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extendicare
2002 annual report
FINANCIAL HIGHLIGHTS
[BAR CHART]
Health Care
Revenue by Country
Year ($ millions)
98 2,113
99 1,893
00 1,807
01 1,705
02 1,756
[BAR CHART]
Health Care Earnings
before Depreciation, Interest
and Income Taxes
Year ($ millions)
98 225
99 111
00 92
01 127
02 160
[BAR CHART]
Earnings(Loss) per Share
from Health Care Operations
before Other Items
Year ($)
98 0.40
99 (0.75)
00 (0.55)
01 (0.18)
02 0.21
(thousands of dollars unless otherwise noted) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Revenue 1,755,674 1,704,511 1,807,406
Earnings before depreciation, interest and income taxes 160,341 127,157 92,469
Earnings (loss) from health care before undemoted 15,268 (11,678) (39,747)
Loss from asset disposals and other items, net of tax (3,854) (35,466) (27,358)
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) from health care 11,414 (47,144) (67,105)
Share of earnings of Crown Life 7,520 10,738 7,827
- ----------------------------------------------------------------------------------------------------------------
Net earnings (loss) 18,934 (36,406) (59,278)
================================================================================================================
Earnings (loss) per share
Health care operations before undernoted and after
preferred share dividends 0.21 (0.18) (0.55)
Loss from asset disposal and other items (0.05) (0.49) (0.36)
Share of earnings of Crown Life 0.10 0.15 0.10
- ----------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per share 0.26 (0.52) (0.81)
================================================================================================================
Cash provided by operations, before changes in working capital 94,575 57,955 81,800
Cash flow per share 1.34 0.81 1.10
Property and equipment capital expenditures 53,145 45,377 46,292
Total assets 1,809,836 1,740,246 1,735,752
Shareholders' equity 358,026 350,696 381,437
Book value per share 4.83 4.61 4.90
Number of Subordinate and Multiple Voting Shares purchased
for cancellation 1,685,200 1,969,500 1,284,100
- ----------------------------------------------------------------------------------------------------------------
Cover: Mary Connors resides at Extendicare Brampton Long-term Care Facility,
which opened in December 2001.
Extendicare, through its subsidiaries, operates 277 long-term care
facilities across North America, with capacity for 29,175 residents. The
Company employs 37,600 people in the United States and Canada.
As well, through its operations in the United States, Extendicare offers
medical specialty services such as subacute care and rehabilitative
therapy, while home health care services are provided in Canada.
Extendicare is committed to delivering quality, patient-oriented health
care services in a cost-effective manner. The hallmarks of our care
philosophy are dignity and respect; they guide our interactions with
residents and their families, as well as with staff and business partners.
We have established rigorous standards to ensure that we meet the physical,
spiritual, social, emotional and intellectual needs of our residents and
health care customers.
Our goal is to be the provider of choice in every community we serve. We
measure our success by our ability to give exceptional care and service to
our residents and partners, while building value for our shareholders.
8 Message to Shareholders
12 Corporate Governance
14 Operations Overview
17 Management's Discussion and Analysis
36 Management's Responsibility for Financial Statements
36 Auditors' Report
37 Consolidated Financial Statements
41 Notes to Consolidated Financial Statements
62 Board of Directors
64 Officers
65 Financial and Statistical Information
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i care about my staff
Theresa Nealy, Administrator
Plymouth Manor Nursing and Rehabilitation Center
Milwaukee, Wisconsin
"I am responsible for the daily operations of a skilled nursing facility.
Fifteen years of experience in long-term care have taught me that an exceptional
staff is the key to delivering exceptional care. Front-line caregivers develop
invaluable insights into our residents' changing needs.
That's why Extendicare's employees are encouraged to find ways to continually
improve care delivery. For us, collaboration works. I've found that when people
know they can make a difference, they enjoy the challenge.
For my team, making a commitment to people who often are unable to look after
themselves is an awesome responsibility, and an incredibly rewarding one."
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i care about our partners
Daniel Baumann, Technical Support Specialist
Virtual Care Provider, Inc.
Milwaukee, Wisconsin
"Virtual Care Provider is one of the largest providers of information
technology services to long-term care companies.
It's my job to keep customers' systems running 24/7. That's a special
responsibility because ultimately, everything I do has an impact on staff and
residents.
A lot of what I do is talk to people. I explain technology to nurses and
administrators. I familiarize my team with the realities of providing long-term
care. I'm a translator for groups with different languages but a shared goal:
delivering the best care possible.
Our solutions help to control costs and reduce paperwork. They make it easier to
process crucial resident data. Virtual Care Provider helps its customers manage
technology so they can focus on what really matters, quality resident care."
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i care about my residents
Frances Daigle, RN, Day Charge Nurse
Extendicare Brampton Long-term Care Facility
Brampton, Ontario
"I've made a career in long-term care. The skills I've acquired allow me to
contribute as a manager, but I became a nurse to provide hands-on care. Working
at Extendicare allows me to do both.
Real care goes far beyond meeting physical needs. In fact, that's just the
starting point. So while I'm a nurse and a manager, I'm also a counsellor, a
facilitator and a friend.
Sometimes, when people learn what I do, they say: You must be a special person.
I don't think so. For everything I give, I get something back. The people I care
for allow me to become part of their lives, part of their families.
Managing a resident home area is my job; caring for the people who live there is
my privilege."
[PICTURE]
[PICTURE]
Mel Rhinelander
President and Chief Executive Officer
Extendicare Inc.
i care about our company
"I have been an Extendicare employee for more than 25 years. I care about
patients and residents, partners, employees and shareholders because they are
our Company. They are our future."
message to shareholders 9
FELLOW SHAREHOLDERS:
During 2002, Extendicare met or exceeded its key financial and operating goals,
despite a challenging environment.
We did so while continuing to demonstrate compassion for patients and residents,
commitment to partners, dedication to employees and determination to build value
for shareholders.
As Chief Executive Officer, my greatest responsibility is to focus Extendicare
on the right goals and ensure that we are well positioned to succeed.
A year ago I told you that Extendicare faced many challenges, but that I
expected us to be profitable from ongoing operations for 2002 as a whole, even
if certain U.S. Medicare funding was not extended beyond September 30. The
funding ended with no decision regarding possible reinstatement, and we did
achieve our profitability goal.
In fact, 2002 - the final year of the phase-in of the U.S. Medicare Prospective
Payment System - was our first profitable year since the introduction of PPS in
1999.
Our results validate the strategies we put in place over several years to reduce
costs and debt within the constraints of PPS; maximize the performance of core
assets; and lower our exposure to general and professional liability risks, our
principal reason for withdrawing from the Florida and Texas nursing home
markets.
In 2002 we continued to pursue census development as our number one U.S.
business priority - and we delivered. It was the story of the year for
Extendicare Health Services, Inc. (EHSI).
Medicare census improved 200 basis points on a same-facility basis from 11.4% of
our U.S. nursing home census in 2001 to 13.4% in 2002. EHSI's nursing home
occupancy climbed to 91.2% in the fourth quarter and averaged 90.3% for the year
as a whole. Our assisted living occupancy rose 70 basis points to 83.8%.
We will continue to focus on the top line, driving revenue through census
growth.
REDUCED TURNOVER AND RELIANCE ON AGENCIES
Although finding employees remains an industry-wide challenge, particularly in
the United States, availability improved somewhat in 2002 and we reduced
turnover. We are intensifying efforts to enhance recruitment and retention - as
we continually raise the bar for staff performance.
In 2002 we sharply decreased expenditures for high-cost agency help. Since
nursing home labour and labour-related spending account for about 70% of EHSI's
total costs, this was an important achievement.
CHALLENGES AND OPPORTUNITIES
EHSI and other long-term care providers face ongoing challenges due to political
and regulatory decisions in the United States. We are disappointed that Congress
has failed to extend certain funding for Medicare beneficiaries in skilled
nursing facilities. We are also concerned that many states are considering
freezes on Medicaid spending this year to address overall budgetary shortfalls.
However, we are pleased to see positive momentum in some states and in comments
by President Bush toward addressing resident care liability costs through tort
reform.
Despite challenges, there are attractive opportunities for EHSI. In late 2002 we
approved a plan to build additions to seven of our facilities, representing
assisted living, independent living and skilled nursing beds in Wisconsin,
Kentucky and Pennsylvania. Work on the additions should be completed in 2004.
We will continue to grow by building on the services we offer within the
long-term care industry. For instance, Virtual Care Provider, Inc. (VCP), our
U.S. information technology subsidiary, hosts application software for smaller
organizations across North America, while meeting all of our U.S. information
technology needs. VCP added new business in 2002, its second full year of
operation, and we expect more growth in 2003.
10 extendicare 2002 annual report
In the U.S., Partners Health Group and Fiscal Services Group provide management
and consulting services, including specialized accounting services, to an
expanding roster of long-term care providers.
Early in 2003, we secured additional long-term contracts to supply accounting
and information technology services to 18 facilities representing 2,500 beds
operated by Senior Health Management, LLC.
CANADA: IMPRESSIVE EARNINGS DRIVEN BY ONTARIO
Extendicare (Canada) Inc. (ECI) provides a competitive advantage to our Company
as a whole - one that U.S. long-term care operators cannot duplicate. It
represents incremental earnings when our American operations are strong and
moderates the impact of downturns in the U.S. business environment.
Last year, we enjoyed impressive earnings from our Canadian nursing, retirement
and managed care operations. We also maintained occupancy levels of better than
98%, excluding newly opened buildings.
In Ontario, ECI's largest and most prosperous market, we are growing our
business by more than 1,300 ECI-owned beds over a four-year period, as part of
the Province's initiative to increase access to long-term care. Our new Ontario
nursing homes are filling up according to plan.
As the building of new nursing homes in Ontario intensifies, many public
operators are turning to us for help. The number of ECI-managed facilities
soared to 27 at year-end 2002, with nearly 4,000 residents, up from 10
facilities with fewer than 1,000 residents at the beginning of the year - and we
have management contracts in place for facilities currently under development.
By year-end, approximately two-thirds of the 20,000 new long-term care beds
promised for Ontario will be in place. We will draw on our excellent U.S.
marketing experience to expand our leading position in Canadian long-term care.
HOME HEALTH CARE OPPORTUNITY
In 2002 we announced that we would leave the British Columbia home health care
market by March 31, 2003 due to adverse business conditions in the Province.
Home health care providers in Ontario continued to feel the impact of spending
constraints by the Community Care Access Centres (CCAC) that contract for their
services. We expect that CCAC spending will increase in 2003 and we remain
optimistic about our business potential in Ontario. Both the federal and Ontario
governments are philosophically committed to home care.
Debate about how to manage the health care system remains impassioned in both
Canada and the U.S. In Canada, major reports prepared in 2002 under the
leadership of Senator Michael Kirby and former Saskatchewan Premier Roy Romanow
both call for more home care.
LONG-TERM OUTLOOK IS GOOD
The long-term prospects for our industry are good because of promising
demographics. Politicians on both sides of the border acknowledge the necessity
of the services we provide.
In relation to the industry, Extendicare is well positioned to weather the
challenges of the current climate, and react quickly and positively to changing
economic circumstances. Unlike many others in the sector, Extendicare owns more
than 92% of its properties, and has purchase options on another 5%. Ownership
increases our agility in making operating decisions and improves our ability to
control costs, while our competitors are subject to escalating lease payments.
Based on current market values, we also have substantial unrecorded value in
fixed assets relative to their book value of $1.0 billion.
We anticipate that Extendicare Inc. will report positive financial results in
2003 - even if the U.S. Medicare cutbacks of September 30, 2002 are not
restored. However, other negative funding decisions with respect to U.S.
Medicare or Medicaid, or changes in our litigation experience, could create
further earnings pressure.
Our Canadian business should benefit from new nursing beds, more management
contracts and higher volumes and margins from ParaMed - enhancing the results of
our Company as a whole.
message to shareholders 11
MANAGING RISK
Extendicare has a well-established track record of identifying early warning
signs, developing strategies to manage risks and taking decisive action well
ahead of the competition.
Several years ago we began accruing for resident care liability costs at a
significantly higher level than our competitors. Subsequent events demonstrated
that we were right.
While the magnitude and unpredictability of resident care liability claims
remains an industry issue, an independent actuarial review and audit of our 2002
accrual for self-insured liabilities confirmed that we were adequately reserved
at year-end.
We articulated a plan to leave unduly litigious states before other large
long-term care companies and we were successful. Our comparatively early exit
enabled us to make our departure on better financial terms.
In 2002, in order to simplify and extend the maturity of our debt structure, we
were proactive in refinancing our U.S. senior credit facility early. EHSI sold
US$150 million principal amount of Senior Notes due 2010, which have been
accepted for registration by the U.S. Securities and Exchange Commission. EHSI
also established a new five-year, US$105 million senior secured revolving credit
facility.
The Notes increase the average life of EHSI's total debt from 4.5 years to seven
years and, together with our new bank credit facility, enhance our financial
flexibility.
In 1999, substantially all of Crown Life's insurance business was sold or
indemnity reinsured to The Canada Life Assurance Company. The final settlement
of the transaction with Canada Life is expected to occur in January 2004.
Extendicare's 34.8% equity interest in Crown Life Insurance Company is
unencumbered by debt, and we are confident that we will realize our $121.5
million carrying value subsequent to the January closing.
Our confidence in the investment potential of our Company is reflected in the
repurchase and cancellation since 1999 of 6.1 million Subordinate and Multiple
Voting Shares at a cost of $25.4 million ($4.13 per share) under the terms of
normal course issuer bids.
Our actions and our reputation as an astute operator speak loud and clear about
our competitive leadership. The sharp upturn in our financial results last year
indicates that we've done the right things to build value for our shareholders.
We continue to believe in the viability of our strategies - ensuring quality
care, improving the profitability of our assets by driving revenue and
controlling costs, reducing risk, diversifying within long-term care, and
strengthening management. We are confident of our ability to maximize
Extendicare's potential over the long term.
On behalf of the Board of Directors, I want to thank our patients and residents,
employees, partners, and shareholders, for giving us their trust. Justifying
your faith is what managing Extendicare is all about.
Mel Rhinelander (signed)
President and Chief Executive Officer
12 extendicare 2002 annual report
CORPORATE GOVERNANCE
Extendicare believes that good corporate governance is good business.
As providers of long-term care, we are particularly aware of the value of trust
and transparency. That is why Extendicare has been committed always to the
principles of disclosure and a strong, independent Board.
Our governance practices generally comply with current New York Stock Exchange
standards and proposed amendments, and they meet or exceed the Toronto Stock
Exchange's Corporate Governance Guidelines. Our Board and Committee members
operate under Charters that clearly define their roles and responsibilities.
These include:
Stewardship - Extendicare's Board oversees the management of the Company,
reviews and approves long-term corporate strategy, and ensures that management
works to maximize shareholder value in a way that is consistent with good
corporate citizenship.
The Board also appoints and evaluates the performance of the Chief Executive
Officer (CEO).
Independence - The majority of our Directors, 12 out of 13, are independent of
management and free from any interests or relationships - other than those
arising from shareholding - that could materially interfere with their ability
to act in the Company's best interests. By virtue of his role, the CEO is the
only Board member not independent of management.
The roles of our CEO and Board Chairman are separate, and each Board Committee
is made up of only independent directors.
Effectiveness - People are appointed to the Extendicare Board based on their
ability to make an effective contribution. This is reflected in the Audit
Committee: all six members are financially literate, and three, by virtue of
education and professional experience, can be considered financial experts.
[PICTURE]
[CAPTION]
[Board members followed up their formal meetings in February 2003 with a visit
to Extendicare Brampton, a recently opened long-term care centre in Brampton,
Ontario. Pictured here in the residents' Country Kitchen are (from left to
right): George Fierheller; Derek Buntain; David Hennigar, Chairman; Frederick
Ladly, Deputy Chairman; Dr. Seth Goldsmith; David Dunlap; Alvin Libin; and Mel
Rhinelander, President and CEO.]
corporate governance 13
Accountability - The Board operates under a Business Conduct policy, formalized
in 1997, that addresses conflicts of interest, confidentiality, protection of
Company assets, fair dealing and compliance with laws, rules and regulations.
Each Director, officer and employee of Extendicare signs the Business Conduct
policy, which can be found on our Website.
As required by the U.S. Securities and Exchange Commission, the Chief Executive
Officer and the Chief Financial Officer certify Extendicare's consolidated
financial statements and related disclosure materials.
Our Board believes that its role extends beyond our Corporate Office.
Consequently, Board meetings are regularly combined with facility visits so that
Directors can enhance their knowledge of operations and interact directly with
employees and residents.
As a result of the corporate and financial scandals of 2000 and 2001, corporate
governance is now the object of intense scrutiny. And while some of this
interest in governance is new, our belief in openness and accountability is not.
Extendicare's commitment to trust and transparency, to providing quality
services while building shareholder value, is well established and enduring.
Additional details of Extendicare's corporate governance, as well as information
on the Board and its Committees, can be found in the Management Information and
Proxy Circular.
[PICTURE]
14 extendicare 2002 annual report
OPERATIONS OVERVIEW
UNITED STATES OPERATIONS
United States operations accounted for 73% of Extendicare Inc.'s total revenue
in 2002. Nursing care is our largest business - and higher occupancy triggered
much stronger results from Extendicare Health Services, Inc. (EHSI).
Our average daily nursing home occupancy, on a same-facility basis, rose to
90.3% last year from 87.8% in 2001.
Our U.S. operations are oriented to meeting the complex medical needs of
patients. About 75% of those who stay in our facilities eventually improve and
are discharged.
In our industry, financial and clinical performance are closely linked. Ensuring
that each patient gets exactly the level and amount of care needed - while
meticulously documenting, demonstrating and reporting the services provided - is
the key to both patient recovery and accurate reimbursement. We have introduced
measures to ensure that EHSI has very strong protocols in place to accomplish
these goals.
The adoption of a new marketing and action plan to improve occupancy was crucial
to our success. We established processes for standardizing admission protocols
and streamlining admitting procedures.
We also increased occupancy by working hard to intensify and broaden
relationships with physicians and hospital discharge planners. Our new protocols
have made us a better business partner for the hospitals and doctors by
providing effective plans and analyses that simplify their decision-making
process.
We aim to be efficient business partners for our referral sources and effective
care partners for our patients.
Our marketing efforts are directed primarily at subacute, medically complex
patients who require rehabilitation services that make up more than 90% of our
admissions. Typically these patients are covered by Medicare or private
insurance, which represent higher reimbursement levels.
Our skilled nursing facilities are surveyed annually to verify their conformity
with federal and state regulations. EHSI's compliance levels remained excellent
in 2002 - well above industry averages.
In late 2002 we rolled out our HealthTrac program, which gives each patient
entering our nursing facilities an outline of specific services to be provided
and expected timelines for recovery.
We are always looking for new ways to enhance the nursing home experience. In
2002 we strengthened employee/patient relationships by beginning to require
nursing home management to work non-traditional hours and spend more time
talking to families and employees.
Most of EHSI's facilities are located in smaller urban locations where we can
establish a strong reputation as a community-oriented long-term care provider,
closely linked to other health care resources.
We will continue our efforts to control costs and to streamline our portfolio by
adding or divesting facilities on an opportunistic basis.
The use of agency staff makes it harder to provide consistent quality care and
increases costs. EHSI reduced agency costs by almost 50% in 2002. Three-quarters
of nursing facilities were agency free at December 31 and EHSI expects to
increase this percentage in 2003.
operations overview 15
In May 2002, we sold seven leased nursing homes in Florida for proceeds of
US$28.6 million. The purchaser had operated these facilities under a lease
agreement since January 2001.
In October 2002, EHSI exercised its right to acquire seven nursing homes in Ohio
and Indiana with more than 900 licensed beds for US$17.9 million. EHSI had
operated the facilities under a lease agreement since 1980.
In 2003 and 2004, EHSI will build seven facility additions in three states. We
are adding assisted and independent living beds to offer long-term care across a
broad spectrum of needs.
Assisted living occupancy rose to 83.8% in 2002 and we anticipate further
improvement in 2003. Occupancy rose during each quarter last year and reached
86.1% in the fourth quarter. We have introduced systems that encourage our
nursing homes and assisted living facilities to work more closely together in
their marketing efforts.
Outpatient rehabilitation clinics are another source of potential growth.
ProStep has 22 freestanding therapy clinics in four states, with long-range
plans to open more.
We provide several options for long-term care operators to decrease their
administrative costs. Among these are full management services from our Partners
Health Group, accounting services from our Fiscal Services Group and information
technology and hosting services from Virtual Care Provider, Inc. (VCP), which is
also responsible for all software development and support services for EHSI.
At year-end 2002, our Partners Health and Fiscal Services groups had management
or consulting contracts with facilities serving more than 6,600 residents, up
from 5,800 one year ago.
VCP's external revenues doubled in 2002 - its second full year of operation -
due mainly to new business.
Management and consulting provide high margins by allowing us to sell our
brainpower without requiring the use of our capital. Our plans involve
developing a coordinated approach to marketing opportunities for all of our
management and consulting services.
EHSI's key strategies in 2003 include increasing our efforts to raise overall
and Medicare census and enhance resident care.
CANADIAN OPERATIONS
In 2002, Canadian operations represented 27% of Extendicare Inc.'s revenue. Our
nursing home business posted excellent results as Extendicare (Canada) Inc.
(ECI) focused on its first major construction program in more than a decade.
This four-year program will have increased our presence in the Ontario long-term
care market by 26% once all of the new buildings are open in 2004.
Last year we opened new nursing homes in Cobourg and Hamilton. All of the new
homes that had been opened by year-end 2002 - including two assisted living
wings - achieved full occupancy.
Early in 2003 we started up new facilities in Toronto and Mississauga. In
addition, new homes will open later this year in Halton Hills and the Windsor
area, bringing Extendicare's long-term care beds in Ontario to more than 8,600.
The final new facility for our current construction program will be completed
next year in Port Hope.
Nursing home occupancy - excluding the new build program - improved slightly in
2002 from already near capacity levels. In order to compete strongly with new
homes, we have developed niche programs in our facilities to meet locally
identified needs. These include French language services, intravenous treatments
and short stay programs.
16 extendicare 2002 annual report
Canadian nursing homes accounted for 18% of Extendicare Inc.'s total revenue in
2002. All ECI facilities are in full compliance with provincial and regional
health authority requirements and are accredited by a non-profit national
council of senior, independent health care professionals.
ECI has established a reputation as a skilled manager and operator of facilities
for third-party owners. The nursing home portfolio that we manage for other
owners is one of the largest in Canada.
In August 2002, we were appointed by the Ontario Ministry of Health and
Long-Term Care to manage a nursing home in Oakville, when the previous
operator's license was revoked.
In November 2002, Ernst & Young Inc., acting as a trustee in bankruptcy,
appointed ECI to manage 14 nursing and retirement facilities with nearly 2,200
beds in southern Ontario.
Last year we began managing the West Park Healthcare Centre in Toronto and the
Southlake Residential Care Village in Newmarket. Southlake will be redeveloped
with our help and remain under ECI management.
