-----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, Fp6Xb4TL7WIE0wTBAxxIh1lAl1aHM9dnIGFBu1NpSUSJcTJ+RB63iZemhbRGa1ut MocDlRN0/JsfhfuVXLPmSg== 0000950152-99-004604.txt : 19990518 0000950152-99-004604.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950152-99-004604 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCR MANOR CARE INC CENTRAL INDEX KEY: 0000878736 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 341687107 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10858 FILM NUMBER: 99626590 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: HEALTH CARE & RETIREMENT CORP / DE DATE OF NAME CHANGE: 19930328 10-Q 1 HCR 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 March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-10858 HCR 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 April 30, 1999. Common stock, $0.01 par value -- 111,031,752 shares ================================================================================ 2 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Number ------ Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 3 Consolidated Statements of Income - Three months ended March 31, 1999 and 1998 4 Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998 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 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15
2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. HCR MANOR CARE, INC. CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1999 1998 (Unaudited) (Note 1) ----------- -------- (In thousands) ASSETS Current assets: Cash and cash equivalents $ 14,402 $ 33,718 Receivables, less allowances for doubtful accounts of $55,589 and $58,125 350,038 314,883 Prepaid expenses and other assets 36,415 33,920 Deferred income taxes 35,235 35,235 ----------- ----------- Total current assets 436,090 417,756 Property and equipment, net of accumulated depreciation of $590,257 and $582,290 1,764,770 1,740,326 Intangible assets, net of amortization 86,541 80,802 Net investment in Genesis preferred stock 293,120 293,120 Other assets 181,944 183,136 ----------- ----------- Total assets $ 2,762,465 $ 2,715,140 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 100,609 $ 107,341 Employee compensation and benefits 47,019 60,976 Accrued insurance liabilities 20,503 26,313 Other accrued liabilities 82,962 72,534 Revolving loans 248,000 230,000 Long-term debt due within one year 6,421 6,547 ----------- ----------- Total current liabilities 505,514 503,711 Long-term debt 697,065 693,180 Deferred income taxes 245,564 245,564 Other liabilities 73,410 73,517 Stockholders' equity: Preferred stock, $.01 par value, 5 million shares authorized Common stock, $.01 par value, 300 million shares authorized, 111.0 and 110.9 million shares issued 1,110 1,109 Capital in excess of par value 357,069 356,333 Retained earnings 882,754 841,726 ----------- ----------- 1,240,933 1,199,168 Less treasury stock, at cost (21) ----------- ----------- Total stockholders' equity 1,240,912 1,199,168 ----------- ----------- Total liabilities and stockholders' equity $ 2,762,465 $ 2,715,140 =========== ===========
See notes to consolidated financial statements. 3 4 HCR MANOR CARE, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, ---------------------------- 1999 1998 ---- ---- (In thousands, except earnings per share) Revenues $ 531,848 $ 551,149 Expenses: Operating 408,549 423,314 General and administrative 21,325 27,778 Depreciation and amortization 28,512 28,383 Provision for restructuring charge, merger expenses, asset impairment and other related charges 6,891 --------- --------- 465,277 479,475 --------- --------- Income from continuing operations before other income (expenses) and income taxes 66,571 71,674 Other income (expenses): Interest expense (12,997) (10,675) Dividend income 4,951 600 Equity in earnings of affiliated companies 497 1,257 Interest income and other 679 1,360 --------- --------- Total other income (expenses) (6,870) (7,458) --------- --------- Income from continuing operations before income taxes 59,701 64,216 Income taxes 18,673 21,735 --------- --------- Income from continuing operations 41,028 42,481 Income from discontinued pharmacy operations (net of taxes of $3,938) 4,370 --------- --------- Income before cumulative effect 41,028 46,851 Cumulative effect of change in accounting principle (net of taxes of $3,759) (5,640) --------- --------- Net income $ 41,028 $ 41,211 ========= ========= Earnings per share - basic Income from continuing operations $ .37 $ .39 Income from discontinued pharmacy operations (net of taxes) .04 Cumulative effect (net of taxes) (.05) --------- --------- Net income $ .37 $ .38 ========= ========= Earnings per share - diluted Income from continuing operations $ .37 $ .38 Income from discontinued pharmacy operations (net of taxes) .04 Cumulative effect (net of taxes) (.05) --------- --------- Net income $ .37 $ .37 ========= ========= Weighted average shares: Basic 110,964 108,175 Diluted 112,242 111,165
