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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 September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10858
MANOR CARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1687107
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
333 N. SUMMIT STREET, TOLEDO, OHIO 43604-2617
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 252-5500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on October 31, 2000.
Common stock, $0.01 par value -- 102,456,532 shares
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
------
<S> <C>
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income -
Three months and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
---------------------
MANOR CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Unaudited) (Note 1)
(In thousands, except per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,630 $ 12,287
Receivables, less allowances for
doubtful accounts of $63,520 and $58,975, respectively 345,940 294,449
Receivable from sale of assets 8,102 44,467
Prepaid expenses and other assets 26,727 28,409
Deferred income taxes 54,363 51,539
--------- ---------
Total current assets 471,762 431,151
Property and equipment, net of accumulated
depreciation of $708,915 and $596,391, respectively 1,577,380 1,550,507
Intangible assets, net of amortization 98,526 88,286
Net investment in Genesis preferred stock 19,000
Other assets 166,848 191,922
----------- -----------
Total assets $2,314,516 $2,280,866
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 99,155 $ 86,614
Employee compensation and benefits 63,127 52,376
Accrued insurance liabilities 59,635 35,870
Income tax payable 4,925 14,906
Other accrued liabilities 55,068 33,266
Revolving loans 139,000 179,000
Long-term debt due within one year 5,537 6,617
---------- ----------
Total current liabilities 426,447 408,649
Long-term debt 661,089 687,502
Deferred income taxes 119,756 126,754
Other liabilities 109,303 76,608
Minority interest 4,266 1,316
Shareholders' equity:
Preferred stock, $.01 par value, 5 million shares
authorized
Common stock, $.01 par value, 300 million shares
authorized, 111.0 million shares issued 1,110 1,110
Capital in excess of par value 344,127 358,958
Retained earnings 814,229 798,068
---------- ----------
1,159,466 1,158,136
Less treasury stock, at cost (8.4 and 8.7 million shares, respectively) (165,811) (178,099)
----------- ----------
Total shareholders' equity 993,655 980,037
----------- -----------
Total liabilities and shareholders' equity $2,314,516 $2,280,866
========== ==========
</TABLE>
See notes to consolidated financial statements.
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MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except earnings per share)
<S> <C> <C> <C> <C>
Revenues $ 604,531 $ 536,732 $ 1,755,696 $ 1,599,034
Expenses:
Operating 501,144 424,244 1,501,646 1,252,041
General and administrative 26,835 23,210 77,042 67,735
Depreciation and amortization 30,683 29,361 90,381 86,376
Provision for restructuring charge,
merger expenses, asset impairment
and other related charges 4,080 14,787
----------- ----------- ----------- -----------
558,662 480,895 1,669,069 1,420,939
----------- ----------- ----------- -----------
Income before other income (expenses),
income taxes and minority interest 45,869 55,837 86,627 178,095
Other income (expenses):
Interest expense (15,369) (14,264) (45,241) (40,510)
Impairment of investments (20,000)
Dividend income 4,951 14,853
Equity in earnings of affiliated companies 821 473 1,270 1,829
Interest income and other 780 1,376 2,081 2,365
----------- ----------- ----------- -----------
Net other expenses (13,768) (7,464) (61,890) (21,463)
----------- ----------- ----------- -----------
Income before income taxes and minority interest 32,101 48,373 24,737 156,632
Income taxes 11,556 14,876 6,860 48,491
Minority interest income 172 1,716
----------- ----------- ----------- -----------
Income before extraordinary item 20,373 33,497 16,161 108,141
Extraordinary item - gain on sale of assets
(net of taxes of $3,866 and $8,271 respectively) 6,047 12,937
----------- ----------- ----------- -----------
Net income $ 20,373 $ 39,544 $ 16,161 $ 121,078
=========== =========== =========== ===========
Earnings per share - basic
Income before extraordinary item $ 0.20 $ 0.32 $ 0.16 $ 0.99
Extraordinary item (net of taxes) 0.06 0.12
----------- ----------- ----------- -----------
Net income $ 0.20 $ 0.37* $ 0.16 $ 1.11
=========== =========== =========== ===========
Earnings per share - diluted
Income before extraordinary item $ 0.20 $ 0.31 $ 0.16 $ 0.98
Extraordinary item (net of taxes) 0.06 0.12
----------- ----------- ----------- -----------
Net income $ 0.20 $ 0.37 $ 0.16 $ 1.10
=========== =========== =========== ===========
Weighted average shares:
Basic 102,205 106,212 102,266 109,187
Diluted 103,276 107,253 103,015 110,379
*Doesn't add due to rounding
</TABLE>
See notes to consolidated financial statements.
