursing facilities. 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
nine months ended September 30, 2002 the average daily
Medicare Part A rate was $311.55. For the three months ended
December 31, 2002, or fourth quarter of 2002, the average
daily Medicare Part A rate was $287.91. Based upon the Medicare
case mix and census in the fourth quarter of 2002, the net
impact of the Medicare Cliff and market basket increase was a
reduction of revenues of approximately $3.9 million. For
the nine months ended September 30, 2003 the average daily
Medicare Part A rate was $292.93, as compared to $311.55 for the
nine months ended September 30, 2002. Based upon the
Medicare case mix and census for the nine months ended
September 30, 2003, the net impact of the Medicare Cliff
and market basket increase was a reduction of revenues of
approximately $12.8 million, as compared to the nine months
ended September 30, 2002. The loss of revenues was
partially offset by a RUGs improvement which increased revenues
by $2.7 million over the nine-month period ended
September 30, 2003 as compared to the nine months ended
September 30, 2002. Based upon the Medicare case mix and
census for the twelve months ended October 1, 2002 to
September 30, 2003 the net impact of the Medicare Cliff and
market basket increase was a reduction of revenues of
$16.7 million.
Effective October 1, 2003 the Centers for
Medicare and Medicaid Services (CMS) increased
Medicare rates by 6.26% reflecting (1) a cumulative
forecast correction (Administrative Fix), to
correct past years under-funded rate increases, which increased
the Federal base payment rates by 3.26%, and (2) the annual
market basket increase of 3.0%. The Company estimated that based
on the Medicare case mix for the nine month period ended
September 30, 2003, this Medicare rate increase would add
approximately $18.45 per Medicare day. Based upon the
Medicare case mix and census in the fourth quarter of 2003, the
impact of the 6.26% Medicare rate increase resulted in
$3.5 million in increased revenues. Based on the Medicare
case mix and census for the year ended December 31, 2003,
this Medicare rate increase amounts to additional annualized
revenue of approximately $13.4 million going forward, which
will be tempered by higher labor and other operating costs. In
order to maintain their commitment to Senator Grassley and CMS
in providing the Administrative Fix, in October 2003 the
Alliance for Quality Nursing Home Care (which is a membership of
large long-term care providers) and the American Health Care
Association (AHCA) announced its support to spend
the Administrative Fix over the next fiscal period on direct
care and services for its residents. In October 2003 CMS
published notice to skilled nursing facilities that within
future cost reports, it will require confirmation that the
Administrative Fix funding was spent on direct patient care and
related expenses.
With respect to the RUGs Refinements, in April
2002 CMS announced that it would delay the refinement of the
RUGs categories thereby extending the related funding
enhancements until September 30, 2003. In May 2003, CMS
released a rule to maintain the current RUGs classification
until October 1, 2004. Further to, but independent of this,
Congress enacted legislation directing CMS to conduct a study on
the RUGs classification system and report its recommendations by
January 2005. The implementation of a RUGs Refinement change,
where all or part of the enhancement is discontinued, could have
a significant impact on the Company. Based upon the Medicare
case mix and census for the
F-38
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
year ended December 31, 2003, the Company
estimates that it received an average $24.12 per resident
day, which on an annualized basis amounts to $17.6 million
related to the RUGs Refinements.
c) Revenue Adjustments and Provisions
(Recovery) for Outstanding Medicare and Medicaid
Receivables
In respect of Medicare cost reporting periods
prior to the implementation of PPS, the Company has ongoing
discussions with its FI regarding the treatment of various items
related to prior years cost reports. Normally items are
resolved during the audit process and no provisions are
required. For items involving differences of opinion between the
Company and the FI regarding cost report methods, such items can
be settled through a formal appeal process. Should this occur, a
general provision for Medicare receivables may be provided for
disagreements, which result in the provider filing an appeal
with the PRRB of the CMS. Estimated differences between the
final settlement and amounts recorded in previous years are
reported as adjustments to revenues in the period.
In respect of Medicaid in states that utilize
retrospective reimbursement systems, nursing facilities are paid
on an interim basis for services provided, subject to
adjustments based upon allowable costs, which are generally
submitted in cost reports on an annual basis. In these states,
revenues are subject to adjustments as a result of cost report
settlements with the state.
During 2003, the Company recorded a provision for
$4.0 million, pertaining to individual Medicare claims in
dispute with the FI for the cost report years 1996 through 1998
(refer to Note 8). Of the $4.0 million provision,
$1.3 million pertains to discontinued operations, and
therefore, was applied to the previously accrued divested
operations liability balance (refer to Note 10). The net
adjustment of $2.7 million resulted in a reduction of
revenues during 2003. Offsetting this, the Company recorded a
recovery of $4.2 million in Medicaid revenues resulting
from a favorable court decision in the State of Ohio relating to
the recovery of alleged government overpayments for adjudicated
Medicaid cost report periods.