See notes to consolidated financial statements. 4 5 HCR MANOR CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31 --------------------------- 1999 1998 ---- ---- (In thousands) OPERATING ACTIVITIES Net income $ 41,028 $ 41,211 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued pharmacy operations (4,370) Depreciation and amortization 28,512 29,053 Asset impairment and other non-cash charges 4,344 Provision for bad debts 3,290 6,865 Deferred income taxes (9,364) Gain (loss) on sale of assets 524 Equity in earnings of affiliated companies (497) (1,257) Changes in assets and liabilities, excluding sold facilities and acquisitions: Receivables (38,445) (29,624) Prepaid expenses and other assets (7,257) 106 Liabilities (16,393) 17,658 -------- -------- Total adjustments (26,446) 9,591 -------- -------- Net cash provided by continuing operations 14,582 50,802 Net cash provided by discontinued pharmacy operations 11,031 -------- -------- Net cash provided by operating activities 14,582 61,833 -------- -------- INVESTING ACTIVITIES Investment in property and equipment (51,779) (69,497) Investment in systems development (8,628) Acquisition of businesses (7,052) (5,964) Proceeds from sale of assets 2,243 2,241 Decrease due to deconsolidation of subsidiary (13,948) Other, net 7,277 -------- -------- Net cash used in investing activities of continuing operations (56,588) (88,519) Net cash used in investing activities of discontinued pharmacy operations (1,221) -------- -------- Net cash used in investing activities (56,588) (89,740) -------- -------- FINANCING ACTIVITIES Net borrowings under bank credit agreements 23,000 12,726 Principal payments of long-term debt (1,241) (2,934) Proceeds from exercise of stock options 931 1,008 Purchase of common stock for treasury (761) -------- -------- Net cash provided by financing activities of continuing operations 22,690 10,039 Net cash used in financing activities of discontinued operations (9,810) -------- -------- Net cash provided by financing activities 22,690 229 -------- -------- Net decrease in cash and cash equivalents (19,316) (27,678) Net Manor Care cash flows for December 1997 (3,213) Cash and cash equivalents at beginning of period 33,718 47,933 -------- -------- Cash and cash equivalents at end of period $ 14,402 $ 17,042 ======== ========
See notes to consolidated financial statements. 5 6 HCR MANOR CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - Basis of 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 HCR Manor Care, Inc. (HCR Manor Care or the Company), the interim data includes all adjustments necessary for a fair statement of the results of the interim periods and, except as discussed in Note 2, all such adjustments are of a normal recurring nature. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The balance sheet at December 31, 1998 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 HCR Manor Care, Inc.'s annual report on Form 10-K for the year ended December 31, 1998. At March 31, 1999, the Company operated 298 skilled and 69 assisted living facilities, 85 outpatient therapy clinics, 1 acute care hospital, 102 medical specialty units and 33 home health offices. NOTE 2 - Restructuring Charge, Merger Expenses, Asset Impairment and Other Related Charges The components of the charge consist of the following (in thousands):
Cash/ Liability at Liability at Non-cash 12/31/98 Charge Activity 3/31/99 -------- -------- ------ -------- ------- Manor Care planned spin-off: Employee benefits cash $ 617 $ 219 $ (351) $ 485 HCR and Manor Care merger: Employee benefits cash 28,294 (15,807) 12,487 Other exit costs cash 4,234 (132) 4,102 Other costs: Amortization non-cash 4,344 (4,344) Duplicate costs cash 2,328 (2,328) Other cash 1,000 1,000 -------- -------- -------- -------- Total $ 34,145 $ 6,891 $(22,962) $ 18,074 ======== ======== ======== ========
In Manor Care's planned spin-off, the employees did not receive lump-sum severance payments upon termination but receive their severance as biweekly payments through 1999. In the HCR and Manor Care merger, 531 employees received termination notices and at March 31, 1999 all but 25 employees have left the Company. Many employees who left the Company continue to be paid 6 7 severance payments on a biweekly basis through 1999. The non-cash charge for amortization primarily related to certain Manor Care software applications which are being used until the transition to HCR applications. The carrying value of the software is being amortized over its remaining estimated useful life ranging from six to nine months. Certain general and administrative costs of $2.3 million represented salaries and benefits for employees performing duplicate services in Toledo or Gaithersburg. NOTE 3 - Earnings Per Share The calculation of earnings per share (EPS) is as follows for the three months ended March 31:
1999 1998 ---- ---- (In thousands, except earnings per share) Numerator: Income from continuing operations (income available to common stockholders) $ 41,028 $ 42,481 ======== ======== Denominator: Denominator for basic EPS - weighted-average shares 110,964 108,175 Effect of dilutive securities: Stock options 1,278 2,990 -------- -------- Denominator for diluted EPS - adjusted for weighted-average shares and assumed conversions 112,242 111,165 ======== ======== EPS - income from continuing operations Basic $ .37 $ .39 Diluted $ .37 $ .38
NOTE 4 - Subsequent Events During the fourth quarter of 1998, the Company formed a strategic alliance with Alternative Living Services (Alterra). The key provisions of the alliance include four components: 1) sale of 28 centers to Alterra for approximately $200 million in cash, 2) creation of a joint venture to develop and construct up to $500 million of specialized assisted living residences in the Company's core markets over the next three to five years, 3) enter into a joint marketing and branding relationship with Alterra and 4) HCR Manor Care will form a new company to provide a variety of ancillary services to Alterra's resident population. During April 1999, the Company completed the sale of three centers to Alterra for approximately $17 million and entered into an ancillary services agreement with Alterra. The remaining asset sales and creation of the development joint venture are expected to be completed in the second quarter of 1999. In May 1999 the Company exercised the purchase option and simultaneously sold the Manor Care headquarters in Gaithersburg, Maryland with a net cash receipt of approximately $25 million. The gain on the sale will be recorded in the second quarter. On May 4, 1999 the Board of Directors of HCR Manor Care authorized the Company to purchase up to $200 million of its common stock through December 31, 2000. The shares may be used for internal stock option and 401(k) match programs and for other uses, such as possible future acquisitions. 7 8 NOTE 5 - New Accounting Pronouncements In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which is effective January 1, 2000. 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. Management has not determined when it will adopt this Statement nor has it determined the impact of adoption. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Revenues for the three months ended March 31, 1999 decreased $19.3 million or 4% to $531.8 million as compared to the same period in 1998. Revenues from skilled nursing and assisted living facilities decreased $19.7 million or 4% due to decreases in rates ($24.1 million) and occupancy ($21.0 million) partially offset by an increase in capacity ($25.4 million). The decline in rates was primarily attributable to transitioning the former HCR long-term care facilities onto the new Medicare Prospective Payment System (PPS). The occupancy levels for all facilities including start-ups were 89% for the three months ended March 31, 1998 compared to 86% for the same period in 1999. The occupancy for the Company's skilled nursing facilities declined from 89% in the first quarter of 1998 to 87% in the first quarter of 1999 reflecting the impact of transitioning onto the Medicare PPS and a decline in the private pay mix over the last year. The growth in bed capacity between the first quarter of 1999 and 1998 was due to the opening of 28 assisted living and 3 skilled facilities in the last nine months of 1998 and first three months of 1999. The quality mix of revenue from Medicare, private pay and insured patients related to skilled nursing and assisted living facilities and rehabilitation operations decreased from 73% for the three months ended March 31, 1998 to 68% for the same period in 1999. This decline was a result of the decrease in Medicare rates and census due to the Medicare PPS and a decline in the private pay mix. Operating expenses for the three months ended March 31, 1999 decreased $14.8 million or 3% to $408.5 million from the comparable period in 1998. Operating expenses from skilled nursing and assisted living facilities decreased $11.6 million or 3%. By excluding the effect of start-up facilities in the first quarter of 1999 and 1998, operating expenses decreased $19.2 million which was primarily attributable to the decline in ancillary costs as a result of the Medicare PPS. General and administrative expense decreased $6.5 million for the three months ended March 31, 1999 as compared to the same period in 1998 as a result of synergies obtained from combining HCR and Manor Care and reclassifying $2.3 million of duplicate costs to the provision for the restructuring charge and other related charges, as explained below. Depreciation and amortization remained constant between the first quarter of 1999 and 1998 due to additional depreciation for completion of new construction projects and renovations in the past year offset by a decline in the amortization of Manor Care's computer software and the Company's goodwill related to the write down of assets in 1998. 8 9 In the first quarter of 1999, the Company recorded a charge of $6.9 million. The components of the first quarter charge and the remaining liability at March 31, 1999 consist of the following (in thousands):