We are developing a facility in Oakville for the Halton Healthcare Services
Corporation - and we will manage this nursing home when it opens in 2003. We
have similar agreements with the District Municipality of Muskoka and the
Toronto Rehabilitation Institute, which are scheduled to open their new
facilities in 2004.
In western Canada, we added management contracts for three homes last year,
totalling more than 300 beds in Manitoba.
ParaMed - Canada's largest private home health care company - accounted for 8%
of Extendicare Inc.'s total revenue in 2002. Hours of service fell to 5.4
million from 6.9 million in 2001. In Ontario, our main market, reduced spending
by the Community Care Access Centres (CCAC) that contract for services affected
all providers. Given the cost-efficiency of home care, we expect Ontario to
increase funding in 2003.
ParaMed has a very consistent record of achievement when bidding on new business
and steadily enhances its industry leadership. In early 2003, we introduced
Outcome Based Care - establishing goals at the outset of each patient's care and
monitoring progress throughout treatment. This program promotes quality care and
strengthens relationships with CCACs and Regional Health Authorities.
We are winding down ParaMed's relatively small British Columbia business by
March 31, 2003 as funding levels and hours of service in the Province continue
to soften, with no government remedy in sight. ParaMed's Vancouver operations
were sold in January 2003 to another service provider and our remaining B.C.
contracts will revert to the Regional Health Authorities.
The federal government appears committed to home care as a means of improving
the health care system. ParaMed is well positioned to benefit from any increase
in home care funding.
ECI continues to enjoy great success in attracting skilled employees and has low
levels of staff turnover. In 2003, our focus will include maintaining high
occupancy in our nursing homes, completing our building program, adding new
management and consulting contracts and increasing ParaMed's business volumes.
management's discussion and analysis 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
The consolidated financial results include those of Extendicare Inc. and its
subsidiaries. Unless the context indicates otherwise, a reference to
"Extendicare" or the "Company" means Extendicare Inc. and its subsidiaries. The
Extendicare Inc. legal entity is not itself a provider of services or products.
In the United States, the Company's wholly owned subsidiary, Extendicare Health
Services, Inc. and its subsidiaries (EHSI), operate long-term care and assisted
living facilities in 15 states. EHSI provides inpatient routine nursing care and
medical specialty services on an inpatient and outpatient basis.
In Canada, the Company's wholly owned subsidiary, Extendicare (Canada) Inc. and
its subsidiaries (ECI), operate nursing and retirement centres in five
provinces, and also manage a chronic care hospital unit in Ontario. ECI is a
major provider of home health care through its ParaMed Home Health Care
division.
At December 31, 2002, Extendicare, through its subsidiaries, operated 277
facilities with capacity for 29,175 residents (December 31, 2001: 261 facilities
with capacity for 26,339 residents). The table on the inside back cover of this
Annual Report details the facilities and resident capacity by area. The Company
has a significant presence (more than 10% of total facilities) in three states -
Pennsylvania, Wisconsin and Ohio - as well as in the Province of Ontario,
Canada. Nursing and assisted living facilities are located in groups within
geographic proximity of each other, thereby allowing for regional development of
ancillary businesses, cost-effective management control and reduced travel
costs. The Company's average occupancy levels for 2002, 2001, and 2000 were
92.0%, 90.0%, and 89.9%, respectively.
UNITED STATES REVENUE
The majority of the Company's operations are in the United States, where 73% of
revenue was earned in 2002 and 2001. EHSI receives payment for its services and
products from various federal (Medicare) and state (Medicaid) medical assistance
programs, as well as from private payors. The private-pay classification
includes payments from individuals, commercial insurers, health maintenance
organizations, preferred provider organizations and other charge-based payment
sources, including Blue Cross associations and the Department of Veterans
Affairs.
The following table sets forth EHSI's percentage of total revenue from Medicare,
Medicaid and private pay sources:
2002 2001 2000
- ------------------------------------------------
Medicare 25.7% 23.8% 24.5%
Medicaid 49.8 50.9 50.8
Private pay 24.5 25.3 24.7
- -----------------------------------------------
Legislative Actions Affecting U.S. Revenue
Prior to October 1, 2002, the incremental Medicare relief packages received from
the Balanced Budget Refinement Act and the Benefits Improvement and Protection
Act provided a total of US$2.7 billion in temporary Medicare funding
enhancements to the long-term care industry. These funding enhancements fell
into two categories. The first was "Legislative Add-ons", which included a
16.66% add-on to the nursing component of the Resource Utilization Groupings III
(RUGs) rate and a 4% base adjustment. The second category was "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-on from three RUGs categories was subsequently redistributed to 14
rehabilitation categories at an add-on rate of 6.7% each.
18 extendicare 2002 annual report
[PIE CHART]
EHSI Percentage of Total 2002
Revenue by Payor Source
Medicare 25.7%
Private pay 24.5%
Medicaid 49.8%
[DESCRIPTION OF PIE CHART]
[The Company's earnings are highly contingent on government funding. For
instance, over 75% of EHSI's services and products are paid for by various
federal (Medicare) and state (Medicaid) assistance programs. Limitations on
Medicare and Medicaid reimbursement for health care services are continually
proposed.]
The Legislative Add-ons expired on September 30, 2002 and EHSI's Medicare
funding has been reduced. Based upon the Medicare case mix and patient days over
the nine-month period ended September 30, 2002, EHSI estimates that it received,
on average, US$31.22 per patient day related to the Legislative Add-ons. The
loss of this funding was partially offset by a 2.6% inflationary increase
("market basket increase") in Medicare rates received by long-term care
providers beginning on October 1, 2002. The combined impact of these changes in
the fourth quarter of 2002 was a net decline in EHSI's average rate of US$23.64
per patient day, which based upon the Medicare case mix and patient days for the
year ended December 31, 2002, amounts to lower annualized revenue of
approximately $23.0 million (US$14.7 million) going forward.
On April 23, 2002 the Centers for Medicare and Medicaid Services (CMS) announced
that it would delay the refinement of the RUGs categories, thereby extending
related funding enhancements for at least one year to September 30, 2003. In the
February 2003 budget, President Bush proposed additional funding to extend the
RUGs Refinements to September 30, 2004. Although the budget has not been passed,
CMS has stated its agreement with extending the RUGs Refinements to September
30, 2004. EHSI estimates that it received, on average, US$24.40 per patient day
in 2002 related to the RUGs Refinements. Based upon the Medicare case mix and
patient days for the year ended December 31, 2002, this amounts to annualized
revenue of approximately $23.8 million (US$15.1 million) going forward. A
decision to discontinue all or part of the enhancements could have a significant
adverse effect on the Company.
In the February 2003 budget, President Bush proposed plans for reductions in the
annual market basket increase for skilled nursing facilities, effective from
October 1, 2003 to October 1, 2007. If this budget is passed, it will mean
reductions in the annual market basket increase for the industry of US$60
million beginning October 2003; US$140 million beginning October 2004; US$240
million beginning October 2005; US$350 million beginning October 2006; and
US$470 million beginning October 2007.
In January 2003, CMS announced that a moratorium on implementing payment caps
for outpatient Part B therapy services, which was scheduled to take effect on
January 1, 2003, would be extended until July 1, 2003. While the impact of a
payment cap cannot be reasonably estimated based on the information available at
this time, it would reduce EHSI's therapy revenue.
In February 2003, CMS announced a plan to reduce reimbursement levels for
uncollectible Part A co-insurance. Under current law, skilled nursing facilities
are reimbursed 100% for any bad debts incurred. The plan is to reduce the
reimbursement levels from the current 100% to 90% beginning October 1, 2003; 80%
beginning October 2004; and 70% beginning October 2005. This is consistent with
the reimbursement policy applicable to hospitals. EHSI estimates that should
this plan be implemented, the impact on net earnings would be $1.6 million
(US$1.0 million).
management's discussion and analysis 19
CANADIAN REVENUE
In Canada, the fees charged by ECI for its nursing centres and home health care
services are regulated by provincial authorities. Accordingly, provincial
programs fund a substantial portion of these fees, with the remainder paid by
individuals. Ontario is ECI's largest market for both its long-term care and
home health care services. It represented just over 70% of ECI's total revenue
in 2002. Funding for Ontario nursing centres is based on reimbursement for the
level of care provided. The provincial government allocates funds, or
"envelopes", for services such as nursing, programs, food and accommodation. ECI
receives a fixed amount per resident day for accommodation and may retain any
excess over costs incurred. With respect to the remaining envelopes, any
deviation in actual costs from scheduled rates is either incurred by ECI (if
costs exceed rates) or is returned to the government (if costs are below rates).
ECI's home health care operations receive 90% of their revenue from contracts
tendered by locally administered provincial agencies. Funding received by ECI
from the Ontario government represented revenue of $228.2 million in 2002,
$229.6 million in 2001 and $273.6 million in 2000.
Ontario Long-term Care Funding
On July 31, 2002, the Government of Ontario announced a funding increase of $100
million to enhance the delivery of nursing and personal care services. Effective
August 1, 2002, Ontario long-term care providers received a funding increase of
$7.20 per resident per day, based on a case mix index of 100. The increase
included $6.33 of flow-through funding for enhanced resident care through
additional nursing staff and other measures. Accordingly, while this portion of
the funding increased ECI's revenues, it did not affect earnings levels. The
remaining increase of $0.87 will improve earnings to the extent that it is not
offset by increased nursing home operating costs. Based on the level of ECI's
Ontario operations at the end of 2002 (approximately 1.6 million resident days
per year), the increase represents additional annual revenue of about $11.5
million going forward, including approximately $10 million for incremental
nursing staff and related costs.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles (GAAP). For a full
discussion of the Company's accounting policies as required by GAAP, see the
accompanying notes to Extendicare's December 31, 2002 audited consolidated
financial statements. The policies discussed below are considered to be critical
to an understanding of the Company's financial statements because their
application requires significant judgement and reliance on estimations of
matters that are inherently uncertain. Specific risks related to these critical
accounting policies are also described below.
U.S. Nursing Facility Revenue Recognition and Accounts Receivable
More than 75% of EHSI's revenues are derived from services provided under
various federal or state medical assistance programs. Revenues are recorded in
the period in which services and products are provided at established rates less
contractual adjustments. Contractual adjustments include differences between
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 laws and regulations governing U.S. federal
and state reimbursement programs, there is a possibility that recorded estimates
may change by a material amount.
The Company records receivables at the net realizable value expected to be
received from U.S. federal and state reimbursement programs, other third-party
payors or individual residents. The Company also estimates which receivables may
be collected within one year and reflects those not expected to be collected
within one year as non-current. Management continually monitors and adjusts the
allowances associated with these receivables. Allowances for bad debts from
other third-party payors or from individual patients are recorded based upon a
specific assessment of an account's collection risk and the Company's historical
experience by payor type. If circumstances change, for instance due to economic
downturn, resulting in higher than expected defaults or denials, management's
estimates of the recoverability of receivables could be reduced by a material
amount.
The Company's Canadian operations are not subject to similar risks associated
with the collection of accounts receivable, due to differences in the government
funding structures for the services provided. Therefore, 93% of the Company's
allowance for current accounts receivable is associated with its U.S.
operations. The associated allowance for doubtful accounts totalled $16.2
million and $24.5 million at December 31, 2002 and 2001, respectively. The
allowance for doubtful accounts for non-current accounts receivable totalled
$24.3 million and $24.6 million at December 31, 2002 and 2001, respectively.
20 extendicare 2002 annual report
Prior to the implementation of the U.S. Medicare Prospective Payment System in
1999, Medicare was a cost-based reimbursement program. In the ordinary course of
business, the Company continues to have discussions with the fiscal intermediary
regarding the treatment of various items related to prior years' cost reports.
Normally, disputes are resolved in the audit process; however, general
provisions are recorded for disagreements that require settlement through a
formal appeal process.
Valuation of Assets and Asset Impairment
The Company records property and equipment at cost less accumulated depreciation
and amortization. These assets are depreciated and amortized 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, the Company adopted the new recommendations
of the Canadian Institute of Chartered Accountants (CICA), Handbook Section 3062
"Goodwill and Other Intangible Assets", and no longer amortizes goodwill and
intangible assets with indefinite useful lives, which previously were amortized
using a straight-line method over a period of no more than 40 years. Instead,
management tests for impairment at least annually. Other intangible assets,
consisting of the cost of leasehold rights, are deferred and amortized over the
term of the lease, including renewal options. The Company periodically assesses
the recoverability of long-lived assets, including property and equipment,
goodwill and other intangibles, when there are indications of potential
impairment based on estimates of undiscounted future cash flows. The amount of
any impairment is calculated by comparing the estimated fair market value with
the carrying value of the related asset. In performing these analyses, the
Company considers such factors as current results, trends and future prospects,
current market value and other economic and regulatory factors.
A substantial change in estimated future cash flows for these assets could
materially change their estimated fair values, possibly resulting in additional
impairment. In response to the implementation of the Medicare Prospective
Payment System, increased litigation, insurance costs in certain states and
increased operating costs resulting from changes in legislation and regulatory
scrutiny, the Company has focused over the past several years on divesting
underperforming nursing and assisted living facilities and non-core health care
assets. As detailed in note 2 to the audited consolidated financial statements,
loss from asset disposals, impairment and other items totalled $6.7 million,
$50.1 million and $42.7 million in 2002, 2001 and 2000, respectively.
Self-insured Liabilities
Insurance coverage for resident care liability and other risks has become
increasingly difficult to obtain. The Company self-insures for certain risks
related to general and professional liability, auto liability, health benefits,
employers' liability and workers' compensation. The Company obtains reinsurance
coverage in amounts and with such coverage and deductibles as management deems
appropriate, based on the nature and risks of its business, historical
experiences, availability and industry standards.
The Company accrues for self-insured liabilities based on past trends and
information received from an independent actuary. Management regularly evaluates
the appropriateness of the carrying value of the self-insured liabilities
through an independent actuarial review. General and professional liability
claims are the most volatile and significant of the risks that the Company
self-insures. Management's 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. These 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 the level of retained risk and other significant assumptions that
underlie the Company's estimates could have a material effect on the future
carrying value of the self-insured liabilities. For example, the Company has
experienced adverse claims development. Consequently, as of January 1, 2000, the
Company's per claim retained risk increased significantly for general and
professional liability coverage, mainly due to the level of risk associated with
the Florida and Texas operations. Since January 1, 2001, EHSI no longer operates
nursing and assisted living facilities in the State of Florida and EHSI exited
the Texas nursing home market on October 1, 2001. However, in 2001, as a result
of the increase in frequency and severity of claims, the Company recorded a
provision of $27.0 million for resident care liability related to the ceased
Florida operations. This charge was reported as part of the loss from asset
disposals, impairment and other items, as detailed in note 2 to the audited
consolidated financial statements. As indicated on the cash flow statement, the
Company has increased its accrual for potential resident care liability claims
in 2002, 2001 and 2000 by $14.7 million, $65.5 million and $75.0 million,
respectively. At December 31, 2002, the Company's accrual for self-insured
general and professional liabilities totalled $137.0 million, compared to $174.2
million at the beginning of the year.
management's discussion and analysis 21
Future Tax Assets and Liabilities
Future tax assets and liabilities reflect the expected future tax consequences
attributed to differences between the financial reporting and tax bases of
assets and liabilities. Future tax assets and liabilities are measured using tax
rates (enacted or substantially enacted at the balance sheet date) anticipated
to apply in the periods that the temporary differences are expected to reverse.
A valuation allowance is established based upon management's estimate of whether
it is more likely than not that some portion or all of the future tax assets
will not be realized. The ultimate realization of future tax assets depends on
the generation of taxable income during the periods in which those temporary
differences become deductible. In making this assessment, management considers
the scheduled reversal of future tax liabilities, projected future taxable
income and tax planning strategies. The Company's valuation allowance for future
tax assets totalled $54.6 million and $58.9 million at December 31, 2002 and
2001, respectively.
SIGNIFICANT EVENTS IN 2002 AND 2001
Issuance of Senior Notes
On June 28, 2002, EHSI completed a private placement of US$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, EHSI completed an
offer to exchange new 9.5% Senior Notes due 2010 that have been registered under
the Securities Act of 1933 for the Notes issued in June 2002. The terms of the
new Senior Notes are identical to the terms of the Senior Notes issued in June
2002 and are guaranteed by all existing and future active subsidiaries of EHSI.
EHSI used the proceeds of $235.6 million (US$149.6 million) to pay $13.1 million
(US$8.3 million) of related fees and expenses, retire $206.0 million of debt
(US$130.8 million, consisting of US$124.5 million outstanding under its previous
credit facility and US$6.3 million of other debt), and for general corporate
purposes.
EHSI had hedged a portion of its previous variable-rate long-term debt through
an interest rate swap with a notional amount of US$25.0 million maturing in
February 2003. Upon refinancing of the debt, EHSI terminated this swap with a
cash payment of $1.0 million (US$0.6 million). This amount and other deferred
financing costs related to the previous credit facility, totalling $4.5 million,
were written off in June 2002 and reported on the earnings statement as part of
the loss from asset disposals, impairment and other items.
Acquisitions
In October 2002, EHSI exercised its right to acquire three skilled nursing
facilities in Ohio and four skilled nursing facilities in Indiana that it had
previously leased, for an aggregate purchase price of $28.2 million (US$17.9
million). The purchase price included cash of US$7.4 million and a US$10.5
million, 10-year note, which bears interest at a rate to be determined by
arbitration (currently being accrued at 10.5%).
Construction
As a result of new beds awarded in 1998 by the Government of Ontario, ECI has
opened eight new facilities with capacity for 1,101 residents. This total
includes 905 new long-term care beds, 120 beds transferred from existing ECI
facilities, and 76 assisted living units. Four of the facilities opened during
2001, two in 2002, and the remaining two in February 2003. In an agreement
finalized in February 2001, ECI obtained from Borealis Long-Term Care Facilities
Inc., a wholly owned subsidiary of the Ontario Municipal Employees Retirement
System, financing of $125.4 million to build the eight new facilities. ECI is
operating the facilities for Borealis during the 25-year capital lease
arrangement at a financing cost of approximately 8.0%.
During 2001, ECI was awarded a further 256 long-term care beds for two new
nursing homes under the Ontario program. In addition, ECI is awaiting approval
for the transfer of 96 long-term care beds that had been awarded to the Halton
Healthcare Services Corporation and plans to use these beds, together with 34
existing beds, to develop a new 130-bed facility. ECI is in the process of
securing financing for these projects.
The Ontario Government is funding a portion of the construction costs over a
20-year period. Approximately $101.0 million will be received by ECI for the new
long-term care beds and certain redeveloped ECI beds. As each facility opens, a
receivable is recorded and offset against the cost of construction, based on
applying a discount rate equivalent to the yield on a 20-year Ontario Government
bond. At December 31, 2002, ECI has recorded $28.1 million in notes related to
the six opened facilities, discounted using rates in the range of 6.2% to 6.5%.
22 extendicare 2002 annual report
[BAR CHART]
Canadian Operations
Year Resident Capacity
00 7,632
01 7,937
02 10,906
[DESCRIPTION OF BAR CHART]
[At the end of 2002, ECI operated 80 facilities in Canada, with capacity for
10,906 residents. The majority of its business is in Ontario, where significant
growth has resulted from additional management contracts and the opening of new
homes.]
Other
During 2002, Extendicare received cash dividends of $22.0 million from Crown
Life Insurance Company (2001 - $22.6 million). Dividends from Crown Life are at
the discretion of its board of directors, and it is not expected that any
further dividends will be received until 2004, when Crown Life finalizes its
sale agreement with The Canada Life Assurance Company, as described in note 7 to
the audited consolidated financial statements.
During 2002, under the terms of normal course issuer bids, the Company purchased
and cancelled 1,685,200 Subordinate and Multiple Voting shares at a cost of $8.1
million. During 2001, the Company purchased and cancelled 1,969,500 Subordinate
and Multiple Voting shares at a cost of $9.8 million.
The current bid, filed in November 2002, is for the purchase and cancellation of
up to 4,700,000 Subordinate Voting Shares, 620,000 Multiple Voting Shares and
38,200 Class II Preferred Shares, Series 1. As at February 20, 2003, cumulative
purchases for cancellation of 20,000 Subordinate Voting Shares have been made
under the current bid, which expires on November 26, 2003.
As of December 2002, EHSI is pursuing settlement of a number of outstanding
Medicaid and Medicare receivables. Due to the length of the settlement process,
some of those receivables are not expected to be collected within one year and,
as a result, are classified as long-term other assets. For one specific issue
involving the allocation of overhead costs totalling US$14.8 million, the first
of three specific claim years was presented to the Provider Reimbursement Review
Board (PRRB) on January 30, 2003. The hearing procedures were discontinued after
the parties negotiated a methodology for resolution of the claim, and
subsequently an administrative resolution was signed by the fiscal intermediary
and EHSI to settle the amount, which will be determined later in 2003. For
another specific issue involving a staffing cost matter totalling US$7.3
million, the first of seven specific claim years was settled prior to the PRRB
hearing, and agreement has been reached with the fiscal intermediary to continue
to negotiate the remaining years in dispute. No adjustment to the amounts
recorded at December 31, 2002 is determinable at this time. Further negotiations
on the remaining years under appeal are to occur during 2003 and until
negotiations are concluded on a majority of the remaining claim years in
dispute, no adjustment to the amounts receivable can be determined. At December
31, 2002, the Company had $97.3 million (US$61.7 million) of gross Medicare and
Medicaid settlement receivables, with a related allowance for doubtful accounts
of $24.3 million (US$15.4 million). The net receivable represents the Company's
estimate of the amount collectible on Medicare and Medicaid prior period cost
reports.
EHSI has a preferred provider agreement with Omnicare, Inc. to provide pharmacy
services to all of EHSI's nursing facilities. Omnicare and EHSI are currently
negotiating the pricing of drugs for Medicare residents and should this matter
not be settled, it will be taken to arbitration. In addition, Omnicare has
requested arbitration for an alleged lost profits claim related to EHSI's
disposition of assets, primarily in Florida. Damage amounts, if any, cannot be
reasonably estimated based on information available at this time. An arbitration
hearing on this matter has not yet been scheduled. Management believes it has
interpreted correctly and 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.
management's discussion and analysis 23
Loss from Asset Disposals, Impairment and Other Items
Significant factors that affected the Company during the past few years included
changes in legislation, changes in the insurance marketplace and the
implementation of the Medicare Prospective Payment System. In response,
management identified assets that were either underperforming or not strategic
to its operations. This resulted in a number of dispositions and the sale or
lease of all of EHSI's nursing home operations in the states of Florida and
Texas. The ceasing of nursing home operations in Florida and Texas limits the
Company's future exposure to litigation claims, which have been prevalent in
these states. Proceeds from the sale of assets have been used primarily to
reduce long-term debt, which improved the Company's leverage and lowered
interest costs.
2002 Dispositions
On May 31, 2002, Tandem Health Care, Inc. exercised its option to purchase seven
Florida properties that it leased from EHSI for gross proceeds of $45.0 million
(US$28.6 million, consisting of cash of US$15.6 million and US$13.0 million of
8.5%, five-year notes). This transaction, together with a deferred gain from the
April 2001 transaction with Tandem, discussed below, resulted in a pre-tax gain
of $6.2 million. EHSI applied US$12.4 million of the net proceeds to reduce its
bank debt.
