-----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, EGKcF4Y45MDxAqnQTJhP/eP0BliIfZQj6e9XGC+Gkh1uXkm+lTjiCpdtxdbepa1k GRwqlpfHrqH7Nd0Aw9/NSg== 0000950152-03-007423.txt : 20030808 0000950152-03-007423.hdr.sgml : 20030808 20030808091013 ACCESSION NUMBER: 0000950152-03-007423 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANOR CARE INC CENTRAL INDEX KEY: 0000878736 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 341687107 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10858 FILM NUMBER: 03830187 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 l02012ae10vq.txt MANOR CARE, INC. 10-Q/QTR END 6-30-2003 ================================================================================ 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, 2003 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 by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). 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, 2003. Common stock, $0.01 par value - 89,077,702 shares ================================================================================ TABLE OF CONTENTS
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 2003 and December 31, 2002................................. 3 Consolidated Statements of Income - Three months and six months ended June 30, 2003 and 2002............ 4 Consolidated Statements of Cash Flows - Six months ended June 30, 2003 and 2002............................. 5 Notes to Consolidated Financial Statements.......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 22 Item 4. Controls and Procedures............................................. 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................... 24 Item 2. Changes in Securities and Use of Proceeds........................... 24 Item 3. Defaults Upon Senior Securities..................................... 24 Item 4. Submission of Matters to a Vote of Security Holders................. 24 Item 5. Other Information................................................... 25 Item 6. Exhibits and Reports on Form 8-K.................................... 25 SIGNATURES...................................................................... 26 EXHIBIT INDEX................................................................... 27
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. MANOR CARE, INC. Consolidated Balance Sheets
June 30, December 31, 2003 2002 ---- ---- (Unaudited) (Note 1) (In thousands, except per share data) ASSETS Current assets: Cash and cash equivalents $ 76,503 $ 30,554 Receivables, less allowances for doubtful accounts of $56,853 and $60,093, respectively 372,374 385,960 Prepaid expenses and other assets 38,570 23,974 Deferred income taxes 58,341 70,329 ------------ ------------ Total current assets 545,788 510,817 Property and equipment, net of accumulated depreciation of $758,882 and $704,348, respectively 1,524,586 1,534,339 Goodwill 87,752 85,814 Intangible assets, net of amortization of $3,325 and $9,234, respectively 10,074 10,457 Other assets 168,807 165,505 ------------ ------------ Total assets $ 2,337,007 $ 2,306,932 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 95,227 $ 95,347 Employee compensation and benefits 144,255 109,628 Accrued insurance liabilities 98,049 109,385 Income tax payable 9,931 11,657 Other accrued liabilities 58,725 48,424 Long-term debt due within one year 9,091 267,423 ------------ ------------ Total current liabilities 415,278 641,864 Long-term debt 664,493 373,112 Deferred income taxes 105,144 79,073 Other liabilities 210,663 196,836 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 347,253 349,304 Retained earnings 1,055,957 1,006,295 Accumulated other comprehensive loss (740) (11) ------------ ------------ 1,403,580 1,356,698 Less treasury stock, at cost (22.0 and 16.0 million shares, respectively) (462,151) (340,651) ------------ ------------ Total shareholders' equity 941,429 1,016,047 ------------ ------------ Total liabilities and shareholders' equity $ 2,337,007 $ 2,306,932 ============ ============
See notes to consolidated financial statements. 3 MANOR CARE, INC. Consolidated Statements Of Income (Unaudited)
Three Months Ended June 30 Six Months Ended June 30 --------------------------- ------------------------------ 2003 2002 2003 2002 --------- --------- ----------- ----------- (In thousands, except earnings per share) Revenues $ 750,586 $ 728,435 $ 1,481,106 $ 1,444,422 Expenses: Operating 633,024 603,467 1,244,511 1,193,797 General and administrative 46,637 30,421 77,346 60,348 Depreciation and amortization 31,863 31,587 63,537 63,356 Asset impairment 24,876 24,876 --------- --------- ----------- ----------- 711,524 690,351 1,385,394 1,342,377 --------- --------- ----------- ----------- Income before other income (expenses) and income taxes 39,062 38,084 95,712 102,045 Other income (expenses): Interest expense (11,317) (9,388) (20,192) (19,332) Gain on sale of assets 2,134 31,197 2,323 30,253 Equity in earnings of affiliated companies 1,599 1,137 3,140 1,873 Interest income and other 431 273 1,132 882 --------- --------- ----------- ----------- Total other income (expenses), net (7,153) 23,219 (13,597) 13,676 --------- --------- ----------- ----------- Income before income taxes 31,909 61,303 82,115 115,721 Income taxes 12,990 23,295 32,068 43,974 --------- --------- ----------- ----------- Income before cumulative effect 18,919 38,008 50,047 71,747 Cumulative effect of change in accounting for goodwill (1,314) --------- --------- ----------- ----------- Net income $ 18,919 $ 38,008 $ 50,047 $ 70,433 ========= ========= ========== ========== Earnings per share - basic: Income before cumulative effect $ .21 $ .38 $ .55 $ .72 Cumulative effect (.01) --------- --------- ----------- ----------- Net income $ .21 $ .38 $ .55 $ .70 (a) ========= ========= ========== ========== Earnings per share - diluted: Income before cumulative effect $ .21 $ .38 $ .54 $ .71 Cumulative effect (.01) --------- --------- ----------- ----------- Net income $ .21 $ .38 $ .54 $ .69 (a) ========= ========= ========== ========== Weighted-average shares: Basic 89,158 99,109 91,396 100,096 Diluted 90,433 100,561 92,456 101,348
(a) Doesn't add due to rounding See notes to consolidated financial statements. 4 MANOR CARE, INC. Consolidated Statements Of Cash Flows (Unaudited)