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MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $16,161 $121,078
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 90,381 86,836
Asset impairment and other non-cash charges 12,240
Impairment of investments 20,000
Provision for bad debts 22,502 18,734
Minority interest 1,716
Deferred income taxes (9,822)
Gain on sale of assets (361) (21,015)
Equity in earnings of affiliated companies (1,270) (1,829)
Changes in assets and liabilities, excluding sold
facilities and acquisitions:
Receivables (37,481) (63,268)
Prepaid expenses and other assets 6,961 (15,103)
Liabilities 74,869 (11,104)
-------- --------
Total adjustments 167,495 5,491
------- ---------
Net cash provided by operating activities 183,656 126,569
------- -------
INVESTING ACTIVITIES
Investment in property and equipment (91,006) (126,589)
Investment in systems development (8,402) (6,368)
Acquisition of businesses (12,402) (8,594)
Proceeds from sale of assets 5,235 263,603
Increase due to consolidation of subsidiary 15,701
-------- -------
Net cash provided by (used in) investing activities (90,874) 122,052
-------- -------
FINANCING ACTIVITIES
Net repayments under bank credit agreements (61,500) (23,000)
Principal payments of long-term debt (4,537) (5,132)
Proceeds from stock options and common stock 267 1,325
Purchase of common stock for treasury (2,669) (163,756)
-------- --------
Net cash used in financing activities (68,439) (190,563)
------- --------
Net increase in cash and cash equivalents 24,343 58,058
Cash and cash equivalents at beginning of period 12,287 33,718
------- -------
Cash and cash equivalents at end of period $36,630 $91,776
======= =======
</TABLE>
See notes to consolidated financial statements.
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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 Manor Care, Inc. (the
Company), the interim data includes all adjustments necessary for a fair
statement of the results of the interim periods and all such adjustments are of
a normal recurring nature, except as discussed in Note 2 below and in
Management's Discussion and Analysis regarding general and professional
liability expense, impairment of investments and other reserves. Operating
results for the nine months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in Manor Care, Inc.'s annual
report on Form 10-K for the year ended December 31, 1999.
During the second quarter of 2000, the Company changed the accounting for its
investment in In Home Health, Inc. (IHHI) from the equity method to
consolidation due to an increase in ownership from 41 percent to 61 percent.
Retroactive to January 1, 2000, the Company began consolidating 100 percent of
the results of IHHI and deducting the minority interest share on an after-tax
basis. IHHI's revenues were $24.7 million and $73.2 million for the three months
and nine months ended September 30, 2000, respectively, and operating expenses
were $21.6 million and $64.3 million for the same periods, respectively. The
Company has reclassified IHHI's expense categories to more closely conform to
the Company's presentation.
At September 30, 2000, the Company operated 299 skilled nursing and 52 assisted
living facilities, 88 outpatient therapy clinics, one acute care hospital and 38
home health offices. IHHI provided its services through 39 offices in 20 markets
located in 15 states.
NOTE 2 - RESTRUCTURING CHARGE, MERGER EXPENSES, ASSET IMPAIRMENT AND OTHER
RELATED CHARGES
During the first nine months of 1999, the Company recorded restructuring and
other charges of $14.8 million in connection with the HCR-Manor Care
transaction. The liability related to the restructuring and other charges
decreased from $2.0 million at December 31, 1999 to $0.1 million at September
30, 2000. The payments during the first nine months of 2000 were attributable to
employee benefit and exit costs.