2001 Dispositions
EHSI effectively ceased nursing operations in Texas by leasing and subleasing 17
nursing homes (1,421 beds) to Senior Health Properties - Texas, Inc. On October
1, 2001 Senior Health began operating these nursing homes based on five-year
leases on four facilities owned by EHSI, and 13 subleases. Senior Health will
operate the subleased facilities for their remaining lease terms. One lease
expired on October 31, 2001 and the owner of the property assumed operation of
the facility. The other 12 leases expire in February 2012. Senior Health has the
right of first refusal with respect to any offer to purchase any of the four
EHSI-owned facilities.
In April 2001, Tandem Health Care, Inc. exercised its option to purchase from
EHSI two leased Florida facilities for gross proceeds of $17.5 million (US$11.4
million, consisting of: cash of US$7.0 million; US$2.5 million of 8.5%,
five-year notes; and US$1.9 million of 9% cumulative preferred shares,
mandatorily redeemable after five years). The resulting pre-tax gain of $3.3
million was deferred until May 2002, as it was dependent on the exercise of some
or all of the remaining purchase options held by Tandem. The net cash proceeds
of the transaction were $10.6 million (US$6.9 million), and $6.2 million (US$4.0
million) was applied to EHSI term bank debt.
In December 2001, ECI sold its investment in Accident Injury Management Clinics
Inc. (AIM), a rehabilitative therapy business operating in Ontario, resulting in
a gain of $1.1 million. Proceeds of $3.5 million from the sale consisted of cash
of $2.2 million and notes receivable of $1.3 million at 6%, maturing in 2005.
Other Items
On an ongoing basis, the Company reviews the levels of its overall reserves for
losses related to EHSI's Florida and Texas operations, which reserves were
initially established when management decided to exit these states. As a result
of events that became known to management in 2002, EHSI increased its reserves
by $8.3 million related to cost report settlement issues, and settlement claims
with suppliers and employees. During 2001, the Company recorded provisions of
$20.3 million for the closure of facilities and for previously ceased operations
in the United States.
In November 2002, as a result of continuing unfavourable business conditions,
management approved a plan to leave the British Columbia home health care market
by winding down its ParaMed B.C. business by March 31, 2003. ParaMed Home Health
Care Services operates five offices in B.C. In 2002, these operations provided
751,000 hours of service (2001 - 870,000), generated revenue of $25.9 million
(2001 - $26.5 million) and contributed approximately $0.4 million (2001 - $0.4
million) to net earnings on an after-tax basis, excluding an allocation of
corporate office costs. ParaMed's B.C. operations contributed $0.7 million to
earnings before interest, taxes, depreciation, amortization and loss from asset
disposals, impairment and other items (EBITDA), excluding an allocation of
corporate office costs, in each of 2002 and 2001. ECI has accrued exit costs of
$1.6 million, consisting of $1.1 million for labour related expenses and $0.5
million for operating lease penalties and other costs.
24 extendicare 2002 annual report
ECI recorded a reduction of $1.5 million in the 2002 fourth quarter for labour
related provisions that were no longer required.
The Company must record a provision for asset impairment when indicators of
impairment are present and the undiscounted cash flows do not appear to be
sufficient to recover the assets' carrying amounts. Accordingly, the Company
recorded provisions of $2.6 million in 2001 related to asset impairment. In
addition, the Company recorded a $27.0 million provision for adverse development
of prior years' general and professional liability costs (resident care
liability costs) related to ceased Florida operations.
Components of Loss from Asset Disposals, Impairment and Other Items
2002 2001
- ---------------------------------------------------------------------------------------------------------------
NET NET LOSS Loss
(millions of dollars) PROCEEDS BOOK VALUE (GAIN) (Gain)
- ---------------------------------------------------------------------------------------------------------------
Loss (gain) from dispositions
United States nursing facilities 40.1 33.9 (6.2) -
Canada rehabilitative therapy services - (1.1)
Provision for closure, exit costs and loss on disposals
United States facilities 8.3 20.3
Canada home health care B.C. operations 1.6 -
Canada reduction of labour related provisions (1.5) -
Write-off of deferred financing costs 4.5 -
Provision for impairment of assets - 2.6
Provision for adverse development of resident care liability costs - 27.0
Other - 1.3
- --------------------------------------------------------------------------------------------------------------
6.7 50.1
==============================================================================================================
RESULTS OF OPERATIONS
The table on the next page presents the Company's quarterly financial results as
reported, in addition to supplemental information to assist the reader in better
understanding the quarterly trend in results and the discussion of
year-over-year comparisons that follows. The Company has presented both EBITDA
and health care results before certain items. The Company reported separately a
loss from asset disposals, impairment and other items of $6.7 million in 2002
and $50.1 million in 2001. On an after-tax basis, these items represented a loss
of $3.9 million ($0.05 loss per share) and $35.5 million ($0.49 loss per share),
respectively. In addition, the 2001 quarterly results described in the table
report separately a third quarter charge to operating expense, which management
has identified as a significant item of a non-recurring nature affecting the
quarterly trend and comparability of results. In the third quarter of 2001, the
Company recorded a provision for prior years' resident care liability costs of
$11.5 million, or $7.9 million on an after-tax basis ($0.11 loss per share).
management's discussion and analysis 25
QUARTERLY FINANCIAL AND SUPPLEMENTAL INFORMATION
Year ended December 31, 2002 (1)
(unaudited) (thousands of dollars except per share amounts) 1st 2nd 3rd 4th Total
- ---------------------------------------------------------------------------------------------------------------------------
Revenue 432,023 429,847 443,079 450,725 1,755,674
===========================================================================================================================
EBITDA (2) 38,920 42,514 42,980 35,927 160,341
===========================================================================================================================
Earnings from health care before undernoted 2,952 5,292 6,027 997 15,268
Loss from asset disposals and other items, net of tax - (3,786) - (68) (3,854)
- ---------------------------------------------------------------------------------------------------------------------------
Earnings from health care 2,952 1,506 6,027 929 11,414
Share of earnings of Crown Life 2,984 575 1,893 2,068 7,520
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings 5,936 2,081 7,920 2,997 18,934
===========================================================================================================================
Earnings (loss) per share
Health care operations before undernoted 0.04 0.07 0.08 0.02 0.21
Loss from asset disposals and other items - (0.05) - - (0.05)
Share of earnings of Crown Life 0.04 0.01 0.03 0.02 0.10
- ---------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share 0.08 0.03 0.11 0.04 0.26
===========================================================================================================================
Year ended December 31, 2001
(unaudited) (thousands of dollars except per share amounts) 1st 2nd 3rd 4th Total
- ---------------------------------------------------------------------------------------------------------------------------
Revenue 408,730 431,129 432,730 431,922 1,704,511
===========================================================================================================================
EBITDA before undernoted 25,468 35,670 34,872 42,645 138,655
Provision for resident care liability costs related to prior years
included in operating expense - - (11,498) - (11,498)
- ---------------------------------------------------------------------------------------------------------------------------
EBITDA 25,468 35,670 23,374 42,645 127,157
===========================================================================================================================
Earnings (loss) from health care before undernoted (6,216) (184) (732) 3,365 (3,767)
Provision for resident care liability costs related to prior years
recorded in EBITDA, net of tax - - (7,911) - (7,911)
Loss from asset disposals and other items, net of tax (1,399) (6,493) (27,574) - (35,466)
- ---------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from health care (7,615) (6,677) (36,217) 3,365 (47,144)
Share of earnings of Crown Life 2,277 2,561 2,405 3,495 10,738
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) (5,338) (4,116) (33,812) 6,860 (36,406)
===========================================================================================================================
Earnings (loss) per share
Health care operations before undernoted (0.09) (0.01) (0.01) 0.04 (0.07)
Provision for resident care liability costs related to prior years
recorded in EBITDA - - (0.11) - (0.11)
Loss from asset disposals and other items (0.02) (0.09) (0.38) - (0.49)
Share of earnings of Crown Life 0.03 0.04 0.03 0.05 0.15
- ---------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per share (0.08) (0.06) (0.47) 0.09 (0.52)
===========================================================================================================================
(1) Results for the second quarter of 2002 have been restated for the
reclassification of certain items between operating expense and loss from
asset disposals and other items.
(2) EBITDA represents earnings before interest, taxes, depreciation,
amortization and loss from asset disposals and other items.
26 extendicare 2002 annual report
[BAR CHART]
EHSI Average Daily Nursing
Year Home Census (same-facility)
00 12,551
01 12,465
02 12,727
[BAR CHART]
EHSI Average Daily Medicare
Year Census (same-facility)
00 1,341
01 1,427
02 1,699
[DESCRIPTION OF BAR CHARTS]
[Extendicare's revenue from ongoing operations rose 6.8% in 2002, primarily as a
result of higher U.S. nursing home census, particularly Medicare. Management
will continue to focus on the top line, driving revenue through census growth.]
FISCAL YEAR 2002 COMPARED WITH 2001
Extendicare's net earnings were $18.9 million ($0.26 per share) for the year
ended December 31, 2002 compared to a loss of $36.4 million ($0.52 loss per
share) in 2001. Pre-tax earnings from health care operations improved by $82.3
million to $22.6 million from a loss of $59.7 million in 2001.
Revenue
Revenue in 2002 from ongoing operations rose $111.4 million, or 6.8%, to
$1,755.7 million from $1,644.3 million in 2001. The 2001 results included
revenue of $60.2 million from assets no longer operated by Extendicare.
Revenue from United States nursing and assisted living operations increased by
$49.0 million to $1,236.6 million in 2002. Revenue from same-facility operations
(those operated throughout 2002 and 2001) improved by $104.2 million and was
partially offset by a $55.2 million decline related to operations ceased during
2001. Improvements in same-facility revenue resulted from several factors,
including increased patient census and higher rates. The change in the U.S.
foreign exchange rate on translation of United States operations added $17.3
million to the year-over-year variance.
The average annual exchange rates used to translate the results of the United
States operations to Canadian dollars were: 1.5704 for 2002; 1.5484 for 2001;
and 1.4852 for 2000.
U.S. same-facility nursing home occupancy increased to 90.3% from the 2001 level
of 87.8%. In particular, Medicare census improved to 13.4% of total nursing
census in 2002 from 11.4% in the prior year.
The key Medicare and Medicaid statistics for the U.S. nursing operations on a
same-facility basis for 2002 and 2001 are summarized in the table below. The
average daily Medicare rate of US$331 in 2002 represents an average rate for the
first nine months of US$337, and a drop in the average daily rate in the fourth
quarter to US$315. (See "United States Revenue - Legislative Actions Affecting
U.S. Revenue" at the beginning of the Management's Discussion and Analysis.)
Medicare Medicaid
- -----------------------------------------------------------------------------------------------------------------
Increase Increase
2002 2001 (Decrease) 2002 2001 (Decrease)
- -----------------------------------------------------------------------------------------------------------------
Average daily rate US$331 US$334 (0.9)% US$127 US$121 5.0%
Residents as a percent of total 13.4% 11.4% 16.5% 68.6% 69.6% (1.3)%
Average daily census 1,699 1,427 19.1% 8,737 8,676 0.7%
- -------------------------------------------------------------------------------------------------------------
Revenue from Canadian nursing centre operations improved $36.3 million, or
13.0%, to $315.9 million. This improvement was primarily due to new Ontario
homes and funding changes to support greater care and staffing needs
(flow-through funding), as well as rate increases. New Ontario homes contributed
approximately $20.7 million to the year-over-year increase.
management's discussion and analysis 27
Canadian home health revenue declined by $25.8 million. Disposal of the
rehabilitative therapy operations in 2001 resulted in lost revenue of $5.1
million. ParaMed experienced a $20.7 million drop in revenue due to a decline in
hours of service, which fell 20.9% to 5.43 million in 2002 from 6.87 million in
the prior year. ParaMed's volumes have decreased in Ontario, its largest market,
and to a lesser extent in B.C. Ninety percent of the drop in hours occurred in
Ontario, as a result of budget constraints at the Community Care Access Centres
(CCAC) that contract for the services. Management believes that this situation
has stabilized, as Ontario volumes in the fourth quarter of 2002 increased 2.8%
from the third quarter of the year. During 2002, ParaMed's hours of service
provided in B.C. declined by 120,000 to 751,000, as some Regional Health
Authorities chose to deliver the services themselves. In addition, funding has
not kept pace with rising operating costs, making it uneconomical to take on new
contracts. In the 2002 fourth quarter, as a result of the continuing
unfavourable home health care climate in B.C., management approved a plan to
exit that market by the end of March 2003.
Other revenue fell $9.8 million to $41.0 million in 2002. Lower revenue from
Extendicare's captive insurance company, due to a discontinued insurance
contract and lower investment income, resulted in a $12.6 million decline. This
was partially offset by a $2.8 million increase in revenue, mainly from
additional management and consulting contracts with other long-term care
providers.
Operating and Administrative Costs
Operating and administrative costs rose $22.1 million, or 1.4%, in 2002 as a
result of increased activity from ongoing operations, discussed below, partially
offset by ceased operations. The Company's accrual for potential resident care
liability claims charged to operating expense declined $23.8 million year over
year to $14.7 million, primarily as a result of exiting nursing home operations
in Texas in the fourth quarter of 2001. A further decline in operating and
administrative costs of $54.3 million was due to the ceasing of operations in
2001.
Operating and administrative costs from ongoing operations, excluding resident
care liability costs, rose approximately $100.2 million. This included $16.1
million attributable to the change in the U.S. foreign exchange rate on
translation of United States operations. Wage-related costs, including
contracted services, increased year over year by approximately $66.0 million, or
6.0%, primarily due to wage pressures in both the U.S. and Canada and
flow-through funding increases, as indicated in the revenue discussion above.
The new facilities in Ontario contributed $11.7 million to the year-over-year
variance in wage-related costs; however, the drop in home health care hours of
service resulted in a reduction of $19.0 million. Remaining operating and
administrative costs rose $18.1 million, due primarily to increased business
activities such as the growth in U.S. Medicare census, new facilities in Ontario
and additional management and consulting contracts.
EBITDA
EBITDA rose 26.1% to $160.3 million in 2002 from $127.2 million last year,
primarily as a result of improvements in U.S. operations. EBITDA as a percent of
revenue increased 167 basis points to 9.1% from the prior year.
EBITDA from U.S. operations improved by $28.8 million year over year. The
accrual for resident care liability costs charged to operating expense declined
$23.8 million to $14.7 million in 2002 as a result of ceasing operations in the
Texas nursing home market. The remaining $5.0 million improvement was mainly due
to higher Medicare census and increased Medicaid and private rates, partially
offset by lower Medicare rates.
EBITDA from Canadian operations rose $4.4 million, with $6.9 million of
improvements in nursing home operations due to new Ontario nursing homes and
funding enhancements. This was partially offset by a $1.3 million decline in
home health care operations because of reduced hours of service and a $1.2
million reduction due to the 2001 sale of the rehabilitative therapy operations.
Depreciation and Amortization
Depreciation and amortization charges declined $2.6 million in 2002. The
cessation of goodwill amortization upon adoption of the CICA new accounting
policy reduced costs by $4.0 million. This was partially offset by an increase
in depreciation as a result of the new Ontario buildings.
Interest
Interest costs declined $3.2 million in 2002 to $62.0 million, as a result of
lower debt levels and interest rates, partially offset by additional interest
costs in Canadian operations due to financing of the new Ontario facilities.
28 extendicare 2002 annual report
Income Taxes
Income taxes for 2002 represented a provision of $11.2 million compared to a
recovery of $12.7 million in 2001. The effective tax rate was 49.5% in 2002
compared to 21.2% in 2001. The effective benefit of the pre-tax loss was less in
2001 due to a shift in income between taxable and non-taxable entities, and as a
result of not tax benefiting operating losses in the Company's captive insurance
company. In the fourth quarter of 2002, the Company reported a shift between
current and future income taxes of $9.2 million to reflect a change in U.S. law
retroactive to 2001 and enacted on March 9, 2002, which extended the net
operating loss carryback period from two years to five years.
Share of Earnings of Crown Life
Extendicare's share of earnings of Crown Life Insurance Company declined to $7.5
million from $10.7 million in 2001. During the second quarter of 2002, Crown
Life reported one-time charges related to an interest penalty on the early
retirement of debt and the settlement of a reinsurance contract. Extendicare's
share of these special charges was $2.5 million.
FISCAL YEAR 2001 COMPARED WITH 2000
Extendicare's loss in 2001 was $36.4 million ($0.52 loss per share) compared to
$59.3 million ($0.81 loss per share) in the prior year. The pre-tax loss from
health care operations declined by $44.1 million to $59.7 million from a loss of
$103.8 million in 2000.
Revenue
Revenue for 2001 declined by $102.9 million compared to 2000.
Revenue from U.S. nursing and assisted living operations declined $158.5
million. Ceased operations reduced nursing and assisted living revenue by $230.2
million, while revenue from same-facility operations (those operated throughout
2001 and 2000) improved by $71.7 million. Improvements in same-facility revenue
resulted from several factors. These included higher rates and improved Medicare
census, partially offset by a $17.8 million Medicare settlement recovery
received in the fourth quarter of 2000 and one less day in 2001. In addition,
the change in the U.S. foreign exchange rate on translation of United States
operations added $48.4 million to the year-over-year variance.
Medicare census improved to 11.4% of total nursing home census in 2001, compared
to 10.7% in 2000, notwithstanding a decline in overall nursing home census on a
same-facility basis. Excluding ceased operations, Medicare patient days in 2001
increased 6.2% to 520,900 from 490,700 in 2000. The average percentage
occupancy, based on U.S. nursing and assisted living facilities in operation
throughout 2001 and 2000, was 87.2% and 87.4%, respectively.
The Company's average daily Medicare and Medicaid rates on a same-facility basis
increased to US$334 and US$121, respectively, compared to US$316 and US$115,
respectively, in 2000. The Company's overall average daily Medicare Part A rate
rose to US$312 in 2001 compared to US$304 in 2000.
Canadian nursing centre operations reported an increase in revenue of $12.9
million. This improvement was primarily due to funding changes to support
greater care and staffing needs, as well as rate increases. Also, the Company
realized additional revenue of $3.5 million in Ontario related to the opening of
four new facilities during the year.
Home health revenue in Canada rose $10.5 million in 2001. The rehabilitative
therapy operations, disposed of in 2001, had contributed $2.1 million to the
revenue increase. Revenue from home health care operations increased by $8.4
million as a result of higher rates and mix of services provided. ParaMed's
hours of service declined year over year by 1.4% to 6.9 million in 2001.
ParaMed's operations saw a decline in service hours in the latter half of 2001,
with 3.2 million hours provided versus 3.7 million hours in the first half of
the year. This decline was due to CCAC budget constraints.
Other revenue of $50.9 million increased $31.9 million. Revenue from the
Company's wholly owned captive insurance companies rose by $10.4 million.
Revenue from new contracts for operating leases, management services, and
consulting services accounted for the remaining $21.5 million improvement.
Operating and Administrative Costs
Operating and administrative costs declined $138.3 million, or 8.2%, as a result
of ceased operations, partially offset by increased costs. The Company's
resident care liability costs (both premiums and accruals for potential claims)
charged to operating expense of $46.6 million declined year over year by $61.4
million, primarily as a result of ceasing operations in Florida at the end of
2000, and Texas in the fourth quarter of 2001. There was a further $198.8
million decline in operating and administrative costs as a result of ceased
operations.
management's discussion and analysis 29
Operating and administrative costs from ongoing operations, excluding resident
care liability costs, rose approximately $121.9 million, including $46.3 million
attributable to the change in the U.S. foreign exchange rate on translation of
United States operations. Wage-related expenses increased year over year by
approximately $59.5 million, primarily due to wage pressures realized in both
the U.S. and Canadian markets, flow-through funding increases, and an additional
$2.3 million in wage-related costs due to the opening of new facilities in
Ontario during 2001. Remaining operating and administrative costs rose $16.1
million, due to a combination of business activities and inflationary increases.
EBITDA
The Company reported EBITDA of $127.2 million (7.5% of revenue) for 2001
compared to $92.5 million (5.1% of revenue) in 2000, an improvement of $34.7
million or 37.5%.
EBITDA from U.S. operations improved by $29.2 million, and represented 7.3% of
revenue in 2001, compared to 4.5% in 2000. Ceased operations, in conjunction
with lower resident care liability costs, partially offset by the non-recurring
Medicare settlement recovery, resulted in a year-over-year improvement in EBITDA
of $13.4 million. EBITDA from ongoing operations rose by $15.8 million due to
improved revenue rates, census mix, and growth in management and consulting
contracts, partially offset by increased operating costs.
EBITDA from Canadian operations rose by $5.4 million, and represented 7.8% of
revenue compared to 7.0% in the prior year. The Company experienced improvements
in both nursing centre and home health operations.
Depreciation and Amortization
Depreciation and amortization charges decreased $3.5 million over 2000,
primarily as a result of ceased operations.
Interest
Interest costs declined $13.2 million in 2001 to $65.2 million, as a result of
lower debt levels and interest rates, partially offset by additional interest
costs in Canadian operations due to financing of the new Ontario facilities.
Income Taxes
Income taxes for 2001 represented a recovery of $12.7 million compared with a
recovery of $36.9 million in 2000. The effective benefit of the pre-tax loss was
less in 2001 than in 2000 due to a shift in income between taxable and
non-taxable entities, and as a result of not tax benefiting operating losses in
the Company's captive insurance company. The Company reported a shift between
current and future income taxes in the fourth quarter of 2001 due to a Canadian
tax reassessment related to deferred revenue. As a result, previously benefited
operating losses have been utilized and future income tax on the deferred
revenue timing difference has been recorded.
Share of Earnings of Crown Life
The Company's share of Crown Life earnings for 2001 was $10.7 million compared
to $7.8 million in 2000. The improvement reflected the profitability of Crown
Life's remaining insurance operations and related investment activities.
LIQUIDITY AND CAPITAL RESOURCES
Long-term debt, including the portion due within one year, increased to $852.9
million at December 31, 2002 from $811.5 million at the beginning of the year,
reflecting repayments of $235.0 million and debt issues totalling $282.5
million. In addition, the debt balance at the end of December 2002 declined from
the opening balance by $6.1 million as a result of the change in the closing
exchange rate on translation of U.S. operations. The closing rates used to
translate U.S. operations were 1.5776 at December 31, 2002 and 1.5928 at
December 31, 2001.
The debt issues of $282.5 million related to the $235.6 million Senior Note
issue, an increase of $30.4 million in capital lease obligations in connection
with the financing of new Ontario nursing homes, and a $16.5 million issue of
notes payable for the acquisition of U.S. facilities. The repayment of $235.0
million of long-term debt included refinancing of $206.0 million of U.S. credit
facilities with proceeds from the Senior Notes.
After taking into account interest rate swap agreements, the weighted average
interest rate of all long-term debt at December 31, 2002 was approximately 7.9%.
In addition, after considering swap agreements in place to convert fixed-rate
debt to floating rates, 66.3% of the long-term debt was effectively at fixed
rates.
