<PAGE> 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
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
------
<S> <C> <C>
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
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HCR MANOR CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited) (Note 1)
----------- --------
(In thousands)
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
HCR MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(In thousands, except earnings per share)
<S> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
HCR MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
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
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 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):
<TABLE>
<CAPTION>
Cash/ Liability at Liability at
Non-cash 12/31/98 Charge Activity 3/31/99
-------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In thousands, except earnings per share)
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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):
<TABLE>
<CAPTION>
Cash/ Liability at Liability at
Non-cash 12/31/98 Charge Activity 3/31/99
-------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Item For Against Withheld Abstain Not Voted
---- --- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 16
EXHIBIT INDEX
Exhibit
- -------
27 Financial Data Schedule for the three months ended March 31, 1999
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,402
<SECURITIES> 0
<RECEIVABLES> 405,627
<ALLOWANCES> 55,589
<INVENTORY> 0
<CURRENT-ASSETS> 436,090
<PP&E> 2,355,027
<DEPRECIATION> 590,257
<TOTAL-ASSETS> 2,762,465
<CURRENT-LIABILITIES> 505,514
<BONDS> 697,065
0
0
<COMMON> 1,110
<OTHER-SE> 1,239,802
<TOTAL-LIABILITY-AND-EQUITY> 2,762,465
<SALES> 0
<TOTAL-REVENUES> 531,848
<CGS> 0
<TOTAL-COSTS> 408,549
<OTHER-EXPENSES> 28,512
<LOSS-PROVISION> 3,290
<INTEREST-EXPENSE> 12,997
<INCOME-PRETAX> 59,701
<INCOME-TAX> 18,673
<INCOME-CONTINUING> 41,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,028
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