Cash/ Liability at Liability at Non-cash 12/31/98 Charge Activity 3/31/99 -------- -------- ------ -------- ------- Manor Care planned spin-off: Employee benefits cash $ 617 $ 219 $ (351) $ 485 HCR and Manor Care merger: Employee benefits cash 28,294 (15,807) 12,487 Other exit costs cash 4,234 (132) 4,102 Other costs: Amortization non-cash 4,344 (4,344) Duplicate costs cash 2,328 (2,328) Other cash 1,000 1,000 -------- -------- -------- -------- Total $ 34,145 $ 6,891 $(22,962) $ 18,074 ======== ======== ======== ========
In Manor Care's planned spin-off, the employees did not receive lump-sum severance payments upon termination but receive their severance as biweekly payments through 1999. In the HCR and Manor Care merger, 531 employees received termination notices and at March 31, 1999 all but 25 employees have left the Company. Many employees who left the Company continue to be paid severance payments on a biweekly basis through 1999. The non-cash charge for amortization primarily related to certain Manor Care software applications which are being used until the transition to HCR applications. The carrying value of the software is being amortized over its remaining estimated useful life ranging from six to nine months. Certain general and administrative costs of $2.3 million represented salaries and benefits for employees performing duplicate services in Toledo or Gaithersburg. Interest expense increased $2.3 million for the three months ended March 31, 1999 as compared to the same period in 1998 due to an increase in debt outstanding under bank credit facilities. Dividend income increased $4.4 million between the first quarter of 1999 and 1998 due to the dividend recorded on the Company's ownership of Series G Cumulative Convertible Preferred Stock of Genesis Health Ventures, Inc (Genesis). The decrease in equity earnings of affiliated companies was attributable to a decline in earnings of the pharmacy partnership due to a reduction in prices as a result of the Medicare PPS. Interest income and other decreased between the first quarter of 1999 and 1998 primarily due to a decline in rental income from Manor Care's corporate office buildings that were sold during 1998. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which is effective January 1, 2000. 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. Management has not determined when it will adopt this Statement nor has it determined the impact of adoption. 9 10 LIQUIDITY AND CAPITAL RESOURCES During the first three months of 1999, the Company satisfied its cash requirements from a combination of cash generated from operating activities and borrowings under bank credit agreements. The Company used the cash principally for capital expenditures. At March 31, 1999, the Company maintained $14.4 million in cash and cash equivalents, of which $11.0 million was invested in short-term investments. Expenditures for property and equipment during the three months ended March 31,1999 consisted of $29.0 million for construction of new facilities and $22.8 million for renovation and maintenance of existing facilities. At March 31, 1999, outstanding borrowings aggregated $729 million under the bank credit agreements. After consideration of usage for letters of credit, the remaining credit availability under the agreements totaled $62.7 million. During the fourth quarter of 1998, the Company formed a strategic alliance with Alternative Living Services (Alterra). Two of the key provisions of the alliance include the sale of 28 centers to Alterra for approximately $200 million in cash and the creation of a joint venture to develop and construct up to $500 million of specialized assisted living residences in the Company's core markets over the next three to five years. During April 1999, the Company completed the sale of 3 centers to Alterra for approximately $17 million. The remaining asset sales and creation of the development joint venture are expected to be completed in the second quarter of 1999. In May 1999 the Company exercised the purchase option and simultaneously sold the Manor Care headquarters in Gaithersburg, Maryland with a net cash receipt of approximately $25 million. On May 4, 1999 the Board of Directors of HCR Manor Care authorized the Company to purchase up to $200 million of its common stock through December 31, 2000. 