-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LNThACrQ2wfvlxtj/9XbJvrJDWlNqtmXpm+LgrD0abwcJ8PrOvvC3S84fIE19L0H UQAvMDrfO403h7tvzI2OiQ== /in/edgar/work/20000810/0000950152-00-005806/0000950152-00-005806.txt : 20000921 0000950152-00-005806.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950152-00-005806 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANOR CARE INC CENTRAL INDEX KEY: 0000878736 STANDARD INDUSTRIAL CLASSIFICATION: [8051 ] IRS NUMBER: 341687107 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10858 FILM NUMBER: 690794 BUSINESS ADDRESS: STREET 1: 333 N. SUMMIT STREET CITY: TOLEDO STATE: OH ZIP: 43604-2617 BUSINESS PHONE: 4192525500 MAIL ADDRESS: STREET 1: P.O. BOX 10086 CITY: TOLEDO STATE: OH ZIP: 43699-0086 FORMER COMPANY: FORMER CONFORMED NAME: HCR MANOR CARE INC DATE OF NAME CHANGE: 19981001 FORMER COMPANY: FORMER CONFORMED NAME: HEALTH CARE & RETIREMENT CORP / DE DATE OF NAME CHANGE: 19930328 10-Q 1 e10-q.txt MANOR CARE, INC. 10-Q 1 ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-10858 MANOR CARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 34-1687107 - ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 333 N. SUMMIT STREET, TOLEDO, OHIO 43604-2617 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 252-5500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of business on July 31, 2000. Common stock, $0.01 par value -- 102,252,778 shares ================================================================================ 2 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Number ------ Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations - Three months and six months ended June 30, 2000 and 1999 4 Consolidated Statements of Cash Flows - Six months ended June 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17
2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. --------------------- MANOR CARE, INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 ----- ---- (Unaudited) (Note 1) (In thousands, except per share data) ASSETS Current assets: Cash and cash equivalents $ 30,913 $ 12,287 Receivables, less allowances for doubtful accounts of $61,687 and $58,975, respectively 319,484 294,449 Receivable from sale of assets 8,319 44,467 Prepaid expenses and other assets 30,023 28,409 Deferred income taxes 54,363 51,539 --------- --------- Total current assets 443,102 431,151 Property and equipment, net of accumulated depreciation of $662,729 and $596,391, respectively 1,580,998 1,550,507 Intangible assets, net of amortization 99,659 88,286 Net investment in Genesis preferred stock 19,000 Other assets 173,080 191,922 ----------- ----------- Total assets $2,296,839 $2,280,866 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 86,215 $ 86,614 Employee compensation and benefits 62,588 52,376 Accrued insurance liabilities 58,897 35,870 Income tax payable 4,226 14,906 Other accrued liabilities 48,675 33,266 Revolving loans 160,000 179,000 Long-term debt due within one year 5,874 6,617 ---------- ---------- Total current liabilities 426,475 408,649 Long-term debt 674,603 687,502 Deferred income taxes 119,756 126,754 Other liabilities 97,094 76,608 Minority interest 4,073 1,316 Shareholders' equity: Preferred stock, $.01 par value, 5 million shares authorized Common stock, $.01 par value, 300 million shares authorized, 111.0 million shares issued 1,110 1,110 Capital in excess of par value 358,756 358,958 Retained earnings 793,856 798,068 ---------- ---------- 1,153,722 1,158,136 Less treasury stock, at cost (8.8 and 8.7 million shares, respectively) (178,884) (178,099) ------------ ---------- Total shareholders' equity 974,838 980,037 ------------ ----------- Total liabilities and shareholders' equity $2,296,839 $2,280,866 ========== ==========
See notes to consolidated financial statements. 3 4 MANOR CARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (In thousands, except earnings per share) Revenues $581,247 $530,454 $1,151,165 $1,062,302 Expenses: Operating 497,570 419,248 1,000,502 827,797 General and administrative 24,844 23,200 50,207 44,525 Depreciation and amortization 30,023 28,503 59,698 57,015 Provision for restructuring charge, merger expenses, asset impairment and other related charges 3,816 10,707 -------- -------- ---------- ---------- 552,437 474,767 1,110,407 940,044 -------- -------- ---------- ---------- Income before other income (expenses), income taxes and minority interest 28,810 55,687 40,758 122,258 Other income (expenses): Interest expense (15,505) (13,249) (29,872) (26,246) Impairment of investments (20,000) (20,000) Dividend income 4,951 9,902 Equity in earnings (losses) of affiliated companies (115) 859 449 1,356 Interest income and other 750 310 1,301 989 -------- -------- ---------- ---------- Net other expenses (34,870) (7,129) (48,122) (13,999) -------- -------- ---------- ---------- Income (loss) before income taxes and minority interest (6,060) 48,558 (7,364) 108,259 Income taxes (benefit) (4,020) 14,942 (4,696) 33,615 Minority interest income 1,389 1,544 -------- -------- ---------- ---------- Income (loss) before extraordinary item (3,429) 33,616 (4,212) 74,644 Extraordinary item - gain on sale of assets (net of taxes of $4,405) 6,890 6,890 -------- -------- ---------- ---------- Net income (loss) $(3,429) $40,506 $(4,212) $81,534 ======== ======== ========== ========== Earnings per share - basic Income (loss) before extraordinary item $ (0.03) $ .30 $ (0.04) $ .67 Extraordinary item (net of taxes) .06 .06 -------- -------- ---------- ---------- Net income (loss) $ (0.03) $ .37* $ (0.04) $ .74* ======== ======== ========== ========== Earnings per share - diluted Income (loss) before extraordinary item $ (0.03) $ .30 $ (0.04) $ .67 Extraordinary item (net of taxes) .06 .06 -------- -------- ---------- ---------- Net income (loss) $ (0.03) $ .36 $ (0.04) $ .73 ======== ======== ========== ========== Weighted average shares: Basic 102,276 110,434 102,297 110,700 Diluted 102,276 111,689 102,297 111,967 *Doesn't add due to rounding
See notes to consolidated financial statements. 4 5 MANOR CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30 ------------------------ 2000 1999 ---- ---- (In thousands) OPERATING ACTIVITIES Net income (loss) $(4,212) $81,534 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 59,698 57,015 Asset impairment and other non-cash charges 8,160 Impairment of investments 20,000 Provision for bad debts 14,747 10,741 Minority interest 1,544 Deferred income taxes (9,822) Gain on sale of assets (447) (11,390) Equity in earnings of affiliated companies (449) (1,356) Changes in assets and liabilities, excluding sold facilities and acquisitions: Receivables (9,179) (68,999) Prepaid expenses and other assets 1,419 (7,497) Liabilities 41,417 (38,742) ------- ------- Total adjustments 118,928 (52,068) ------- ------- Net cash provided by operating activities 114,716 29,466 ------- ------- INVESTING ACTIVITIES Investment in property and equipment (64,982) (101,235) Investment in systems development (5,544) (3,988) Acquisition of businesses (12,402) (7,593) Proceeds from sale of assets 4,809 96,555 Increase due to consolidation of subsidiary 15,701 ------- ------- Net cash used in investing activities (62,418) (16,261) ------- ------- FINANCING ACTIVITIES Net borrowings (repayments) under bank credit agreements (28,500) 26,100 Principal payments of long-term debt (4,217) (2,371) Proceeds from stock options and common stock 111 1,128 Purchase of common stock for treasury (1,066) (56,419) ------- ------- Net cash used in financing activities (33,672) (31,562) ------- -------- Net increase (decrease) in cash and cash equivalents 18,626 (18,357) Cash and cash equivalents at beginning of period 12,287 33,718 ------- ------- Cash and cash equivalents at end of period $30,913 $15,361 ======= =======
See note to consolidated financial statements. 5 6 MANOR CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of Manor Care, Inc. (the Company), the interim data includes all adjustments necessary for a fair statement of the results of the interim periods and all such adjustments are of a normal recurring nature, except as discussed in Note 2 below and in Management's Discussion and Analysis regarding general and professional liability expense, impairment of investments and other reserves. Operating results for the six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Manor Care, Inc.'s annual report on Form 10-K for the year ended December 31, 1999. During the second quarter of 2000, the Company changed the accounting for its investment in In Home Health, Inc. (IHHI) from the equity method to consolidation due to an increase in ownership from 41 percent to 61 percent. Retroactive to January 1, 2000, the Company began consolidating 100 percent of the results of IHHI and deducting the minority interest share on an after-tax basis. IHHI's revenues were $24.2 million and $48.5 million for the three months and six months ended June 30, 2000, respectively, and operating expenses were $21.2 million and $42.8 million for the same periods, respectively. The Company has reclassified IHHI's expense categories to more closely conform to the Company's presentation. At June 30, 2000, the Company operated 301 skilled nursing and 47 assisted living facilities, 87 outpatient therapy clinics, one acute care hospital and 38 home health offices. IHHI provided its services through 39 offices in 20 markets located in 15 states. NOTE 2 - RESTRUCTURING CHARGE, MERGER EXPENSES, ASSET IMPAIRMENT AND OTHER RELATED CHARGES During the first half of 1999, the Company recorded restructuring and other charges of $10.7 million in connection with the HCR-Manor Care transaction. The liability related to the restructuring and other charges in 1998 and 1999 decreased from $2.0 million at December 31, 1999 to $0.2 million at June 30, 2000. The payments during the first half of 2000 were attributable to employee benefit and exit costs. 6 7 NOTE 3 - EARNINGS PER SHARE The calculation of earnings per share (EPS) is as follows:
Three months ended June 30 Six months ended June 30 -------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (In thousands, except earnings per share) Numerator: Income (loss) before extraordinary item [income (loss) available to common shareholders] $(3,429) $33,616 $(4,212) $74,644 ======= ======= ======= ======= Denominator: Denominator for basic EPS - weighted-average shares 102,276 110,434 102,297 110,700 Effect of dilutive securities: Stock options 1,255 1,267 ------- ------- ------- ------- Denominator for diluted EPS - adjusted for weighted-average shares and assumed conversions 102,276 111,689 102,297 111,967 ======= ======= ======= ======= EPS - income (loss) before extraordinary item Basic and Diluted $(.03) $.30 $(.04) $.67
The dilutive effect of stock options would have been 442,000 shares and 587,000 shares for the three months and six months ended June 30, 2000, respectively. These shares were not included in the calculation because the effect would be anti-dilutive with a net loss. NOTE 4 - SEGMENT INFORMATION The Company provides a range of health care services. The Company has one reportable operating segment, long-term care, which includes the operation of skilled nursing and assisted living facilities. The "Other" category includes the non-reportable segments and corporate items not considered to be an operating segment. The revenues in the "Other" category include services for rehabilitation, home health and hospital care. Asset information, including capital expenditures, is not reported by segment by the Company. Operating performance represents revenues less operating expenses and does not include general and administrative expense, depreciation and amortization, the provision for restructuring and other charges, other income and expense items, and income taxes. The "Other" category is not comparative as IHHI is included on a consolidated basis in 2000 and on the equity method in 1999. See Management's Discussion and Analysis for a discussion of unusual expenses recorded in the first and second quarter of 2000. 7 8
Long-term Care Other Total -------------- ----- ----- (In thousands) Three months ended June 30, 2000 Revenues from external customers $496,497 $84,750 $581,247 Intercompany revenues 6,992 6,992 Depreciation and amortization 28,321 1,702 30,023 Operating margin 89,157 (5,480) 83,677 Three months ended June 30, 1999 Revenues from external customers 474,391 56,063 530,454 Intercompany revenues 5,283 5,283 Depreciation and amortization 27,345 1,158 28,503 Operating margin 99,316 11,890 111,206 Six months ended June 30, 2000 Revenues from external customers 984,872 166,293 1,151,165 Intercompany revenues 13,400 13,400 Depreciation and amortization 54,363 5,335 59,698 Operating margin 145,966 4,697 150,663 Six months ended June 30, 1999 Revenues from external customers 947,863 114,439 1,062,302 Intercompany revenues 10,281 10,281 Depreciation and amortization 55,010 2,005 57,015 Operating margin 203,426 31,079 234,505
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which was postponed in Statement No. 137 and is now effective January 1, 2001. This Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. This Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of this Statement will have a significant effect on earnings or the financial position of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW During the second quarter of 2000, the Company changed the accounting for its investment in In Home Health, Inc. (IHHI) from the equity method to consolidation due to an increase in ownership from 41 percent to 61 percent. Retroactive to January 1, 2000, the Company began consolidating 100 percent of the results of IHHI and deducting the minority interest share on an after-tax basis. IHHI's revenues were $24.2 million and $48.5 million for the three months and six months ended June 30, 2000, respectively, and operating expenses were $21.2 million and $42.8 million for the same periods, respectively. The Company formed a strategic alliance with Alterra Healthcare Corporation (Alterra) in 1998. Two of the key provisions of the alliance included the sale of 26 centers and lease of two centers to Alterra in 1999 and the creation of a joint venture in 1999 to develop and construct specialized 8 9 assisted living residences in the Company's core markets. The Company, Alterra and a development joint venture have jointly and severally guaranteed a revolving line of credit. The line of credit was reduced from $200 million to $60 million on March 30, 2000. The reduction in the revolving credit agreement reflects a modification in the joint development intentions of the partners due in part to lower development activity than originally planned. At June 30, 2000, there was $57 million of guaranteed debt outstanding under the $60 million revolving line of credit. As a result of a change in the credit agreement and its relationship with Alterra, the Company purchased six facilities in the second quarter of 2000 that were originally contributed by the Company in September 1999 to various project companies of which the joint venture has a 10 percent equity interest. The