Seniorsfirst by the Numbers (a summary of our 2008 audited financials)

As a former Chief Financial Officer, I still love the numbers and the messages they convey. Just ask my wife who has to put up with my quarterly financial statements of our personal home budget. She might even tell you her favorite story about the time I gave her a written test to see how well she really understood our personal finances. I don't know if I was more amazed at how well she actually did, or that she actually agreed to take it.

Anyway, the Seniorsfirst auditors have completed our audit for 2008 and issued audited financial statements, so I thought I would share my CEO perspective on them and give you an insiders view.

I'll start with Valley Manor.

First, the bad news.............operating revenue decreased 6% from the previous year based on a drop in overall occupancy. Our independent living apartments fell from 86% to 85% (we were at 91% in 2006 & 2005) and our assisted living apartments fell from 90% to 80% (we were 97% and 92% in 2006 & 2005 respectively).

Now, some good news.............excluding a write off of development costs in 2007, our 2008 operating expenses decreased 3%, primarily as a result of reduced variable costs associated with less occupancy. This certainly mitigated the effect of lost revenue, but still resulted in a loss from operations of $600,000. We knew this was the case and had reported the drop in occupancy and anticipated loss from operations all year round.

More bad news..........our non-operating revenue (contributions and investment earnings) took a big hit in 2008 like everyone else. The failing economy not only impacts our occupancy, but it impacts the level of contributions received from donors and took a huge bite out of our investments. While it is normal for a not-for-profit organization to subsidize operating losses with non-operating revenue, in 2008 we experienced a $600,000 non-operating loss in addition to our $600,000 operating loss. That computes to a total hit to our cumulative net assets of 1.2 million dollars for the year 2008!

Some positive perspective...........accounting standards require certain recognition of activity that doesn't always require an actual outlay of cash. In fact, our Valley Manor operations actually spun positive cash from operations in the amount of $225,000. We spent $500,000 on capital improvement related purchases and mortgage principal payments, for a net negative cash flow of $250,000. The $600,000 non-operating loss is primarily unrealized loss on market rate investments, which in theory can be recovered if and when the economy recovers.

A final perspective...........the Valley Manor fiscal operation and structure works at 90% occupancy. There is a huge upside potential if we can attain increased occupancy. We have recently initiated an "Occupancy Enhancement" program and, although it is still early, we have seen remarkable improvement in the first quarter of 2008. Our objective is to reach 90-92% occupancy which should result in an operating surplus sufficient to cover our cash outlays plus a reserve for future capital improvement needs.

Okay, lets talk about Kirkhaven and see how the failing economy impacted the nursing home business.

First, the good news................operating income actually increased a whooping 8% over the previous year. How did that happen you're probably wondering? First, we initiated a Medicare Maximization program that increased both our Medicare utilization and Medicare rate that resulted in over $650,000 additional Medicare related revenue. Second, our State Medicaid rate actually increased significantly due to a proposed new rate methodology that resulted in just over $560,000 additional Medicaid revenue (which still doesn't cover our costs).

Now, the bad news.............operating expenses increased a whooping 10% over the previous year. How could that be when inflation is running near 3% you're probably wondering? Don't we have expense budget controls? Good questions, so lets break it down and evaluate more closely. We can categorize our cost increases in 4 distinct buckets:

Benefit Costs- unfortunately, we don't have as much control over certain mandated or third-party benefit costs like pension, workers compensation, health insurance and unemployment insurance. These and other employee benefit costs increased over $400,000 or 31% from 2007.

Medicare Costs- our Medicare Maximization revenue didn't just "fall in our lap", we had to earn it. That meant investing in training, consultant fees, increased therapy, pharmacy, lab costs and staff. We earned an additional $650,000 in revenue, but our program cost investment increased our costs $140,000.

Corporate Overhead Allocations- when Valley Manor and Kirkhaven joined together under the Seniorsfirst corporate umbrella in 1999, we consolidated several back office corporate functions (executive administration, finance office, human resources, marketing, purchasing, etc.). The shared corporate overhead costs are allocated between both organizations based on specific utilization statistics. The consolidation of these now shared services has saved both organizations hundreds of thousands of dollars. In 2008, we revised the allocation percentages to recognize the reduction in utilization by Valley Manor when we discontinued or restructured several lines of business. Although we also reduced our total corporate costs, the revised allocations shifted more costs to Kirkhaven resulting in a net increase in corporate overhead costs of $60,000.

Bad Debt Allowance- it is normal for a nursing home to experience bad debts of approximately 1% of operating revenue. Historically, Kirkhaven has conservatively booked allowances for far less than this amount in some years. However, as time passes, evidence has shown that our actual experience is right around the 1% level. Based on this evidence, we booked a significant expense in 2008 to bring our bad debt allowance to a level consistent with the 1% historical experience. This resulted in a bad debt expense increase of $100,000 in 2008.

When you factor out these 4 primary cost increase drivers, the rest of our operating costs (wages, supplies, purchased services, facility costs, etc.) increased at a more reasonable rate of 3.3%. The net of all of this resulted in a loss from operations of just under $500,000.

More bad news.............similar to Valley Manor and the rest of the country, Kirkhaven's non-operating revenue did not fare well either. We experienced a net loss of $70,000 from contributions and related investment losses and a 1.6 million dollar loss related to our pension plan assets. That totals a 1.67 million dollar non-operating loss plus a $500,000 operating loss that took a 2.17 million dollar bite out of our cumulative net assets.

A final perspective...........again, accounting standards require certain recognition of some activities that don't require an actual cash outlay. In fact, Kirkhaven spun positive cash of $560,000 from operations, of which $500,000 was used for capital improvement purchases and mortgage principal payments, resulting in a modest $60,000 cash surplus. Similar to Valley Manor and other organizations, the non-operating loss on investments and the Kirkhaven pension are primarily unrealized market-rate investments, which should recover over time.

Still, Kirkhaven and other nursing homes are in a precarious position. The State budget crisis looms heavy and the likelihood is that the Medicaid rate increases of 2008 will evaporate in 2009. That will seriously challenge our revenue stream and put even more pressure on our Medicare maximization and expense containment efforts.

If all of this seems over-whelming, welcome to my world. There are days when I wonder why I bother. The challenges are huge and sometimes the regulatory and political nonsense can get to you. But I love the mission of Seniorsfirst and I even love the numbers, even if they don't always love you back. Thanks for visiting my Blog. Be sure to visit again as I keep you posted on how we survive in the "jungle".