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NOTE 3 - EARNINGS PER SHARE
The calculation of earnings per share (EPS) is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except earnings per share)
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item
(income available to common shareholders) $20,373 $33,497 $16,161 $108,141
======= ======= ======= =======
Denominator:
Denominator for basic EPS -
weighted-average shares 102,205 106,212 102,266 109,187
Effect of dilutive securities:
Stock options 934 1,041 703 1,192
Nonvested restricted stock 137 46
------- ------- ------- -------
Denominator for diluted EPS -
adjusted for weighted-average
shares and assumed conversions 103,276 107,253 103,015 110,379
======= ======= ======= =======
EPS - income before extraordinary item
Basic $.20 $.32 $.16 $.99
Diluted $.20 $.31 $.16 $.98
</TABLE>
NOTE 4 - SEGMENT INFORMATION
The Company provides a range of health care services. The Company has one
reportable operating segment, long-term care, which includes the operation of
skilled nursing and assisted living facilities. The "Other" category includes
the non-reportable segments and corporate items not considered to be an
operating segment. The revenues in the "Other" category include services for
rehabilitation, home health and hospital care. Asset information, including
capital expenditures, is not reported by segment by the Company. Operating
performance represents revenues less operating expenses and does not include
general and administrative expense, depreciation and amortization, the provision
for restructuring and other charges, other income and expense items, and income
taxes. The "Other" category is not comparative as IHHI is included on a
consolidated basis in 2000 and on the equity method in 1999. See Management's
Discussion and Analysis for a discussion of unusual expenses recorded in the
first half of 2000.
<TABLE>
<CAPTION>
Long-term Care Other Total
-------------- ----- -----
(In thousands)
<S> <C> <C> <C>
Three months ended September 30, 2000
Revenues from external customers $517,050 $87,481 $604,531
Intercompany revenues 7,138 7,138
Depreciation and amortization 28,017 2,666 30,683
Operating margin 92,605 10,782 103,387
</TABLE>
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<TABLE>
<CAPTION>
Long-term Care Other Total
-------------- ----- -----
(In thousands)
<S> <C> <C> <C>
Three months ended September 30, 1999
Revenues from external customers $480,450 $56,282 $536,732
Intercompany revenues 5,169 5,169
Depreciation and amortization 26,648 2,713 29,361
Operating margin 99,057 13,431 112,488
Nine months ended September 30, 2000
Revenues from external customers 1,501,922 253,774 1,755,696
Intercompany revenues 20,538 20,538
Depreciation and amortization 82,380 8,001 90,381
Operating margin 238,571 15,479 254,050
Nine months ended September 30, 1999
Revenues from external customers 1,428,313 170,721 1,599,034
Intercompany revenues 15,450 15,450
Depreciation and amortization 81,658 4,718 86,376
Operating margin 302,483 44,510 346,993
</TABLE>
NOTE 5 - DEBT
The Company's $200 million credit agreement (364 Day Agreement), which matured
September 22, 2000, was amended and now matures September 21, 2001.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which was postponed in Statement
No. 137 and is now effective January 1, 2001. This Statement requires the
Company to recognize all derivatives on the balance sheet at fair value. Because
the Company currently does not use derivatives, management believes that the
adoption of this Statement will have no effect on earnings or the financial
position of the Company.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During the second quarter of 2000, the Company changed the accounting for its
investment in In Home Health, Inc. (IHHI) from the equity method to
consolidation due to an increase in ownership from 41 percent to 61 percent.
Retroactive to January 1, 2000, the Company began consolidating 100 percent of
the results of IHHI and deducting the minority interest share on an after-tax
basis. IHHI's revenues were $24.7 million and $73.2 million for the three months
and nine months ended September 30, 2000, respectively, and operating expenses
were $21.6 million and $64.3 million for the same periods, respectively.
The Company formed a strategic alliance with Alterra Healthcare Corporation
(Alterra) in 1998. Two of the key provisions of the alliance included the sale
of 26 centers and lease of two centers to Alterra in 1999 and the creation of a
joint venture in 1999 to develop and construct specialized assisted living
residences in the Company's core markets. The Company, Alterra and a development
joint venture have jointly and severally guaranteed a revolving line of credit.
The line of credit was reduced from $200 million to $60 million on March 30,
2000. The reduction in the
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revolving credit agreement reflects a modification in the joint development
intentions of the partners due in part to lower development activity than
originally planned. At September 30, 2000, there was $57 million of guaranteed
debt outstanding under the $60 million revolving line of credit. As a result of
a change in the credit agreement and its relationship with Alterra, the Company
purchased six facilities in the second quarter of 2000 that were originally
contributed by the Company in September 1999 to various project companies in
which the joint venture had a 10 percent equity interest. The Company paid $2.7
million in cash for the six facilities and reclassified its receivable related
to developing these assets of $21.6 million to property and equipment. Of this
amount, $14.4 million was a receivable at December 31, 1999.