Six Months Ended June 30 ----------------------------- 2003 2002 ---------- --------- (In thousands) OPERATING ACTIVITIES Net income $ 50,047 $ 70,433 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 63,537 63,356 Asset impairment and other non-cash charges 26,190 Provision for bad debts 15,630 21,618 Deferred income taxes 38,059 Net gain on sale of assets (2,323) (30,253) Equity in earnings of affiliated companies (3,140) (1,873) Changes in assets and liabilities, excluding sold facilities and acquisitions: Receivables (1,814) (39,170) Prepaid expenses and other assets (13,185) 21,939 Liabilities 46,971 (7,240) ---------- --------- Total adjustments 143,735 54,567 ---------- --------- Net cash provided by operating activities 193,782 125,000 ---------- --------- INVESTING ACTIVITIES Investment in property and equipment (46,297) (44,321) Investment in systems development (2,175) (1,851) Acquisitions (12,436) (35,430) Proceeds from sale of assets 12,705 84,174 Adjustment of acquisition of assets from development joint venture 1,183 ---------- --------- Net cash provided by (used in) investing activities (48,203) 3,755 ---------- --------- FINANCING ACTIVITIES Net repayments under bank credit agreements (259,300) (54,000) Principal payments of long-term debt (7,023) (4,432) Proceeds from issuance of senior notes 299,372 Payment of deferred financing costs (7,109) Proceeds from exercise of stock options 471 56 Purchase of common stock for treasury (126,041) (83,088) ---------- --------- Net cash used in financing activities (99,630) (141,464) ---------- --------- Net increase (decrease) in cash and cash equivalents 45,949 (12,709) Cash and cash equivalents at beginning of period 30,554 26,691 ---------- --------- Cash and cash equivalents at end of period $ 76,503 $ 13,982 ========== =========
See notes to consolidated financial statements. 5 MANOR CARE, INC. Notes To Consolidated Financial Statements (Unaudited) NOTE 1 - ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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. Operating results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States 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, 2002. At June 30, 2003, the Company operated 293 skilled nursing facilities, 70 assisted living facilities, 91 outpatient therapy clinics and 88 home health and hospice offices. COMPREHENSIVE INCOME Comprehensive income represents the sum of net income plus other comprehensive income (loss). Comprehensive income totaled $18.0 million and $49.3 million for the three and six months ended June 30, 2003, respectively, and $37.6 million and $70.2 million for the three and six months ended June 30, 2002, respectively. The other comprehensive loss in 2003 primarily represents the reversal of the unrealized gain on investments due to the sale of the securities underlying the investments. The other comprehensive loss in 2002 primarily relates to the unrealized loss on investments. INSURANCE LIABILITIES At June 30, 2003 and December 31, 2002, the workers' compensation liability consisted of short-term reserves of $27.1 million and $26.3 million, respectively, which were included in accrued insurance liabilities, and long-term reserves of $41.5 million and $32.5 million, respectively, which were included in other long-term liabilities. The expense for workers' 6 compensation was $12.2 million and $24.5 million for the three and six months ended June 30, 2003, respectively, and $14.3 million and $25.4 million for the three and six months ended June 30, 2002, respectively. Although management believes that the Company's liability reserves are adequate, there can be no assurance that these reserves will not require material adjustment in future periods. See Note 7 for discussion of the Company's general and professional liability. STOCK-BASED COMPENSATION Stock options are granted for a fixed number of shares to employees with an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for the stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, the Company recognizes no compensation expense for the stock options. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation for options granted since 1995.
Three months ended Six months ended June 30 June 30 ------------------------- ----------------------------- 2003 2002 2003 2002 --------- --------- ---------- --------- (In thousands, except earnings per share) Net income - as reported $ 18,919 $ 38,008 $ 50,047 $ 70,433 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (2,110) (2,138) (3,911) (3,645) --------- --------- ---------- --------- Net income - pro forma $ 16,809 $ 35,870 $ 46,136 $ 66,788 ========= ========= ========== ========= Earnings per share - as reported: Basic $ .21 $ .38 $ .55 $ .70 Diluted $ .21 $ .38 $ .54 $ .69 Earnings per share - pro forma: Basic $ .19 $ .36 $ .50 $ .67 Diluted $ .19 $ .36 $ .50 $ .66
7 INTEREST RATE SWAP AGREEMENTS Interest rate swap agreements are considered to be derivative financial instruments that must be recognized on the balance sheet at fair value. The Company's interest rate swap agreements have been formally designated to hedge certain fixed-rate senior notes and are considered to be effective fair value hedges based on meeting certain hedge criteria. The fair value of the interest rate swap agreements affects only the balance sheet and is recorded as a non-current asset or liability with an offsetting adjustment to the underlying senior note. The net interest amounts paid or received and net amounts accrued through the end of the accounting period are included in interest expense. NEW ACCOUNTING STANDARD In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51" (the Interpretation). The Interpretation requires the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise that has a controlling financial interest through ownership of a majority voting interest in the entity. The Interpretation provides specific guidance on determining whether an entity is considered a variable interest entity (VIE). A subsidiary of the Company leases the Company's corporate headquarters from an unconsolidated entity (the lessor) under an operating lease, which expires in January 2009. The lessor has invested capital at risk exceeding 3 percent of the assets of the transaction with the remainder being financed through a debt obligation. In the Company's March 2003 Form 10-Q, the Company stated that it expected to consolidate its headquarters under this Interpretation. After additional research, the Company determined that it is prohibited from consolidating its headquarters based on the legal entity that owns the building. The building is currently owned by a legal entity that includes other operations of the lessor, and, accordingly is not a VIE. If the lessor had created a separate legal entity to acquire the building, then this entity would be a VIE. Because of the difference in legal form, different accounting may result when the substance of the transaction is similar. As a result, the Company will continue to account for the arrangement as an operating lease. Accordingly, neither the leased corporate headquarters nor the related debt will be reported in the Company's balance sheet. 8 NOTE 2 - REVENUES Revenues for certain health care services are as follows:
Three Months Ended Six Months Ended June 30 June 30 ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- (In thousands) Skilled nursing and assisted living services $ 640,515 $ 625,821 $1,270,484 $1,234,118 Home health and hospice services 83,744 72,898 156,632 139,624 Rehabilitation services (excludes intercompany revenues) 21,574 22,477 42,498 43,361 Hospital care 5,383 21,344 Other services 4,753 1,856 11,492 5,975 ---------- ---------- ---------- ---------- $ 750,586 $ 728,435 $1,481,106 $1,444,422 ========== ========== ========== ==========
NOTE 3 - DEBT Debt consists of the following:
June 30, December 31, 2003 2002 -------- -------- (In thousands) Five Year Agreement $259,300 7.5% Senior Notes, net of discount $149,731 149,795 8% Senior Notes 199,689 200,000 6.25% Senior Notes, net of discount 199,385 2.125% Convertible Senior Notes 100,000 Mortgages and other notes 19,748 26,325 Capital lease obligations 5,031 5,115 -------- -------- 673,584 640,535 Less: Amounts due within one year 9,091 267,423 -------- -------- Long-term debt $664,493 $373,112 ======== ========
In April 2003, the Company refinanced its five-year , $500 million revolving credit facility that was scheduled to mature September 24, 2003. The financing package included a new three-year $200 million revolving credit facility, $200 million of 6.25% Senior Notes due in 2013 and $100 million of 2.125% Convertible Senior Notes due in 2023. The Company plans to voluntarily increase the interest rate on the Convertible Senior Notes to 2.625% effective August 20, 2003 as these investors will not otherwise participate in the common stock dividend. See Note 9 for a discussion of the cash dividend. 9 Manor Care, Inc.'s three-year $200 million revolving credit facility was established with a group of banks. As of June 30, 2003, there were no loans outstanding under this agreement and after consideration of usage for letters of credit, there was $161.4 million available for future borrowing. Loans under the three-year credit facility are guaranteed by substantially all of the Company's subsidiaries. This credit agreement contains various covenants, restrictions and events of default. Among other things, these provisions require the Company to maintain certain financial ratios and impose certain limits on its ability to incur indebtedness, create liens, pay dividends, repurchase stock, dispose of assets and make acquisitions. Loans under the three-year credit facility bear interest at variable rates that reflect, at the election of the Company, the agent bank's base lending rate or an increment over Eurodollar indices, depending on the quarterly performance of a key ratio. The three-year credit facility also provides for a fee on the total amount of the facility, depending on the performance of the same key ratio. In addition to direct borrowings, the three-year credit facility may be used to support the issuance of up to $100 million of letters of credit. The Company issued $200 million principal amount of 6.25% Senior Notes due in 2013, priced at 99.686 percent to yield 6.29 percent. Interest is payable each May 1 and November 1, beginning November 1, 2003. The Company also issued $100 million principal amount of 2.125% Convertible Senior Notes due in 2023, priced at 100 percent. Interest is payable each April 15 and October 15, beginning October 15, 2003. The Company may not redeem the Convertible Senior Notes before April 15, 2010. Starting with the six-month period beginning April 15, 2010, the Company may be obligated to pay contingent interest to the holders of the Convertible Senior Notes under certain circumstances. The Company's obligation to pay contingent interest is considered to be an embedded derivative and the initial value is not material. The initial conversion price is $31.12 per share of common stock, equivalent to 32.1337 shares of the Company's common stock per $1,000 principal amount of notes. The conversion price is subject to adjustment in certain events. The holders of the Convertible Senior Notes may convert their notes into shares of the Company's common stock prior to the stated maturity at their option only under the following circumstances: (1) if the average of the last reported sales price of the Company's common stock for the 20 trading days immediately prior to the conversion date is greater than or equal to 120% of the conversion price per share of common stock on such conversion date; (2) if the notes have been called for redemption; (3) upon the occurrence of specified corporate transactions; and (4) if the credit ratings assigned to the notes decline to certain levels. The holders of the Convertible Senior Notes may require the Company to purchase all or a portion of their notes at any of five specified dates during the life of the notes, with the first such date being April 15, 2005. Except for the initial repurchase date, the Company may elect to satisfy the repurchase in whole or in part with common stock rather than cash. 10 The net proceeds of approximately $292.3 million from the closing of the three-year credit facility, Senior Notes and Convertible Senior Notes were used to repay borrowings outstanding under the Company's five-year revolving credit facility and to purchase $25.0 million of the Company's common stock concurrent with the refinancing transactions. The Company is in the process of registering the Senior Notes and Convertible Senior Notes with the Securities and Exchange Commission. The Senior Notes and Convertible Senior Notes are guaranteed by substantially all of the Company's subsidiaries. NOTE 4 - INTEREST RATE SWAP AGREEMENTS In May 2003 the Company entered into interest rate swap agreements on a notional amount of $200 million in order to provide a better balance of fixed and variable rate debt. These fair value hedge agreements effectively convert the interest rate on $100 million each of the Company's 7.5% and 8% Senior Notes to variable rates equal to six-month LIBOR plus a spread. The fair value of these agreements was immaterial at June 30, 2003. The adjustment to interest expense related to these agreements for the second quarter of 2003 was immaterial. NOTE 5 - STOCK REPURCHASE In April 2003, the Company's board of directors authorized management to spend an additional $100 million to purchase common stock through December 31, 2004. The Company purchased 6,282,147 shares in the first half of 2003 for $126.0 million, including the $25 million repurchased concurrently with the Convertible Senior Notes offering, and an additional 65,900 shares in July 2003 for $1.7 million. At July 31, 2003, the Company had remaining unused repurchase authority of $110.2 million. 11 NOTE 6 - EARNINGS PER SHARE The calculation of earnings per share (EPS) is as follows:
Three Months Ended Six Months Ended June 30 June 30 ------------------- ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- (In thousands, except earnings per share) Numerator: Income before cumulative effect $ 18,919 $ 38,008 $ 50,047 $ 71,747 ======== ======== ======== ======== Denominator: Denominator for basic EPS - weighted-average shares 89,158 99,109 91,396 100,096 Effect of dilutive securities: Stock options 926 1,147 738 964 Non-vested restricted stock 349 305 322 288 -------- -------- -------- -------- Denominator for diluted EPS - adjusted for weighted-average shares and assumed conversions 90,433 100,561 92,456 101,348 ======== ======== ======== ======== EPS - Income before cumulative effect: Basic $ .21 $ .38 $ .55 $ .72 Diluted $ .21 $ .38 $ .54 $ .71
Options to purchase shares of the Company's common stock that were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares were: 3.6 million shares with an average exercise price of $26 for the first half of 2003 and 2.1 million shares with an average exercise price of $32 for the first half of 2002. NOTE 7 - CONTINGENCIES One or more subsidiaries or affiliates of Manor Care of America, Inc. (MCA) 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 MCA. The Actions allege that Cenco transported and/or generated hazardous substances that came to be located at the sites in 12 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 MCA 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 its future environmental liabilities will be about $4.5 million. The Company has received insurance proceeds that will offset amounts due as a result of these exposures, depending upon the ultimate liabilities. The Company is party to various other legal matters arising in the ordinary course of business including patient care-related claims and litigation. At June 30, 2003 and December 31, 2002, the general and professional liability consisted of short-term reserves of $55.3 million and $50.3 million, respectively, which were included in accrued insurance liabilities, and long-term reserves of $117.5 million, which were included in other long-term liabilities. The expense for general and professional liability claims, premiums and administrative fees was $21.9 million and $42.7 million for the three and six months ended June 30, 2003, respectively, and $23.7 million and $41.3 million for the three and six months ended June 30, 2002, respectively, which was included in operating expenses. Although management believes that the Company's liability reserves are adequate, there can be no assurance that such provision and liability will not require material adjustment in future periods. NOTE 8 - SEGMENT INFORMATION The Company provides a range of health care services. The Company now has two reportable operating segments, long-term care, which includes the operation of skilled nursing and assisted living facilities, and home health and hospice. The home health and hospice segment met the 10 percent disclosure threshold requirement in the second quarter of 2003 and the Company restated its 2002 corresponding information. The "Other" category includes the non-reportable segments and corporate items. The revenues in the "Other" category include services for rehabilitation, hospital care and other services. The Company's hospital was sold on April 30, 2002. 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, asset impairment, other income and expense items, income taxes and cumulative effect. The other category is not comparative as the Company sold its hospital on April 30, 2002 and recorded $8.4 million of operating expenses in the second quarter of 2003 related to a proposed settlement of a review of certain Medicare cost reports filed by facilities of the former Manor Care, Inc. for the period 1992-1998. See Management's Discussion and Analysis for additional discussion of this expense. 13
Long-Term Home Heath Care and Hospice Other Total ---------- ----------- ---------- ---------- (In thousands) Three months ended June 30, 2003 Revenues from external customers $ 640,515 $ 83,744 $ 26,327 $ 750,586 Intercompany revenues 15,234 15,234 Depreciation and amortization 29,709 987 1,167 31,863 Operating margin 106,536 18,018 (6,993) 117,561 Three months ended June 30, 2002 Revenues from external customers 625,821 72,898 29,716 728,435 Intercompany revenues 14,197 14,197 Depreciation and amortization 29,703 876 1,008 31,587 Operating margin 116,178 13,280 (4,490) 124,968 Six months ended June 30, 2003 Revenues from external customers 1,270,484 156,632 53,990 1,481,106 Intercompany revenues 29,720 29,720 Depreciation and amortization 59,231 1,953 2,353 63,537 Operating margin 210,971 28,951 (3,327) 236,595 Six months ended June 30, 2002 Revenues from external customers 1,234,118 139,624 70,680 1,444,422 Intercompany revenues 27,734 27,734 Depreciation and amortization 58,383 1,341 3,632 63,356 Operating margin 231,770 23,125 (4,270) 250,625
NOTE 9 - SUBSEQUENT EVENT On July 25, 2003 the Company declared that it will pay a quarterly cash dividend of 12.5 cents per share of common stock. The dividend is payable August 20, 2003 to shareholders of record on August 7, 2003. The Company currently intends to declare and pay regular quarterly cash dividends; however, there can be no assurance that any dividends will be declared or paid in the future. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS - OVERVIEW Federal Medicare Payment Legislation. The Centers for Medicare & Medicaid Services, or CMS, made several announcements during the quarter that should increase Medicare reimbursement. CMS indicated that it would not implement case-mix refinements at least until fiscal 2005 and recommended a 3.0 percent market basket adjustment increase in Medicare payment rates for fiscal 2004. In June, CMS announced a proposal to increase nursing center Medicare reimbursement by an additional 3.26 percent beginning October 1, 2003. With the annual market basket adjustment and the correction proposed by CMS, we expect our fourth quarter Medicare revenues to increase by approximately $20 per patient day. CRITICAL ACCOUNTING POLICIES General and Professional Liability. Our general and professional reserves include amounts for patient care-related claims and incurred but not reported claims. We evaluated the adequacy of our general and professional liability reserves with our independent actuary during the second quarter of 2003 for all policy periods through May 31, 2003. The amount of our reserves is determined based on an estimation process that uses information obtained from both company-specific and industry data. The estimation process requires us to continuously monitor and evaluate the life cycle of the claims. Using data obtained from this monitoring and our assumptions about emerging trends, we along with our independent actuary develop information about the size of ultimate claims based on our historical experience and other available industry information. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle unpaid claims. Our assumptions take into consideration our internal efforts to contain our costs by reviewing our risk management programs, our operational and clinical initiatives, and other industry changes affecting the long-term care market. In comparing the first half of 2003 with the first half of 2002, the number of new claims is flat. We expect the average settlement costs per claim for the year 2003 to approximate 2002. Our accrual for current claims per month is $6.9 million. Although we believe our reserves are adequate, we can give you no assurance that this liability will not require material adjustment in future periods. 15 RESULTS OF OPERATIONS - QUARTER AND YEAR-TO-DATE JUNE 30, 2003 COMPARED WITH JUNE 30, 2002 Revenues. Our revenues increased $22.2 million, or 3 percent, from the second quarter of 2002 to 2003. Excluding the results of our hospital that we sold in April 2002, our revenues increased $27.5 million, or 4 percent. Revenues from our long-term care segment (skilled nursing and assisted living facilities) increased $14.7 million, or 2 percent, due to increases in rates/patient mix--$11.8 million and occupancy--$9.5 million that were partially offset by a decrease in capacity--$6.6 million. Our revenues from the home health and hospice segment increased $10.8 million, or 15 percent, primarily because of an increase in hospice patient days. Our revenues in the first half of 2003 increased $36.7 million, or 3 percent, compared with the first half of 2002. Excluding the results of our hospital that we sold in April 2002, our revenues increased $58.0 million, or 4 percent. Revenues from our long-term care segment increased $36.4 million, or 3 percent, due to increases in rates/patient mix--$29.8 million and occupancy--$15.2 million that were partially offset by a decrease in capacity--$8.6 million. Our revenues from the home health care and hospice segment increased $17.0 million, or 12 percent, primarily because of an increase in hospice patient days. Our average rates per day for the long-term care segment were as follows:
Second Quarter First Half ------------------- Increase ------------------ Increase 2003 2002 (Decrease) 2003 2002 (Decrease) ------- ------- ---------- ------- ------ ---------- Medicaid $131.29 $122.99 7% $129.78 $122.23 6% Private and other (skilled only) $188.66 $180.60 4% $188.78 $180.49 5% Medicare $311.19 $334.41 (7)% $310.75 $333.70 (7)%
We expect our Medicaid rates to increase only 2 percent in the third quarter compared to the prior year because of the difficult budgeting situations in most states. The increase in overall rates was also a result of a shift in the mix of our patients to a higher percentage of Medicare patients, even though the Medicare rate decreased. The rate decreased because certain of the increases in Medicare reimbursement for skilled nursing facilities provided for under the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999, or BBRA 99, and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, or BIPA 2000, expired on September 30, 2002, the so-called Medicare Cliff. 16 Our occupancy levels were as follows:
Second Quarter First Half -------------- ---------------- 2003 2002 2003 2002 ---- ---- ---- ---- Total 88% 87% 88% 87% Excluding start-up facilities 88% 88% 88% 88% Skilled nursing facilities 89% 88% 89% 88%
The quality mix of revenues from Medicare, private pay and insured patients that related to skilled nursing and assisted living facilities and rehabilitation operations was 67 percent for the second quarter and first half of 2003 and 68 percent for the second quarter and first half of 2002. Our bed capacity declined between the second quarter and first half of 2002 and 2003 primarily because we sold three skilled nursing facilities in May 2003 with 374 beds and closed or sold three skilled nursing facilities in 2002 with 498 beds, which was partially offset by opening three assisted living facilities in 2002 with 188 beds. Operating Expenses. Our operating expenses in the second quarter of 2003 increased $29.6 million, or 5 percent, compared with the second quarter of 2002. Excluding the results of our hospital that was sold on April 30, 2002, operating expenses increased $35.4 million, or 6 percent. During the second quarter of 2003, we recorded an expense of $8.4 million for a proposed settlement of a review of certain Medicare cost reports filed by facilities of the former Manor Care, Inc. prior to the implementation of the prospective payment system. This review, which was conducted by the Department of Justice and the Office of Inspector General of the Department of Health and Human Services, focused primarily on nursing cost allocations made in reliance upon instructions from the facilities' Medicare fiscal intermediary for the period 1992-1998. We believe the former Manor Care facilities were fully entitled to the reimbursement they received for these allocations. The agreement in principle, if ultimately approved and executed by all parties, will resolve any uncertainty over potential liability to the Medicare program. We have fully cooperated with the Department of Justice throughout the review. No complaint has been filed, nor has any subpoena been issued to the Company related to this matter. This agreement in principle is subject to final approvals within the Department of Justice and to negotiation of a definitive settlement agreement. We expect the settlement to be completed in the third quarter. Operating expenses from our long-term care segment increased $24.3 million, or 5 percent between the second quarters of 2002 and 2003. We attribute the largest portion ($15.8 million) of the long-term care operating expense increase to wages, temporary staffing and payroll overhead. Our other operating expense increase for this segment included ancillary costs, excluding internal labor, of $2.8 million. Ancillary costs, which include various types of therapies, medical supplies and prescription drugs, increased as a result of our more medically complex patients. Our general and professional liability expense decreased $1.2 million because 17 we