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FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------------------- ------------------------
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A [X]
(Cover page 1 of 2 pages)
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Based on the closing price of $22.95 per share on March 15, 2001, the aggregate
market value of the registrant's voting stock held by non-affiliates was
$2,229,582,517. Solely for purposes of this computation, the registrant's
directors and executive officers have been deemed to be affiliates. Such
treatment is not intended to be, and should not be construed to be, an admission
by the registrant or such directors and officers that all of such persons are
"affiliates," as that term is defined under the Securities Act of 1934.
The number of shares of Common Stock, $.01 par value, of
Manor Care, Inc. outstanding as of March 15, 2001 was 103,039,664.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference in the Part indicated:
We incorporate by reference specific portions of the registrant's Proxy
Statement for the Annual Stockholders' Meeting to be held May 8, 2001 in Part
III.
EXPLANATORY NOTE
We are filing this amendment to our Form 10-K for the year ended December
31, 2000 to implement the SEC's plain English rules for Items 1-7a and 9-14,
changing merely their form but not substance. We have not made any changes to
Item 8, "Financial Statements and Supplementary Data" from the original filing.
(Cover page 2 of 2 pages)
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TABLE OF CONTENTS
PART I
Item 1. Business ....................................................2
Item 2. Properties .................................................14
Item 3. Legal Proceedings ..........................................16
Item 4. Submission of Matters to a Vote of Security Holders ........18
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters ........................................19
Item 6. Selected Financial Data ....................................20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................21
Item 7a. Quantitative and Qualitative Disclosures about Market Risk..34
Item 8. Financial Statements and Supplementary Data ................34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................63
PART III
Item 10. Directors and Executive Officers of the Registrant .........63
Item 11. Executive Compensation .....................................65
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................................65
Item 13. Certain Relationships and Related Transactions .............65
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ................................................66
SIGNATURES ............................................................73
EXHIBITS ............................................................76
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Manor Care, Inc., which we also refer to as Manor Care, provides a range of
health care services, including skilled nursing care, assisted living, subacute
medical and rehabilitation care, rehabilitation therapy, home health care,
hospice care, and management services for subacute care and rehabilitation
therapy. The most significant portion of our business relates to long-term care,
including skilled nursing care and assisted living, which is our only reportable
operating segment. We provide greater detail about the revenues of certain
health care services and other segment information in Notes 5 and 16 to the
consolidated financial statements.
At December 31, 2000, we operated 298 skilled nursing facilities and 56 assisted
living facilities in 32 states with more than 60 percent of our facilities
located in Ohio, Michigan, Illinois, Pennsylvania and Florida. Some of our
centers include medical specialty units that provide subacute medical and
rehabilitation care, and/or Alzheimer's care programs. At December 31, 2000, we
operated 87 outpatient rehabilitation clinics, an acute care hospital and 78
home health care offices that include the offices of In Home Health, Inc., or
IHHI.
We owned 41 percent of IHHI at December 31, 1999 and acquired additional shares
in June 2000 to increase our ownership to 61 percent. On December 28, 2000,
pursuant to a merger agreement approved by the IHHI stockholders, we purchased
the remaining shares of IHHI to increase our ownership to 100 percent. We paid
approximately $14.0 million for the additional ownership interest during 2000.
In 1998, we formed a strategic alliance with Alterra Healthcare Corporation, or
Alterra, to develop a broad-based network primarily dedicated to the care of
patients suffering from Alzheimer's disease. In 1999, as part of this alliance
we:
- sold 26 assisted living centers to Alterra for $154.5 million and
leased two other centers to Alterra;
- created a joint venture to develop and construct up to $500 million of
Alzheimer's dementia care assisted living facilities in our core
markets over the next three to five years;
- formed a new company to provide a variety of ancillary services,
including rehabilitation therapy and home and hospice care, to
residents in Alterra centers;and
- contributed 20 facilities valued at $77.8 million to various project
companies or partnerships of which the joint venture had a 10 percent
equity interest.