As at December 31, 2003, the States of
Pennsylvania, Indiana, Oregon, and Washington have submitted
proposed state plan amendments and waivers, which are awaiting
review and approval by CMS pertaining to the fiscal year
commencing July 1, 2003. The retrospective plan amendments
and waivers seek an increase in the level of federal funding for
the Medicaid programs, and would result in providing nursing
facilities with revenue rate increases to offset new or
increased provider taxes. As the plan amendments and waivers
have not been approved, the Company has recorded revenues based
upon amounts received. Based upon the final and CMS approved
plan amendments and waivers, changes in the Medicaid rates and
any associated provider taxes could result in adjustments to
earnings for the six month period July 1, 2003 to
December 31, 2003.
|
|
14. |
Loss on Disposal of Assets, Provision for
Closure and Exit Costs, and Impairment of Long-Lived
Assets |
In response to the implementation of Medicare
Prospective Payment System (PPS), increased litigation and
insurance costs in certain states, and increased operational
costs resulting from changes in legislation and regulatory
scrutiny, during the period of 1998 through 2001, the Company
focused on the divestiture of under-performing nursing and
assisted living facilities and the divestiture of non-core
healthcare assets. These asset divestitures primarily included
the sale of the Companys pharmacy operation to Omnicare,
Inc. in 1998 and the sale of facilities and/or transfer of all
operations in the States of Florida and Texas in 1999, 2000 and
2001. With the exception of the Companys assisted living
facilities in Texas, the Company ceased to operate facilities in
the States of Florida and Texas through transactions primarily
involving Tandem, Greystone, Senior Health
Properties South, Inc. (Senior
F-39
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Health-South) and Senior Health
Properties Texas, Inc. (Senior
Health-Texas). As a result of this strategy, for the years
ended 2002 and 2001, the Company has recorded the significant
items as follows:
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Loss (gain) on the disposal of assets
|
|
$ |
(3,961 |
) |
|
$ |
1,054 |
|
Provisions for closure and exit costs and other
items
|
|
|
5,293 |
|
|
|
23,192 |
|
Loss on the impairment of long-lived assets
|
|
|
|
|
|
|
1,685 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,332 |
|
|
$ |
25,931 |
|
|
|
|
|
|
|
|
|
|
Below is a summary of the significant
transactions that resulted in the above provisions, gains and
losses.
In May 2002, 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). The Company applied
$12.4 million of the proceeds to reduce bank debt. 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. As a result, the
Company recorded a gain on the sale of the asset of
$4.0 million, inclusive of the deferred gain of
$2.2 million from the sale of two leased nursing facilities
in April 2001. The 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 addition, 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.
In 2001, the Company recorded a loss on disposal
of assets of $1.0 million and a provision for closure and
exit costs and other items of $23.2 million, totaling
$24.2 million as discussed below:
|
|
|
|
|
In September 2001, the Company transferred (via
license transfer) all nursing facilities in Texas to Senior
Health-Texas resulting in a pre-tax loss of $1.8 million
and recorded a loss on another property for $0.2 million.
The transfer involved 17 skilled nursing facilities, with a
capacity of 1,421 residents, of which 13 facilities are
subleased to Senior Health-Texas and the remainder leased to
Senior Health-Texas on a five-year term from the Company. Senior
Health-Texas will operate the subleased facilities for their
remaining lease terms, one of which expired in October 2001, and
the remainder will expire through February 2012. In November
2001, the landlord of the subleased nursing facility for which
the lease term expired in October 2001 assumed operational
responsibility for the facility and the Company provided
consulting services to the landlord for a five-month period. The
annual rental income from Senior Health-Texas is approximately
$3.9 million per annum, or $1.8 million in excess of
the Companys current annual lease costs, and will escalate
in alignment to the existing lease and in alignment with
Medicaid rate increases for the owned facilities. Senior
Health-Texas has the right to first refusal on the purchase of
the four owned facilities;
|
|
|
|
The Company recorded provisions totaling
$2.2 million relating to the closure and/or sale of three
nursing properties for $2.0 million, and another property
for $0.2 million; and
|
|
|
|
The Company made additional provisions of
$20.2 million relating to previously sold operations, of
which $19.0 million relates to the nursing facilities in
Florida. This $19.0 million consists of an
$11.0 million provision related to Florida claims for years
prior to 2001 based upon an actuarial review of resident
liability costs and an $8.0 million provision for Florida
closure and exit costs. The
|
F-40
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
$11.0 million provision was the result of an
increase in the estimate of the incurred but not yet reported
claims and an increase in the frequency and severity of claims
incurred by the Company.
|
In April 2001, Tandem exercised its option to
purchase two leased nursing properties in Florida for gross
proceeds of $11.4 million. The proceeds consisted of cash
of $7.0 million, a $2.5 million interest-bearing
five-year note and $1.9 million in cumulative dividend
preferred shares, redeemable after five years. The
Companys carrying value of the two facilities was
$9.2 million. Tandem continued to operate seven nursing
facilities under a lease agreement with the Company, with an
option to purchase these facilities, which Tandem exercised in
May 2002. In accordance with Statement of Financial Accounting
Standards No. 66 (SFAS No. 66), the Company
deferred a potential gain on the sale of these assets of
$2.2 million because a significant portion of the proceeds
had not been received and the ultimate determination of the gain
was dependent on Tandem exercising some or all of the remaining
purchase options available to it. For these reasons, the Company
did not record any gain or loss on the sale until May 2002 as
described above. The Company applied $4.0 million of the
net cash proceeds to further reduce its term bank debt.