At December 31, 2002 the Company had cash and cash equivalents of $52.6 million,
compared with $25.5 million at December 31, 2001.
Cash flow generated from operations before working capital changes was $94.6
million, $58.0 million and $81.8 million in 2002, 2001 and 2000, respectively.
Cash flow from operations included cash dividends from Crown Life Insurance
Company in 2002 and 2001 of $22.0 million and $22.6 million, respectively.
30 extendicare 2002 annual report
[BAR CHART]
Year Cash Flow from Operations,
before Working Capital Changes
(millions of dollars)
00 81.8
01 58.0
02 94.6
[BAR CHART]
Year Cash Flow per Share
(dollars)
00 1.10
01 0.81
02 1.34
[DESCRIPTION OF BAR CHARTS]
[Cash flow generated from operations, prior to working capital changes, rose 63%
in 2002 to $94.6 million or $1.34 per share, due to the growth in earnings.]
The net change in operating working capital (excluding cash and borrowings
included in current liabilities) reflected a source of cash of $3.7 million in
2002 and $78.5 million in 2001, and a use of cash in 2000 of $34.2 million. The
2002 source of cash resulted from a reduction in accounts receivable because of
improved collections efforts, and an increase in accounts payable primarily due
to the January 1, 2003 semi-annual interest payment on the new Senior Notes.
This was partially offset by an increase in taxes recoverable as a result of the
change in the U.S. tax loss carryback period from two to five years. The 2001
working capital change included an income tax refund of $34.5 million on U.S.
operating losses and a reduction in accounts receivable due to improved
collections efforts and ceased operations. The 2000 working capital use of cash
reflected reduced accounts payable in excess of the decline in accounts
receivable, primarily as a result of asset disposals.
Cash used for investing activities was $37.9 million in 2002 and $33.5 million
in 2001, compared to a source of cash of $50.8 million in 2000. Proceeds of
$19.7 million were realized on asset transactions in 2002, compared to $12.2
million and $54.5 million in 2001 and 2000, respectively. Property and equipment
capital expenditures, net of financing, reflected on the cash flow statement
were $53.1 million in 2002, $45.4 million in 2001 and $46.3 million in 2000.
Expenditures related to the growth of the business - such as construction of
facilities and bed additions - were approximately $11.8 million, $9.8 million
and $22.0 million, respectively. These expenditures related to the construction
of new Ontario nursing homes, and were net of financing for costs paid directly
by Borealis under the capital lease arrangement in 2002 and 2001 of $30.4
million and $54.0 million, respectively. Maintenance capital expenditures, which
represent required periodic capital improvements and routine replacement of
capital items, were $41.3 million, $35.6 million and $24.3 million,
respectively, for the past three years. Maintenance capital expenditures have
increased due to additional renovation projects to existing facilities.
Cash used in financing activities was $33.4 million in 2002, $86.6 million in
2001 and $116.6 million in 2000. The 2002 use of cash reflects the purchase and
cancellation by the Company of its shares, financing costs related to the U.S.
Senior Note issue, and the increase in restricted cash held for self-insured
liabilities. The use of cash for financing activities in 2001 and 2000 primarily
reflected the Company's reduction of long-term debt.
At the end of 2002, the Company's accrual for self-insured general and
professional liabilities was $137.0 million compared to $174.2 million at the
beginning of the year. Claims payments, net of the current period provision,
decreased the accrual by $36.0 million. The change in the United States exchange
rate reduced the balance by a further $1.2 million. The accrual for self-insured
liabilities includes estimates of the costs of both reported claims and claims
incurred but not yet reported. Since January 1, 2001, EHSI no longer operates
nursing and assisted living facilities in the State of Florida and EHSI exited
the Texas nursing home market on October 1, 2001. Provisions recorded in 2002,
2001 and 2000 for potential general and professional liability claims were $14.7
million, $65.5 million and $75.0 million, respectively. The Company completed an
independent actuarial review as part of the year-end audit, which confirmed the
adequacy of reserves and current accruals. Management believes the Company has
provided sufficient reserves as of December 31, 2002 for estimated costs of
self-insured liabilities.
The Company invests funds to support the accrual for self-insured liabilities.
These funds, reported in other assets, totalled $56.2 million at the end of
2002, compared to $45.5 million at the end of 2001. In addition to the 2001
year-end funds, the Company's captive insurance company, Laurier Indemnity
Company, Ltd., held an intercompany investment in EHSI bonds. This investment
had a face value of $24.5 million (US$15.4 million) and a carrying value of
$21.3 million (US$13.4 million). Extendicare Inc. acquired these bonds from
Laurier during 2002. Most of the risks that the Company self-insures are
long-term in nature and, accordingly, claims payments for any particular policy
year occur over a long period of time. The Company believes that it has
sufficient cash resources to meet its estimated current claims payment
obligations.
management's discussion and analysis 31
The Company obtains third-party reinsurance for its self-insured liabilities.
Beginning in 2000, due to the litigious environment experienced by the long-term
care industry, the Company's reinsurance premiums and per claim risk retention
for general and professional liability coverage increased significantly.
Payments for settlement of general and professional liability claims were $50.7
million, $57.3 million and $25.7 million in 2002, 2001 and 2000, respectively.
On June 28, 2002, EHSI refinanced all outstanding indebtedness under its then
existing credit facility with proceeds from the issuance of 9.5% Senior Notes
due 2010 and entered into a new credit facility that expires on June 28, 2007,
which provides senior secured financing of up to US$105.0 million on a revolving
basis. At December 31, 2002, there were no borrowings drawn under this credit
facility, other than support for US$38.8 million of letters of credit. At EHSI's
option, borrowings drawn during the first four fiscal quarters will bear
interest at an annual rate equal to the London Interbank Borrowing Rate (LIBOR),
plus 3.50%; or the Base Rate, as defined in the new credit facility, plus 2.50%.
Subsequent borrowings will bear interest subject to adjustments based on
financial performance. EHSI's obligations under the new credit facility are
guaranteed by: Extendicare Holdings, Inc., EHSI's direct parent; each of EHSI's
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 EHSI or any of its domestic subsidiaries. EHSI's obligations are
secured by a perfected first priority security interest in certain of EHSI's
tangible and intangible assets and all of EHSI's and its subsidiary guarantors'
capital stock. The new credit facility is also secured by a pledge of 65% of the
voting stock of EHSI's and its subsidiary guarantors' foreign subsidiaries, if
any. EHSI's new credit facility contains customary covenants and events of
default and is subject to various mandatory prepayments and commitment
reductions.
The new credit facility requires that EHSI comply with various financial
covenants on a consolidated basis, including: a minimum fixed charge coverage
ratio starting at 1.10:1 and increasing to 1.20:1 in 2005; a minimum tangible
net worth starting at 85% of EHSI's tangible net worth at March 31, 2002 and
increasing by 50% of EHSI's net income for each fiscal quarter plus 100% of any
additional equity raised; a maximum senior leverage ratio starting at 4.25:1 and
reducing to 4.00:1 in 2005; and a maximum senior secured leverage ratio starting
at 1.75:1 and reducing to 1.50:1 in 2005.
EHSI was in compliance with these financial covenants as of December 31, 2002.
In order to hedge its exposure to fluctuations in the market value of the Senior
Notes, EHSI entered into a five-year interest rate swap contract with a notional
amount of US$150 million. The contract effectively converted up to US$150
million of EHSI fixed interest rate indebtedness into variable interest rate
indebtedness.
In June 2002, EHSI entered into a five-year interest rate cap with a notional
amount of US$150 million. Under this cap, EHSI 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, adjusted monthly, 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, resulting from market interest rate
increases over a certain level.
Extendicare's long-term debt, including current maturities, as a percent of
total long-term debt and capital, was 70.4% at December 31, 2002 compared to
69.8% at the beginning of the year. The Company's long-term debt increased
during the year as a result of financing Ontario construction and U.S.
acquisitions. Shareholders' equity increased as a result of 2002 earnings,
partially offset by a reduction in share capital due to the purchase of shares
for cancellation.
During 2003, capital expenditures of approximately $100.0 million are planned,
including an estimated $40.0 million related to the new Ontario facilities.
Approximately $16.0 million is expected to be spent in 2003 on construction of
facility additions in the United States. The Board of Directors has approved a
proposal to build additions to seven of EHSI's facilities, representing 96
assisted living, 30 independent living and 38 skilled nursing beds in Wisconsin,
Kentucky and Pennsylvania. In conjunction with the construction of new
facilities or additions, renovations of existing facilities in the U.S. and
Canadian operations are planned.
Current cash flow levels, available bank credit facilities and long-term capital
lease financing are sufficient to support ongoing operations and capital
expenditures, service debt obligations and pay preferred share dividends. At
December 31, 2002, EHSI had cash of US$27.0 million and US$66.2 million
available under its revolver loan, and the Canadian operations had cash and
available bank lines totalling $15.2 million.
32 extendicare 2002 annual report
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Business Risks and Uncertainties
The majority of Extendicare's operations are conducted in the United States,
which accounted for 73% of total revenue in 2002. The U.S. operations are
self-sustaining and their revenues and expenses are translated at average rates
of exchange in effect during the period. Assets and liabilities are translated
at the exchange rates in effect at the balance sheet date. As a result,
Extendicare's financial position is subject to foreign currency exchange risks,
which could adversely impact its operating results. The average annual exchange
rates used to translate the revenues and expenses of the United States
operations to Canadian dollars were: 1.5704 for 2002; 1.5484 for 2001; and
1.4852 for 2000. The closing rates used to translate the assets and liabilities
of the U.S. operations were 1.5776 at December 31, 2002 and 1.5928 at December
31, 2001.
The Company's earnings are highly contingent on government funding, both in the
United States and Canada, and the effective management of staffing and other
costs of operations, which are strictly monitored through government regulatory
authorities. Management is unable to predict whether governments will adopt
changes in their reimbursement systems, or if adopted and implemented, what
effect such initiatives would have on the Company. For instance, limitations on
U.S. Medicare and Medicaid reimbursement for health care services are
continually proposed. Changes in applicable laws and regulations could have an
adverse effect on reimbursement levels from governmental, private and other
sources.
Financial pressures on state budgets will directly impact the U.S. Medicaid
budgets and hence the level of available funding for inflationary increases. In
addition, these pressures have caused the states to take initiatives to reduce
the level of funding to long-term care providers. A study by the Kaiser
Commission on Medicaid and the Uninsured issued in January 2003 said that 49
states have made or plan to make Medicaid cuts in fiscal 2003 and that 32 states
have made or are planning a second round of cuts to the programs, which will
mainly affect long-term care providers. As Medicaid revenue accounts for 50% of
EHSI's revenue, and 69% of its costs are wages and associated staff benefits,
Medicaid funding constraints could have a significant adverse impact on the
Company's results from operations and cash flow.
As discussed at the beginning of this Management's Discussion and Analysis (see
"United States Revenue - Legislative Actions Affecting U.S. Revenue"), temporary
Medicare funding known as Legislative Add-ons expired on September 30, 2002.
Based on its Medicare case mix and patient days over the nine-month period ended
September 30, 2002, EHSI estimates that it received, on average, US$31.22 per
patient day related to the Legislative Add-ons. Partially offsetting the absence
of this funding in the fourth quarter, on October 1, 2002 long-term care
providers received a 2.6% market basket increase in Medicare rates. The impact
of these two items in the fourth quarter of 2002 was a net decline in EHSI's
average rate of US$23.64 per patient day. Based on the Medicare case mix and
patient days for the year ended December 31, 2002, this amounts to lower
annualized revenue of approximately $23.0 million (US$14.7 million) going
forward.
In addition, further temporary Medicare funding enhancements, known as RUGs
Refinements, were scheduled to expire on September 30, 2003. In the February
2003 budget, President Bush proposed additional funding to extend the RUGs
Refinements to September 30, 2004. Although the budget has not been passed, CMS
has stated its agreement with the extension of the RUGs Refinements to September
30, 2004. EHSI estimates that it received, on average, US$24.40 per patient day
in 2002 related to the RUGs Refinements. Based on the Medicare case mix and
patient days for the year ended December 31, 2002, this amounts to annualized
revenue of approximately $23.8 million (US$15.1 million) going forward. A
decision to discontinue all or part of the enhancement could have a significant
adverse effect on the Company.
In the February 2003 budget, President Bush proposed plans for reductions in the
annual market basket increase for skilled nursing facilities, effective from
October 1, 2003 to October 1, 2007. If this budget is passed, it will mean
reductions in the annual market basket increase for the industry of US$60
million beginning October 2003; US$140 million beginning October 2004; US$240
million beginning October 2005; US$350 million beginning October 2006; and
US$470 million beginning October 2007.
In January 2003, CMS announced that a moratorium on implementing payment caps
for outpatient Part B therapy services, which was scheduled to take effect on
January 1, 2003, would be extended until July 1, 2003. While the impact of a
payment cap cannot be reasonably estimated based on the information available at
this time, it would reduce EHSI's therapy revenue.
management's discussion and analysis 33
In February 2003, CMS announced a plan to reduce reimbursement levels for
uncollectible Part A co-insurance. Under current law, skilled nursing facilities
are reimbursed 100% for any bad debts incurred. The plan is to reduce the
reimbursement levels from the current 100% to 90% beginning October 1, 2003; 80%
beginning October 2004; and 70% beginning October 2005. This is consistent with
the reimbursement policy applicable to hospitals. EHSI estimates that should
this plan be implemented, the impact on net earnings would be $1.6 million
(US$1.0 million).
As a result of its divestiture program in Texas and Florida, EHSI has assumed
notes from the purchasers and retained ownership of certain nursing home
properties, which are leased to unrelated long-term care providers. On December
31, 2002, EHSI held an aggregate $33.9 million (US$21.5 million) in notes and
owned $26.8 million (US$17.0 million) in nursing home properties in Texas and
Florida. In 2002, EHSI earned $9.0 million (US$5.7 million) in management and
consulting fees, and $6.8 million (US$4.3 million) in rental revenue from the
properties owned on December 31, 2002. As a result, EHSI's earnings and cash
flow can be influenced by the financial stability of these unrelated long-term
care operators.
The Company is attempting to settle a number of outstanding U.S. Medicare and
Medicaid receivables. Normally, such items are resolved during an annual audit
process and no provision is required. However, where differences exist between
EHSI and the fiscal intermediary, EHSI may record a general provision. Although
management remains confident regarding the successful settlement of these
issues, an unfavourable settlement could impair EHSI's earnings and cash flow.
At December 31, 2002, EHSI had $97.3 million (US$61.7 million) in gross Medicare
and Medicaid settlement receivables with a related allowance for doubtful
accounts of $24.3 million (US$15.4 million), reflecting management's estimate of
the amounts collectible on Medicare and Medicaid prior period cost reports.
EHSI entered into a preferred provider agreement with Omnicare, Inc. pursuant to
the divestiture of EHSI's pharmacy operation in 1998. Omnicare and EHSI are
currently negotiating the pricing of drugs for Medicare residents and should
this matter not be settled, it will be taken to arbitration. In addition,
Omnicare has requested arbitration for an alleged lost profits claim relating to
EHSI's disposition of assets, primarily in Florida. Damage amounts, if any,
cannot be reasonably estimated based on information available at this time. An
arbitration hearing has not yet been scheduled. Management believes that it has
interpreted the contract correctly and has complied with its terms; however,
there can be no assurance that this claim will not be successful or that other
claims will not arise.
The Company had $137.0 million in accruals for self-insured general and
professional liabilities at December 31, 2002, including estimates of the costs
of reported claims and claims incurred but not yet reported. As a result of
adverse claims development experienced by the Company and the long-term care
industry as a whole, the Company's per claim retained risk increased
significantly in 2000. This was mainly due to risk levels associated with the
Florida and Texas operations. The Company was successful in exiting these two
highly litigious states and thereby limiting future exposure to general
liability claims. However, changes in the level of retained risk, timing and
eventual settlement of claims, as well as other significant assumptions that
underlie management's estimates, could have a material effect on the future
carrying value of the self-insured liabilities.
The Company has recorded financial statement benefit for tax losses and other
deferred tax assets based on future anticipated taxable earnings. A valuation
allowance of $54.6 million was recorded primarily against capital losses and
state net operating losses. The allowance for state net operating losses was to
reflect shorter carryforward periods and reductions in various states'
apportionments. The amount of the deferred tax assets considered realizable
could be further reduced if estimates of future taxable income during the
carryforward period are lowered.
EHSI is in compliance with the financial covenants of its credit facility,
Subordinated and Senior Notes, as of December 31, 2002. While management has a
strategy to remain in compliance, there can be no assurance that future covenant
requirements will be met. EHSI's bank lines can be affected by its ability to
remain in compliance. If EHSI does not remain in compliance, its ability to
amend the covenants or refinance its debt can be affected.
34 extendicare 2002 annual report
[PIE CHART]
Extendicare Long-term Debt
Canadian fixed rate (31.5%)
U.S. floating rate (33.7%)
U.S. fixed rate (34.8%)
[DESCRIPTION FOR PIE CHART]
[At the end of 2002, Extendicare had $852.9 million of long-term debt,including
current maturities, with a weighted average interest rate of 7.9%. After
considering swap agreement in place to convert fixed-rate debt of floating
rates, 33.7% of the Company's long-term debt was effectively at floating rates.]
Qualitative Disclosures
The Company uses interest rate swaps to hedge its fixed-rate U.S. debt
obligations and interest rate caps as a hedge of its variable-rate U.S. debt and
also to offset possible increases in variable-rate payments under its interest
rate swap related to increases in market interest rates.
The Company also has market risk related to the value of investments in stock
and stock warrants, which were obtained in connection with the 1998 sale of
EHSI's 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. The Company intends to hold them until management
believes the market opportunity is appropriate to sell or exercise the holdings.
Management monitors the markets to determine the appropriate time to sell or
otherwise act with respect to its stock and warrant holdings in order to
maximize their value.
The Company does not enter into derivative instruments (i.e. interest rate swaps
and caps) for any purpose other than interest rate hedging. In other words, the
Company does not speculate using derivative instruments and does not engage in
trading activity of any kind.
The table below presents principal, or notional, amounts and related weighted
average interest rates by year of maturity for the Company's debt obligations,
excluding capital lease obligations as described in note 15 to the consolidated
financial statements, and interest rate swaps as of December 31, 2002. It
incorporates only exposures that existed at that date and does not consider
exposures or positions that could arise subsequently or future interest rate
movements. As a result, the information has limited predictive value. The
Company's ultimate results with respect to interest rate fluctuations will
depend on the exposures that occur, hedging strategies at the time and interest
rate movements.
After Fair
(thousands of dollars unless otherwise noted) 2003 2004 2005 2006 2007 2007 Total Value
- ----------------------------------------------------------------------------------------------------------------------------
Long-term Debt
Payable in Canadian dollars
Fixed rate 3,361 3,669 4,008 14,215 4,573 125,426 155,252 183,406
Average interest rate 8.97% 8.99% 9.01% 8.52% 9.08% 9.13% 9.06% -
Payable in United States dollars
Fixed rate 1,094 1,165 1,138 1,102 277,013 252,041 533,553 484,653
Average interest rate 7.51% 7.60% 7.62% 7.51% 9.32% 9.60% 9.42% -
Variable rate - - - - - 50,483 50,483 47,077
Average interest rate - - - - - 1.65% 1.65% -
Interest Rate Swaps (fixed to variable)
Notional amount - - - - - 236,640 236,640 (8,682)
Average pay rate (variable rate) - - - - - - 6.23% -
Average receive rate (fixed rate) - - - - - - 9.35% -
Interest Rate Caps
Notional amount - - - - - 236,640 236,640 1,496
- ----------------------------------------------------------------------------------------------------------------------------
management's discussion and analysis 35
RECENTLY ISSUED ACCOUNTING STANDARDS
Stock-based Compensation Plan
As described in note 10 to the audited consolidated financial statements, the
Company has a stock-based compensation plan for which no compensation cost is
recorded for employee awards, in accordance with the CICA Handbook Section 3870.
In late 2002, the Canadian Accounting Standards Board announced its intention to
revise Section 3870 to require the expensing of stock-based employee
compensation awards effective January 1, 2004. As a result, the Company has
decided to defer any change in its current accounting policy until such time as
final rules are adopted.
Hedging
CICA Accounting Guideline 13 establishes new criteria for hedge accounting and
will apply to all hedging relationships in place for fiscal years beginning on
or after July 1, 2003. Currently, the only hedging relationships the Company has
are its interest rate swap, which effectively converts fixed-rate debt to
floating rates, and an interest rate cap. The interest rate cap is for a
notional US$150.0 million and under the new criteria, only US$32.0 million would
qualify as an effective cash flow hedge to limit increases in interest payments
under variable-rate debt obligations. The remainder of the interest rate cap,
with a notional amount of US$118.0 million, is used to offset increases in
variable-rate interest payments under the interest rate swap to the extent
one-month LIBOR exceeds 7%. Under the new criteria, this portion would not
qualify as an effective hedge, and as such, would be recognized on the balance
sheet and measured at fair value, with changes in fair value recognized
currently in income. At December 31, 2002, the fair value of the interest rate
cap was a liability of $1.5 million (US$0.9 million), of which $1.2 million
would be considered an ineffective hedge under the new Accounting Guideline,
which takes effect for the Company on January 1, 2004.
FORWARD-LOOKING INFORMATION
Information provided by the Company from time to time, including this Annual
Report, contains or may contain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including
the Company's business strategy. Forward-looking statements can be identified
because they generally contain the words "anticipate", "believe", "estimate",
"expect", "objective", "project", or a similar expression.
Forward-looking statements reflect management's beliefs and assumptions and are
based on information currently available to the Company. They are not guarantees
of future performance and involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements of the
Company to differ materially from those expressed or implied in the statements.
In addition to the assumptions and other factors referred to specifically in
connection with these statements, such factors are identified in the Company's
public filings with Canadian and United States securities regulators and
include, but are not limited to, the following: changes in the health care
industry in general and the long-term care industry in particular because of
political and economic influences; changes in regulations governing the industry
and the Company's compliance with such regulations; changes in government
funding levels for health care services; liabilities and other claims asserted
against the Company; the Company's ability to attract and retain qualified
personnel; the availability and terms of capital to fund the Company's capital
expenditures; changes in competition; and demographic changes.
Given these risks and uncertainties, readers are cautioned not to place undue
reliance on the Company's forward-looking statements.
36 extendicare 2002 annual report
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Extendicare Inc. and other
financial information contained in this Annual Report are the responsibility of
management. The consolidated financial statements have been prepared in
conformity with Canadian generally accepted accounting principles, using
management's best estimates and judgements, where appropriate. In the opinion of
management, these consolidated financial statements reflect fairly the financial
position, results of operations and cash flows of the Company within reasonable
limits of materiality. The financial information contained elsewhere in this
Annual Report has been reviewed to ensure consistency with that in the
consolidated financial statements.
A system of internal accounting and administrative controls is maintained by
management to provide reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition and that financial records are
properly maintained to provide accurate and reliable financial statements.