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We and Alterra jointly and severally guaranteed a line of credit related to the
joint venture that was to mature September 30, 2002. In 2000 we took the
following actions with respect to the joint venture:
- Together with Alterra, we curtailed current and ceased future
development activities;
- Together with Alterra, we reduced the joint venture's revolving line
of credit from $200 million to $60 million; and
- We purchased seven facilities that we originally contributed to the
joint venture in 1999.
In January 2001, we and Alterra further reduced the line of credit to $57
million and adjusted the maturity date to June 29, 2001.
Our executive offices are located at 333 N. Summit Street, Toledo, Ohio
43604-2617. Our telephone number is (419) 252-5500.
NARRATIVE DESCRIPTION OF BUSINESS
LONG-TERM CARE SERVICES
We are a leading owner and operator of long-term care centers in the United
States, with the majority of our facilities operating under the respected
Heartland, ManorCare and Arden Courts names.
Skilled Nursing Centers. Our facilities use interdisciplinary teams of
experienced medical professionals to provide services prescribed by physicians.
These teams include registered nurses, licensed practical nurses and certified
nursing assistants, who provide individualized comprehensive nursing care around
the clock. We designed "Quality of Life" programs to give the highest possible
level of functional independence to residents. Licensed therapists provide
physical, speech, respiratory and occupational therapy for patients recovering
from strokes, heart attacks, orthopedic conditions, or other illnesses, injuries
or disabilities. In addition, the centers provide first-class dietary services,
social services, therapeutic recreational activities, housekeeping and laundry
services. The Joint Commission on Accreditation of Healthcare Organizations has
accredited many of our centers.
Assisted Living Services. We have a number of stand-alone assisted living
centers as well as units within our skilled nursing centers dedicated to
providing personal care services and assistance with general activities of daily
living such as dressing, bathing, meal preparation and medication management. We
use a comprehensive resident assessment to help determine the appropriate
package of services desired or required by each resident. Our assisted living
staff encourages residents to socialize and participate in a broad spectrum of
activities.
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SPECIALTY SERVICES
Subacute Medical and Rehabilitation Care. Our leadership in subacute
programs designed to shorten or eliminate hospital stays exemplifies our
commitment to reducing the cost of quality health care. Working closely with
patients, families and insurers, interdisciplinary teams of experienced medical
professionals develop comprehensive, individualized patient care plans that
target the essential medical, functional and discharge planning objectives. We
provide medical and rehabilitation programs for patients recovering from major
surgery; severe injury; or serious cardiovascular, respiratory, infectious,
endocrine or neurological illnesses.
Alzheimer's Care. As an industry leader in Alzheimer's care, we provide
innovative services and facilities to care for Alzheimer's patients in early,
middle and advanced stages of the disease. Trained staffs provide specialized
care and programming for persons with Alzheimer's or related disorders in
freestanding Arden Courts facilities and in dedicated units within many of our
skilled nursing centers.
HEALTH CARE SERVICES
We provide rehabilitation therapy in our long-term care centers, other skilled
centers, hospitals and our 87 outpatient therapy clinics serving the Midwestern
and Mid-Atlantic states, Texas and Florida. Our home health care business
specializes in all levels of home health, hospice care and rehabilitation
therapy from 78 offices in 18 states. We provide program management services for
subacute care and acute rehabilitation programs in hospitals and skilled nursing
centers. We own and operate a general medical/surgical acute care hospital with
172 licensed beds in Texas. We entered into long-term management contracts with
physician practices in the Midwestern states, specializing in vision care and
refractive eye surgery.
OTHER SERVICES
We own approximately 96 percent of a start-up medical transcription company that
converts medical dictation into electronically formatted patient records. Health
care providers use the records in connection with patient care and other
administrative purposes.