Company paid $2.7 million in cash for the six facilities and reclassified its receivable related to developing these assets of $21.6 million to property and equipment. Of this amount, $14.4 million was a receivable at December 31, 1999. During the second quarter of 1999, the Company closed on three of the 26 assisted living facilities sold to Alterra for $13 million realizing a $0.6 million extraordinary gain and contributed fourteen properties to various project companies or partnerships for $57 million recognizing no gain or loss. RESULTS OF OPERATIONS As explained in the overview, the Company changed the accounting for its investment in IHHI retroactive to January 1, 2000. In the table below, IHHI's financial results have been removed from 2000 to be comparative with 1999.
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (In thousands) Revenues $557,023 $530,454 $1,102,697 $1,062,302 Expenses: Operating 476,333 419,248 957,647 827,797 General and administrative 22,981 23,200 46,585 44,525 Depreciation and amortization 29,721 28,503 59,089 57,015
Revenues for the three months ended June 30, 2000 increased $26.6 million or 5 percent as compared to the same period in 1999. By excluding the facilities sold or leased in 1999, revenues increased $35.0 million or 7 percent. Revenues from skilled nursing and assisted living facilities that are included in operations in 2000 increased $30.5 million or 7 percent due to increases in rates ($25.2 million) and capacity ($5.8 million) partially offset by a decrease in occupancy ($0.5 million). Revenues for the six months ended June 30, 2000 increased $40.4 million or 4 percent as compared to the same period in 1999. By excluding the facilities sold or leased in 1999, revenues increased $56.8 million or 5 percent. Revenues from skilled nursing and assisted living facilities that are included in operations in 2000 increased $53.4 million or 6 percent due to increases in rates ($37.7 million) and capacity ($19.6 million) partially offset by a decrease in occupancy ($3.9 million). The increase in rates was attributable to private, Medicaid and Medicare. The Medicare rate increase in the second quarter related to provisions in the Balanced Budget Refinement Act (BBRA 99) passed by Congress in November 1999 that included the temporary increase in payment for certain high cost nursing home patients and the benefit of early adoption to the new federal rates, which was completed in many of the Company's facilities in June. After 9 10 the end of the quarter, the Health Care Financing Administration announced that it would delay implementation of its refinement proposal related to the Medicare changes in the BBRA 99 that would have eliminated the increase for certain high cost nursing home patients. The growth in bed capacity between 1999 and 2000 was due to the opening of three skilled nursing facilities as well as other bed additions. The occupancy levels remained at 86 percent for the three months and six months ended June 30, 1999 and 2000. The quality mix of revenue from Medicare, private pay and insured patients related to skilled nursing and assisted living facilities and rehabilitation operations remained constant at 67 percent for the three months and six months ended June 30, 1999 and 2000. Operating expenses for the three months ended June 30, 2000 increased $57.1 million or 14 percent from the comparable period in 1999. By excluding facilities sold or leased in 1999, operating expenses increased $61.8 million or 15 percent. Operating expenses from skilled nursing and assisted living facilities that are included in operations in 2000 increased $37.0 million. These increases primarily related to labor costs, including temporary staffing, of $18.5 million and general and professional liability costs of $7.9 million (see further explanation below), as well as increases in ancillary costs and other general expenses. Operating expenses from the Company's transcription business increased $3.7 million. The unusual operating expenses for the second quarter totaled $17.7 million that included $3.2 million for expenses related to the discontinued Manor Care buy-out transaction, $7.3 million reserve for amounts due from Genesis Health Ventures, Inc. (Genesis) as a result of Genesis' bankruptcy filing on June 22, 2000 and $7.2 million reserve for amounts due from Alterra or the related development joint venture. Operating expenses for the six months ended June 30, 2000 increased $129.9 million or 16 percent from the comparable period in 1999. By excluding facilities sold or leased in 1999, operating expenses increased $144.0 million or 18 percent. Operating expenses from skilled nursing and assisted living facilities that are included in operations in 2000 increased $108.6 million, as discussed below. Operating expenses from the Company's transcription business increased $6.8 million, as well as the $17.7 million of unusual expenses recorded in the second quarter as discussed previously. The major portion of the skilled nursing and assisted living operating expense