a) Loss (Gain) on the Disposal of
Assets
The following summarizes the components of the
loss (gain) on the sale of assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
2001 |
|
|
|
|
|
|
|
Proceeds |
|
|
|
Proceeds |
|
|
|
|
Net of |
|
Net |
|
|
|
Net of |
|
Net |
|
|
|
|
Selling Costs |
|
Book Value |
|
(Gain) |
|
Selling Costs |
|
Book Value |
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Loss (gain) from dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing and assisted living facilities
|
|
$ |
25,500 |
|
|
$ |
21,539 |
|
|
$ |
(3,961 |
) |
|
$ |
11,296 |
|
|
$ |
12,064 |
|
|
$ |
768 |
|
|
Other
|
|
|
1,815 |
|
|
|
1,815 |
|
|
|
|
|
|
|
394 |
|
|
|
680 |
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,315 |
|
|
$ |
23,354 |
|
|
$ |
(3,961 |
) |
|
$ |
11,690 |
|
|
$ |
12,744 |
|
|
$ |
1,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
b) Provision for Closure and Exit Costs
and Other items
The provision for closure and exit costs and
other items is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Provision for closure of the following facilities:
|
|
|
|
|
|
|
|
|
|
Florida skilled nursing and assisted living
|
|
$ |
5,293 |
|
|
$ |
7,965 |
|
|
Texas skilled nursing
|
|
|
|
|
|
|
1,200 |
|
|
Pharmacy
|
|
|
|
|
|
|
1,200 |
|
|
Other locations
|
|
|
|
|
|
|
1,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,293 |
|
|
|
12,228 |
|
Provision for adverse development of general and
professional liability costs
|
|
|
|
|
|
|
10,964 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,293 |
|
|
$ |
23,192 |
|
|
|
|
|
|
|
|
|
|
c) Impairment of Long-lived
Assets
The Company records impairment losses recognized
for long-lived assets used in operations when indicators of
impairment are present and the estimated undiscounted future
cash flows do not appear to be sufficient to recover the
assets carrying amounts. The impairment loss is measured
by comparing the fair value of the asset to its carrying amount.
In addition, once management has committed the organization to
F-41
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
a plan for disposal, assets held for disposal are
adjusted to the lower of the assets carrying value and the
fair value less costs to sell. Accordingly, management has
estimated the future cash flows of each facility and reduced the
carrying value to the estimated fair value less costs to sell,
where appropriate.
In September 2001 the Company made a formal
decision to divest of its nursing facilities (but not assisted
living facilities) in Texas and completed a transaction through
which the Company ceased operating these facilities. This
transaction resulted in the Company leasing all four owned
facilities and subleasing the remaining 13 nursing facilities to
a third party operator. As a result of the transaction, in 2001
the Company recorded a provision of $1.7 million for
impairment of these remaining Texas properties, which all
related to leasehold rights and leasehold improvements on the
facilities.
d) Reconciliation to cash flow
statement
The following reconciles the loss from asset
impairment, disposals and other items to that reported in the
cash flow statements. The provision for general and professional
liability costs is removed as it is already reflected in the
line item provision for self-insured liabilities as an item not
involving cash.
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Reconciliation of loss:
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of assets
|
|
$ |
(3,961 |
) |
|
$ |
1,054 |
|
|
Provision for closure and exit costs and other
items
|
|
|
5,293 |
|
|
|
12,228 |
|
|
Loss on impairment
|
|
|
|
|
|
|
1,685 |
|
|
|
|
|
|
|
|
|
|
Total per cash flow statement
|
|
|
1,332 |
|
|
|
14,967 |
|
|
Provision for general and professional liability
costs
|
|
|
|
|
|
|
10,964 |
|
|
|
|
|
|
|
|
|
|
Total per statement of operations
|
|
$ |
1,332 |
|
|
$ |
25,931 |
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash proceeds from dispositions:
|
|
|
|
|
|
|
|
|
|
Proceeds, net of selling costs
|
|
$ |
27,315 |
|
|
$ |
11,296 |
|
|
Notes receivable
|
|
|
(13,000 |
) |
|
|
(1,793 |
) |
|
Preferred shares
|
|
|
|
|
|
|
(1,904 |
) |
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets in cash flow
|
|
$ |
14,315 |
|
|
$ |
7,599 |
|
|
|
|
|
|
|
|
|
|
As a lessee, the Company, at December 31,
2003, was committed under non-cancelable operating leases
requiring future minimum rentals as follows:
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
2004
|
|
$ |
8,550 |
|
2005
|
|
|
8,174 |
|
2006
|
|
|
5,435 |
|
2007
|
|
|
3,863 |
|
2008
|
|
|
3,512 |
|
After 2008
|
|
|
17,402 |
|
|
|
|
|
|
|
Total minimum payments
|
|
$ |
46,936 |
|
|
|
|
|
|
Operating lease costs were $9.1 million,
$10.6 million and $14.6 million in 2003, 2002 and
2001, respectively. These leases expire on various dates
extending to the year 2013 and in many cases contain renewal
options.