The Extendicare Board of Directors is responsible for ensuring that management
fulfills its responsibilities for financial reporting and internal controls. The
Board carries out this responsibility principally through its independent Audit
Committee comprised of unrelated and outside directors. The Audit Committee
meets regularly during the year to review significant accounting and auditing
matters with management and the independent auditors and to review the interim
and annual consolidated financial statements of the Company.
The consolidated financial statements have been audited by KPMG LLP, Chartered
Accountants, which has full and unrestricted access to the Audit Committee.
KPMG's report on the consolidated financial statements follows.
February 20, 2003 Mel Rhinelander (signed) Mark W. Durishan (signed)
President and Chief Vice-President, Finance, and
Executive Officer Chief Financial Officer
AUDITORS' REPORT
To the Shareholders of Extendicare Inc.
We have audited the consolidated balance sheets of Extendicare Inc. as at
December 31, 2002 and 2001 and the consolidated statements of earnings (loss),
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2002
and 2001 and the results of its operations and cash flows for each of the years
in the three-year period ended December 31, 2002 in accordance with Canadian
generally accepted accounting principles.
Toronto, Canada KPMG LLP (signed)
February 20, 2003 Chartered Accountants
consolidated financial statements 37
CONSOLIDATED BALANCE SHEETS
(thousands of dollars) December 31 2002 2001
- ---------------------------------------------------------------------------
ASSETS
Current assets
Cash and short-term investments 56,815 26,491
Accounts receivable 191,443 194,412
Income taxes recoverable 17,912 8,352
Future income tax assets (note 12) 55,849 17,987
Inventories, supplies and prepaid expenses 15,709 15,227
- ---------------------------------------------------------------------------
337,728 262,469
Property and equipment (note 4) 953,591 968,202
Goodwill (note 5) 113,858 115,196
Other intangible assets (note 5) 6,646 8,705
Other assets (note 6) 276,505 249,730
- ---------------------------------------------------------------------------
1,688,328 1,604,302
Investment in Crown Life Insurance Company (note 7) 121,508 135,944
- ---------------------------------------------------------------------------
1,809,836 1,740,246
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank overdraft 4,191 942
Accounts payable and accrued liabilities 311,062 306,825
Accrual for self-insured liabilities (note 8) 55,216 -
Current maturities of long-term debt (note 9) 6,209 23,128
- ---------------------------------------------------------------------------
376,678 330,895
Accrual for self-insured liabilities (note 8) 81,735 174,224
Long-term debt (note 9) 846,734 788,354
Deposits under divestiture agreement (note 6) 47,328 47,784
Future income tax liabilities (note 12) 99,335 48,293
- ---------------------------------------------------------------------------
1,451,810 1,389,550
Shareholders' equity 358,026 350,696
- ---------------------------------------------------------------------------
1,809,836 1,740,246
===========================================================================
Approved by the Board David J. Hennigar (signed) Mel Rhinelander (signed)
Chairman President and
Chief Executive Officer
38 extendicare 2002 annual report
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(thousands of dollars except per share amounts)
Years ended December 31 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
REVENUE (note 11)
Nursing and assisted living centres
United States 1,236,565 1,187,547 1,346,033
Canada 315,907 279,559 266,671
Outpatient therapy - United States 16,144 14,733 14,430
Home health - Canada 146,034 171,809 161,323
Other 41,024 50,863 18,949
- -------------------------------------------------------------------------------------------------------
1,755,674 1,704,511 1,807,406
OPERATING AND ADMINISTRATIVE COSTS 1,571,214 1,549,152 1,687,408
- -------------------------------------------------------------------------------------------------------
EARNINGS BEFORE UNDERNOTED 184,460 155,359 119,998
Lease costs 24,119 28,202 27,529
Depreciation and amortization 68,989 71,547 75,002
Interest, net 62,047 65,248 78,484
Loss from asset disposals, impairment and other items (note 2) 6,689 50,082 42,747
- -------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 22,616 (59,720) (103,764)
- -------------------------------------------------------------------------------------------------------
INCOME TAXES (note 12)
Current (recovery) (7,108) 8,270 (20,625)
Future (reduction) 18,310 (20,929) (16,291)
- -------------------------------------------------------------------------------------------------------
11,202 (12,659) (36,916)
- -------------------------------------------------------------------------------------------------------
Earnings (loss) from health care before minority interests 11,414 (47,061) (66,848)
Minority interests - 83 257
- -------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FROM HEALTH CARE 11,414 (47,144) (67,105)
SHARE OF EARNINGS OF CROWN LIFE (note 7) 7,520 10,738 7,827
- -------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) 18,934 (36,406) (59,278)
=======================================================================================================
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (note 13) 0.26 (0.52) (0.81)
=======================================================================================================
consolidated financial statements 39
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars) Years ended December 31 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS
Net earnings (loss) 18,934 (36,406) (59,278)
Adjustments for:
Depreciation and amortization 68,989 71,547 75,002
Provision for self-insured liabilities 14,730 65,521 74,955
Payments for self-insured liabilities (50,707) (57,312) (25,672)
Provision for punitive damages - - 13,249
Future income taxes (note 12) 18,310 (20,929) (16,291)
Dividends received, net of undistributed share of earnings of Crown Life 14,476 11,874 (7,827)
Loss from asset disposals, impairment and other items (note 2) 6,689 23,130 42,747
Recovery for settlements with third parties - - (17,794)
Other 3,154 530 2,709
- ---------------------------------------------------------------------------------------------------------------
94,575 57,955 81,800
Net change in operating working capital, excluding cash
Accounts receivable 11,017 40,703 7,825
Inventories, supplies and prepaid expenses (774) 958 2,593
Accounts payable and accrued liabilities 8,168 (3,425) (50,635)
Income taxes (14,710) 40,215 6,066
- ---------------------------------------------------------------------------------------------------------------
98,276 136,406 47,649
- ---------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTMENT ACTIVITIES
Property and equipment (53,145) (45,377) (46,292)
Acquisition (note 3) (10,985) - -
Net cash proceeds from divestiture agreement (note 6) - - 43,774
Net cash proceeds from dispositions (note 2) 19,680 12,236 10,677
Income taxes recovered related to dispositions - - 42,584
Other assets 6,510 (371) 71
- ---------------------------------------------------------------------------------------------------------------
(37,940) (33,512) 50,814
- ---------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Issue of long-term debt 235,585 29,851 -
Repayment of long-term debt (235,044) (104,799) (115,501)
Purchase of subsidiary public debt - (24,852) (6,735)
Decrease (increase) in investments held for self-insured liabilities (10,650) 27,989 13,161
Purchase of shares for cancellation (8,441) (10,283) (4,036)
Financing costs (13,235) (2,301) (2,894)
Other (1,638) (2,167) (592)
- ---------------------------------------------------------------------------------------------------------------
(33,423) (86,562) (116,597)
- ---------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE GAIN (LOSS) ON CASH HELD IN FOREIGN CURRENCY 162 183 (62)
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,075 16,515 (18,196)
Cash and cash equivalents at beginning of year 25,549 9,034 27,230
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 52,624 25,549 9,034
===============================================================================================================
CASH IS REPRESENTED BY:
Cash and short-term investments 56,815 26,491 10,181
Bank overdraft 4,191 942 1,147
- ---------------------------------------------------------------------------------------------------------------
52,624 25,549 9,034
===============================================================================================================
40 extendicare 2002 annual report
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(thousands of dollars for amounts) Years
ended December 31 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Number Amount Number Amount Number Amount
- --------------------------------------------------------------------------------------------------------------------------------
SHARE CAPITAL (note 10)
Class I Preferred Shares
Cumulative Redeemable, Series 2
Issued and outstanding at beginning of year 154,405 3,860 173,705 4,343 226,005 5,650
Purchased pursuant to obligation (14,700) (368) (19,300) (483) (52,300) (1,307)
- --------------------------------------------------------------------------------------------------------------------------------
Issued and outstanding at end of year 139,705 3,492 154,405 3,860 173,705 4,343
- --------------------------------------------------------------------------------------------------------------------------------
Adjustable Dividend, Series 3
Issued and outstanding at beginning of year 93,310 2,333 165,243 4,131 165,243 4,131
Converted to Series 4 - - (71,933) (1,798) - -
- --------------------------------------------------------------------------------------------------------------------------------
Issued and outstanding at end of year 93,310 2,333 93,310 2,333 165,243 4,131
- --------------------------------------------------------------------------------------------------------------------------------
Adjustable Dividend, Series 4
Issued and outstanding at beginning of year 241,240 6,031 169,307 4,233 169,307 4,233
Issued on conversion of Series 3 - - 71,933 1,798 - -
- --------------------------------------------------------------------------------------------------------------------------------
Issued and outstanding at end of year 241,240 6,031 241,240 6,031 169,307 4,233
- --------------------------------------------------------------------------------------------------------------------------------
Class II Preferred Shares, Series 1 382,979 6,319 382,979 6,319 382,979 6,319
- --------------------------------------------------------------------------------------------------------------------------------
Class I and II Preferred Shares issued
and outstanding at end of year 18,175 18,543 19,026
------- ------- -------
Subordinate Voting Shares
Issued and outstanding at beginning of year 58,544,511 274,672 60,063,923 282,275 61,348,023 288,311
Purchased pursuant to issuer bid (1,472,300) (6,877) (1,744,900) (8,201) (1,284,100) (6,036)
Issued on conversion of Multiple Voting Shares 5,925 15 203,488 506 - -
Issued pursuant to options 28,875 84 22,000 92 - -
- --------------------------------------------------------------------------------------------------------------------------------
Issued and outstanding at end of year 57,107,011 267,894 58,544,511 274,672 60,063,923 282,275
- --------------------------------------------------------------------------------------------------------------------------------
Multiple Voting Shares
Issued and outstanding at beginning of year 12,775,917 31,790 13,204,005 32,855 13,204,005 32,855
Purchased pursuant to issuer bid (212,900) (530) (224,600) (559) - -
Converted to Subordinate Voting Shares (5,925) (15) (203,488) (506) - -
- --------------------------------------------------------------------------------------------------------------------------------
Issued and outstanding at end of year 12,557,092 31,245 12,775,917 31,790 13,204,005 32,855
- --------------------------------------------------------------------------------------------------------------------------------
SHARE CAPITAL 317,314 325,005 334,156
------- ------- -------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year (44,108) (5,661) 55,644
Earnings (loss) for the year 18,934 (36,406) (59,278)
Transfer of contributed surplus (note 10) - 21 3,303
Purchase of shares in excess of book (note 10) (667) (1,062) -
Retroactive adjustments for new
accounting requirements (notes 12, 17) - - (4,085)
Preferred share dividends (704) (1,000) (1,245)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (26,545) (44,108) (5,661)
- --------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT ACCOUNT 67,257 69,799 52,942
- --------------------------------------------------------------------------------------------------------------------------------
358,026 350,696 381,437
================================================================================================================================
notes to consolidated financial statements 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles and include the
accounts of Extendicare Inc. and its subsidiaries ("Extendicare" or the
"Company"). Health care operations are conducted through wholly owned
subsidiaries Extendicare Health Services, Inc. (EHSI) in the United
States, and Extendicare (Canada) Inc. (ECI) in Canada, and their
subsidiaries.
The equity method is used to account for the Company's 34.8% ownership
interest in Crown Life Insurance Company (Crown Life).
Certain comparative figures have been reclassified in order to conform
to the presentation adopted in 2002.
(b) Change in Accounting Policies
Effective January 1, 2002, the Company adopted the new recommendations
of the Canadian Institute of Chartered Accountants (CICA) Handbook
Section 3870 "Stock-based Compensation and Other Stock-based Payments",
certain provisions of Section 1581 "Business Combinations" related to
goodwill and intangible assets, Section 3062 "Goodwill and Other
Intangible Assets" and the revisions to Section 1650 "Foreign Currency
Translation". As at December 31, 2002, the adoption of these new
policies has not resulted in any adjustments to the opening deficit
position. Details of the current accounting policies and policy changes
related to the new standards are described in notes 1(d), 1(h), 1(n), 5
and 10, which follow.
(c) Use of Estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. The more subjective of
such estimates are Medicare cost reimbursement, accrual for
self-insured liabilities, impairment of capital assets and goodwill,
and valuation allowances for future tax assets. The recorded amounts
for such items are based on management's best information and
judgement, and accordingly, actual results could differ from estimates.
(d) Foreign Currency Translation
Foreign operations and foreign currency denominated items are
translated to Canadian dollars.
Revenues and expenses of self-sustaining foreign operations are
translated at average rates of exchange in effect during the period.
Assets and liabilities are translated at the exchange rates in effect
at the balance sheet date. Unrealized exchange gains or losses arising
on translation are deferred and included in shareholders' equity in the
foreign currency translation adjustment account.
Other assets and liabilities denominated in foreign currencies are
translated at the exchange rates in effect at the balance sheet date.
Translation gains and losses are reflected in earnings in the period in
which they arise. Under new accounting rules adopted by the Company,
translation gains and losses related to long-term monetary assets and
liabilities, which were formerly deferred and amortized, are now
charged directly to earnings.
(e) Cash and Cash Equivalents
Cash and cash equivalents include unrestricted cash and short-term
investments less bank overdraft. 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.
42 extendicare 2002 annual report
(f) Property and Equipment
Property and equipment is stated at cost less accumulated depreciation
and amortization. Provisions for depreciation and amortization are
computed by the straight-line method at rates based on the following
estimated life expectancies.
Buildings 20 to 40 years
Building improvements 5 to 30 years
Furniture and equipment varying periods not exceeding 15 years
Land improvements 10 to 25 years
Leasehold improvements the shorter of the useful life of the improvements or the initial term of the lease
Leased nursing home assets held under option agreements are stated at
cost less accumulated depreciation. Provisions for depreciation are
computed as outlined above.
(g) Deferred Charges
Costs associated with obtaining financing are deferred and amortized
over the life of the related debt. The costs of acquiring leasehold
rights are deferred and amortized over the term of the lease including
renewal options. Deferred charges are stated at cost less accumulated
amortization and are included in other assets in the consolidated
balance sheets.
(h) Goodwill and Other Intangible Assets
Goodwill represents the cost of acquired net assets in excess of their
fair market values. The purchase method of accounting is used for all
business combinations.
Goodwill and other intangible assets with indefinite useful lives are
not amortized, but are tested for impairment at least annually.
Goodwill is allocated to reporting units and any potential goodwill
impairment is identified by comparing the carrying value of a reporting
unit with its fair value. If any potential impairment is indicated,
then it is quantified by comparing the carrying value of goodwill to
its fair value, based on the fair value of the assets and liabilities
of the reporting unit.
Intangible assets, other than goodwill, which have definite useful
lives are amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment by
assessing the recoverability of the carrying values. The other
intangible assets relate to leasehold rights, which are amortized over
the term of the lease including renewal options.
(i) Impairment of Capital Assets
The Company periodically assesses the recoverability of capital assets
when there are indications of potential impairment. In performing this
analysis, management considers such factors as current results, trends
and future prospects, in addition to other economic and regulatory
factors. The amount of any impairment is determined as the excess of
the asset's net carrying value over its estimated net recoverable
amount, as determined by its estimated future cash flows or current
market value, as appropriate.
(j) Accrual and Investments Held for Self-insured Liabilities
The Company self-insures certain risks related to general and
professional liability. The accrual for self-insured liabilities
includes estimates of the costs of both reported claims and claims
incurred but not reported and is based on estimates of loss based on
assumptions made by management, including consideration of actuarial
projections.
The Company invests funds to support the accrual for self-insured
liabilities. These funds are investment grade, are carried at amortized
cost approximating market value and are classified in other assets as
investments held for self-insured liabilities.
The Company also self-insures certain risks related to auto liability,
health benefits, employers' liability and workers' compensation and
accruals for these self-insured risks are included in accounts payable
and accrued liabilities.
(k) Revenue
In the United States, nursing centre revenue results from the payment
for services and products from various federal and state medical
assistance programs as well as private-pay residents. Revenues are
recorded in the period in which services and products are provided at
established rates less contractual adjustments. Contractual adjustments
include differences between established billing rates and amounts
estimated by management as reimbursable under various reimbursement
formulas or contracts in effect. Differences between final settlements
and amounts recorded in previous years are reported as adjustments to
revenues in the period such settlements are determined.
notes to consolidated financial statements 43
In Canada, the fees charged by ECI for its nursing centres and home
care services are regulated by provincial authorities. Provincial
programs fund a substantial portion of these fees.
(l) Income Taxes
The Company follows the liability method of tax allocation, which is
based on differences between financial reporting and tax bases of
assets and liabilities. Future income tax liabilities or assets are
calculated using tax rates anticipated to apply in the periods that the
temporary differences are expected to reverse. The income tax rates
used to measure income tax assets and liabilities are those rates
enacted or substantially enacted at the balance sheet date. Realization
of future tax assets is dependent on the availability of taxable income
of similar character.
(m) Employee Future Benefits
The costs of the Company's defined benefit pension plans,
post-retirement health, life insurance and other post-employment
benefits are accrued as earned, based on actuarial valuations. The
Company's pension fund assets are valued at market values and the net
actuarial gain or loss in excess of 10% of the greater of the benefit
obligations and the market value of plan assets is amortized over the
average remaining service periods of active employees. Employee future
benefit obligations are measured using market interest rates for high
quality debt instruments.
(n) Stock-based Compensation Plan
The Company has a stock-based compensation plan, which is described in
note 10. No compensation cost is recorded for stock-based employee
compensation awards. Consideration paid by employees on the exercise of
stock options is recorded as share capital.
2. LOSS FROM ASSET DISPOSALS, IMPAIRMENT AND OTHER ITEMS
The following summarizes the components of the loss from asset disposals,
impairment and other items.
(thousands of dollars) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Proceeds Net Net Book Loss Loss Loss
of Selling Costs Value (Gain) (Gain) (Gain)
- -------------------------------------------------------------------------------------------------------------------------
Loss (gain) from dispositions
United States nursing and outpatient facilities 40,150 33,926 (6,224) - 4,858
Canada rehabilitation therapy services - (1,064) -
Provision for closure, exit costs and loss on disposals
United States facilities 8,317 20,315 3,614
Canada home health care B.C. operations 1,635 - -
Canada reduction of labour related provisions (1,525) - -
Write-off of deferred financing costs 4,486 - -
Provision for adverse development of general
and professional liability costs - 26,952 -
United States provision for impairment of assets - 2,592 31,595
United States provision for severance costs - - 1,641
Other - 1,287 1,039
- -------------------------------------------------------------------------------------------------------------------------
6,689 50,082 42,747
=========================================================================================================================
44 extendicare 2002 annual report
The following reconciles the loss from asset disposals, impairment 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
provision for self-insured liabilities line, as an item not involving cash.
(thousands of dollars) 2002 2001 2000
- -----------------------------------------------------------------------------------------
Reconciliation of loss to cash flow statements
Loss from asset disposals, impairment and other items 6,689 50,082 42,747
Provision for general and professional liability costs - (26,952) -
- -----------------------------------------------------------------------------------------
6,689 23,130 42,747
=========================================================================================
Reconciliation of cash proceeds from dispositions
Proceeds, net of selling costs 40,150 20,290 13,516
Notes receivable (20,470) (5,133) (1,421)
Preferred shares - (2,921) -
Cash held in escrow - - (1,418)
- -----------------------------------------------------------------------------------------
19,680 12,236 10,677
=========================================================================================
2002
In November, as a result of continuing unfavourable business conditions,
management approved a plan to leave the British Columbia home health care market
by winding down its ParaMed B.C. business by March 31, 2003. The Company has
accrued exit costs of $1,635,000, consisting of $1,082,000 for labour related
expenses and $553,000 for operating lease penalties and other costs.
In December, ECI recorded a reduction of $1,525,000 for labour related
provisions that were no longer required due to certain events within the year.
In June, EHSI wrote off deferred financing costs, including a charge from the
termination of the swap agreement as referred to in note 9, of $4,486,000
related to the previous credit facility, which was retired from the proceeds of
the issuance of the 9.5% Senior Notes due 2010.
In May, Tandem Health Care, Inc. (Tandem) exercised its option to purchase seven
Florida properties that it leased from EHSI for gross proceeds of $44,979,000
(US$28,567,000, consisting of cash proceeds of US$15,567,000 and five-year, 8.5%
notes receivable of US$13,000,000). This transaction, together with the deferred
gain from the April 2001 transaction with Tandem discussed below, resulted in a
pre-tax gain of $6,224,000. The May transaction also resulted in the conversion
of US$1,904,000 in preferred shares received in the April 2001 transaction to
US$1,904,000 of notes, due April 2006. Also in May, EHSI recorded a provision
for closure and exit costs related to Florida divested operations of $8,317,000,
concerning the settlement of cost report issues and supplier and employee
claims.
2001
During the year, the Company made provisions totalling $20,315,000 related to
ceased operations. These were comprised of a provision of $3,002,000
(US$1,953,000) related to the closure and/or sale of three nursing properties, a
loss of $2,814,000 (US$1,829,000) related to the transfer of the Texas nursing
operations, and $14,499,000 (US$9,426,000) in provisions for previously ceased
operations, primarily for the Florida nursing homes.
The Company also recorded charges of $1,287,000 related to interest on past
years' tax re-assessments and a write-off of deferred financing costs from the
early retirement of debt.
On December 7, 2001, ECI sold its investment in Accident Injury Management
Clinics Inc. (AIM), a rehabilitative therapy business, resulting in a pre-tax
gain of $1,064,000. Gross proceeds of $3,500,000 from the sale consisted of cash
of $2,200,000 and notes receivable of $1,300,000.
At the end of September, EHSI ceased operating its nursing homes in Texas,
consisting of 17 facilities (1,421 beds), through lease agreements with a
third-party operator that has an option to purchase the properties. In addition
to the loss described above on transfer of the assets, a provision of $2,592,000
(US$1,685,000) was recorded for impairment of the remaining Texas properties,
related to leasehold rights and leasehold improvements.
notes to consolidated financial statements 45
In September, based on an independent actuarial review, the Company recorded an
additional provision of $26,952,000 for resident care liability costs related to
the Company's ceased Florida operations for years prior to 2001.
In April, EHSI disposed of two leased facilities in Florida to Tandem, which had
operated the facilities since December 31, 2000 under lease agreements with
purchase options. Gross proceeds of $17,494,000 (US$11,402,000, comprised of
cash proceeds of US$7,000,000, notes receivable of US$2,498,000 and preferred
shares of US$1,904,000) were received, resulting in a $3,254,000 pre-tax gain
that was deferred until the balance of the purchase options held by Tandem on
the remaining leased facilities were completed.
2000
In December 2000, EHSI disposed of one nursing facility (120 beds) in Florida
for proceeds of $5,246,000 (US$3,446,000, comprised of cash proceeds of
US$2,571,000, including escrow funds of US$932,000, and a note receivable net of
applicable discounts of US$875,000). The sale resulted in a pre-tax loss of
$3,875,000.
During the third quarter of 2000, EHSI disposed of one nursing facility (119
beds) in Florida for $4,151,000 (US$2,809,000), resulting in a pre-tax gain of
$1,389,000.
During the second quarter of 2000, EHSI disposed of two nursing centres, which
previously had been closed, for gross proceeds of $3,959,000 (US$2,656,000).