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 has cash flow commitments related to the HCR and Manor Care merger restructuring plan that will require approximately $18 million in the remainder of 1999, primarily for employee benefits. HCR Manor Care 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 which 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. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the year. Any of the HCR Manor Care computer software and hardware that are date sensitive and all of our embedded chip devices could recognize a two digit date of `00' as `1900' rather than `2000'. This could result in system failures and miscalculations causing disruptions to our operations. In 1995, HCR began an evaluation and upgrade to all of its technical infrastructure including hardware, operating systems and business applications. With the completion of that upgrade 10 11 process, the Company will have in place, a complete package of technical solutions that properly utilize dates beyond December 31, 1999. The estimated costs of this package are expected to be $35 million. Most of these costs will be capitalized and amortized over a five to twelve year period. Since inception of the project, the Company has incurred approximately $21.7 million ($2.7 million expensed and $19.0 million capitalized) as of March 31, 1999. The Company has completed the technical solution definition and is 75% complete with the implementation. All computer hardware, software and operating system upgrades are expected to be in place by the end of the third quarter of 1999. It has not been necessary to accelerate our original implementation plan due to the Year 2000 issue. To insure that our embedded chip devices, vendor and supplier interfaces are also Year 2000 compliant, the Company has put into place an assessment, remediation, testing, implementation and contingency plan for all products, services and relationships that do not meet our Year 2000 compliance standards. The Company expects all phases along with the contingency plan to be completed by the end of the third quarter of 1999 with internal resources. The Company has queried our significant suppliers and at this point, based on their representations, the Company does not believe that Year 2000 presents a material exposure as it relates to our embedded chip devices, system interfaces, significant suppliers or vendors. The Company believes today that the most likely worst case scenario, if it occurred, would involve temporary disruptions in delivery of medical and other supplies and temporary disruptions in payments, especially payments from Medicare and other government programs. If the federal and state healthcare reimbursement agencies or their intermediaries were to fail to implement Year 2000 compliant technologies before December 31, 1999, a temporary cash flow disruption could result. Those agencies and intermediaries have Year 2000 plans in place and the Company continues to monitor the status of those projects. However, all of the governmental agencies have stated that interim payment procedures would be implemented if their Year 2000 solutions are not in place by January 1, 2000. The foregoing assessment is based on information currently available to the Company. The Company will revise its assessment as it implements its Year 2000 strategy. The Company's Year 2000 compliance program is an ongoing process and the risk assessments and estimates of costs and completion dates for various phases of the program are subject to change. The cost of the Year 2000 program and the dates on which the Company believes the phases of the program will be completed are based on management's best estimates, which were derived using numerous assumptions of future events. Factors that could cause such changes include availability of qualified personnel and consultants, the actions of third parties and material changes in governmental regulations. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. 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 11 12 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; liability and other claims asserted against the Company; 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, 1998. PART II. OTHER INFORMATION Item 1. Legal Proceedings. On May 7, 1999 Genesis Health Ventures ("Genesis") filed suit in the United States District Court for the District of Delaware (the "Delaware Action") against the Company, Manor Care, Inc., Paul A. Ormond and Stewart Bainum, Jr. Manor Care, Inc. has been a wholly-owned subsidiary of the company since September 25, 1998. Mr. Ormond is President and Chief Executive Officer of the Company and Mr. Bainum is Chairman of the Board of Directors of the Company and formerly was Chairman of the Board, President and Chief Executive Officer of Manor Care, Inc. 