LABOR
Labor costs, including temporary staffing, account for approximately 64 percent
of our operating expenses, and we compete with other health care providers to
attract and retain qualified or skilled personnel. We also compete with various
industries for lower-wage employees. A shortage of nurses or other trained
personnel and general inflationary pressures required us to enhance our wage and
benefits packages in order to compete for qualified personnel. Although we
currently do not face a staffing shortage in all markets where we operate, we
have used high priced temporary help to supplement staffing levels in markets
with shortages of health care workers. If a shortage of
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nurses or other health care workers occurred in all geographic areas in which we
operate, it could adversely affect our ability to attract and retain qualified
personnel and could further increase our operating costs.
CUSTOMERS
No individual customer or related group of customers accounts for a significant
portion of our revenue. We do not expect that the loss of a single customer or
group of related customers would have a material adverse effect.
Certain classes of patients rely on a common source of funds to pay the cost of
their care. The following table reflects the allocation of revenue sources among
Medicare, Medicaid, and private pay and other sources for the last three years
for services related to skilled nursing, assisted living and rehabilitation
operations.
2000 1999 1998
---- ---- ----
Medicaid 33% 33% 29%
Medicare 24% 20% 22%
Private pay & other 43% 47% 49%
---- ---- ----
100% 100% 100%
==== ==== ====
Medicaid is a medical assistance program for the indigent, operated by
individual states with the financial participation of the federal government.
Medicare is a health insurance program for the aged and certain other
chronically disabled individuals, operated by the federal government.
Private pay and other sources include commercial insurance, individual patients'
own funds, managed care plans and the Veterans Administration. Although payment
rates vary among these sources, market forces and costs largely determined these
rates.
Government reimbursement programs such as Medicare and Medicaid prescribe, by
law, the billing methods and amounts that may be charged and reimbursed to care
for patients covered by these programs. On August 5, 1997, Congress enacted the
Balanced Budget Act of 1997, or the Budget Act, which sought to achieve a
balanced federal budget by, among other things, reducing federal spending on
Medicare and Medicaid. The Budget Act contained numerous changes affecting
Medicare and Medicaid payments to skilled nursing facilities, home health
agencies, hospices and therapy providers, among others.
Medicare and Medicaid Payment Changes Under the Budget Act. Medicare
reimbursed skilled nursing facilities retrospectively for cost reporting periods
that began before July 1, 1998. Under this system, each facility received an
interim payment during the year. The skilled nursing facility then submitted a
cost report at the end of each year and Medicare adjusted the payment to reflect
actual allowable direct and indirect costs of services. The Budget Act changed
the Medicare payment system to a prospective system in which Medicare reimburses
skilled nursing facilities at a daily rate for specific covered services
regardless of their actual cost based on various categories of patients. The
Medicare program phased in this prospective payment system over three cost
reporting periods beginning on or after July 1, 1998. The Budget Act also
required a prospective
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payment system to be established for home health services that began October 1,
2000. The Budget Act also reduced payments to many providers and suppliers,
including therapy providers and hospices, and gave states greater flexibility to
administer their Medicaid programs by repealing the federal requirement that
payment be reasonable and adequate to cover the costs of "efficiently and
economically operated" nursing facilities.
Federal Medicare Payment Legislation. In November 1999, Congress passed the
Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999, or BBRA 99.