During the second and third quarters of 1999, the Company sold 26 assisted
living facilities to Alterra for $159 million realizing a $8.6 million
extraordinary gain and contributed twenty properties to various project
companies or partnerships for $74 million recognizing no gain or loss.
RESULTS OF OPERATIONS
As explained in the overview, the Company changed the accounting for its
investment in IHHI retroactive to January 1, 2000. In the table below, IHHI's
financial results have been removed from 2000 to be comparative with 1999.
<TABLE>
<CAPTION>
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
--------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Revenues $579,824 $536,732 $1,682,521 $1,599,034
Expenses:
Operating 479,509 424,244 1,437,156 1,252,041
General and administrative 24,769 23,210 71,354 67,735
Depreciation and amortization 30,394 29,361 89,483 86,376
</TABLE>
Revenues for the three months ended September 30, 2000 increased $43.1 million
or 8 percent as compared to the same period in 1999. By excluding the facilities
sold or leased in 1999, revenues increased $47.2 million or 9 percent. Revenues
from skilled nursing and assisted living facilities that are included in
operations in 2000 increased $40.7 million or 9 percent due to increases in
rates ($37.0 million) and capacity/occupancy ($3.7 million).
Revenues for the nine months ended September 30, 2000 increased $83.5 million or
5 percent as compared to the same period in 1999. By excluding the facilities
sold or leased in 1999, revenues increased $104.0 million or 7 percent. Revenues
from skilled nursing and assisted living facilities that are included in
operations in 2000 increased $94.1 million or 7 percent due to increases in
rates ($74.6 million) and capacity/occupancy ($19.5 million).
The increase in rates was attributable to private, Medicaid and Medicare. The
Medicare rate increase related to provisions in the Balanced Budget Refinement
Act (BBRA 99) passed by Congress in November 1999 that included the temporary
increase in payment for certain high cost nursing home patients and the benefit
of early adoption to the new federal rates, which was completed in many of the
Company's facilities in June. In the third quarter, the Health Care Financing
Administration announced that it would delay implementation of its refinement
proposal related to the Medicare changes in the BBRA 99 that would have
eliminated the increase for certain high cost nursing home patients.
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The growth in bed capacity between 1999 and 2000 was due to the opening of three
skilled nursing facilities in 1999 and seven assisted living facilities in the
second and third quarters of 2000, as well as other bed additions. The occupancy
levels were 87 percent for the three months and nine months ended September 30,
1999 compared to 87 percent and 86 percent for the three months and nine months
ended September 30, 2000, respectively. The quality mix of revenue from
Medicare, private pay and insured patients related to skilled nursing and
assisted living facilities and rehabilitation operations was 66 percent and 67
percent for the three months and nine months ended September 30, 1999,
respectively, as well as for the same periods in 2000.
Operating expenses for the three months ended September 30, 2000 increased $55.3
million or 13 percent from the comparable period in 1999. By excluding
facilities sold or leased in 1999, operating expenses increased $59.8 million or
14 percent. Operating expenses from skilled nursing and assisted living
facilities that are included in operations in 2000 increased $47.6 million.
These increases primarily related to labor costs, including temporary staffing,
of $23.4 million and general and professional liability costs of $9.7 million
(see further explanation below), as well as increases in ancillary costs and
other general expenses. Operating expenses from the Company's transcription
business increased $3.9 million.
Operating expenses for the nine months ended September 30, 2000 increased $185.1
million or 15 percent from the comparable period in 1999. By excluding
facilities sold or leased in 1999, operating expenses increased $203.8 million
or 17 percent. Operating expenses from skilled nursing and assisted living
facilities that are included in operations in 2000 increased $156.2 million, as
discussed below. Operating expenses from the Company's transcription business
increased $10.6 million and there were $17.7 million of unusual expenses
recorded in the second quarter that included $3.2 million for expenses related
to the discontinued Manor Care buy-out transaction, $7.3 million reserve for
amounts due from Genesis Health Ventures, Inc. (Genesis) as a result of Genesis'
bankruptcy filing on June 22, 2000 and $7.2 million reserve for amounts due from
Alterra or the related development joint venture.
