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