recorded expense of $4.9 million in the second quarter of 2002 due to a court-ordered liquidation of one of our insurers. Excluding the $4.9 million charge, the expense increased as a result of an increase in the claims accrual and insurance premiums. Also, during the second quarter of 2002, we reversed $2.1 million of a 2001 charge that related to the damage award from an arbitration decision with NeighborCare Pharmacy Services, or NeighborCare, based on an amendment to the decision and award in June 2002. Our operating expenses from our home health and hospice segment increased $6.1 million, or 10 percent between the second quarters of 2002 and 2003. The increase related to labor costs of $2.9 million, ancillary costs including pharmaceuticals of $1.4 million and other direct nursing care costs, including medical equipment and supplies, of $1.6 million. Our operating expenses in the first half of 2003 increased $50.7 million, or 4 percent, compared with the first half of 2002. Excluding the results of our hospital that was sold on April 30, 2002, operating expenses increased $70.6 million, or 6 percent. See our discussion above for the $8.4 million expense recorded in the second quarter of 2003 related to Medicare cost reports. Operating expenses from our long-term care segment increased $57.2 million, or 6 percent, between the first half of 2002 and 2003. The largest portion of the long-term care operating expense increase of $36.1 million related to wages, temporary staffing and payroll overhead. Our other operating expense increases for this segment included ancillary costs, excluding internal labor, of $5.0 million and general and professional liability expense of $2.3 million. Excluding the $4.9 million charge mentioned above in 2002, our general and professional liability expense increased because of an increase in the claims accrual and insurance premiums. See our discussion above for the reversal of the $2.1 million charge in the second quarter of 2002 related to the NeighborCare arbitration. Our operating expenses from our home health and hospice segment increased $11.2 million, or 10 percent. The increase related to labor costs of $5.9 million, ancillary costs including pharmaceuticals of $2.8 million and other direct nursing care costs, including medical equipment and supplies, of $2.7 million. General and Administrative Expenses. Our general and administrative expenses increased $16.2 million and $17.0 million from the second quarters and first half of 2002 to 2003, respectively. An increase of $6.2 million related to restructuring split-dollar life insurance policies for officers and key employees as a result of the Sarbanes-Oxley Act of 2002 which prohibits employee loans in the form of prepaid premiums and recent tax law changes that make the internal buildup of cash surrender value taxable. The restructuring requires transferring a portion of the Company's share of the split-dollar life insurance polices to the employees. The other significant expense related to the increase in costs associated with our stock appreciation 18 rights and deferred compensation plans of $10.0 million, primarily from the 30 percent increase in our stock price this quarter. The major portion of this increase ($8.1 million) was included in general and administrative expenses and the remainder was an operating expense increase divided between our operating segments. Asset Impairment. During our quarterly reviews of long-lived assets in 2002, management determined that certain assets were impaired by $24.9 million. The impairment consisted of $19.9 million for certain long-lived assets and $5.0 million of our vision business' intangible assets. Refer to our Form 10-Q for the quarter ended June 30, 2002 for additional discussion. Interest Expense. Interest expense increased from the second quarter of 2002 to 2003 because of the higher interest rates associated with our fixed-rate senior notes issued in April 2003 compared with our variable-rate credit agreement debt that was paid off. The increase in interest expense also related to additional amortization of finance fees from the new senior notes. We expected our interest expense to increase by approximately $1.0 million per month as a result of the refinancing. See Note 3 to the consolidated financial statements for discussion of our debt refinancing. We entered into interest rate swap agreements in May 2003 on a notional amount of $200 million to hedge certain fixed-rate senior notes. These agreements effectively converted the interest rates of these notes to variable rates in order to provide a better balance of fixed and variable rate debt. The effect was not material for the second quarter of 2003. See Note 4 to the consolidated financial statements for discussion of our interest rate swap agreements. Gain on Sale of Assets. Our gain on sale of assets in the first half of 2002 primarily related to the gain of $31.1 million recognized on the sale of our hospital on April 30, 2002. Equity in Earnings of Affiliated Companies. Our equity earnings increased in the second quarter and first half of 2003 compared with 2002 primarily because of our ownership interests in two hospitals acquired on April 30, 2002. Income Taxes. Our effective tax rate increased to 40.7 percent in the second quarter of 2003 compared with 38.0 percent for the year 2002 as a result of non-deductible expense from restructuring the split-dollar life insurance policies. Cumulative Effect of Change in Accounting Principle. In July 2001, the Financial Accounting Standards Board issued Statement No. 142, "Goodwill and Other Intangible Assets," that we adopted January 1, 2002. Under this Statement, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually for impairment, or more frequently if impairment indicators arise. We completed our initial impairment test in the second quarter of 19 2002 and determined that $1.3 million of our goodwill related to our vision business was impaired. The impairment loss, with no tax effect, was recorded retroactive to January 1, 2002 as a cumulative effect of a change in accounting principle. FINANCIAL CONDITION - JUNE 30, 2003 AND DECEMBER 31, 2002 Prepaid expenses and other assets increased $14.6 million due to $7.6 million of restricted cash placed in an escrow account to prepay miscellaneous debt in the third quarter and $5.4 million for prepaid general liability insurance due to payment of premiums for the policy year beginning June 1, 2003. Property and equipment decreased $9.8 million primarily due to depreciation of $59.3 million and disposal of assets of $8.6 million. These decreases were partially offset by $46.3 million in new construction and renovations to