The major portion of the skilled nursing and assisted living operating expense
increase was attributable to recording $33.6 million of general and professional
liability expense in the first quarter of 2000 related to a change in estimate
incorporating industry experience for claims originating in policy years 1994
through 1999, as well as an increase in current period expense of $23.7 million
for the first nine months of 2000 compared to last year. The additional expense
was determined as a result of independent evaluations of the Company's growing
potential liability for patient-related litigation despite a continuing good
quality record and generally low historical claims experience. The evaluations
were prepared in response to the dramatic increases in the average cost per
claim and volume of lawsuits filed against the Company and in the long-term care
industry in general. The adjustment reflects the additional litigation and
settlement costs the Company could incur if there is no change in the current
environment, particularly in the state of Florida. Independent evaluations of
the industry's experience indicate the need to increase ongoing expense accruals
for renewing policy periods and claims that could arise out of this year's
experience.
General and professional liability claims for the long-term care industry,
especially in the state of Florida, have become increasingly expensive. The
average cost of a claim in Florida in 1999 was two and one-half times higher
than the rest of the country and industry providers in the state are
experiencing three times the number of claims compared to the national average.
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The Company and other affected providers are actively pursuing legislative and
regulatory changes that include tort reform. However, there can be no assurances
that legislative changes will be made, or that any such change will have a
positive impact on the current trend.
The other operating expense increases for skilled nursing and assisted living
facilities were attributable to labor costs, including temporary staffing, of
$56.5 million, as well as increases in ancillary costs and other general
expenses.
General and administrative expense increased $1.6 million and $3.6 million for
the three months and nine months ended September 30, 2000 as compared to the
same periods in 1999 primarily as a result of employee benefit plans, legal
expenses and general cost increases. Depreciation and amortization increased
$1.0 million and $3.1 million for the three months and nine months ended
September 30, 2000 compared to the same periods in 1999 primarily due to
computer software amortization.
The Company recorded restructuring and other charges of $4.1 million and $14.8
million for the three months and nine months ended September 30, 1999,
respectively, in connection with the HCR-Manor Care transaction. The liability
related to the restructuring and other charges decreased from $2.0 million at
December 31, 1999 to $0.1 million at September 30, 2000. The payments during the
first nine months of 2000 were attributable to employee benefit and exit costs.
Interest expense increased $1.1 million and $4.7 million for the three months
and nine months ended September 30, 2000 as compared to the same periods in 1999
due to an increase in interest rates, as the average debt outstanding has
declined. The impairment of investments of $20 million was attributable to
Genesis' bankruptcy filing on June 22, 2000, which represented the remaining
book value of Genesis' Series G Cumulative Convertible Preferred Stock (Series G
Preferred Stock) as well as another Genesis investment. Dividend income
decreased in comparison to the prior year due to two items. First, no dividend
income was recorded on the Series G Preferred Stock in 2000. In 1999, the
Company recorded $4.4 million of dividend income each quarter and then fully
reserved the dividends at the end of the year. As a result of the nonpayment of
the cumulative dividends for four consecutive quarters, all future dividends
beginning in 2000 are payable in additional shares of Series G Preferred Stock.
Based on Genesis' inability to pay cash dividends and its current operating
performance, the Company is fully reserving the dividends in 2000. Second, as a
result of changing the accounting for the Company's investment in IHHI in 2000,
the preferred stock dividend of $0.6 million per quarter was eliminated in
consolidation and was fully reported in 1999 under the equity method of
accounting.
The income tax expense for the nine months ended September 30, 2000 included a
$1.9 million tax benefit related to IHHI. IHHI's management concluded that the
tax benefits related to net operating loss carryforwards are now more likely
than not to be realized in the carryforward periods and therefore, changed the
valuation allowance against the deferred tax assets associated with the net
operating loss carryforwards established in 1997.
The minority interest income for the three months and nine months ended
September 30, 2000 represented the minority owners' share of IHHI's net income
for those periods. In 1999, IHHI's financial results were not consolidated,
instead the Company's share of IHHI's earnings were recorded on the line item,
"equity in earnings of affiliated companies."
In the first nine months of 1999, the Company recorded the gains on sale of
assets as extraordinary
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items as required after a business combination accounted for as a pooling of
interests. In the second quarter, the Company exercised a purchase option on
Manor Care's corporate headquarters in Gaithersburg, Maryland and sold the
property realizing net proceeds of $25 million and a $10.3 million gain ($6.3
million after tax). In the second quarter, the Company closed on three of the
twenty-six assisted living facilities sold to Alterra for $13 million realizing
a $0.6 million gain ($0.3 million after tax) and in the third quarter closed on
the remaining twenty-three facilities for $146 million realizing an $8.0 million
gain ($4.9 million after tax).