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") and that such alleged conduct constituted violations of Section 10(b) of the Securities and Exchange Act of 1934, common law fraudulent misrepresentation, negligent misrepresentation and breach of contract. The suit seeks compensatory and punitive damages in excess of $100 million and preliminary and permanent injunctive relief enforcing a covenant not to compete allegedly applicable to the Company. The Company believes that the material allegations of the complaint are untrue and that it has substantial defenses to the factual and legal assertions in the complaint. The Company intends to vigorously defend the lawsuit. Although the ultimate outcome of the case is uncertain, it is not likely to have a material adverse effect on the financial condition of the Company. In addition to the Delaware Action, on May 7, 1999 Vitalink instituted a lawsuit in the Circuit Court for Baltimore City, Maryland (the "Maryland Action") against the Company, Manor Care, Inc. and ManorCare Health Services, Inc. (collectively, the "Maryland Defendants") seeking damages, preliminary and permanent injunctive relief and a declaratory judgment related to allegations that the Maryland Defendants have improperly sought to terminate certain pharmacy related contracts between Vitalink and ManorCare Health Services, Inc. Vitalink has also purported to institute arbitration proceedings (the "Arbitration") against the Maryland Defendants with the American Arbitration Association, seeking substantially the same relief as sought in the Maryland Action with respect to one of pharmacy related contracts at issue in the Maryland Action and also certain additional permanent relief with respect to that contract. On May 13, 1999, Vitalink and the Maryland 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; (iii) to stay termination of the agreements at issue until a decision can be reached in the Arbitration; and (iv) that Vitalink shall not proceed on its claims for preliminary reief in the Maryland Action or the Arbitration in view of the May 13, 1999 agreement. The Company believes that the material allegations in the Maryland Action and in the demand for Arbitration are untrue and that it has substantial factual and legal defenses to both the Maryland Action and the Arbitration. The Company intends to vigorously defend the Maryland Action and the Arbitration. Although the ultimate outcome of such proceedings is uncertain, the outcome is not likely to have a material adverse effect on the financial condition of the Company. 12 13 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. The Company believes the waste disposal activities at issue occurred prior to the Manor Care subsidiary's acquisition of Cenco. 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 $5 million. The Company is party to various other legal proceedings arising in the ordinary course of business. The Company does not believe the results of such proceedings, even if unfavorable to the Company, would have a material adverse effect on its financial position. Item 2. Changes in Securities. None Item 3. Defaults Upon Senior Securities. None 13 14 Item 4. Submission of Matters to a Vote of Security Holders. At the Company's Annual Meeting of Stockholders held on May 4, 1999 the stockholders approved the following items: a) elect Stewart Bainum as a director, b) elect Joseph H. Lemieux as a director, c) elect Gail R. Wilensky as a director and d) ratify the selection of Ernst & Young LLP as independent public accountants for the year ending December 31, 1999. The items were approved by a vote as follows:
Item For Against Withheld Abstain Not Voted ---- --- ------- -------- ------- --------- a 98,101,514 863,041 11,777,116 b 97,934,134 1,030,421 11,777,116 c 98,175,744 788,811 11,777,116 d 98,670,651 84,350 209,554 11,777,116
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 three months ended March 31, 1999 (b) Reports on Form 8-K On February 8, 1999, HCR Manor Care filed a Form 8-K for the restatement of the first three quarters of 1998 due to two items. In the fourth quarter of 1998, the Company changed the accounting for its investment in In Home Health, Inc. from consolidation to the equity method retroactive to January 1, 1998 and the Company elected to adopt Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," as of January 1, 1998. 14 15 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. HCR Manor Care, Inc. (Registrant) Date May 17, 1999 By /s/ Geoffrey G. Meyers ---------------- -------------------------------------------- Geoffrey G. Meyers, Executive Vice-President and Chief Financial Officer 15 16 EXHIBIT INDEX Exhibit - ------- 27 Financial Data Schedule for the three months ended March 31, 1999 16 EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 14,402 0 405,627 55,589 0 436,090 2,355,027 590,257 2,762,465 505,514 697,065 0 0 1,110 1,239,802 2,762,465 0 531,848 0 408,549 28,512 3,290 12,997 59,701 18,673 41,028 0 0 0 41,028 0.37 0.37
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