Together, the sales resulted in a pre-tax loss of $2,268,000.
During the first quarter of 2000, EHSI disposed of seven outpatient therapy
facilities for gross proceeds of $309,000, resulting in a pre-tax loss of
$104,000.
During the fourth quarter of 2000, the Company recorded a provision of
$31,595,000 (US$20,753,000) related to the impairment of capital assets. The
provision included the write-down to net realizable value of certain assets that
were subject to a purchase transaction (see below). Also during 2000, the
Company determined that certain other United States assets located outside of
Florida were impaired and, accordingly, recorded a provision of $7,358,000.
In December, EHSI leased nine nursing centres in Florida (1,033 beds) to Tandem
for an 18-month term. During 2001 and 2002, Tandem exercised its right to
acquire all nine facilities. The provision for impairment of assets recorded in
2000 included $24,237,000 related to the nine leased facilities, as the option
price was less than the net book value of the assets.
The Company recorded a provision of $3,614,000 primarily related to the closure
of two nursing facilities and one assisted living facility in the United States.
Severance costs recorded of $1,641,000 were related to the divestiture of
Florida operations.
3. ACQUISITION
On October 1, 2002, EHSI exercised its right to acquire seven nursing facilities
that EHSI previously leased, for $28,157,000 (US$17,871,000). Three of the
facilities are located in Ohio and four are in Indiana, representing a total of
902 licensed beds. The purchase price consisted of US$7,371,000 in cash and a
US$10,500,000 10-year note, which bears interest at a rate to be determined by
arbitration (currently being accrued at 10.5%).
4. PROPERTY AND EQUIPMENT
(thousands of dollars) 2002 2001
- -----------------------------------------------------------------
Land 81,155 92,133
Buildings 1,104,219 1,085,722
Furniture and equipment 157,241 175,738
Leasehold improvements 13,256 20,932
Construction in progress 47,212 29,366
- -----------------------------------------------------------------
1,403,083 1,403,891
Accumulated depreciation and amortization 449,492 435,689
- -----------------------------------------------------------------
953,591 968,202
=================================================================
Property and equipment includes $85,507,000 (2001 - $66,029,000) of net assets
under capital leases of which $85,027,000 (2001 - $65,526,000) relates to
construction of eight new facilities, net of $28,137,000 (2001 - $18,229,000) of
government funding and $1,133,000 (2001 - $152,000) of depreciation.
46 extendicare 2002 annual report
Based on new beds awarded by the Government of Ontario, ECI undertook to
construct 11 new facilities. In an agreement finalized in February 2001, ECI
obtained from Borealis Long-Term Care Facilities Inc. (Borealis), a wholly owned
subsidiary of the Ontario Municipal Employees Retirement System, financing of
$125,400,000 to build eight of the new facilities. ECI will operate the
facilities for Borealis during the 25-year capital lease arrangement at a
financing cost of approximately 8.0%. During 2002, Borealis funded $30,390,000
(2001 - $83,907,000) in construction costs, which ECI capitalized as property
and equipment, offset by a capital lease obligation. In 2001, ECI incurred
$29,851,000 of construction costs prior to the finalization of the February 2001
agreement. Accordingly, this portion of the funding was reported on the 2001
statement of cash flows as an issue of long-term debt. Construction costs
subsequently incurred were paid directly by Borealis. The minimum rental
schedule for capital leases includes anticipated capital expenditures of
$11,103,000 required to complete the facilities, as well as related financing
costs, as agreed to with Borealis (note 15).
The Ontario Government is funding a portion of the construction costs over a
20-year period, with approximately $101,000,000 to be received by ECI for the
new beds and redevelopment of certain existing beds. As each facility opens, a
receivable from the government is recorded and offsets the cost of construction,
based on applying a discount rate equivalent to the yield on a 20-year Ontario
Government bond. During 2002, $9,908,000 (2001 - $18,229,000) of amounts
receivable included in other assets, discounted at rates ranging from 6.2% to
6.5%, was treated as a reduction of property and equipment related to the six
facilities that were opened at year-end (note 6).
At December 31, 2002, as a lessor, EHSI leases 10 nursing facilities and
subleases 12 facilities. Four of the leases with an operator in the State of
Texas expire December 2005 and the subleases expire through February 2012. Six
leases with an operator in the State of Florida expire October 2006. The terms
of the agreements provide the lessee with the option to purchase the facilities
during the term. These leases are treated as operating leases. The net book
value at December 31, 2002 of the assets under operating lease agreements was
$26,772,000 (2001 - $70,537,000).
Interest is capitalized in connection with the construction of facilities and is
amortized over their estimated useful life. Interest capitalized in 2002, 2001
and 2000 was $2,625,000, $4,761,000 and $849,000, respectively.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
(thousands of dollars) Canada United States Total
- -------------------------------------------------------------------------------
Goodwill
Opening balance, December 31, 2000 951 111,824 112,775
Amortization of goodwill (189) (3,789) (3,978)
Disposals in the year (450) - (450)
Foreign exchange - 6,849 6,849
- -------------------------------------------------------------------------------
Closing balance, December 31, 2001 312 114,884 115,196
Disposals in the year (242) - (242)
Foreign exchange - (1,096) (1,096)
- -------------------------------------------------------------------------------
Closing balance, December 31, 2002 70 113,788 113,858
===============================================================================
(thousands of dollars) 2002 2001
- ----------------------------------------------------------------
Other intangible assets
Gross carrying value 17,122 18,650
Accumulated amortization (10,476) (9,945)
- ----------------------------------------------------------------
Net carrying value 6,646 8,705
================================================================
Intangible assets consist entirely of leasehold rights. Amortization recorded
for the year was $1,967,000 (2001 - $1,951,000). The remaining change was due to
the removal of fully amortized intangible assets of $1,344,000 and foreign
exchange.
notes to consolidated financial statements 47
The Company adopted the new accounting standard effective January 1, 2002. Both
the transitional and annual tests for goodwill impairment were conducted for the
Company's reporting units and no impairment existed. There were no
reclassifications between goodwill and other intangibles under the new standard.
The Company reassessed the useful lives and residual values of all intangible
assets acquired with estimable useful lives and has made no change to the
amortization periods. Amortization of goodwill has ceased effective January 1,
2002.
The following table discloses a reconciliation of the impact of the new standard
for goodwill and other intangible assets on reported net earnings (loss) and
basic and diluted earnings (loss) per share, had the new standard been applied
in prior years.
(thousands of dollars) 2002 2001 2000
- ----------------------------------------------------------------------------
Net earnings (loss)
Net earnings (loss) as reported 18,934 (36,406) (59,278)
Add back: amortization of goodwill - 3,978 3,392
- ----------------------------------------------------------------------------
Adjusted net earnings (loss) 18,934 (32,428) (55,886)
============================================================================
(dollars)
- ----------------------------------------------------------------------------
Basic and diluted earnings (loss) per share
As reported 0.26 (0.52) (0.81)
Adjusted 0.26 (0.47) (0.77)
- ----------------------------------------------------------------------------
6. OTHER ASSETS
(thousands of dollars) 2002 2001
- ------------------------------------------------------------------------------------------
Investments held for self-insured liabilities 56,203 45,465
Assets held under divestiture agreement (details below) 57,152 61,820
Notes, mortgages and amounts receivable 79,383 52,588
Other long-term receivables, less allowance of $24,325 (2001- $24,559) 46,905 57,990
Deferred charges 23,645 19,075
Other investments 13,217 12,792
- ------------------------------------------------------------------------------------------
276,505 249,730
==========================================================================================
Assets held under divestiture agreement
Land 4,864 4,911
Building 87,600 88,445
Furniture and equipment 14,490 15,665
- ------------------------------------------------------------------------------------------
106,954 109,021
Accumulated depreciation and amortization 49,802 47,201
- ------------------------------------------------------------------------------------------
57,152 61,820
==========================================================================================
The Company invests funds to support the accrual for self-insured liabilities.
In 2002, Laurier Indemnity Company, Ltd., the Company's captive insurance
company, sold its investment in EHSI Senior Subordinated Notes to Extendicare
Inc. At December 31, 2001, this investment, with a carrying value of
$21,308,000, was included in the captive's investments held for self-insured
liabilities of $66,773,000 and on consolidation was eliminated as an
intercompany investment and reflected as a reduction of long-term debt.
48 extendicare 2002 annual report
For Medicare revenues earned prior to the implementation of the Prospective
Payment System, and Medicaid programs with a retrospective reimbursement system,
differences between revenue that EHSI ultimately expects to realize from these
programs and amounts received are reflected as accounts receivable; or as
accrued liabilities when payments have exceeded revenue that the Company
ultimately expects to realize. Accounts receivable from both Medicare and
Medicaid state programs at December 31, 2002, totalled $73,021,000 (2001 -
$76,716,000), net of an allowance of $24,325,000 (2001 - $24,559,000). The
amounts expected to be substantially collected within one year are reported as
current accounts receivable, and the remaining amounts, totalling $46,905,000
(2001 - $57,990,000), are reported in other assets.
As of December 2002, EHSI is pursuing settlement of a number of outstanding
Medicare and Medicaid receivables. For one specific issue involving the
allocation of overhead costs totalling $23,348,000 (US$14,800,000), the first of
three specific claim years was presented to the Provider Reimbursement Review
Board (PRRB) on January 30, 2003. The hearing procedures were discontinued after
the parties negotiated a methodology for resolution of the claim, and
subsequently an administrative resolution was signed by the fiscal intermediary
and EHSI to settle the amount, which will be determined later in 2003. For
another issue involving a staffing cost matter totalling $11,516,000
(US$7,300,000), the first of seven specific claim years was settled prior to the
PRRB hearing, and agreement has been reached with the fiscal intermediary to
continue to negotiate the remaining years in dispute. No adjustment to the
amounts recorded at December 31, 2002 is determinable at this time. Further
negotiations on the remaining claim years under appeal are to occur during 2003
and until negotiations are concluded on a majority of the claim years in
dispute, no adjustment to the amounts receivable can be determined.
In September 2000, EHSI reached an agreement with Greystone Tribeca Acquisition
L.L.C. (Greystone), involving the disposal of 11 nursing centres and four
assisted living centres. Gross proceeds were cash of $44,985,000 (US$30,000,000)
and contingent consideration in the form of a series of notes, which have an
aggregate potential value of up to US$30,000,000 plus interest. The Greystone
notes have a maximum term of 3.5 years, and may be retired at any time by
Greystone through the subsequent sale or refinancing of the facilities. As of
December 31, 2002, Greystone had not sold or refinanced any of the nursing
properties. During the term of the notes, EHSI retains the right of first
refusal and an option to repurchase the facilities. Accordingly, the contingent
notes have not been reported on the balance sheet, and while EHSI no longer
operates these facilities, they will remain on EHSI's balance sheet as assets
held under divestiture agreement, as required by generally accepted accounting
principles, until final consideration for each facility is determined and a
corresponding gain or loss is recorded. The assets held under divestiture
agreement of $57,152,000 are net of depreciation of $9,237,000 from the date of
the agreement.
7. INVESTMENT IN CROWN LIFE INSURANCE COMPANY
Extendicare holds a 34.8% (1,113,690 shares) common equity interest in Crown
Life. In 2002, Extendicare received dividends of $21,996,000 or $19.75 per
common share (2001 - $22,608,000 or $20.30 per common share) from Crown Life.
In December 2000, Crown Life completed its acquisition of the common shares not
held by its two principal shareholders, HARO Financial Company and Extendicare.
Crown Life sold or indemnity reinsured substantially all of its insurance
business to The Canada Life Assurance Company (Canada Life) in a 1999
transaction. The resulting comprehensive agreement between Crown Life and its
principal shareholders provides that at a later date Canada Life may either
acquire substantially all of the balance of Crown Life's insurance business, or
at the election of Canada Life or Crown Life's principal shareholders, make an
offer for all of the common shares of Crown Life.
Crown Life has voided certain reinsurance contracts and continues to investigate
the validity of the claims arising from other reinsurance contracts. It is not
possible to estimate the ultimate costs, if any, that may result.
Crown Life is a defendant in a number of lawsuits. It is not possible to predict
the outcome of outstanding litigation, or to estimate any costs that might
arise.
notes to consolidated financial statements 49
8. SELF-INSURED LIABILITIES AND MEASUREMENT UNCERTAINTY
The accrual for self-insured liabilities is based on management's best estimate
of the ultimate cost to settle claims. Management regularly evaluates the
appropriateness of the carrying value of this liability. General and
professional liability claims are the most volatile and significant of the risks
that the Company self-insures.
Management's estimate of the accrual for general and professional liability
costs is significantly influenced by assumptions, which are limited by the
uncertainty of predictions concerning 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 in which the Company operates; coverage limits of third-party
reinsurance; the effectiveness of the claims management process; and uncertainty
regarding the outcome of litigation.
The Company has experienced adverse claims development. Consequently, as of
January 1, 2000 the Company's per claim retained risk increased significantly
for resident care liability coverage, mainly due to the level of risk associated
with the Florida and Texas operations. In 2001, EHSI no longer operated nursing
and assisted living facilities in the State of Florida and as of October 1, 2001
ceased nursing operations in the State of 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 a
provision to increase its accrual for resident care liability costs in the third
quarter of 2001. This additional accrual was based on an independent actuarial
review and was largely attributable to potential claims for Florida and Texas.
Changes in the Company's level of retained risk, and other significant
assumptions that underlie management's estimates of self-insured liabilities,
could have a material effect on the future carrying value of the self-insured
liabilities, as well as on the Company's operating results and liquidity.
General and professional liability claim payments for any one policy year occur
over a period of several years. The Company has estimated a current portion of
the professional liability claim payments.
The Company invests funds to support the accrual for self-insured liabilities
and believes that it has sufficient cash resources to meet its estimated current
claims payment obligations.
9. LONG-TERM DEBT
(thousands of dollars) 2002 2001
- --------------------------------------------------------------------------------
Payable in Canadian Dollars
Mortgages, 5.81% to 9.81%, maturing through to 2013 155,252 158,331
Obligations under capital leases (note 4) 113,584 83,810
Payable in United States Dollars
Bank term loans, at rates varying with prime
and/or LIBOR, maturing through to 2004 - 217,276
Senior Subordinated Notes at 9.35%, due 2007 271,505 274,121
Senior debt at 9.50%, due 2010 236,074 -
Mortgages and Industrial Development Bonds
6.25% to 13.61%, maturing through to 2010 8,058 12,731
At varying rates, due 2014 50,484 57,232
Notes payable, 3.00% to 10.50%, maturing through to 2012 17,915 7,884
Obligations under capital leases 71 97
- --------------------------------------------------------------------------------
852,943 811,482
Less due within one year and included in current liabilities 6,209 23,128
- --------------------------------------------------------------------------------
846,734 788,354
================================================================================
50 extendicare 2002 annual report
After taking into account interest rate swap agreements, the weighted average
interest rate of all long-term debt at December 31, 2002 was approximately 7.9%.
In addition, after considering swap agreements in place to convert fixed-rate
debt to floating rates, 66.3% of the long-term debt was effectively at fixed
rates.
Interest paid in 2002, 2001 and 2000 was $55,075,000, $66,391,000 and
$78,984,000, respectively.
On June 28, 2002, EHSI completed a private placement of US$150,000,000 of 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, EHSI completed an
offer to exchange new 9.5% Senior Notes due 2010 that have been registered under
the Securities Act of 1933 for the Notes issued in June 2002. The terms of the
new Senior Notes are identical to the terms of the Senior Notes issued in June
2002 and are guaranteed by all existing and future active subsidiaries of EHSI.
EHSI used the proceeds of $235,585,000 (US$149,625,000) to pay $13,123,000
(US$8,335,000) of related fees and expenses, retire $206,008,000 of debt
(US$130,840,000, consisting of US$124,479,000 outstanding under its previous
credit facility and US$6,361,000 of other debt), and for general corporate
purposes.
Also on June 28, 2002, EHSI entered into an interest rate swap agreement and an
interest rate cap agreement. The swap arrangement is used to hedge a notional
US$150,000,000 of EHSI's fixed-rate 9.35% Senior Subordinated Notes maturing in
December 2007. Under the swap, EHSI pays a variable rate of interest equal to
the one-month London Interbank Borrowing Rate (LIBOR) (1.42% at December 31,
2002), adjustable monthly, plus a spread of 4.805% and receives a fixed rate of
9.35% to maturity of the swap in December 2007.
The interest rate cap agreement also covers a notional amount of US$150,000,000
maturing in December 2007. Under the cap agreement EHSI 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, adjusted monthly, over the cap rate of
7%. A portion of the interest rate cap with a notional amount of US$32,000,000
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 US$118,000,000
is used to offset increases in variable-rate interest payments under the
interest rate swap to the extent that one-month LIBOR exceeds 7%.
EHSI had hedged a portion of its previous variable-rate long-term debt through
an interest rate swap with a notional amount of US$25,000,000 maturing in
February 2003. Upon refinancing of the debt, EHSI terminated this swap with a
cash payment of $1,000,0000 (US$635,000) and this financing cost is included in
the earnings statement as part of loss from asset disposals, impairment and
other items.
Concurrent with the sale of the Senior Notes, EHSI established a new, five-year
US$105,000,000 senior secured revolving credit facility (the "Credit Facility")
that is used to support letters of credit and for general corporate purposes.
Borrowings under the Credit Facility bear interest, at EHSI's option, at the
Eurodollar rate or the prime rate, plus applicable margins, depending upon
EHSI's leverage ratio. As at December 31, 2002 EHSI 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 US$38,800,000, was US$66,200,000.
The Senior Notes and the Credit Facility contain a number of covenants,
including: restrictions on the payment of dividends by EHSI; limitations on
capital expenditures, investments, redemptions of EHSI's common stock and
changes of control of EHSI; as well as financial covenants, including fixed
charge coverage, debt leverage, and tangible net worth ratios. EHSI is required
to make mandatory prepayments of principal upon the occurrence of certain
events, such as certain asset sales and certain issuances of securities. EHSI is
permitted to make voluntary prepayments at any time under the Credit Facility.
The Senior Notes are redeemable at EHSI's option 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
- ----------------------------------------
2006 104.750%
2007 102.375%
2008 and thereafter 100.000%
- ----------------------------------------
notes to consolidated financial statements 51
EHSI is in compliance with the financial covenants as of December 31, 2002.
EHSI has no independent assets or operations, the guarantees of the Senior Notes
are full and unconditional, and joint and several, and any of EHSI's
subsidiaries that do not guarantee the Senior Notes are minor.
On December 2, 1997, EHSI issued US$200,000,000 of 9.35% Senior Subordinated
Notes due 2007 (the "Subordinated Notes"). The Subordinated Notes are unsecured
senior subordinated obligations of EHSI subordinated in right of payment to all
existing and future senior indebtedness of EHSI, which includes all borrowings
under the Credit Facility as well as all indebtedness not refinanced by the
Credit Facility. The Subordinated Notes mature on December 15, 2007. Interest is
payable semi-annually. At December 31, 2002, $44,015,000 (US$27,900,000) of the
Senior Subordinated Notes was held by Extendicare Inc. and was deducted from
long-term debt.
In Canada, the Company has a $40,000,000 operating line, of which $36,848,000
supports a standby letter of credit, primarily to secure pension obligations.
Principal payments on long-term debt due within the next five fiscal years,
exclusive of obligations under capital leases, after giving effect to renewal
privileges, are as follows:
Year (thousands of dollars)
- -----------------------------------------------
2003 4,455
2004 4,834
2005 5,146
2006 15,317
2007 325,601
- -----------------------------------------------
10. SHARE CAPITAL
The authorized capital of the Company consists of an unlimited number of:
Class I preferred shares, issuable in series; Class II preferred shares,
issuable in series; Subordinate Voting Shares; and Multiple Voting Shares,
convertible on the basis of one Subordinate Voting Share for each Multiple
Voting Share. All preferred shares are redeemable at $25.00 per share at the
option of the Company.
The Cumulative Redeemable Preferred Shares, Series 2 are entitled to receive
quarterly cumulative preferential cash dividends in an amount determined by
applying $25.00 to one-quarter of 71% of the average Canadian prime rate of
interest for the quarter ended immediately before the relevant dividend payment
date.
The Adjustable Dividend Preferred Shares, Series 3 are entitled to receive
quarterly cumulative preferential cash dividends in an amount determined by
applying $25.00 to one-quarter of 72% of an interest rate to be determined every
five years by reference to yields on selected Government of Canada bonds. The
rate has been set at 3.96% for the period commencing February 16, 2001, and
ending February 15, 2006. The Series 3 Preferred Shares are convertible into
Adjustable Dividend Preferred Shares, Series 4 on a share-for-share basis on
February 16, 2006, and on each fifth anniversary thereof.
The Adjustable Dividend Preferred Shares, Series 4 are entitled to receive
quarterly cumulative preferential cash dividends in an amount determined by
applying $25.00 to one-quarter of 72% of the average Canadian prime rate of
interest for the quarter ended immediately before the relevant dividend payment
date. The Series 4 Preferred Shares are convertible into Series 3 Preferred
Shares on a share-for-share basis on February 16, 2006, and on each fifth
anniversary thereof.
The Class II Preferred Shares, Series 1 are entitled to receive monthly
cumulative cash dividends in an amount determined by applying $25.00 to
one-twelfth of the defined Annual Dividend Rate applicable to that calendar
month. The Annual Dividend Rate for a calendar month is calculated with
reference to the Canadian prime rate of interest and the defined Calculated
Trading Price of the Class II Preferred Shares, Series 1.
The holders of Subordinate Voting Shares are entitled to one vote for each share
held at any meeting of shareholders of the Company. The Subordinate Voting
Shares entitle the holders thereof to quarterly preferential dividends
cumulative within each financial year, aggregating 2.5 cents per share in each
financial quarter, after which each Multiple Voting Share and Subordinate Voting
Share participates equally in all further dividends.
52 extendicare 2002 annual report
The holders of Multiple Voting Shares are entitled to 10 votes for each share
held at any meeting of shareholders.
During 2002, shares purchased for cancellation in excess of their original cost
resulted in a direct charge to retained earnings of $667,000 (2001- $1,062,000).
During 2001 and 2000, the Company's accumulated contributed surplus of $21,000
and $3,303,000, respectively, arising on the purchase for cancellation of
shares, was transferred to retained earnings.
During 2002, under the terms of a Normal Course Issuer Bid, the Company
purchased and cancelled 1,472,300 Subordinate Voting Shares at a cost of
$6,992,000 (2001 - 1,744,900 shares at a cost of $8,237,000) and 212,900
Multiple Voting Shares at a cost of $1,084,000 (2001 - 224,600 shares at a cost
of $1,571,000). The shares purchased and cancelled during 2002 included 20,000
Subordinate Voting Shares purchased under the current Bid at a cost of $85,600.
The current Bid, which commenced November 27, 2002, will terminate for each
class of shares on the earlier of November 26, 2003 and the dates on which a
total of 4,700,000 Subordinate Voting Shares, 620,000 Multiple Voting Shares and
38,200 Class II Preferred Shares, Series 1, have been purchased and cancelled by
the Company pursuant to the Bid.