increase related to recording $33.6 million of general and professional liability expense in the first quarter of 2000 related to prior periods, dating back to the mid-1990s, as well as an increase in current period expense of $14.0 million for the first half of 2000 compared to last year. The additional expense was determined as a result of independent evaluations of the Company's growing potential liability for patient-related litigation despite a continuing good quality record and generally low historical claims experience. The evaluations were prepared in response to the dramatic increases in the average cost per claim and volume of lawsuits filed with the Company and in the long-term care industry in general. The adjustment reflects the additional litigation and settlement costs the Company could incur if there is no change in the current environment, particularly in the state of Florida. Independent evaluations of the industry's experience indicate the need to increase ongoing expense accruals for renewing policy periods and claims that could arise out of this year's experience. General and professional liability costs for the long-term care industry, especially in the state of Florida, have become increasingly expensive. The average cost of a claim in Florida in 1999 was two and one-half times higher than the rest of the country and industry providers in 10 11 the state are experiencing three times the number of claims compared to the national average. The Company and other affected providers are actively pursuing legislative and regulatory solutions that include tort reform. However, there can be no assurances that legislative changes will be made, or that any such change will have a positive impact on the current trend. The other operating expense increases for skilled nursing and assisted living facilities were attributable to labor costs, including temporary staffing, of $33.0 million, as well as increases in ancillary costs and other general expenses. General and administrative expense increased $2.1 million for the six months ended June 30, 2000 as compared to the same period in 1999 primarily as a result of legal expenses and general cost increases. Depreciation and amortization increased $1.2 million and $2.1 million for the three months and six months ended June 30, 2000 compared to the same periods in 1999 primarily due to computer software amortization. The Company recorded restructuring and other charges of $3.8 million and $10.7 million for the three months and six months ended June 30, 1999, respectively, in connection with the HCR-Manor Care transaction. The liability related to the restructuring and other charges in 1998 and 1999 decreased from $2.0 million at December 31, 1999 to $0.2 million at June 30, 2000. The payments during the first half of 2000 were attributable to employee benefit and exit costs. Interest expense increased $2.3 million and $3.6 million for the three months and six months ended June 30, 2000 as compared to the same periods in 1999 due to an increase in interest rates, as the average debt outstanding has declined. The impairment of investments of $20 million was attributable to Genesis' bankruptcy filing on June 22, 2000, which represented the remaining book value of Genesis' Series G Cumulative Convertible Preferred Stock (Series G Preferred Stock) as well as another Genesis investment. Dividend income decreased in comparison to the prior year due to two items. First, no dividend income was recorded on the Series G Preferred Stock in 2000. In 1999, the Company recorded $4.4 million of dividend income each quarter and then fully reserved the dividends at the end of the year. As a result of the nonpayment of the cumulative dividends for four consecutive quarters, all future dividends beginning in 2000 are payable in additional shares of Series G Preferred Stock. Based on Genesis' inability to pay cash dividends and its current operating performance, the Company is fully reserving the dividends in 2000. Second, as a result of changing the accounting for the Company's investment in IHHI in 2000, the preferred stock dividend of $0.6 million per quarter was eliminated in consolidation and was fully reported in 1999 under the equity method of accounting. The income tax benefit for the three months and six months ended June 30, 2000 included a $1.9 million benefit related to the consolidation of IHHI. IHHI's management concluded that the tax benefits related to net operating loss carryforwards are now more likely than not to be realized in the carryforward periods and therefore, changed the valuation allowance against the deferred tax assets associated with the net operating loss carryforwards established in 1997. The minority interest income for the three months and six months ended June 30, 2000 represented the minority owners' share of IHHI's net income for those periods. In 1999, IHHI's financial results were not consolidated, instead the Company's share of IHHI's earnings were recorded on the line item equity in earnings of affiliated companies. 