F-42
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
As a lessor, at December 31, 2003, the
Company leases 10 nursing properties (1,065 beds) to two
unrelated operators in Florida and in Texas. The leases are
accounted for as operating leases and both operators have an
option to purchase the facilities during the term. The lease of
six nursing properties to Senior Health-South expires in
December 2006, and the Company earns rental income (based upon
the net operating cash flow of the properties), which on average
cannot exceed $2.0 million per annum. Rental income earned
during 2003 totaled $0.3 million (2002
$0.5 million; 2001 $0.5 million) under
this lease. Senior Health-Texas leases four nursing properties
for a term that expires in September 2006, and subleases another
12 properties until February 2012, all in Texas. The annual
rental income during 2003 totaled $3.9 million
(2002 $3.8 million; 2001
$0.5 million) or $1.8 million in excess of the
Companys annual lease cost. The cost and accumulated
depreciation of facilities under operating lease arrangements
included in Property and Equipment (refer to
Note 6) as of December 31, 2003 and
December 31, 2002 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Land and land improvements
|
|
$ |
2,147 |
|
|
$ |
2,147 |
|
Buildings and improvements
|
|
|
33,172 |
|
|
|
32,748 |
|
Furniture and equipment
|
|
|
6,894 |
|
|
|
8,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
42,213 |
|
|
|
42,957 |
|
Less accumulated depreciation and amortization
|
|
|
26,440 |
|
|
|
25,987 |
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$ |
15,773 |
|
|
$ |
16,970 |
|
|
|
|
|
|
|
|
|
|
|
|
16. |
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, in June 2002, it terminated these
interest rate swaps with a cash payment of $0.6 million,
and recorded a 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 Companys 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)
(1.1625% as of December 31, 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 are recorded in other comprehensive income, and as such had
no impact on the Companys 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 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
F-43
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
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.
The Company does not speculate using derivative
instruments.
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. The Company
maintains risk management control systems to monitor interest
rate cash flow risk attributable to both the Companys
outstanding or forecasted debt obligations as well as the
Companys offsetting hedge positions. The risk management
control systems involve the use of analytical techniques,
including cash flow sensitivity analysis, to estimate the
expected impact of changes in interest rates on the
Companys future cash flows.
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 AOCI as a component of
Shareholders 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 December 31,
2003, the fair value of the interest rate swap designated as a
fair value hedge is an asset of $4.2 million and is offset
by a liability of $4.2 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
December 31, 2003, and the gain credited to AOCI (net of
income tax effect) for 2003 was $32,000. The fair value of the
portion of the interest rate cap not designated as a hedging
instrument, which was $0.6 million as of December 31,
2003, is recorded as a liability recorded in other long-term
liabilities. During 2004, 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.
|
|
17. |
Commitments and Contingencies |
Capital Expenditures
The Company as of December 31, 2003 had
capital expenditure purchase commitments outstanding of
approximately $9.2 million. In addition, the Company has
entered into construction agreements for additions to two
nursing facilities (38 beds), additions to four assisted living
facilities (87 units) and the construction of one
free-standing assisted living facility (40 units). Four of
these seven projects are expected to be completed in 2004, with
the remainder to be completed in early 2005. The total
approximate cost of the projects is $15.2 million and
$6.1 million is committed to be spent in 2004 and 2005 in
respect of these capital projects.
Insurance and Self-insured
Liabilities
As discussed in Note 11, 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 Companys health
providers, assistants and other staff as
F-44
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
it relates to their respective duties performed
on the Companys 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. Refer to
Note 11, which describes the nature and accrual for
litigation settlements.
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 diligent to address these regulatory
efforts.
Regulatory Risks
All providers are subject to surveys and
inspections by state and federal authorities to ensure
compliance with applicable laws and licensure requirements of
the Medicare and Medicaid programs. The survey process is
intended to review the actual provision of care and services,
and remedies for assessed deficiencies can be levied based upon
the scope and severity of the cited deficiencies. Remedies range
from the assessment of fines to the withdrawal of payments under
the Medicare and Medicaid programs. Should a deficiency not be
addressed through a plan of correction, a facility can be
decertified from the Medicare and Medicaid program. As of
December 31, 2003, the Company has certain facilities under
plans of correction. While it is not possible to estimate the
final outcome of the required corrective action, the Company has
accrued for known costs.
Omnicare Preferred Provider
Agreement
In 1998, the Company disposed of its pharmacy
operations to Omnicare, Inc. Subsequently, the Company entered
into a Preferred Provider Agreement, the terms of which enabled
Omnicare to execute Pharmacy Service Agreements and Consulting
Service Agreements with all of the Companys 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 that 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 PPS rates. Omnicare
has 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 for the years 2001 and 2002, and
should this matter not be settled, the matter will be taken to
arbitration. Provisions for settlement of this claim is included
within the financial statements.