The Company's Stock Option Plan (the "Plan") provides for the granting, from
time to time, at the discretion of the Board of Directors, to certain directors,
officers and employees of the Extendicare group of companies, of options to
purchase Subordinate Voting Shares of the Company for cash. The Plan provides
that the exercise price of any option granted shall not be less than the closing
price (or, if there is no closing price, the simple average of the bid and ask
price) of the Subordinate Voting Shares as quoted on the Toronto Stock Exchange
on the trading day prior to the date of grant. It also permits options to be
exercised for a period not to exceed either five or 10 years from the date of
grant, as determined by the 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 a corporate
reorganization.
A total of 4,747,475 Subordinate Voting Shares have been reserved under stock
option plans, of which a total of 2,514,750 Subordinate Voting Shares have been
granted. These options have exercise prices ranging from $2.37 to $15.60, and
expire between April 2003 and August 2007.
Stock option transactions during 2002 and 2001 were as follows:
2002 2001
- -----------------------------------------------------------------------------------------------------------------
Number of Weighted-average Number of Weighted-average
Stock Options Exercise Price ($) Stock Options Exercise Price ($)
- -----------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,342,875 6.84 1,933,000 7.80
Granted 846,000 4.38 754,000 4.05
Exercised (28,875) 2.90 (22,000) 4.15
Cancelled (645,250) 14.29 (322,125) 6.30
- -----------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,514,750 4.14 2,342,875 6.84
=================================================================================================================
Options exercisable at year-end 851,625 4.33 902,875 11.68
- -----------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-average Weighted-average Weighted-average
Number of Remaining Exercise Number of Exercise
Range of Exercise Price ($) Stock Options Contractual Life Price ($) Stock Options Price ($)
- --------------------------------------------------------------------------------------------------------------------------------
2.37 to 4.36 2,014,750 3.1 years 3.71 580,375 3.36
4.70 to 7.01 474,000 2.2 5.34 245,250 5.44
15.60 26,000 0.3 15.60 26,000 15.60
- --------------------------------------------------------------------------------------------------------------------------------
notes to consolidated financial statements 53
Under the new accounting standard for stock-based compensation that the Company
adopted effective January 1, 2002, disclosure of the fair value method of
accounting for stock options is required and is described below.
The following table presents the pro forma impact on the Company's consolidated
net earnings (loss) and related per share amounts had the Company recorded
employee compensation expense in the current and prior years based on the fair
value of all outstanding stock options on their grant date.
(thousands of dollars except per share amounts) 2002 2001 2000
- -------------------------------------------------------------------------------------------------
Net earnings (loss) 18,934 (36,406) (59,278)
Compensation expense related to fair value of stock options (1,309) (1,161) (1,025)
- -------------------------------------------------------------------------------------------------
Pro forma net earnings (loss) 17,625 (37,567) (60,303)
=================================================================================================
Basic and diluted earnings (loss) per share
As reported 0.26 (0.52) (0.81)
Pro forma 0.24 (0.54) (0.83)
- -------------------------------------------------------------------------------------------------
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model. The weighted average fair value of options
granted during the years ended December 31, 2002, 2001 and 2000 was $1.92,
$2.34, and $1.60, respectively. The following weighted average assumptions were
used to determine the fair value of options on the date of grant.
2002 2001 2000
- --------------------------------------------------------------------------
Dividend yield - - -
Expected share price volatility 47.4% 48.8% 70.9%
Risk-free rate of return 4.3% 3.6% 6.1%
Expected period until exercise 4.4 YEARS 4.3 years 4.4 years
- --------------------------------------------------------------------------
11. REVENUE
The Company derived approximately 76%, 75% and 75% of its United States revenue
in 2002, 2001 and 2000, respectively, from services provided under various
federal (Medicare) and state (Medicaid) medical assistance programs. The
Medicare program pays each participating facility a prospectively set rate for
each resident, which is based on the resident's acuity. Most Medicaid programs
fund participating facilities using a case-mix based system, paying
prospectively set rates.
In the normal course of business, EHSI has ongoing discussions with its fiscal
intermediaries regarding the treatment of various items related to prior years'
cost reports. Normally items are resolved during the audit process and no
provision is required. Differences of opinion regarding cost reporting methods
between EHSI and its fiscal intermediaries can be settled through a formal
appeal process. Should this occur, a general provision for Medicare receivables
may be recorded for disagreements that result in EHSI filing an appeal with the
PRRB of the Centers for Medicare and Medicaid Services (CMS).
In 2000, the PRRB heard EHSI's first appeal involving the reimbursement of
workers' compensation costs and issued a decision that supported EHSI's
position. The CMS administrator confirmed the PRRB's decision, which resulted in
a favourable settlement of $18,465,000, including a recovery of the general
provision of $15,272,000. In addition, EHSI reached a settlement with a fiscal
intermediary regarding another cost reporting issue, which resulted in revenue
of $3,495,000, including a recovery of $2,522,000 of the general provision. In
total, a recovery of $17,794,000 was recorded in 2000 related to the general
provision recorded in 1999.
54 extendicare 2002 annual report
12. INCOME TAXES
The provision (recovery) for income taxes is comprised as follows:
(thousands of dollars) 2002 2001 2000
- ---------------------------------------------------------------------------------------------
Earnings (loss) from health care before income taxes 22,616 (59,720) (103,764)
=============================================================================================
Income taxes at statutory Canadian rate of 38.62%
(2001 - 42.12%; 2000 - 43.95%) 8,733 (25,154) (45,609)
Income tax effect relating to the following items
Non-deductible goodwill and accounting provisions - 1,223 924
Tax rate variance of foreign subsidiaries 1,552 6,241 6,891
Benefit of operating and capital loss utilization (411) (224) -
Non-taxable income - (224) (531)
Other items 1,328 5,479 1,409
- ---------------------------------------------------------------------------------------------
11,202 (12,659) (36,916)
=============================================================================================
Cash taxes paid in 2002 were $7,571,000 and cash taxes recovered during 2001 and
2000 were $31,945,000 and $69,275,000, respectively.
The Company adopted, on a retroactive basis, the new requirements of the CICA
effective January 1, 2000, with respect to accounting for income taxes. The
Company did not restate prior periods and therefore, at January 1, 2000,
shareholders' equity included a cumulative charge to opening retained earnings
of $1,250,000.
At December 31, 2002, the Company had net operating loss carryforwards available
for U.S. state income tax financial reporting purposes of $133,300,000, which
expire in 2003 through 2022. The Company also had net operating loss
carryforwards available for U.S. federal income tax financial reporting purposes
of $5,318,000, which expire in 2021. In addition, the Company had $3,765,000 net
operating loss carryforwards available for Canadian income tax purposes, which
expire in 2003 through 2009. To the extent the realization of these losses is
uncertain, they have been offset by a valuation allowance.
At December 31, 2002, the Company had $258,700,000 of capital loss carryforwards
available for U.S. state income tax purposes, which expire in 2004. For Canadian
income tax purposes there were capital losses available of $58,844,000 (2001 -
$62,979,000) that can be carried forward indefinitely to apply against future
capital gains. The future tax benefit of the combined capital losses of
$30,648,000 (2001 - $31,010,000) has been fully offset in the valuation
allowance for future tax assets.
The valuation allowance for future tax assets as of December 31, 2002 and 2001
was $54,614,000 and $58,862,000, respectively. The net change in the total
valuation allowance for 2002 was a decrease of $4,248,000. In assessing the
realizability of future tax assets, management considers whether it is more
likely than not that some portion or all of the future tax assets will not be
realized. The ultimate realization of future 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
future 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.
notes to consolidated financial statements 55
Future income taxes are provided for temporary differences. The significant
components of future income tax assets and liabilities are as follows:
(thousands of dollars) 2002 2001
- -----------------------------------------------------------------------------
Future income tax assets
Self-insurance reserves 40,958 40,184
Investment in Crown Life 8,256 11,088
Employee benefit accruals 15,359 14,466
Accounts receivable reserves 2,837 11,855
Net capital loss carryforwards 30,648 32,010
Deferred revenue 4,688 5,044
Goodwill 2,600 3,220
Operating loss carryforwards 15,295 22,356
Operating reserves 8,636 6,285
Other 11,151 11,398
- -----------------------------------------------------------------------------
140,428 157,906
Valuation allowance 54,614 58,862
- -----------------------------------------------------------------------------
85,814 99,044
- -----------------------------------------------------------------------------
Future income tax liabilities
Property and equipment 104,812 107,850
Leasehold rights 2,884 3,580
Other 21,604 17,920
- -----------------------------------------------------------------------------
129,300 129,350
- -----------------------------------------------------------------------------
Future income tax liabilities, net 43,486 30,306
Less current portion of future income tax assets, net 55,849 17,987
- -----------------------------------------------------------------------------
Long-term future income tax liabilities, net 99,335 48,293
=============================================================================
13. EARNINGS (LOSS) PER SHARE
Earnings per share is calculated by dividing net earnings after preferred share
dividends for the year by the weighted average number of combined Subordinate
Voting Shares and Multiple Voting Shares outstanding during the year. Diluted
earnings per share, using the treasury stock method, assumes outstanding stock
options are exercised at the beginning of the year and common shares are
purchased at the average market price during the year from funds derived on the
exercise of these outstanding options.
The following table reconciles the numerator and denominator of the basic and
diluted earnings (loss) per share computation:
(thousands of dollars except per share amounts) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings (loss) per share
Net earnings (loss) 18,934 (36,406) (59,278)
Dividends on preferred shares (708) (1,028) (1,243)
- -------------------------------------------------------------------------------------------------------------
18,226 (37,434) (60,521)
=============================================================================================================
Denominator for basic and diluted earnings (loss) per share
Basic weighted average number of shares 70,696,172 71,928,589 74,332,251
Dilutive stock options 578,314 - -
- -------------------------------------------------------------------------------------------------------------
Diluted weighted average number of shares 71,274,486 71,928,589 74,332,251
=============================================================================================================
Basic and diluted earnings (loss) per share 0.26 (0.52) (0.81)
- -------------------------------------------------------------------------------------------------------------
56 extendicare 2002 annual report
14. SEGMENTED INFORMATION
During 2002, Extendicare had two reportable operating segments: United States
operations and Canadian operations. The Company's operations are managed
independently of each other because of their geographic areas and regulatory
environments. Each operation retains its own management team and is responsible
for compiling its own financial information.
The Company, through its subsidiaries, operates long-term care facilities in the
United States and Canada. Also offered in the United States are medical
specialty services, such as subacute care and rehabilitative therapy services,
while home health care services are provided in Canada.
Substantial portions of the Company's revenues are funded by various federal,
state, provincial and local government programs. The funding programs from which
Extendicare receives 10% or more of its revenues are: the United States federal
Medicare program, representing revenues of $328,313,000, $292,380,000 and
$335,495,000 in 2002, 2001 and 2000, respectively; and the Ontario provincial
government, representing revenues of $228,201,000, $229,618,000 and $273,585,000
in 2002, 2001 and 2000, respectively.
The significant accounting policies of the reportable operating segments are the
same as those described in note 1. Information about the Company's segments and
a reconciliation of segment profit to net earnings (loss) are as follows:
(thousands of dollars) 2002
- -------------------------------------------------------------------------------------------------------------------------
UNITED STATES CANADA TOTAL
- -------------------------------------------------------------------------------------------------------------------------
Revenue
Nursing and assisted living centres 1,236,565 315,907 1,552,472
Outpatient therapy 16,144 - 16,144
Home health - 146,034 146,034
Other 36,361 4,663 41,024
- -------------------------------------------------------------------------------------------------------------------------
1,289,070 466,604 1,755,674
=========================================================================================================================
Earnings before undernoted 140,545 43,915 184,460
Lease costs 20,056 4,063 24,119
Depreciation and amortization 60,313 8,676 68,989
Interest expense 48,757 19,966 68,723
Interest revenue (3,427) (3,249) (6,676)
Intersegment interest expense (revenue) 2,511 (2,511) -
Loss from asset disposals, impairment and other items 6,579 110 6,689
- -------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 5,756 16,860 22,616
Income taxes
Current (recovery) (12,837) 5,729 (7,108)
Future 17,026 1,284 18,310
- -------------------------------------------------------------------------------------------------------------------------
Earnings from health care 1,567 9,847 11,414
Share of earnings of Crown Life 7,520
- -------------------------------------------------------------------------------------------------------------------------
Net earnings 18,934
=========================================================================================================================
Cash used in property and equipment 30,928 22,217 53,145
Balance sheet
Property and equipment 718,439 235,152 953,591
Goodwill 113,788 70 113,858
Leasehold rights 6,646 - 6,646
Assets before undernoted 1,380,347 307,981 1,688,328
Investment in Crown Life 121,508
- -------------------------------------------------------------------------------------------------------------------------
Total consolidated assets 1,809,836
=========================================================================================================================
notes to consolidated financial statements 57
(thousands of dollars) 2001
- --------------------------------------------------------------------------------------------------------------------------
United States Canada Total
- --------------------------------------------------------------------------------------------------------------------------
Revenue
Nursing and assisted living centres 1,187,547 279,559 1,467,106
Outpatient therapy 14,733 - 14,733
Home health - 171,809 171,809
Other 47,508 3,355 50,863
- --------------------------------------------------------------------------------------------------------------------------
1,249,788 454,723 1,704,511
==========================================================================================================================
Earnings before undernoted 115,137 40,222 155,359
Lease costs 23,474 4,728 28,202
Depreciation and amortization 64,197 7,350 71,547
Interest expense 55,216 15,129 70,345
Interest revenue (3,631) (1,466) (5,097)
Intersegment interest expense (revenue) 976 (976) -
Loss from asset disposals, impairment and other items 50,082 - 50,082
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (75,177) 15,457 (59,720)
Income taxes
Current 1,798 6,472 8,270
Future (reduction) (21,245) 316 (20,929)
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from health care before minority interests (55,730) 8,669 (47,061)
Minority interests - 83 83
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from health care (55,730) 8,586 (47,144)
Share of earnings of Crown Life 10,738
- --------------------------------------------------------------------------------------------------------------------------
Net loss (36,406)
==========================================================================================================================
Cash used in property and equipment 26,355 19,022 45,377
Balance sheet
Property and equipment 764,321 203,881 968,202
Goodwill 114,884 312 115,196
Leasehold rights 8,705 - 8,705
Assets before undernoted 1,324,399 279,903 1,604,302
Investment in Crown Life 135,944
- --------------------------------------------------------------------------------------------------------------------------
Total consolidated assets 1,740,246
==========================================================================================================================
58 extendicare 2002 annual report
(thousands of dollars) 2000
- --------------------------------------------------------------------------------------------------------------------------------
United States Canada Total
- -------------------------------------------------------------------------------------------------------------------------------
Revenue
Nursing and assisted living centres 1,346,033 266,671 1,612,704
Outpatient therapy 14,430 - 14,430
Home health - 161,323 161,323
Other 16,660 2,289 18,949
- -------------------------------------------------------------------------------------------------------------------------------
1,377,123 430,283 1,807,406
===============================================================================================================================
Earnings before undernoted 85,688 34,310 119,998
Lease costs 23,272 4,257 27,529
Depreciation and amortization 68,071 6,931 75,002
Interest expense 68,516 13,903 82,419
Interest revenue (1,993) (1,942) (3,935)
Intersegment interest expense (revenue) 406 (406) -
Loss from asset disposals, impairment and other items 42,747 - 42,747
- -------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (115,331) 11,567 (103,764)
Income taxes
Current (recovery) (21,435) 810 (20,625)
Future (reduction) (19,934) 3,643 (16,291)
- -------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from health care before minority interests (73,962) 7,114 (66,848)
Minority interests 37 220 257
- -------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from health care (73,999) 6,894 (67,105)
Share of earnings of Crown Life 7,827
- -------------------------------------------------------------------------------------------------------------------------------
Net loss (59,278)
===============================================================================================================================
Cash used in property and equipment 19,436 26,856 46,292
Balance sheet
Property and equipment 763,578 156,653 920,231
Goodwill 111,824 951 112,775
Leasehold rights 10,101 - 10,101
Assets before undernoted 1,385,451 202,894 1,588,345
Investment in Crown Life 147,407
- -------------------------------------------------------------------------------------------------------------------------------
Total consolidated assets 1,735,752
===============================================================================================================================
notes to consolidated financial statements 59
15. OTHER COMMITMENTS
At December 31, 2002, the Company was committed under non-cancellable leases
requiring future minimum rentals as follows:
(thousands of dollars) Capital Leases Operating Leases Total
- --------------------------------------------------------------------------------------
2003 11,644 14,430 26,074
2004 11,644 13,026 24,670
2005 11,634 12,446 24,080
2006 11,616 8,089 19,705
2007 11,616 5,096 16,712
Thereafter 224,058 29,122 253,180
- --------------------------------------------------------------------------------------
Total minimum payments 282,212 82,209 364,421
=========================
Less amount representing interest 157,521
---------
Obligations under capital leases 124,691
=================================================
At December 31, 2002, ECI had outstanding capital expenditure commitments of
$29,200,000 related to three new Ontario nursing facilities and EHSI had
commitments of approximately $8,491,000 (US$5,382,000).
16. CONTINGENT LIABILITIES
The Company and its consolidated subsidiaries are defendants in actions brought
against them from time to time in connection with their operations. It is not
possible to predict the ultimate outcome of the various proceedings at this time
or to estimate additional costs that may result.
EHSI entered into a preferred provider agreement with Omnicare, Inc. (Omnicare)
pursuant to the divestiture of its pharmacy operations in 1998. In connection
with its agreement to provide pharmacy services, Omnicare has requested
arbitration for an alleged lost profits claim related to EHSI's disposition of
assets, primarily in Florida. Damage amounts, if any, cannot be reasonably
estimated based on information available at this time. An arbitration hearing
has not yet been scheduled. Management believes it has interpreted correctly and
complied with the terms of the preferred provider agreement; however, there can
be no assurance that this claim will not be successful or that other claims will
not be made with respect to the agreement. Also, EHSI and Omnicare are currently
negotiating the pricing of drugs for Medicare residents and should this matter
not be settled, it will be taken to arbitration.
In 2002, the Company guaranteed US$2,500,000 of a US$5,000,000 first mortgage
loan by Republic First Bank to Delaware Valley Convalescent Homes Inc. (Delaware
Valley). The loan is secured by a US$1,000,000 Certificate of Deposit held by
the lender and a first mortgage on the long-term care facility, which has an
appraised value in excess of the total loan. A subsidiary of the Company manages
the facility for the owner and has first right of refusal on the purchase of the
facility. If the guarantee was called, it could be necessary for the Company to
assume the full loan. The term of the guarantee is the earlier of November 29,
2004, full payment of the loan by Delaware Valley or payment by the Company
pursuant to this guarantee.
In December 2000, EHSI leased six nursing facilities (585 beds) to Senior Health
Properties - South Inc. (Senior Health) for a 60-month term. Under the terms of
the transaction, Senior Health has an option to purchase the properties for
US$10,700,000. EHSI will earn rental income based upon the net operating cash
flow of the properties, which cannot exceed on average US$2,000,000 per annum,
and has entered into a specific-services consulting agreement over the term of
the lease with Senior Health. Under the terms of the transaction, EHSI has
retained a commitment to fund any cash flow deficiencies for one of the six
properties, which EHSI anticipates would not exceed US$300,000 per annum. All
operations and assets, other than the land, building and equipment, were
transferred to the lessees at the commencement of the leases at no cost to the
lessees.
60 extendicare 2002 annual report
17. EMPLOYEE FUTURE BENEFITS
Retirement compensation arrangements, including defined benefit plans, are
maintained with certain employee groups. Information about the Company's defined
benefit pension plans follows:
(thousands of dollars) 2002 2001
- ------------------------------------------------------------------------------
Accrued benefit obligations
Balance at beginning of year 25,084 22,742
Current service cost 600 572
Benefits paid (1,328) (1,589)
Interest costs 1,753 1,706
Actuarial losses 2,627 1,653
- ------------------------------------------------------------------------------
Balance at end of year 28,736 25,084
==============================================================================
Plan assets
Fair value at beginning of year 5,393 6,288
Employer contributions 1,177 1,124
Actual return on plan assets (144) (430)
Benefits paid (1,328) (1,589)
- ------------------------------------------------------------------------------
Fair value at end of year 5,098 5,393
==============================================================================
Funded status - plan deficit 23,638 19,691
Unrecognized net experience losses (5,300) (2,117)
Other (321) (281)
- ------------------------------------------------------------------------------
Accrued benefit liability 18,017 17,293
==============================================================================
Net benefit plan expense
Current period service costs 600 572
Interest cost 1,753 1,706
Expected return on plan assets (412) (480)
- ------------------------------------------------------------------------------
Net benefit plan expense 1,941 1,798
==============================================================================
Significant assumptions
Discount rate 6.4% 7.0%
Expected long-term rate of return on plan assets 7.5% 8.0%
Rate of compensation increase 5.0% 5.0%
Average remaining service period of active employees 9 years 10 years
- ------------------------------------------------------------------------------
The Company maintains defined contribution retirement 401(K) savings plans in
its United States operations, which are made available to substantially all of
the Company's United States employees. EHSI pays a matching contribution of 17%
to 25% of every qualifying dollar contributed by plan participants, net of any
forfeitures. The Company incurred expenses related to the 401(K) savings plans
of $2,016,000, $2,013,000 and $2,036,000 in 2002, 2001 and 2000, respectively.
The Company adopted effective January 1, 2000, on a retroactive basis, the new
requirements of the CICA with respect to accounting for employee future
benefits. The Company did not restate prior periods and therefore, at January 1,
2000, shareholders' equity included a cumulative charge to opening retained
earnings of $2,835,000, net of income taxes of $2,101,000.
notes to consolidated financial statements 61
18. FINANCIAL INSTRUMENTS
With the exception of the following, the fair values of financial instruments
approximate their recorded values.
(thousands of dollars) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------
Accounts receivable, less allowance 235,738 232,509 248,798 246,828
Notes, mortgages and amounts receivable,
including current portion 81,993 82,827 56,192 56,567
Other investments 13,217 7,284 12,792 9,445
Investments held for self-insured liabilities 56,203 56,850 45,465 46,507
Long-term debt, including current portion 852,943 833,901 811,482 833,421
Interest rate swap (asset) - (8,682) - 2,235
Interest rate cap - 1,496 - -
- -----------------------------------------------------------------------------------------------------------------
Accounts receivable, including other long-term receivables, are recorded at the
net realizable value expected to be received from government assistance
programs, other third-party payors or individual patients. The carrying values
of accounts receivable approximate fair values due to their short maturities,
with the exception of certain settlement receivables from third-party payors
that are anticipated to be collected beyond one year. The fair values of these
settlement receivables are estimated based on discounted cash flows at current
borrowing rates.
Notes and mortgages receivable primarily consist of debt service and capital
expenditure trust funds, and notes due from government agencies. The fair values
for these instruments are based on the amount of future cash flows associated
with each instrument, discounted using current applicable rates for similar
instruments of comparable maturity and credit quality.