11 12 In the second quarter of 1999, the Company recorded the gains on sale of assets as an extraordinary item as required after a business combination accounted for as a pooling of interests. The Company exercised a purchase option on Manor Care's corporate headquarters in Gaithersburg, Maryland and sold the property realizing net proceeds of $25 million and a $10.3 million gain ($6.3 million after tax). In conjunction with selling the Manor Care corporate headquarters, three interest rate swaps with a notional amount of $30.3 million that hedged the operating lease payments for the property were terminated for a gain of $0.5 million. The Company closed on three assisted living facilities sold to Alterra for $13 million realizing a $0.6 million gain ($0.3 million after tax). FINANCIAL CONDITION The June 30, 2000 balance sheet included the balances of IHHI. The most significant IHHI line items were current assets of $34.2 million, which included cash of $18.7 million and accounts receivable of $11.9 million, and current liabilities of $20.6 million. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which was postponed in Statement No. 137 and is now effective January 1, 2001. This Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. This Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of this Statement will have a significant effect on earnings or the financial position of the Company. LIQUIDITY AND CAPITAL RESOURCES During the first half of 2000, the Company satisfied its cash requirements from cash generated from operating activities. Cash flows from operating activities were $114.7 million for the first half of 2000, an increase of $85.3 million from the same period in 1999. The increase in liabilities was due to the additional accrual for general and professional liability claims discussed previously. The Company used the cash principally for capital expenditures, acquisition of businesses and repayment of debt. Expenditures for property and equipment for six months ended June 30 were $65.0 million in 2000 and $101.2 million in 1999 that included amounts for the construction of new facilities of $31.5 million in 2000 and $52.5 million in 1999. At June 30, 2000, outstanding borrowings aggregated $627.0 million under the bank credit agreements. After consideration of usage for letters of credit, the remaining credit availability under the agreements totaled $57.4 million. On May 4, 1999, the Board of Directors authorized the Company to purchase up to $200 million of its common stock through December 31, 2000, and on February 8, 2000, the Board authorized an additional $100 million through December 31, 2001. The Company purchased 90,000 shares for $1.1 million in the first half of 2000 and a total of 8.8 million shares for $181.4 million since May 1999. The shares may be used for internal stock option and 401(k) match programs and for other uses, such as possible future acquisitions. The Company believes that its cash flow from operations will be sufficient to cover debt payments, future capital expenditures and operating needs. It is likely that the Company will pursue growth from acquisitions, partnerships and other ventures that would be funded from excess cash from operations, credit available under the bank credit agreement and other financing arrangements that are normally available in the marketplace. 12 13 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Statements contained in this Form 10-Q which are not historical facts may be forward-looking statements within the meaning of federal law. Such forward-looking statements reflect management's beliefs and assumptions and are based on information currently available to management. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the regions in which the Company operates; industry capacity; demographic changes; existing government regulations and changes in, or the failure to comply with, governmental regulations; legislative proposals for health care reform; the ability to enter into managed care provider arrangements on acceptable terms; changes in Medicare and Medicaid reimbursement levels; changes in current trends in the cost and volume of general and professional liability claims; competition; changes in business strategy or development plans; and the ability to attract and retain qualified personnel. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth or referred to above in this paragraph. The Company disclaims any obligation to update such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes in the Company's market risks since December 31, 1999. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Since May of 1999, the Company and certain related persons and entities have been parties to several actions by or against Genesis Health Ventures, Inc. ("Genesis") and its subsidiary, NeighborCare Pharmacy Services, Inc. ("NeighborCare"). On or about June 22, 2000, Genesis and NeighborCare filed voluntary petitions for bankruptcy under Chapter 11 of the Bankruptcy Code, which effectively stayed the actions to the extent they had not been stayed already. The status of the various Genesis/NeighborCare lawsuits is discussed below. On May 7, 1999, Genesis filed suit in federal district court in Delaware against the Company, its wholly owned subsidiary, Manor Care of America, Inc. (formerly known as Manor Care, Inc. ("Manor Care")), its Chief Executive Officer, Paul A. Ormond, and its Chairman, Stewart Bainum, Jr. The complaint alleges that the defendants fraudulently induced Genesis to acquire, in August 1998, all of the outstanding stock of Vitalink Pharmacy Services, Inc. ("Vitalink"), an approximately 50 percent owned subsidiary of Manor Care, and that such alleged conduct constituted violations of Section 10(b) of the Securities Exchange Act of 1934, common law fraudulent misrepresentation and negligent misrepresentation. The suit also alleges that the Company's ownership in a partnership known as Heartland Healthcare Services violates a non-compete provision signed by Manor Care. The suit seeks compensatory and 13 14 punitive damages in excess of $100 million and preliminary and permanent injunctive relief enforcing the covenant not to compete. On June 10, 1999, Genesis filed an amended complaint that was substantively identical to the original complaint. On June 29, 1999, the defendants moved to dismiss or, in the alternative, to stay the lawsuit in its entirety. On or about March 22, 2000, the court granted the defendants' motion to stay the action in its entirety pending the arbitration discussed below, but denied the motion with respect to the alternative request to dismiss the action. The Company intends to vigorously defend the lawsuit. Although the ultimate outcome of the case is uncertain, management believes that it is not likely to have a material adverse effect on the financial condition of the Company. On August 27, 1999, Manor Care filed a separate action against Genesis concerning its 1998 acquisition of Vitalink. Manor Care's lawsuit charges Genesis with violations of Section 11 and Section 12 of the Securities Act of 1933, based upon Genesis' misrepresentations and/or misleading omissions in connection with Genesis' issuance of approximately $293 million of Genesis Preferred Stock as consideration to Manor Care for its approximately 50 percent interest in Vitalink. Manor Care seeks, among other things, compensatory damages and recission voiding Manor Care's purchase of the Genesis Preferred Stock and requiring Genesis to return to Manor Care the consideration that it paid at the time of the Vitalink sale. On November 23, 1999, Genesis moved to dismiss the lawsuit in its entirety. On or about January 18, 2000, Genesis moved to consolidate Manor Care's lawsuit with the suit that Genesis had filed in Delaware district court on May 7, 1999. Both of Genesis' motions were pending before the court as of the time the matter was automatically stayed by Genesis' June 22, 2000 bankruptcy filing. Additionally, on May 7, 1999, NeighborCare instituted a lawsuit in the Circuit Court for Baltimore City, Maryland (the "Maryland Action") against the Company, Manor Care and ManorCare Health Services, Inc. ("MHS") seeking damages, preliminary and permanent injunctive relief, and a declaratory judgment related to allegations that the defendants had improperly sought to terminate certain Master Service Agreements ("MSAs") between Vitalink (n/k/a NeighborCare) and MHS. NeighborCare also instituted arbitration proceedings (the "Arbitration") against the same defendants, seeking substantially the same relief as sought in the Maryland Action with respect to one of the MSAs at issue in the Maryland Action and also certain additional permanent relief with respect to that contract. On May 13, 1999, NeighborCare and the defendants agreed: (i) to consolidate the Maryland Action into the Arbitration; (ii) to dismiss the Maryland Action with prejudice as to jurisdiction and without prejudice as to the merits; and (iii) to stay termination of the agreements at issue until a decision can be reached in the Arbitration. NeighborCare has since dismissed the Maryland Action and consolidated certain of those claims into the Arbitration by filing an Amended Demand for Arbitration. On June 15, 1999, the defendants filed an answer and counterclaim, denying the material allegations in the Amended Demand, and they subsequently moved to dismiss three of the six claims alleged in the Amended Demand. On or about May 17, 2000, the Arbitrator granted in part the defendants' motion to dismiss, thereby dismissing two of NeighborCare's six claims. On or about May 23, 2000, based upon NeighborCare's representation that it would likely file for bankruptcy before it could complete the Arbitration hearing set for the weeks of June 12 and July 3, 2000, the Arbitrator vacated the hearing dates. The matter has been stayed since NeighborCare's June 22, 2000 bankruptcy filing. The Company intends to vigorously defend the Arbitration. Although the ultimate outcome of the Arbitration is uncertain, management believes that it is not likely to have a material adverse effect on the financial condition of the Company. 