existing facilities and a $10.1 million cash payment to exercise a purchase option on a leased facility. Accrued insurance liabilities decreased $11.3 million primarily due to an $18.6 million payment of an environmental liability. We also received insurance proceeds of $9.5 million in January 2003 to offset half of this payment, which reduced our receivables. Other accrued liabilities increased $10.3 million as a result of the $8.4 million reserve for a proposed settlement of a review of certain Medicare cost reports related to the former Manor Care, Inc. Our debt classification between current and long-term changed during the first half of 2003 as a result of the new financing package completed in April 2003. We issued $300.0 million of senior notes. With the proceeds, we paid off our expiring revolving credit facility that had a balance of $259.3 million at December 31, 2002 and was classified as a current liability. See Note 3 to the consolidated financial statements for additional discussion of the financing package. LIQUIDITY AND CAPITAL RESOURCES Cash Flows. During the first half of 2003, we satisfied our cash requirements from cash generated from operating activities. We used the cash principally for capital expenditures, acquisitions, to purchase our common stock and in the first quarter to pay down debt. Cash flows from operating activities were $193.8 million for the first half of 2003, an increase of $68.8 million from the first half of 2002. We have not paid any estimated federal tax payments in 2003 compared with $33.0 million in the first half of 2002 due to changes in tax laws and accounting methods for tax return purposes. During the first half of 2002, we paid $22.0 million to NeighborCare related to the arbitration decision and $35.3 million to the Internal Revenue Service related to the settlement agreement for company owned life insurance. 20 Investing Activities. Our expenditures for property and equipment of $46.3 million in the first half of 2003 included $8.1 million to construct new facilities and expand existing facilities. In the first quarter of 2003, we exercised a purchase option for $10.1 million on a facility that was previously leased. Debt Agreement. During April 2003, we refinanced our five-year, $500 million revolving credit agreement that was scheduled to mature September 24, 2003. The financing package included a new three-year $200 million revolving credit facility, $200 million of 6.25% Senior Notes due in 2013 and $100 million of 2.125% Convertible Senior Notes due in 2023. The net proceeds of approximately $292.3 million from the closing of these transactions were used to repay borrowings outstanding under our five-year revolving credit facility and to purchase $25.0 million of our common stock concurrent with the refinancing transactions. As of June 30, 2003, there were no loans outstanding under the new three-year revolving credit facility and after consideration of usage for letters of credit, there was $161.4 million available for future borrowing. Stock Purchase. During 2001 and 2002, our board of directors authorized us to spend up to $300 million to purchase our common stock with $200 million of the authorization expiring on December 31, 2003 and the remaining $100 million on December 31, 2004. In April 2003, our board authorized an additional $100 million through December 31, 2004. With these authorizations, we purchased 6,282,147 shares in the first half of 2003 for $126.0 million, which includes the $25.0 million repurchased concurrently with the Convertible Senior Notes offering, and an additional 65,900 shares in July 2003 for $1.7 million. We have $110.2 million remaining authority to repurchase our shares as of July 31. We may use the shares for internal stock option and 401(k) match programs and for other uses, such as possible future acquisitions. Cash Dividend. On July 25, 2003, the Company declared that it will pay a quarterly cash dividend of 12.5 cents per share of common stock to shareholders of record on August 7, 2003. This is the first dividend payment in the Company's history and will approximate $11.0 million payable on August 20, 2003. We intend to declare and pay regular quarterly cash dividends; however, there can be no assurance that any dividends will be declared or paid in the future. We believe that a certain amount of debt has an appropriate place in our overall capital structure and it is not our strategy to eliminate all debt financing. Because of our significant annual cash flow, we believe that we will be able to refinance the major pieces of our debt as they mature. We believe that our cash flow from operations will be sufficient to cover operating needs, future capital expenditure requirements, scheduled debt payments of miscellaneous small borrowing arrangements and capitalized leases, cash dividends and some share repurchase. It is likely that we will pursue growth from acquisitions, partnerships and other ventures that we 21 would fund from excess cash from operations, credit available under our bank credit agreement and other financing arrangements that are normally available in the marketplace. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This report may include forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. We identify forward-looking statements in this report by using words or phrases such as "anticipate," "believe," "estimate," "expect," "intend," "may be," "objective," "plan," "predict," "project," and "will be" and similar words or phrases, or the negative thereof. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by us in those statements include, among others: changes in the health care industry because of political and economic influences; changes in Medicare, Medicaid and certain private payors' reimbursement levels; existing government regulations, including applicable health care, tax and health and safety regulations, and changes in, or the failure to comply with, governmental regulations or the interpretations thereof; legislative proposals for health care reform; competition and general economic and business conditions; the ability to attract and retain qualified personnel; changes in current trends in the cost and volume of patient-care related claims and workers' compensation claims and in insurance costs related to such claims; other litigation and our ability to complete the settlement with the Department of Justice. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Item 3. Quantitative and Qualitative Disclosures About Market Risk Changes in U.S. interest rates expose us to market risks inherent with derivatives and other financial instruments. Our interest expense is most sensitive to changes in the general level of U.S. interest rates applicable to our U.S. dollar indebtedness. In the second quarter of 2003, we refinanced our five-year credit agreement prior to its scheduled maturity in September 2003 with a new three-year $200 million credit facility, $200 million of 6.25% Senior Notes due in 2013 and $100 million of 2.125% Convertible Senior Notes due in 2023. There are no loans 22 outstanding under our new credit facility at June 30, 2003. The Company plans to voluntarily increase the interest rate on the Convertible Senior Notes to 2.625% effective August 20, 2003 as these investors will not otherwise participate in the common stock dividend. We entered into interest rate swap agreements on a notional amount of $200 million in May 2003 in order to provide a better balance of fixed and variable rate debt. The agreements effectively convert the interest rate on $100 million each of our 7.5% and 8% Senior Notes to variable rates equal to six-month LIBOR plus a spread. The following table provides information about our significant interest rate risk at June 30, 2003 compared with December 31, 2002:
June 30, 2003 December 31, 2002 --------------------- ---------------------- Principal (Notional) Fair Principal Fair Amount Value Amount Value ------ ----- ------ ----- (In thousands) Variable rate debt: Five-year credit agreement, matures September 2003, interest at a Eurodollar-based rate plus .40% $ 259,300 $ 259,300 Fixed rate debt: Senior Notes: 7.5%, due June 2006 $ 150,000 $163,810 150,000 157,362 8%, due March 2008 200,000 223,440 200,000 217,072 6.25%, due April 2013 200,000 206,386 Convertible Senior Notes: 2.125%, due April 2023 100,000 113,250 Interest rate swaps - liability: Pay variable rate (6.24%) and receive fixed (7.5%), due June 2006 100,000 94 Pay variable rate (6.13%) and receive fixed (8%), due March 2008 100,000 311
23 Item 4. Controls and Procedures An evaluation was performed under the supervision and with the participation of our management, including the chief executive officer, or CEO, and chief financial officer, or CFO, of the effectiveness of the design and operation of our disclosure procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 2003. There have been no significant changes in our internal control over financial reporting in the second quarter of 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. See Note 7 - Contingencies in the notes to the consolidated financial statements for a discussion of litigation related to environmental matters and patient-care related claims. Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. At the Company's Annual Meeting of Stockholders held on May 6, 2003 the stockholders voted on the following items: a) elect Frederick V. Malek as a director, b) elect Robert G. Siefers as a director, c) elect M. Keith Weikel as a director, d) elect Thomas L. Young as a director, e) ratify the selection of Ernst & Young LLP as independent public accountants for the year ending December 31, 2003, f) approve the stockholder proposal to declassify the board and g) approve the stockholder proposal to index stock options. Items a-f were approved and Item g was not approved. The votes were as follows:
Item For Against Withheld Abstain - ---- --- ------- -------- ------- a 80,986,463 1,547,070 b 80,614,931 1,918,602 c 81,174,922 1,358,611 d 80,726,364 1,807,169 e 77,294,288 4,710,038 529,207 f 49,729,577 18,703,518 840,022 g 8,158,218 60,058,954 1,055,925
24 Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits
S-K Item 601 No. - -------- 31.1 Chief Executive Officer Certification 31.2 Chief Financial Officer Certification 32.1 Chief Executive Officer Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 32.2 Chief Financial Officer Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
(b) Reports on Form 8-K On April 10, 2003, Manor Care, Inc. filed a Form 8-K and under Item 9 included the April 9, 2003 press release announcing the Company's intention to refinance its existing credit facility and to issue $200 million of Senior Notes and $90 million of Senior Convertible Notes. The risk factors that were included in the preliminary Offering Memorandum in connection with the Senior Convertible Notes were included in the Form 8-K. On April 25, 2003, Manor Care, Inc. filed a Form 8-K and under Item 9 (the information was provided under Item 12 - Results of Operations and Financial Condition) furnished the April 25, 2003 press release reporting the Company's financial results for the first quarter of 2003. 25 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 8, 2003 By /s/ Geoffrey G. Meyers -------------------------------------------- Geoffrey G. Meyers, Executive Vice President and Chief Financial Officer 26 EXHIBIT INDEX
Exhibit - ------- 31.1 Chief Executive Officer Certification 31.2 Chief Financial Officer Certification 32.1 Chief Executive Officer Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 32.2 Chief Financial Officer Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
27 EX-31.1 3 l02012aexv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 CEO CERTIFICATION I, Paul A. Ormond, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Manor Care, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2003 /s/ Paul A. Ormond Chairman, President and Chief Executive Officer 28 EX-31.2 4 l02012aexv31w2.txt EXHIBIT 31.2 EXHIBIT 31.2 CFO CERTIFICATION I, Geoffrey G. Meyers, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Manor Care, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2003 /s/ Geoffrey G. Meyers Executive Vice President and Chief Financial Officer 29 EX-32.1 5 l02012aexv32w1.txt EXHBIT 32.1 EXHIBIT 32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 I, Paul A. Ormond, Chairman, President and Chief Executive Officer of Manor Care, Inc. (the Company) certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Quarterly Report of the Company on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company as of, and for, the periods presented in the Report. /s/ Paul A. Ormond Paul A. Ormond Chairman, President and Chief Executive Officer August 8, 2003 30 EX-32.2 6 l02012aexv32w2.txt EXHIBIT 32.2 EXHIBIT 32.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 I, Geoffrey G. Meyers, Executive Vice President and Chief Financial Officer of Manor Care, Inc. (the Company) certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Quarterly Report of the Company on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company as of, and for, the periods presented in the Report. /s/ Geoffrey G. Meyers Geoffrey G. Meyers Executive Vice President and Chief Financial Officer August 8, 2003 31 -----END PRIVACY-ENHANCED MESSAGE-----