FINANCIAL CONDITION
The September 30, 2000 balance sheet included the balances of IHHI. The most
significant IHHI line items were current assets of $40.8 million, which included
cash of $18.6 million and accounts receivable of $18.8 million, and current
liabilities of $20.7 million.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which was postponed in Statement
No. 137 and is now effective January 1, 2001. This Statement requires the
Company to recognize all derivatives on the balance sheet at fair value. Because
the Company currently does not use derivatives, management believes that the
adoption of this Statement will have no effect on earnings or the financial
position of the Company.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2000, the Company satisfied its cash
requirements from cash generated from operating activities. Cash flows from
operating activities were $183.7 million for the first nine months of 2000, an
increase of $57.1 million from the same period in 1999. The increase in
liabilities was due to the additional accrual for general and professional
liability claims discussed previously. The Company used the cash principally for
capital expenditures, acquisition of businesses and repayment of debt.
Expenditures for property and equipment for nine months ended September 30 were
$91.0 million in 2000 and $126.6 million in 1999 that included amounts for the
construction of new facilities of $44.9 million in 2000 and $67.1 million in
1999.
The Company's $200 million credit agreement (364 Day Agreement), which matured
September 22, 2000, was amended and now matures September 21, 2001. At September
30, 2000, outstanding borrowings aggregated $594.0 million under its bank credit
agreements. After consideration of usage for letters of credit, the remaining
credit availability under the agreements totaled $78.1 million.
On May 4, 1999, the Board of Directors authorized the Company to purchase up to
$200 million of its common stock through December 31, 2000, and on February 8,
2000, the Board authorized an additional $100 million through December 31, 2001.
The Company purchased 215,000 shares for $2.7 million in the first nine months
of 2000 and a total of 8.9 million shares for $183.0 million since May 1999. The
shares may be used for internal stock option and 401(k) match programs and for
other uses, such as possible future acquisitions.
The Company believes that its cash flow from operations will be sufficient to
cover debt payments, future capital expenditures and operating needs. It is
likely that the Company will pursue growth from acquisitions, partnerships and
other ventures that would be funded from excess cash from operations, credit
available under the bank credit agreement and other financing arrangements that
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are normally available in the marketplace.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-Q which are not historical facts may be
forward-looking statements within the meaning of federal law. Such
forward-looking statements reflect management's beliefs and assumptions and are
based on information currently available to management. Forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both nationally and in the regions in which the Company operates;
industry capacity; demographic changes; existing government regulations and
changes in, or the failure to comply with, governmental regulations; legislative
proposals for health care reform; the ability to enter into managed care
provider arrangements on acceptable terms; changes in Medicare and Medicaid
reimbursement levels; changes in current trends in the cost and volume of
general and professional liability claims; competition; changes in business
strategy or development plans; and the ability to attract and retain qualified
personnel. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements set forth or referred
to above in this paragraph. The Company disclaims any obligation to update such
factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in the Company's long-term debt since
December 31, 1999.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Since May of 1999, the Company and certain related persons and entities have
been parties to several actions by or against Genesis Health Ventures, Inc.
("Genesis") and its subsidiary, NeighborCare Pharmacy Services, Inc.
("NeighborCare"). On or about June 22, 2000, Genesis and NeighborCare filed
voluntary petitions for bankruptcy under Chapter 11 of the Bankruptcy Code,
which effectively stayed the actions to the extent they had not been stayed
already. The status of the various Genesis/NeighborCare lawsuits is discussed
below.
On May 7, 1999, Genesis filed suit in federal district court in Delaware against
the Company, its wholly owned subsidiary, Manor Care of America, Inc. (formerly
known as Manor Care, Inc. ("Manor Care")), its Chief Executive Officer, Paul A.