14 15 On July 26, 1999, NeighborCare filed an additional complaint in the Circuit Court for Baltimore County, Maryland against Omnicare, Inc. and Heartland Healthcare Services, Inc. (a partnership between subsidiaries of Omnicare, Inc. and the Company) seeking injunctive relief and compensatory and punitive damages. The complaint includes counts for tortious interference with Vitalink's purported contractual rights under the MSAs. On October 4, 1999, the defendants moved to dismiss or, in the alternative, to stay the lawsuit in its entirety. On November 12, 1999, the court stayed the matter pending the Arbitration. Although the ultimate outcome of the case is uncertain, management believes that it is not likely to have a material adverse effect on the financial condition of the Company. On December 22, 1999, Manor Care filed suit in federal court in Toledo, Ohio against Genesis; Cypress Group, L.L.C.; TPG Partners II, L.P.; and Nazem, Inc. The complaint alleges that the issuance by Genesis of its Series H and Series I Preferred Stock violated the terms of the Series G Preferred Stock and the terms of a rights agreement entered into between Genesis and Manor Care in connection with the Vitalink transaction. On February 29, 2000, the defendants moved to dismiss the case. That motion was pending before the court as of the time the matter was automatically stayed by Genesis' June 22, 2000 bankruptcy filing. One or more subsidiaries or affiliates of Manor Care have been identified as potentially responsible parties (PRPs) in a variety of actions (the Actions) relating to waste disposal sites which allegedly are subject to remedial action under the Comprehensive Environmental Response Compensation Liability Act, as amended, 42 U.S.C. Sections 9601 et seq. (CERCLA) and similar state laws. CERCLA imposes retroactive, strict joint and several liability on PRPs for the costs of hazardous waste clean-up. The Actions arise out of the alleged activities of Cenco, Incorporated and its subsidiary and affiliated companies (Cenco). Cenco was acquired in 1981 by a wholly owned subsidiary of Manor Care. The Actions allege that Cenco transported and/or generated hazardous substances that came to be located at the sites in question. Environmental proceedings such as the Actions may involve owners and/or operators of the hazardous waste site, multiple waste generators and multiple waste transportation disposal companies. Such proceedings involve efforts by governmental entities and/or private parties to allocate or recover site investigation and clean-up costs, which costs may be substantial. The potential liability exposure for currently pending environmental claims and litigation, without regard to insurance coverage, cannot be quantified with precision because of the inherent uncertainties of litigation in the Actions and the fact that the ultimate cost of the remedial actions for some of the waste disposal sites where Manor Care is alleged to be a potentially responsible party has not yet been quantified. Based upon its current assessment of the likely outcome of the Actions, the Company believes that the potential environmental liability exposure, after consideration of insurance coverage, is approximately $4.5 million. The Company is party to various other legal matters arising in the ordinary course of business including patient care-related claims and litigation. The Company believes that the resolution of such matters will not result in liability materially in excess of accounting accruals established with respect to such matters. 15 16 ITEM 2. CHANGES IN SECURITIES. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a)Exhibits S-K Item 601 No. 27 Financial Data Schedule for the six months ended June 30, 2000 27.1 Financial Data Schedule restated for the three months ended March 31, 2000 due to the consolidation of In Home Health, Inc. (b) Reports on Form 8-K None 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Manor Care, Inc. (Registrant) Date August 10, 2000 By /s/ Geoffrey G. Meyers ------------------ ---------------------- Geoffrey G. Meyers, Executive Vice President and Chief Financial Officer 17 18 EXHIBIT INDEX Exhibit - ------- 27 Financial Data Schedule for the six months ended June 30, 2000 27.1 Financial Data Schedule restated for the three months ended March 31, 2000 due to the consolidation of In Home Health, Inc. 18 EX-27 2 ex27.txt EXHIBIT 27
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 30,913 0 389,490 61,687 0 443,102 2,243,727 662,729 2,296,839 426,475 674,603 0 0 1,110 973,728 2,296,839 0 1,151,165 0 1,000,502 59,698 14,747 29,872 (7,364) (4,696) (4,212) 0 0 0 (4,212) (0.04) (0.04)
EX-27.1 3 ex27-1.txt EXHIBIT 27.1
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 25,486 0 408,028 61,825 0 453,442 2,185,677 635,393 2,313,004 422,984 677,582 0 0 1,110 977,128 2,313,004 0 569,918 0 502,932 29,675 9,140 14,367 (1,304) (676) (783) 0 0 0 (783) (0.01) (0.01)
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