F-45
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
In 2002, in connection with its agreements to
provide pharmacy services to the Company, Omnicare, Inc. has
requested arbitration for an alleged lost profits claim related
to the Companys 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.
|
|
18. |
Transactions with Shareholder and
Affiliates |
The following is a summary of the Companys
transactions with Extendicare and its affiliates in 2003, 2002
and 2001:
Insurance
The Company insures certain risks with affiliated
insurance subsidiaries of Extendicare. The cost of general and
professional liability premiums was the most significant
insurance expense charged to the Company by the affiliates. The
consolidated statements of operations for 2003, 2002 and 2001
include intercompany insurance premium expenses of
$10.7 million, $9.9 million and $5.7 million,
respectively. The 2001 figure is net of favorable actuarial
adjustments for prior years under its retroactively-rated
workers compensation coverage in the amount of
$0.9 million.
Capital and Other Transactions
During 2001 and 2000, Extendicare and/or one of
its wholly owned subsidiaries acquired $19.0 million and
$8.9 million, respectively, of the Companys Senior
Subordinated Notes. As of December 31, 2003, Extendicare
held $27.9 million (14.0%) of the Companys
outstanding Senior Subordinated Notes.
Computer Services
In January 2001, the Company established an
agreement for computer hardware and software support services
with Virtual Care Provider, Inc. (VCP), an
affiliated subsidiary of Extendicare. The annual cost of
services was $5.7 million for 2003 (2002
$6.8 million; 2001 $6.5 million).
Due to Shareholders and Affiliates
Transactions affecting these accounts were
general and professional liability insurance charges, accrued
liability claims from an affiliate and working capital advances
to an affiliate in 2003, 2002 and 2001, and charges (payments)
from (to) shareholder and affiliates for income taxes in each of
the three years.
At December 31, 2003, 2002 and 2001 the
Company had a $3.5 million non-interest bearing payable
with no specific due date to a subsidiary company of Extendicare.
The Companys results of operations are
included in the consolidated federal tax return of its
U.S. parent company. Accordingly, federal current and
deferred income taxes payable are transferred to the
Companys parent company. The provisions for income taxes
have been calculated as if the Company was a separately taxed
entity for each of the periods presented in the accompanying
consolidated financial statements.
F-46
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Total income taxes for the years ended
December 31, 2003, 2002 and 2001 were allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Income tax expense (benefit)
|
|
$ |
11,965 |
|
|
$ |
3,117 |
|
|
$ |
(12,512 |
) |
Shareholders equity for unrealized gain or
(loss) on investments
|
|
|
2,227 |
|
|
|
(663 |
) |
|
|
295 |
|
Shareholders equity for unrealized gain
(loss) on cash flow hedges
|
|
|
4 |
|
|
|
525 |
|
|
|
(596 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,196 |
|
|
$ |
2,979 |
|
|
$ |
(12,813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax expense (benefit) on income (loss)
before income taxes consists of the following for the year ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
9,079 |
|
|
$ |
(8,690 |
) |
|
$ |
|
|
|
Deferred
|
|
|
1,666 |
|
|
|
10,582 |
|
|
|
(13,223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal
|
|
|
10,745 |
|
|
|
1,892 |
|
|
|
(13,223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,066 |
|
|
|
456 |
|
|
|
544 |
|
|
Deferred
|
|
|
154 |
|
|
|
769 |
|
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total State
|
|
|
1,220 |
|
|
|
1,225 |
|
|
|
711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$ |
11,965 |
|
|
$ |
3,117 |
|
|
$ |
(12,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2002, the Company reported a
reclassification of $5.9 million from deferred to current
income tax benefit, reflecting a new federal tax law enacted in
March 2002 retroactive to 2001, which extended the net operating
loss carryback period to five years from two years.
The differences between the effective tax rates
on earnings before provision for income taxes and the United
States federal income tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
Statutory federal income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase (reduction) in tax rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of Federal income tax
benefit
|
|
|
8.6 |
|
|
|
12.6 |
|
|
|
0.8 |
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
(2.0 |
) |
|
Other permanent items
|
|
|
1.9 |
|
|
|
6.3 |
|
|
|
(0.9 |
) |
|
Change in valuation allowance
|
|
|
(6.1 |
) |
|
|
|
|
|
|
(3.1 |
) |
|
Work opportunity credit
|
|
|
(2.0 |
) |
|
|
(7.9 |
) |
|
|
1.4 |
|
|
Other, net
|
|
|
(0.1 |
) |
|
|
3.2 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
37.3 |
% |
|
|
49.2 |
% |
|
|
31.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company received payments of
$1.4 million, $0.7 million and $22.5 million for
federal income taxes from its U.S. parent in 2003, 2002 and
2001, respectively and made payments of $7.7 million in
2003 to its U.S. parent for federal income taxes.