In addition, in December 2000 Congress passed the Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act of 2000, or BIPA 2000. Both BBRA 99 and
BIPA 2000 redress certain reductions in Medicare reimbursement resulting from
the Budget Act. Several provisions of BBRA 99 positively affected us, beginning
primarily in the latter half of 2000. These favorable provisions include:
- a temporary increase in the payment for certain high cost nursing home
patients, for services provided beginning April 1, 2000. BIPA 2000
amended this provision to redistribute the amounts applicable to
rehabilitation patients from three specific categories to all
rehabilitation categories. This temporary increase will continue until
the Secretary of the Department of Health and Human Services
implements a refined patient classification to better account for
medically complex patients;
- increases in federal daily rates by an additional 4 percent per year
for the 12 months ending September 30, 2001 and 2002;
- for cost reporting periods beginning on or after January 1, 2000,
skilled nursing facilities may waive the prospective payment system
transition period and elect to receive 100 percent of the federal
daily rate;
- specific services or items, such as ambulance services in conjunction
with renal dialysis, chemotherapy items and prosthetic devices,
furnished on or after April 1, 2000, may be reimbursed in addition to
the prospective payment system daily rate;
- a two-year moratorium on the annual $1,500 therapy cap on each of
physical/speech therapy and occupational therapy beginning with
services provided on or after January 1, 2000. BIPA 2000 amended this
provision, extending the moratorium through December 31, 2002; and
- a delay in the 15 percent reduction in the base payment level for our
home health business until October 2001. BIPA 2000 further amended
this provision, extending the delay through September 30, 2002. In
addition, BIPA 2000 requires that the Government Accounting Office
submit a report to Congress by April 1, 2002 analyzing the need to
reduce payment limits for home health services by 15 percent.
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We expect the positive effects of these provisions to continue through 2001. In
addition to the changes noted above, several other BIPA 2000 provisions will
positively affect us beginning in the second quarter of 2001. These provisions
include the following:
- BIPA 2000 increased the skilled nursing facility prospective payment
adjustment upward for rates effective October 1, 2000 through
September 30, 2001;
- effective April 1, 2001 and continuing through September 30, 2002, the
nursing component of the federal prospective rate will be increased by
16.66 percent; and
- BIPA 2000 provides a 5 percent increase in rates for hospice services
furnished on or after April 1, 2001 through September 30, 2002.
We cannot assure you that payments from governmental or private payors will
remain at levels comparable to levels described above. Furthermore, we cannot
assure you that these payments will be sufficient to cover our costs for
patients in these programs in the future. We cannot now predict whether any
changes in reimbursement will be adopted in the future or what effect any
changes, if adopted, would have on us.
REGULATION AND LICENSES
General. Health care is an area of extensive and frequent regulatory
change. The federal government and the states in which we operate regulate
various aspects of our business. These regulatory bodies, among other things,
require us annually to license our skilled nursing facilities, assisted living
facilities in some states, and other health care businesses, including home
health agencies and hospices. In particular, to operate nursing facilities and
provide health care services we must comply with federal, state and local laws
relating to the delivery and adequacy of medical care, distribution of
pharmaceuticals, equipment, personnel, operating policies, fire prevention,
rate-setting, and building codes and environmental protection.
Governmental and other authorities periodically inspect our skilled nursing
facilities to assure that we continue to comply with their various standards. We
must pass these inspections to continue our licensing under state law, to obtain
certification under the Medicare and Medicaid programs and to continue our
participation in the Veterans Administration program. We can only participate in
other third-party programs if our facilities pass these inspections. In
addition, these authorities inspect our record keeping and inventory control.
From time to time, we, like others in the health care industry, may receive
notices from federal and state regulatory agencies alleging that we failed to
comply with applicable standards. These notices may require us to take
corrective action, and may impose civil money penalties and/or other operating
restrictions on us. If our skilled nursing facilities fail to comply with these
directives or otherwise fail to comply substantially with licensure and
certification laws, rules and regulations, we could lose our certification as a
Medicare and Medicaid provider and/or lose our licenses.
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Local and state health and social service agencies and other regulatory
authorities specific to their location regulate, to varying degrees, our
assisted living facilities. While regulations and licensing requirements often
vary significantly from state to state, they typically address, among other
things:
- personnel education, training and records;
- facility services, including administration of medication, assistance
with supervision of medication management and limited nursing
services;
- physical plant specifications;
- furnishing of resident units;
- food and housekeeping services;
- emergency evacuation plans; and
- resident rights and responsibilities.