Ormond, and its Chairman, Stewart Bainum, Jr. The complaint alleges that the
defendants fraudulently induced Genesis to acquire, in August 1998, all of the
outstanding stock of Vitalink Pharmacy Services, Inc. ("Vitalink"), an
approximately 50 percent owned subsidiary of Manor Care, and that such alleged
conduct constituted violations of Section 10(b) of the Securities Exchange Act
of 1934, common law fraudulent misrepresentation and negligent
misrepresentation. The suit also alleges that the Company's ownership in a
partnership known as Heartland Healthcare Services violates a non-compete
provision signed by Manor Care. The suit seeks compensatory and
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punitive damages in excess of $100 million and preliminary and permanent
injunctive relief enforcing the covenant not to compete. On June 10, 1999,
Genesis filed an amended complaint that was substantively identical to the
original complaint. On June 29, 1999, the defendants moved to dismiss or, in the
alternative, to stay the lawsuit in its entirety. On or about March 22, 2000,
the court granted the defendants' motion to stay the action in its entirety
pending the arbitration discussed below, but denied the motion with respect to
the alternative request to dismiss the action. The Company intends to vigorously
defend the lawsuit. Although the ultimate outcome of the case is uncertain,
management believes that it is not likely to have a material adverse effect on
the financial condition of the Company.
On August 27, 1999, Manor Care filed a separate action in federal district court
in Delaware against Genesis concerning its 1998 acquisition of Vitalink. Manor
Care's lawsuit charges Genesis with violations of Section 11 and Section 12 of
the Securities Act of 1933, based upon Genesis' misrepresentations and/or
misleading omissions in connection with Genesis' issuance of approximately $293
million of Genesis Preferred Stock as consideration to Manor Care for its
approximately 50 percent interest in Vitalink. Manor Care seeks, among other
things, compensatory damages and recission voiding Manor Care's purchase of the
Genesis Preferred Stock and requiring Genesis to return to Manor Care the
consideration that it paid at the time of the Vitalink sale. On November 23,
1999, Genesis moved to dismiss the lawsuit in its entirety. On or about January
18, 2000, Genesis moved to consolidate Manor Care's lawsuit with the suit that
Genesis had filed in Delaware district court on May 7, 1999. On or about
September 29, 2000, the Court granted in part and denied in part Genesis' motion
to dismiss and also denied Genesis' motion to consolidate the lawsuits.
Additionally, on May 7, 1999, NeighborCare instituted a lawsuit in the Circuit
Court for Baltimore City, Maryland (the "Maryland Action") against the Company,
Manor Care and ManorCare Health Services, Inc. ("MHS") seeking damages,
preliminary and permanent injunctive relief, and a declaratory judgment related
to allegations that the defendants had improperly sought to terminate certain
Master Service Agreements ("MSAs") between Vitalink (n/k/a NeighborCare) and
MHS. NeighborCare also instituted arbitration proceedings (the "Arbitration")
against the same defendants, seeking substantially the same relief as sought in
the Maryland Action with respect to one of the MSAs at issue in the Maryland
Action and also certain additional permanent relief with respect to that
contract. On May 13, 1999, NeighborCare and the defendants agreed: (i) to
consolidate the Maryland Action into the Arbitration; (ii) to dismiss the
Maryland Action with prejudice as to jurisdiction and without prejudice as to
the merits; and (iii) to stay termination of the agreements at issue until a
decision can be reached in the Arbitration. NeighborCare has since dismissed the
Maryland Action and consolidated certain of those claims into the Arbitration by
filing an Amended Demand for Arbitration. On June 15, 1999, the defendants filed
an answer and counterclaim, denying the material allegations in the Amended
Demand, and they subsequently moved to dismiss three of the six claims alleged
in the Amended Demand. On or about May 17, 2000, the Arbitrator granted in part
the defendants' motion to dismiss, thereby dismissing two of NeighborCare's six
claims. On or about May 23, 2000, based upon NeighborCare's representation that
it would likely file for bankruptcy before it could complete the Arbitration
hearing set for the weeks of June 12 and July 3, 2000, the Arbitrator vacated
the hearing dates. The matter has been stayed since NeighborCare's June 22, 2000
bankruptcy filing. The Company intends to vigorously defend the Arbitration.
Although the ultimate outcome of the Arbitration is uncertain, management
believes that it is not likely to have a material adverse effect on the
financial condition of the Company.
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On July 26, 1999, NeighborCare filed an additional complaint in the Circuit
Court for Baltimore County, Maryland against Omnicare, Inc. and Heartland
Healthcare Services, Inc. (a partnership between subsidiaries of Omnicare, Inc.
and the Company) seeking injunctive relief and compensatory and punitive
damages. The complaint includes counts for tortious interference with Vitalink's
purported contractual rights under the MSAs. On October 4, 1999, the defendants
moved to dismiss or, in the alternative, to stay the lawsuit in its entirety. On
November 12, 1999, the court stayed the matter pending the Arbitration. Although
the ultimate outcome of the case is uncertain, management believes that it is
not likely to have a material adverse effect on the financial condition of the
Company.