F-47
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The components of the net state deferred tax
assets and liabilities as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
State Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Employee benefit accruals
|
|
$ |
1,898 |
|
|
$ |
1,555 |
|
|
Accrued liabilities
|
|
|
2,494 |
|
|
|
3,560 |
|
|
Accounts receivable reserves
|
|
|
184 |
|
|
|
666 |
|
|
Capital loss carryforwards
|
|
|
13,530 |
|
|
|
13,530 |
|
|
Operating loss carryforwards
|
|
|
5,296 |
|
|
|
6,684 |
|
|
Other assets
|
|
|
1,241 |
|
|
|
1,577 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
24,643 |
|
|
|
27,572 |
|
|
Valuation allowance
|
|
|
19,057 |
|
|
|
21,003 |
|
|
|
|
|
|
|
|
|
|
|
|
Total state deferred tax assets
|
|
|
5,586 |
|
|
|
6,569 |
|
State Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,609 |
|
|
|
5,722 |
|
|
Goodwill
|
|
|
504 |
|
|
|
433 |
|
|
Leasehold rights
|
|
|
194 |
|
|
|
263 |
|
|
Miscellaneous
|
|
|
2,362 |
|
|
|
2,836 |
|
|
|
|
|
|
|
|
|
|
|
|
Total state deferred tax liabilities
|
|
|
8,669 |
|
|
|
9,254 |
|
|
|
|
|
|
|
|
|
|
Net state deferred tax assets (liabilities)
|
|
$ |
(3,083 |
) |
|
$ |
(2,685 |
) |
|
|
|
|
|
|
|
|
|
The Company paid state income taxes of $539,000,
$699,000 and $326,000 in 2003, 2002 and 2001, respectively. As
of December 31, 2003 the Company had $65.4 million of
total net operating loss carryforwards available for state
income tax financial reporting purposes, which expire from 2004
to 2023. As of December 31, 2003, the Company had
$164 million of capital loss carryforwards for state income
tax purposes which expire in 2004. Because the realizability of
these losses is uncertain, the operating loss and capital loss
carryforwards are offset by a valuation allowance.
The valuation allowance for state deferred tax
assets as of December 31, 2003 and 2002 was
$19.1 million and $21.0 million, respectively. The net
change in the total valuation allowance for the years ended
December 31, 2003 and 2002 was a decrease of
$1.9 million and an increase of $0.8 million,
respectively. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Management
believes it is more likely than not the Company will realize the
benefits of these deductible differences, net of the valuation
allowances.
F-48
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The accumulated balances for each classification
of comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains |
|
|
|
|
Unrealized Gains |
|
(Losses) on |
|
Accumulated Other |
|
|
(Losses) on |
|
Cash |
|
Comprehensive |
|
|
Securities |
|
Flow Hedges |
|
Income |
|
|
|
|
|
|
|
Balance at December 31, 2000
|
|
$ |
(1,703 |
) |
|
$ |
|
|
|
$ |
(1,703 |
) |
Cumulative effect of change in accounting for
hedging activities
|
|
|
|
|
|
|
(913 |
) |
|
|
(913 |
) |
Net current period change
|
|
|
441 |
|
|
|
(192 |
) |
|
|
249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2001
|
|
|
(1,262 |
) |
|
|
(1,105 |
) |
|
|
(2,367 |
) |
Reclassification to loss on early retirement of
debt
|
|
|
|
|
|
|
635 |
|
|
|
635 |
|
Net current period change
|
|
|
(995 |
) |
|
|
339 |
|
|
|
(656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
(2,257 |
) |
|
|
(131 |
) |
|
|
(2,388 |
) |
Net current period change
|
|
|
3,341 |
|
|
|
32 |
|
|
|
3,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
$ |
1,084 |
|
|
$ |
(99 |
) |
|
$ |
985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The related tax effects allocated to each
component of other comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-Tax |
|
Tax (Expense) |
|
Net-of-Tax |
|
|
Amount |
|
or Benefit |
|
Amount |
|
|
|
|
|
|
|
Unrealized gains (losses) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during
the period
|
|
$ |
5,568 |
|
|
$ |
(2,227 |
) |
|
$ |
3,341 |
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative gains (losses) arising during the
period
|
|
|
36 |
|
|
|
(4 |
) |
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$ |
5,604 |
|
|
$ |
(2,231 |
) |
|
$ |
3,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21. |
Uncertainties and Certain Significant
Risks |
Revenues
The Companys 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 BBRA and BIPA, as outlined in note 13(b), provided a
total of $2.7 billion in temporary Medicare funding
enhancements 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 RUGs rate and the 4% base adjustment. On
September 30, 2002 the Legislative Add-ons expired, or
Medicare Cliff, resulting in a reduction in Medicare
rates for all long-term care providers. Based upon the Medicare
case mix and census for the twelve month period October 1,
2002 to September 30, 2003 the Company estimates that the
net impact of the Medicare Cliff and market basket increase was
a reduction of revenues of approximately $16.7 million.
F-49
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
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. In April 2002 CMS
announced that it would delay the refinement of the RUGs
categories thereby extending the related funding enhancements
until September 30, 2003. In May 2003, CMS released a rule
to maintain the current RUGs classification until
October 1, 2004. Further to, but independent of this,
Congress enacted legislation directing CMS to conduct a study on
the RUGs classification system and report its recommendations by
January 2005. The implementation of a RUGs Refinement change,
where all or part of the enhancement is discontinued, could have
a significant impact on the Company. Based upon the Medicare
case mix and census for the year ended December 31, 2003
the Company estimates that it received an average
$24.12 per resident day, which on an annualized basis
amounts to $17.6 million related to the RUGs Refinements.