If assisted living facilities fail to comply with licensing requirements, these
facilities could lose their licenses. Most states also subject assisted living
facilities to state or local building codes, fire codes and food service
licensure or certification requirements. In addition, since the assisted living
industry is relatively new, the manner and extent to which it is regulated at
federal and state levels are evolving. Changes in the laws or new
interpretations of existing laws as applied to the skilled nursing facilities,
the assisted living facilities or other components of our health care businesses
may significantly impact our methods and costs of doing business.
Licensing and Certification. Our success depends in part upon our ability
to satisfy applicable regulations and requirements to procure and maintain
required licenses and Medicare and Medicaid certifications in rapidly changing
regulatory environments. If we fail to satisfy applicable regulations or to
procure or maintain a required license or certification, it could have a
material adverse effect on us. In addition, certain regulatory developments,
such as revisions in the building code requirements for assisted living and
skilled nursing facilities, mandatory increases in scope and quality of care to
be offered to residents, and revisions in licensing and certification standards,
could have a material adverse effect on us.
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Health Care Reforms. In recent years, there have been numerous initiatives
on the federal and state levels for comprehensive reform affecting the payment
for and availability of health care services. Some aspects of these health care
initiatives could adversely affect us such as:
- reductions in funding of the Medicare and Medicaid programs;
- potential changes in reimbursement regulations by the Health Care
Financing Administration;
- enhanced pressure to contain health care costs by Medicare, Medicaid
and other payors; and
- greater state flexibility in the administration of Medicaid.
Certificate of Need Laws. Many states have adopted Certificate of Need or
similar laws that generally require that the appropriate state agency approve
certain acquisitions and determine that a need exists for certain bed additions,
new services and capital expenditures or other changes before health care
providers add beds and/or new services or undertake capital expenditures. To the
extent that state agencies require us to obtain a Certificate of Need or other
similar approvals to expand our operations, either by acquiring facilities or by
expanding or providing new services or other changes, our expansion plans could
be adversely affected if we cannot obtain the necessary approvals. Our expansion
of operations could be adversely affected by changes in standards applicable to
approvals and possible delays and expenses associated with obtaining the
approvals. We cannot assure you that we will be able to obtain Certificate of
Need approval for all future projects requiring approval.
Federal and State Fraud and Abuse. We are also subject to federal and state
laws that govern financial and other arrangements involving health care
providers. These laws prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers designed to induce or
encourage providers to refer patients to, or recommend or arrange, a particular
provider for medical products and services. These laws include the federal
"Stark Legislation" which, with limited exceptions, prohibits physicians from
referring Medicare and Medicaid patients for certain designated health services,
including home health services, physical therapy and occupational therapy, to an
entity in which the physician has a financial interest.
The January 2001 final rule to implement the Stark Legislation makes clear that
the restrictions apply to referrals for designated health services provided in
skilled nursing facilities. This final rule is commonly referred to as Phase I.
Certain statutory exceptions are available for employment agreements, leases,
in-office ancillary services and other physician arrangements. Phase I of the
final rule also sets forth additional exceptions. Most of this rule will become
effective January 4, 2002, except for provisions governing referrals for home
health care services, which became effective April 6, 2001.
We expect Phase II of the final rule, which will cover the remaining portions of
the statute, including those pertaining to Medicaid, to be released in 2001.
Phase I of the final rule eases
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certain of the restrictions in the proposed rule, including the criteria for
qualifying as a group practice. The final rule also, among other things:
- recognizes an exception for referrals for residents covered under a
Medicare Part A skilled nursing facility stay and for patients covered
under the Medicare hospice benefit;
- conforms the supervision requirements to Medicare coverage and payment
policies for the specific services;
- clarifies the definitions of designated health services and indirect
financial relationships; and
- creates various new exceptions, including exceptions for indirect
compensation arrangements and fair market value transactions.