On December 22, 1999, Manor Care filed suit in federal court in Toledo, Ohio
against Genesis; Cypress Group, L.L.C.; TPG Partners II, L.P.; and Nazem, Inc.
The complaint alleges that the issuance by Genesis of its Series H and Series I
Preferred Stock violated the terms of the Series G Preferred Stock and the terms
of a rights agreement entered into between Genesis and Manor Care in connection
with the Vitalink transaction. On February 29, 2000, the defendants moved to
dismiss the case. That motion was pending before the court as of the time the
matter was automatically stayed by Genesis' June 22, 2000 bankruptcy filing.
One or more subsidiaries or affiliates of Manor Care have been identified as
potentially responsible parties (PRPs) in a variety of actions (the Actions)
relating to waste disposal sites which allegedly are subject to remedial action
under the Comprehensive Environmental Response Compensation Liability Act, as
amended, 42 U.S.C. Sections 9601 et seq. (CERCLA) and similar state laws. CERCLA
imposes retroactive, strict joint and several liability on PRPs for the costs of
hazardous waste clean-up. The Actions arise out of the alleged activities of
Cenco, Incorporated and its subsidiary and affiliated companies (Cenco). Cenco
was acquired in 1981 by a wholly owned subsidiary of Manor Care. The Actions
allege that Cenco transported and/or generated hazardous substances that came to
be located at the sites in question. Environmental proceedings such as the
Actions may involve owners and/or operators of the hazardous waste site,
multiple waste generators and multiple waste transportation disposal companies.
Such proceedings involve efforts by governmental entities and/or private parties
to allocate or recover site investigation and clean-up costs, which costs may be
substantial. The potential liability exposure for currently pending
environmental claims and litigation, without regard to insurance coverage,
cannot be quantified with precision because of the inherent uncertainties of
litigation in the Actions and the fact that the ultimate cost of the remedial
actions for some of the waste disposal sites where Manor Care is alleged to be a
potentially responsible party has not yet been quantified. Based upon its
current assessment of the likely outcome of the Actions, the Company believes
that the potential environmental liability exposure, after consideration of
insurance coverage, is approximately $4.5 million.
The Company is party to various other legal matters arising in the ordinary
course of business including patient care-related claims and litigation. The
Company believes that the resolution of such matters will not result in
liability materially in excess of accounting accruals established with respect
to such matters.
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Item 2. CHANGES IN SECURITIES.
----------------------
None
Item 3. DEFAULTS UPON SENIOR SECURITIES.
--------------------------------
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
None
Item 5. OTHER INFORMATION.
------------------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits
S-K Item
601 NO.
--------
4 Second Amendment to Five Year Credit Agreement dated
as of September 22, 2000 among Manor Care, Inc.
(formerly known as HCR Manor Care, Inc.), Manor Care
of America, Inc. (formerly known as Manor Care,
Inc.), various financial institutions, and Bank of
America, N.A., as Administrative Agent.
4.1 Third Amendment to 364 Day Credit Agreement dated as
of September 22, 2000 among Manor Care, Inc.
(formerly known as HCR Manor Care, Inc.), Manor Care
of America, Inc. (formerly known as Manor Care,
Inc.), various financial institutions and Bank of
America, N.A., as Administrative Agent.
27 Financial Data Schedule for the nine months ended
September 30, 2000
(b) Reports on Form 8-K
None
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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 November 9, 2000 by /s/ Geoffrey G. Meyers
------------------- ----------------------
Geoffrey G. Meyers, Executive Vice President
and Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
4 Second Amendment to Five Year Credit Agreement dated as of September
22, 2000 among Manor Care, Inc. (formerly known as HCR Manor Care,
Inc.), Manor Care of America, Inc. (formerly known as Manor Care,
Inc.), various financial institutions, and Bank of America, N.A., as
Administrative Agent.
4.1 Third Amendment to 364 Day Credit Agreement dated as of September 22,
2000 among Manor Care, Inc. (formerly known as HCR Manor Care, Inc.),
Manor Care of America, Inc. (formerly known as Manor Care, Inc.),
various financial institutions and Bank of America, N.A., as
Administrative Agent.
27 Financial Data Schedule for the nine months ended September 30, 2000
18