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. Under the plan
announced by CMS, the reimbursement level would be reduced to
70% over a three year period 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. CMS did not implement the rule
change effective October 1, 2003, and continues to review
the proposed plan. The Company estimates that should this plan
be implemented, the negative impact on net earnings would be
$1.3 million in 2004, increasing to $3.3 million in
2006.
As at December 31, 2003, the States of
Pennsylvania, Indiana, Oregon, and Washington have submitted
proposed state plan amendments and waivers, which are awaiting
review and approval by CMS pertaining to the fiscal year
commencing July 1, 2003. Refer to note 12 (c) for
further information. As the state plan amendments and waivers
have not been approved, the Company has recorded revenues based
upon amounts received. Based upon the final and CMS approved
state plan amendments and waivers, changes in Medicaid rates and
any associated provider taxes could result in adjustment to
earnings for the six month period commencing July 1, 2003
to December 31, 2003.
Interests in Unrelated Long Term Care
Providers
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 December 31, 2003, the Company has
$21.4 million in notes and $6.9 million in non-current
amounts receivable due from unrelated long-term care providers
in Florida and Texas; and owns $15.8 million in nursing
home properties in Texas and Florida. In 2003, the Company
earned $5.7 million in annual management and consulting
fees, and $2.1 million in rental revenue from properties
owned as at December 31, 2003 from unrelated long-term
operators. As a result, the earnings and cash flow of the
Company can be influenced by the financial stability of these
unrelated long-term operators.
Medicare and Medicaid Receivables
The Company is attempting to settle a number of
outstanding Medicare and Medicaid receivables. Normally such
items are resolved during an annual audit process and no
provision is required. However, where differences exist between
the Company and the FI, the Company may record a general
provision. In January 2003, the Company settled through
resolution at the PRRB hearing the first of three specific claim
years involving an allocation of overhead cost issue. For
another staffing cost issue, the Company settled prior to the
PRRB hearing, the first of seven years and in January 2004
reached a negotiated
F-50
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
settlement for the remainder of the six years.
There will be no significant adjustment to the recorded
receivable balance as a result of the January 2004 negotiated
settlement of the staffing cost issue. Further negotiations
continue on the remaining two years under appeal for the
$11.5 million overhead cost issue, which failing
resolution, the issue will be heard by the PRRB. A PRRB hearing
has been scheduled in April 2004 for one of the two remaining
years under appeal. A PRRB hearing has been scheduled in
September 2004 for a Director of Nursing cost issue involving
two cost reporting periods totaling $3.8 million. The
Company continues to negotiate on the remaining issues and when
appropriate seek resolution from the PRRB. No adjustment to the
receivable amount can be determined until negotiations are
concluded on a majority of issues that are involved in the cost
reporting years under appeal. Though the Company remains
confident that it will successfully settle the issues, an
unsuccessful conclusion could negatively impact the
Companys earnings and cash flow. As of December 31,
2003 the Company had $51.2 million in gross Medicare and
Medicaid settlement receivables with a related allowance for
doubtful accounts of $14.0 million. The net amounts
receivable represents the Companys estimate of the amount
collectible on Medicare and Medicaid prior period cost reports.
Claims and Contingencies
The Company entered into a Preferred Provider
Agreement with Omnicare, Inc. pursuant to the divestiture of its
pharmacy operation in 1998. In connection with its agreement to
provide pharmacy services, Omnicare has requested arbitration
for an alleged lost profits claim relating to the Companys
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. The Company believes that it has
interpreted correctly and complied with the terms of the
Preferred Provider Agreement; however there can be no assurances
that this claim will not be successful or other claims arise.
The Company is subject to surveys and inspections
by state and federal authorities to ensure compliance with
applicable laws and licensure requirements of the Medicare and
Medicaid programs. The survey process is intended to review the
actual provision of care and services, and remedies for assessed
deficiencies can be levied based upon the scope and severity of
the cited deficiencies. Remedies range from the assessment of
fines to the withdrawal of payments under the Medicare and
Medicaid programs. Should a deficiency not be addressed through
the plan of correction, a facility can be decertified from the
Medicare and Medicaid program. As of December 31, 2003 the
Company has certain facilities under a plan of correction. While
it is not possible to estimate the final outcome of the required
corrective action, the Company has accrued for known costs.
The Company has $45.1 million in accruals
for self-insured liabilities as of December 31, 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.
Debt Obligations
The Company has a high level of indebtedness with
debt service obligations totaling $392.9 million in
borrowings at December 31, 2003 representing 59.6% of total
capitalization (defined as total long-term liabilities plus
total equity), compared to a similar ratio of 61.7% at
December 31, 2002. As a result, the degree to which the
Company is leveraged could have important consequences,
including, but not limited to the following:
|
|
|
|
|
a substantial portion of the Companys cash
flow from operations would be dedicated to the payment of
principal and interest on the Companys indebtedness,
thereby reducing the funds available for other purposes;
|
F-51
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
the Companys ability to obtain additional
financing within its current Credit Facility for working
capital, capital expenditures, acquisitions or other purposes
may be limited; and
|
|
|
|
certain of the Companys borrowings are at
variable rates of interest, which exposes the Company to the
risk of higher interest rates.
|
The Company expects to satisfy the required
payments of principal and interest on indebtedness from cash
flow from operations. However, the Companys ability to
generate sufficient cash flow from operations depends on a
number of internal and external factors, including factors
beyond the Companys control such as prevailing industry
conditions. There can be no assurance that cash flow from
operations will be sufficient to enable the Company to service
its debt and meet other obligations.