We have sought to comply in all respects with all applicable provisions of the
Stark Legislation; however, we cannot assure you that our physician arrangements
will be found to comply with the Stark Legislation, as the law may ultimately be
interpreted. In addition, we are subject to the federal "anti-kickback law."
Among other things, this law prohibits the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of patients, or
the purchasing, leasing, ordering, or arranging for any goods, services or items
for which payment can be made under Medicare, Medicaid or other federal health
care programs. Possible sanctions for violating the anti-kickback law include
criminal penalties, civil money penalties and/or exclusion from participation in
Medicare, Medicaid or other federal health care programs. Furthermore, many
states restrict business relationships between physicians and other providers of
health care services, and some have enacted laws similar to the federal Stark
Legislation and the anti-kickback law.
False Claim Regulation. Several criminal and civil statutes prohibit
false claims. Criminal provisions at 42 U.S.C. Section 1320a-7b prohibit filing
false claims or making false statements to receive payment or certification
under Medicare and Medicaid, or failing to refund overpayments or improper
payments. Offenses for violation are felonies punishable by up to five years
imprisonment and/or $25,000 fines. Criminal penalties may also be imposed
pursuant to the Federal False Claim Act, 18 U.S.C. Section 287. In addition,
under the Health Insurance Portability and Accountability Act of 1996, or HIPAA,
Congress enacted a criminal health care fraud statute for fraud involving a
health care benefit program, which it defined to include both public and private
payors. Civil provisions at 31 U.S.C. Section 3729 prohibit the known filing of
a false claim or the known use of false statements to obtain payment. Penalties
for violations are fines ranging from $5,500 to $11,000, plus treble damages,
for each claim filed. Also, the statute allows any individual to bring a suit,
known as a qui tam action, alleging false or fraudulent Medicare or Medicaid
claims or other violations of the statute and to potentially share in any
amounts paid by the entity to the government in fines or settlement. We have
sought to comply with these statutes; however, we cannot assure you that these
laws will ultimately be interpreted in a manner consistent with our practices or
business transactions.
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The federal government, private insurers and various state enforcement agencies
have increased their scrutiny of providers' business practices and claims in an
effort to identify and prosecute fraudulent and abusive practices. The federal
government has issued fraud alerts concerning home health services, the
provision of medical services and supplies to skilled nursing facilities, and
arrangements between hospices and nursing facilities; accordingly, these areas
may come under closer scrutiny by the government. In addition, the Department of
Health and Human Services, Office of Inspector General and the Department of
Justice have from time to time established enforcement initiatives focusing on
specific billing practices or other suspected areas of abuse. Current
initiatives include:
- the appropriateness of therapy services provided to Medicare
beneficiaries residing in skilled nursing facilities;
- appropriate cost allocation between the Medicare-certified and
non-certified portions of the facility; and
- billing for ancillary supplies, resident assessments and quality of
care.
HIPAA, which became effective January 1, 1997, expands the scope of certain
fraud and abuse laws to include all health care services, whether or not they
are reimbursed under a federal health care program, and creates new enforcement
mechanisms to combat fraud and abuse. The Budget Act also expands numerous
health care fraud provisions.
In addition, some states prohibit business corporations from providing, or
holding themselves out as a provider of, medical care. Possible sanctions for
violating any of these restrictions or prohibitions include loss of licensure or
eligibility to participate in reimbursement programs and civil and criminal
penalties. These laws vary from state to state and have seldom been interpreted
by the courts or regulatory agencies. We have sought to structure our business
relationships and transactions in compliance with these federal and state fraud
and abuse laws; however, we cannot assure you that these laws will ultimately be
interpreted in a manner consistent with our practices or business transactions.
Our failure to comply with these laws could result in civil money penalties,
exclusion from the Medicare, Medicaid and other federal health care programs,
and criminal convictions.