Receivables from government agencies represent the only concentrated group of
credit risks for the Company. Management does not believe that there are any
credit risks associated with these government agencies other than possible
funding delays. Receivables other than from government agencies consist of
receivables from various payors and do not represent any concentrated credit
risks to the Company. Furthermore, management continually monitors and adjusts
its allowances associated with these receivables.
Other investments consist of investments in stock and warrants, the fair values
of which are based on quoted market prices.
The fair values for investments held for self-insured liabilities are based on
quoted market prices. These investments are subject to insurance regulatory
requirements. At year-end, the investment portfolio was comprised of
investment-grade United States dollar-denominated corporate and government
securities. The securities within the investments held for self-insured
liabilities are all considered to be available for sale.
The Company has determined that it is not reasonable or meaningful to calculate
a fair value for the accrual for self-insured liabilities.
The fair values for long-term debt are based on the amount of future cash flows
associated with each instrument discounted using current applicable rates for
similar instruments of comparable maturity and credit quality.
The fair values of the interest rate swap and interest rate cap are based on the
quoted market prices as provided by the financial institutions that are counter
party to the arrangements.
62 extendicare 2002 annual report
BOARD OF DIRECTORS
DAVID J. HENNIGAR (CG)
Chairman
Mr. Hennigar is Chairman of Annapolis Group Inc. and of High Liner Foods Inc.,
as well as Chairman and founder of Acadian Securities Inc. He serves as a
director of Crown Life Insurance Company and Scotia Investments Limited, as well
as of several other private and public companies. Mr. Hennigar has been on the
Extendicare Board since 1980; he resides in Bedford, Nova Scotia. Age 63.
H. MICHAEL BURNS (CG)(IS)
Deputy Chairman
Mr. Burns is President of Kingfield Investments Limited and a director of
several private and public companies, including Algoma Central Corp., Landmark
Global Financial Corp., Phoenix Canada Oil, Starrex Mining Corporation Ltd. and
InterStar Mining Group Inc. Mr. Burns is Chancellor of Renison College, at the
University of Waterloo. He has been on the Extendicare Board since 1978, and
resides in Maple, Ontario. Age 65.
FREDERICK B. LADLY (CG)(HR)(QS)
Deputy Chairman
Mr. Ladly is Vice-Chairman of Crown Life Insurance Company and a director of
High Liner Foods Inc., UBS Bank (Canada), UBS Trust (Canada) and Knudsen
Engineering Limited. He has been on the Extendicare Board since 1986. Mr. Ladly
resides in the Township of Bathurst, Ontario. Age 72.
MEL RHINELANDER
President and Chief Executive Officer
Mr. Rhinelander was appointed Chief Executive Officer of Extendicare Inc. in
August 2000, following his appointment as President in August 1999. He joined
the Company in 1977 and has served in a number of senior positions. Mr.
Rhinelander was elected to the Extendicare Board on May 2, 2000, and he resides
in Milwaukee, Wisconsin. Age 52.
DEREK H. L. BUNTAIN (A)(HR)(IS)
Mr. Buntain is President of The Dundee Bank, a private bank offering banking
services to international clients. He serves as a director of a number of public
companies, including Dundee Precious Metals Inc., Eurogas Corporation and
Cencotech Inc. Mr. Buntain joined the Extendicare Board in 1995, and he resides
in Grand Cayman, Cayman Islands. Age 62.
SIR GRAHAM DAY (CG)(HR)
Sir Graham is Chairman of Sobeys Inc., a national food distributor, and Counsel
to the Atlantic Canada law firm of Stewart McKelvey Stirling Scales. He serves
as a director of a number of public and private companies, including The Bank of
Nova Scotia and Empire Company Limited, and is a Fellow of the Institute of
Corporate Directors. Sir Graham holds the Herbert S. Lamb Chair in Business
Education in Dalhousie's Graduate School of Business Administration. He has been
on the Board since 1989, and resides in Hantsport, Nova Scotia. Age 69.
GEORGE S. DEMBROSKI (A)(IS)
Mr. Dembroski serves as a director of a number of public and private companies,
including Cameco Corporation, the largest independent producers of uranium,
Electrohome Limited, Heroux-Devtek Inc., Middlefield Bancorp Limited and Murphy
Oil Corporation. Mr. Dembroski joined the Extendicare Board in 1995, and resides
in Toronto, Ontario. Age 68.
DAVID M. DUNLAP (A)(HR)(QS)
Mr. Dunlap is Chairman of G.F. Thompson Co. Ltd., a manufacturer and distributor
of plumbing products. Mr. Dunlap has been on the Board since 1980, and resides
in the Township of King, Ontario. Age 64.
board of directors 63
GEORGE A. FIERHELLER (A)(IS)
Mr. Fierheller is President of Four Halls Inc., a private investment and
consulting firm, and Chairman of The Greater Toronto Marketing Alliance. He
serves as a director of GBC North America Growth Fund Inc., Rogers Wireless
Communications Inc. and Ontario Exports Inc. In addition, Mr. Fierheller is a
Member of the Order of Canada and Past President of the Toronto Board of Trade.
He has been on the Extendicare Board since 1981, and resides in Toronto,
Ontario. Age 69.
DR. SETH B. GOLDSMITH (CG)(QS)
Dr. Goldsmith is an attorney and Professor Emeritus at the University of
Massachusetts at Amherst. He is former Chief Executive Officer of the Miami
Jewish Home & Hospital for the Aged, and has served as a consultant to numerous
organizations including the World Health Organization, Geneva, Switzerland, and
the U.S. Army. Dr. Goldsmith has been on the Board since 1995, and he resides in
Hollywood, Florida. Age 61.
MICHAEL J. L. KIRBY (CG)(HR)(QS)
Mr. Kirby is a member of The Senate of Canada. He serves as a director of The
Bank of Nova Scotia, Goldfarb Corporation, Maxxcom Inc., Indigo Books & Music
Inc., CPI Plastics Group Ltd. and Ontario Energy Savings Corporation. Mr. Kirby
has been on the Extendicare Board since 1987, and he resides in Nepean, Ontario.
Age 61.
ALVIN G. LIBIN (A)
Mr. Libin is President and Chief Executive Officer of Balmon Holdings Ltd., a
management services and investment company. He is Chairman of the Alberta
Ingenuity Fund, is a director and one of the owners of the Calgary Flames of the
National Hockey League, and serves as a director of several corporate and
community boards. Mr. Libin is an Officer of the Order of Canada, and has been
on the Extendicare Board since 1984. He resides in Calgary, Alberta. Age 71.
J. THOMAS MACQUARRIE, Q.C. (A)(HR)
Mr. MacQuarrie is a senior partner in the Atlantic Canada law firm of Stewart
McKelvey Stirling Scales. He serves as a director of Minas Basin Pulp and Power
Company Limited and High Liner Foods Inc., as well as of a number of other
public and private corporations. Mr. MacQuarrie has been on the Extendicare
Board since 1980. He resides in Halifax, Nova Scotia. Age 65.
HONORARY DIRECTORS
MARSH A. COOPER
President, M.A. Cooper Consultants Inc.
JOHN J. JODREY
Chairman, Scotia Investments Limited
DERRIL G. MCLEOD, Q.C.
Senior Counsel, Pedersen, Norman, McLeod & Todd
(A) Audit Committee
(CG)Corporate Governance and Nominating Committee
(HR)Human Resources Committee
(IS)Information Systems Committee
(QS)Quality Standards Committee
64 extendicare 2002 annual report
OFFICERS
Extendicare Inc.
3000 Steeles Avenue East
Markham, Ontario
Canada L3R 9W2
Tel: (905) 470-4000
Fax: (905) 470-5588
David J. Hennigar
Chairman
H. Michael Burns
Deputy Chairman
Frederick B. Ladly
Deputy Chairman
Mel Rhinelander
President and
Chief Executive Officer
Mark W. Durishan
Vice-President, Finance,
and Chief Financial Officer
Philip W. Small
Senior Vice-President,
Strategic Planning and
Investor Relations
Len G. Koroneos
Vice-President and Treasurer
Jillian E. Fountain
Corporate Secretary
Extendicare Health Services, Inc.
111 West Michigan Street
Milwaukee, Wisconsin
United States 53203-2903
Tel: (414) 908-8000
(800) 395-5000
Fax: (414) 908-8059
Mel Rhinelander
Chairman and
Chief Executive Officer
Mark W. Durishan
Vice-President,
Chief Financial Officer,
and Treasurer
Richard L. Bertrand
Senior Vice-President,
Development
Philip W. Small
Senior Vice-President,
Strategic Planning and
Investor Relations
Roch Carter
Vice-President, General Counsel
and Assistant Secretary
Douglas J. Harris
Vice-President and Controller
L. William Wagner
Vice-President
Jillian E. Fountain
Corporate Secretary
Extendicare (Canada) Inc.
3000 Steeles Avenue East
Markham, Ontario
Canada L3R 9W2
Tel: (905) 470-4000
Fax: (905) 470-5588
Mel Rhinelander
Chairman and
Chief Executive Officer
Shelly L. Jamieson
President
Mark W. Durishan
Vice-President and
Chief Financial Officer
Philip W. Small
Senior Vice-President,
Strategic Planning
and Investor Relations
Stephen R. Haas
Vice-President, ParaMed Home
Health Care
Robert J. Kallonen
Vice-President, Eastern Operations
Paul Rushforth
Vice-President, Western Operations
Elaine E. Everson
Vice-President and Controller
Christina L. McKey
Vice-President, Human Resources
R. Gordon Spear
Vice-President, Administration
Jillian E. Fountain
Corporate Secretary
financial and statistical information 65
FINANCIAL AND STATISTICAL INFORMATION
(unaudited) (thousands of dollars unless otherwise noted) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Property and equipment 953,591 968,202 920,231 1,017,382 1,292,369
Health care assets 1,688,328 1,604,302 1,588,345 1,697,800 2,089,207
Investment in Crown Life, equity basis 121,508 135,944 147,407 136,323 132,631
Long-term debt 846,734 788,354 802,426 891,955 1,004,261
Shareholders' equity 358,062 350,696 381,437 435,933 656,853
FINANCIAL RESULTS
Revenue
Nursing and assisted living centres
United States 1,236,565 1,187,547 1,346,033 1,364,084 1,470,539
Canada 315,907 279,559 266,671 260,723 240,782
United Kingdom - - - 35,985 38,412
Outpatient therapy and medical supplies - United States 16,144 14,733 14,430 63,989 209,308
Home health - Canada 146,034 171,809 161,323 150,280 134,984
Other 41,024 50,863 18,949 17,626 18,843
- ------------------------------------------------------------------------------------------------------------------------------------
1,755,674 1,704,511 1,807,406 1,892,687 2,112,868
====================================================================================================================================
Earnings (loss)
Health care
Earnings before depreciation, interest and income taxes 160,341 127,157 92,469 110,747 225,296
Earnings (loss) from health care 11,414 (47,144) (67,105) (182,520) 61,812
Share of earnings of Crown Life 7,520 10,738 7,827 22,818 3,520
Net earnings (loss) 18,934 (36,406) (59,278) (159,702) 65,332
Earnings (loss) per share from operations
Health care operations before undernoted and after
preferred share dividends 0.21 (0.18) (0.55) (0.75) 0.40
Loss (gain) from asset disposals, impairment and other items (0.05) (0.49) (0.36) (1.69) 0.40
Share of earnings of Crown Life 0.10 0.15 0.10 0.30 0.05
- ------------------------------------------------------------------------------------------------------------------------------------
0.26 (0.52) (0.81) (2.14) 0.85
====================================================================================================================================
OTHER INFORMATION
Number of facilities (period end)
United States 197 198 212 237 246
Canada 80 63 62 60 60
United Kingdom - - - - 16
- ------------------------------------------------------------------------------------------------------------------------------------
277 261 274 297 322
====================================================================================================================================
Operational resident capacity (period end)
United States 18,269 18,402 19,420 22,055 23,536
Canada 10,906 7,937 7,632 7,527 7,828
United Kingdom - - - - 1,062
- ------------------------------------------------------------------------------------------------------------------------------------
29,175 26,339 27,052 29,582 32,426
====================================================================================================================================
Average occupancy (percentage) 92.0 90.0 89.9 88.2 88.9
U.S. payor source as a percentage of total U.S. revenue
Medicare 26 24 24 22 29
Medicaid 50 51 51 50 43
Private 24 25 25 28 28
Canadian home health care hours of service 5,433,000 6,868,000 6,967,000 6,562,000 6,303,000
Number of employees (period end) 37,600 36,700 38,800 41,000 44,100
Number of shares outstanding (period end)
Subordinate Voting Shares 57,107,011 58,544,511 60,063,923 61,348,023 62,532,182
Multiple Voting Shares 12,557,092 12,775,917 13,204,005 13,204,005 13,217,646
- ------------------------------------------------------------------------------------------------------------------------------------
66 extendicare 2002 annual report
A FOUNDATION OF CARE
Extendicare is a leading North American provider of long-term care and
care-related services. Our principal business is the operation of long-term care
facilities in the United States and Canada. From this foundation, we have
developed other care-related businesses.
[EXTENDICARE LOGO]
CARE FACILITIES
Long-term Care Facilities
Extendicare's subsidiaries - Extendicare (Canada) Inc. (ECI) in Canada and
Extendicare Health Services, Inc. (EHSI) in the U.S. - operate 229 nursing
facilities with capacity for more than 26,200 residents.
Our nursing facilities are designed for people who cannot be cared for at home
or in assisted living facilities, due to frailty or other physical limitations.
Residents receive assistance with activities of daily living and continuing
care. Programs and services are offered for those with behavioural needs.
In the United States, we provide skilled nursing and rehabilitative therapy to
patients recovering from acute illness or injury.
Assisted Living and Retirement Facilities
Assisted living facilities offer support for activities of daily living, such as
personal care, reminders to take medication, and housekeeping. Staff is
available 24 hours a day to enable residents to maintain active and independent
lifestyles.
Retirement communities provide comfortable suites, housekeeping services, meals,
activities, security, transportation and special amenities. Residents are
typically very active and live independently.
We operate 1,912 units in U.S. assisted living communities and 824 units in
Canadian retirement communities, as well as two 38-unit Canadian assisted living
wings.
SERVICES FOR THE LONG-TERM CARE SECTOR
Management and Consulting
In Canada and the U.S., Extendicare provides management and consulting services
to other organizations - including government, not-for-profit and private-sector
operators - seeking to enhance care levels and operating efficiencies in areas
such as nursing, dietary, cost reimbursement, information technology, asset
management, regulatory compliance and accounting. Operators can access our
expertise in all phases of planning, development and management of new
facilities.
Group Purchasing
Extendicare offers group purchasing of supplies, furnishings and capital
equipment through UHF Purchasing Group in the U.S. and LTC Group Purchasing in
Canada. The economies of scale created by group purchasing produce cost savings
for our facilities and those of other providers.
LTC Group Purchasing members can also obtain support in organizing nutritional
care and dining services.
[VIRTUAL CARE PROVIDER(SM) LOGO]
Information Technology
Virtual Care Provider, Inc. (VCP) is a leading application service provider to
operators in the health care industry. In addition to providing support to the
Extendicare group of companies, VCP deploys, hosts and manages access to
packaged software applications, from a central facility, for more than 300
application hosting subscribers. VCP reduces customers' in-house technology
resource requirements in an increasingly complex health care environment.
HOME CARE AND THERAPY SERVICES
[PARAMED LOGO]
Canada's largest private-sector home health care provider, ParaMed Home Health
Care, offers all levels of nursing care, home support, occupational and
speech-language therapy and physiotherapy. ParaMed's excellent reputation is
reflected in contracts with government home health care programs, social service
agencies and insurance companies.
[PROGRESSIVE STEP REHABILITATION SERVICES LOGO]
Progressive Step Rehabilitation Services (ProStep) operates 22 rehabilitative
therapy clinics in the U.S., including 10 in Pennsylvania, nine in Wisconsin,
two in Texas and one in Ohio. Patient populations range from pediatric to
geriatric. ProStep's Medicare-certified facilities treat outpatients requiring
physical, occupational and speech-language therapy, pulmonary rehabilitation and
nursing services.
EXTENDICARE AT A GLANCE
Extendicare, through its subsidiaries, operates 277 long-term care facilities
across North America, with capacity for 29,175 residents. The Company employs
37,600 people in the United States and Canada. As well, through its operations
in the United States, Extendicare offers medical specialty services such as
subacute care and rehabilitative therapy, while home health care services are
provided in Canada.
FACILITY LOCATION AND RESIDENT CAPACITY
Assisted Living and
Nursing Centres Retirement Centres Hospitals/Units Total
- ----------------------------------------------------------------------------------------------------------------
Number of Resident Number of Resident Number of Resident Number of Resident
at December 31, 2002 Facilities Capacity Facilities Capacity Facilities Capacity Facilities Capacity
- ----------------------------------------------------------------------------------------------------------------
BY STATE/PROVINCE
United States
Pennsylvania 27 3,165 8 298 - - 35 3,463
Massachusetts 5 606 - - - - 5 606
Delaware 1 120 - - - - 1 120
Ohio 29 3,052 3 165 - - 32 3,217
West Virginia 1 120 - - - - 1 120
Wisconsin 24 2,220 10 443 - - 34 2,663
Minnesota 10 1,232 1 60 - - 11 1,292
Indiana 17 1,812 3 133 - - 20 1,945
Kentucky 18 1,510 1 39 - - 19 1,549
Washington 15 1,486 8 381 - - 23 1,867
Oregon 3 192 2 102 - - 5 294
Idaho 2 179 - - - - 2 179
Louisiana 3 567 - - - - 3 567
Arkansas 1 96 3 181 - - 4 277
Texas - - 2 110 - - 2 110
- ---------------------------------------------------------------------------------------------------------------
Total United States 156 16,357 41 1,912 - - 197 18,269
- ---------------------------------------------------------------------------------------------------------------
Canada
Ontario 47 7,166 6 900 1 120 54 8,186
Alberta 15 1,229 - - - - 15 1,229
Saskatchewan 5 654 - - - - 5 654
Manitoba 5 762 - - - - 5 762
British Columbia 1 75 - - - - 1 75
- ---------------------------------------------------------------------------------------------------------------
Total Canada 73 9,886 6 900 1 120 80 10,906
- ---------------------------------------------------------------------------------------------------------------
Total 229 26,243 47 2,812 1 120 277 29,175
===============================================================================================================
extendicare at a glance
[MAP OF NORTH AMERICA]
Assisted Living and
Nursing Centres Retirement Centres Hospitals/Units Total
- ----------------------------------------------------------------------------------------------------------------
Number of Resident Number of Resident Number of Resident Number of Resident
at December 31, 2002 Facilities Capacity Facilities Capacity Facilities Capacity Facilities Capacity
- ----------------------------------------------------------------------------------------------------------------
BY TYPE OF OWNERSHIP
United States
Owned 129 13,035 35 1,691 - - 164 14,726
Leased 10 1,066 1 65 - - 11 1,131
Managed 17 2,256 5 156 - - 22 2,412
- ---------------------------------------------------------------------------------------------------------------
Total United States 156 16,357 41 1,912 - - 197 18,269
- ---------------------------------------------------------------------------------------------------------------
Canada
Owned 46 6,239 1 73 - - 47 6,312
Leased 6 693 - 76 - - 6 769
Managed 21 2,954 5 751 1 120 27 3,825
- ---------------------------------------------------------------------------------------------------------------
Total Canada 73 9,886 6 900 1 120 80 10,906
- ---------------------------------------------------------------------------------------------------------------
Total 229 26,243 47 2,812 1 120 277 29,175
===============================================================================================================
SHAREHOLDER INFORMATION
EXTENDICARE INC.
3000 Steeles Avenue East
Markham, Ontario L3R 9W2
Tel: (905) 470-4000
Fax: (905) 470-5588
www.extendicare.com
email: wsmith@extendicare.com
SHAREHOLDER INQUIRIES
Jillian Fountain
Corporate Secretary
Tel: (905) 470-5534
INVESTOR RELATIONS
Wendy Smith
Tel: (905) 470-5584
TRANSFER AGENT
Computershare Trust Company of Canada
Tel: (800) 564-6253
www.computershare.com
ANNUAL MEETING
Shareholders are invited to attend the Annual Meeting of Extendicare Inc. on
Thursday, May 8, 2003 at 11:00 a.m. at the Glenn Gould Studio, Canadian
Broadcasting Centre, 250 Front Street West, Toronto, Ontario, Canada.
CORPORATE INFORMATION
Extendicare Inc.'s 2002 Annual Report is available for viewing or printing on
the Company's Website at www.extendicare.com, in addition to news releases,
quarterly reports and other filings with the securities commissions. Printed
copies are available upon request to the Corporate Secretary.
STOCK EXCHANGE LISTINGS
Toronto Stock Exchange
New York Stock Exchange (EXE.A only)
SHARE INFORMATION
Year-end Closing Market Price on the TSX
----------------------------------------
Shares Outstanding
Shares Stock Symbol at December 31, 2002 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Multiple Voting Shares EXE 12,557,092 $ 4.70 $ 5.27 $ 3.50
Subordinate Voting Shares EXE.A 57,107,011 4.20 5.25 3.40
Class I Preferred Shares
Cumulative Redeemable, Series 2 EXE.PR.B 139,705 23.00 24.00 24.00
Adjustable Dividend, Series 3 EXE.PR.C 93,310 20.10 23.55 14.50
Adjustable Dividend, Series 4 EXE.PR.D 241,240 21.90 21.00 21.00
Class II Preferred Shares, Series 1 EXE.PR.E 382,979 17.00 16.06 17.00
- --------------------------------------------------------------------------------------------------------------------
QUARTERLY PRICE RANGES OF SUBORDINATE VOTING SHARES (EXE.A) ON THE TSX
1st 2nd 3rd 4th
- -------------------------------------------------------
2002: High $ 6.67 $ 6.40 $ 5.51 $ 4.89
Low 3.95 5.15 3.51 3.60
2001: High 4.45 6.85 8.25 7.58
Low 3.25 4.13 5.55 4.87
- ------------------------------------------------------
TRADING PRICE OF SUBORDINATE VOTING SHARES (EXE.A) ON THE TSX
[LINE GRAPH]
CORE VALUES
Companies, like people, make choices based on values that they hold. Our values
guide our behaviour and, in many ways, determine our future.
For Extendicare, our values are our compass. They give us direction and purpose.
That's why our commitment to our shareholders, residents, patients and employees
remains the same today as it was yesterday. And it is the same today as it will
be tomorrow.
We owe them unwavering dedication to the core values that have been the
foundation of our Company for 35 years and will continue to drive its success.
- Success means providing quality services to residents and patients, who
entrust us with their health and dignity. We endeavour to make each day
an affirmation of life.
- Success means energizing employees to live our vision of excellence.
Good people are our greatest strength. That is why we strive to create
enjoyable and rewarding work environments.
- Success means achieving profitable growth over the long term to create
value for our shareholders. We are committed to communicating
effectively with them.
Success means embracing these values. They define Extendicare.
[EXTENDICARE LOGO]
3000 Steeles Avenue East
Markham, Ontario, Canada L3R 9W2
www.extendicare.com