The Company is in compliance with all of the
financial covenants as of December 31, 2003. While
management has a strategy to remain in compliance, there can be
no assurance that the Company will meet future covenant
requirements. The Companys available bank lines can be
affected by its ability to remain in compliance, or if not,
would depend upon managements ability to amend the
covenant or refinance the debt.
|
|
22. |
Disclosures About Fair Values of Financial
Instruments |
The estimated fair values of the Companys
financial instruments at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
|
Value |
|
Fair Value |
|
Value |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Cash and cash equivalents
|
|
$ |
48,855 |
|
|
$ |
48,855 |
|
|
$ |
24,360 |
|
|
$ |
24,360 |
|
Non-current accounts receivable
|
|
|
25,938 |
|
|
|
22,370 |
|
|
|
29,731 |
|
|
|
28,786 |
|
Other assets
|
|
|
44,184 |
|
|
|
43,517 |
|
|
|
40,642 |
|
|
|
39,740 |
|
Long-term debt
|
|
|
392,918 |
|
|
|
419,239 |
|
|
|
398,150 |
|
|
|
360,486 |
|
Interest rate swaps (asset)
|
|
|
(4,190 |
) |
|
|
(4,190 |
) |
|
|
(5,503 |
) |
|
|
(5,503 |
) |
Interest rate cap
|
|
|
781 |
|
|
|
781 |
|
|
|
948 |
|
|
|
948 |
|
Deferred compensation
|
|
|
6,391 |
|
|
|
6,391 |
|
|
|
5,787 |
|
|
|
5,787 |
|
Other long-term liabilities
|
|
|
991 |
|
|
|
991 |
|
|
|
1,262 |
|
|
|
1,262 |
|
Long-term due to affiliate
|
|
|
3,484 |
|
|
|
3,484 |
|
|
|
3,484 |
|
|
|
3,484 |
|
The fair value of non-current accounts
receivable, which are anticipated to be collected beyond one
year, are estimated based on discounted cash flows at estimated
current borrowing rates.
Other assets consist of debt service and capital
expenditure trust funds and other financial instruments, the
fair values of which are estimated based on market prices from
the same or similar issues of the underlying investments.
The fair value of long-term debt is estimated
based on approximate borrowing rates currently available to the
Company for debt equal to the existing debt maturities. For
other long-term liabilities, principally refundable escrows, it
is not practicable to estimate fair value.
The fair values of the interest rate swap and cap
are based on the quoted market prices as provided by the
financial institution which is a counterparty to the
arrangements.
The fair value of deferred compensation, other
long-term liabilities and long-term due to affiliate are
estimated to be equal to their carrying value.
F-52
EXTENDICARE HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
23. |
Supplementary Quarterly Financial Data
(Unaudited) |
The following is a summary of the quarterly
results of operations for the years ended December 31, 2003
and 2002 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
1st |
|
2nd |
|
3rd |
|
4th |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
211,426 |
|
|
$ |
213,258 |
|
|
$ |
220,030 |
|
|
$ |
225,718 |
|
|
$ |
870,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before provision for income taxes
|
|
|
3,828 |
|
|
|
6,974 |
|
|
|
8,999 |
|
|
|
12,250 |
|
|
|
32,051 |
|
Provision for income taxes
|
|
|
1,540 |
|
|
|
2,793 |
|
|
|
3,598 |
|
|
|
4,034 |
|
|
|
11,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
2,288 |
|
|
$ |
4,181 |
|
|
$ |
5,401 |
|
|
$ |
8,216 |
|
|
$ |
20,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
|
|
|
1st |
|
2nd |
|
3rd |
|
4th |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
198,241 |
|
|
$ |
201,778 |
|
|
$ |
206,765 |
|
|
$ |
208,267 |
|
|
$ |
815,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal of assets and provision
for closure and exit costs and other items
|
|
|
|
|
|
|
(1,332 |
) |
|
|
|
|
|
|
|
|
|
|
(1,332 |
) |
Gain (loss) on early retirement of debt
|
|
|
|
|
|
|
(2,849 |
) |
|
|
|
|
|
|
|
|
|
|
(2,849 |
) |
Earnings (loss) before provision for income taxes
|
|
|
2,970 |
|
|
|
1,430 |
|
|
|
3,197 |
|
|
|
(1,260 |
) |
|
|
6,337 |
|
Provision (benefit) for income taxes
|
|
|
1,313 |
|
|
|
923 |
|
|
|
1,192 |
|
|
|
(311 |
) |
|
|
3,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$ |
1,657 |
|
|
$ |
507 |
|
|
$ |
2,005 |
|
|
$ |
(949 |
) |
|
$ |
3,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
$125,000,000
Extendicare Health Services, Inc.
6 7/8% New
Senior Subordinated Notes
due 2014
PROSPECTUS
July 20, 2004