Related Party Rule. Before implementation of the prospective payment
system for skilled nursing facilities, the Medicare program limited certain
allowable costs for items and services provided by companies that are associated
or affiliated with a Medicare provider or have control of, or are controlled by,
a Medicare provider. Many state Medicaid programs have adopted the same rule in
determining costs that will be included in the payment rates. Unless a provider
qualifies for the exception to the related party rule, the Medicare program will
only reimburse the provider for the cost incurred by the related party in
providing products or services, rather than the related party's charge. An
organization can qualify for the exception to the related party rule by meeting
the following criteria:
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- the entities are bona fide separate organizations;
- a substantial part of the supplying organization's business activity
is conducted with non-related organizations and there is an open,
competitive market for the services or products;
- the services or products are commonly obtained by a provider from
other organizations and are not a basic element of patient care
ordinarily furnished directly to patients by the providers; and
- the charge to the provider is in line with the charge for these
services and products in the open market and no more than the charge
made under comparable circumstances to others.
The Medicare program has taken the position that one of our subsidiaries
providing rehabilitation management services is a related party and that certain
fees paid to this entity should be adjusted based upon the related party rule.
We are in the process of appealing the Medicare program's decision to adjust
these fees. We believe that, to the extent the Medicare program considers this
subsidiary or any other subsidiary of ours to be a related party for purposes of
this rule, the operations of each subsidiary would qualify for the exception to
the related party rule. However, we cannot assure you that the interpretation
and application of the related party rule and its exception by governmental
authorities will result in Manor Care qualifying for the exception. The
application of the Medicare related party rule could adversely affect allowable
payments to our skilled nursing facilities for pre-July 1, 1998 cost reports.
Health Information Practices. HIPAA also mandates, among other things, that
the Department of Health and Human Services adopt standards for the exchange of
electronic health information in an effort to encourage overall administrative
simplification and enhance the effectiveness and efficiency of the health care
industry. The Department of Health and Human Services has adopted standards for
the following:
- electronic transactions and code sets;
- unique identifiers for providers, employers, health plans and
individuals;
- security and electronic signatures;
- privacy; and
- enforcement.
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Although HIPAA was intended ultimately to reduce administrative expenses and
burdens faced within the health care industry, we believe the law will initially
bring about significant and, in some cases, costly changes. The Department of
Health and Human Services has released two rules to date mandating the use of
new standards with respect to certain health care transactions and health
information. The first rule establishes standards for the use of electronic
signatures and requires the use of uniform standards for common health care
transactions, including:
- health care claims information;
- plan eligibility, referral certification and authorization;
- claims status;
- plan enrollment and disenrollment;
- payment and remittance advice;
- plan premium payments; and
- coordination of benefits.
Second, the Department of Health and Human Services has released standards
relating to the privacy of individually identifiable health information. These
standards not only require our compliance with rules governing the use and
disclosure of protected health information, but they also require us to impose
those rules, by contract, on any business associate to whom we disclose
information. The Department of Health and Human Services has proposed rules
governing the security of health information, but has not yet issued these rules
in final form.
The Department of Health and Human Services finalized the new transaction
standards on August 17, 2000, and we will be required to comply with them by
October 16, 2002. The Department of Health and Human Services issued the privacy
standards on December 28, 2000, which became effective on April 14, 2001, with a
compliance date of April 14, 2003. Once the Department of Health and Human
Services has issued the security regulations in final form, affected parties
will have approximately two years to be fully compliant. Sanctions for failing
to comply with the HIPAA health information practices provisions include
criminal penalties and civil sanctions.
Management is in the process of evaluating the effect of HIPAA on us. At this
time, management anticipates that we will be able to fully comply with those
HIPAA requirements that have been adopted. However, management cannot at this
time estimate the cost of compliance, nor can we estimate the cost of compliance
with standards that have not yet been finalized by the Department of Health and
Human Services. Although the new and proposed health information standards are
likely to have a significant effect on the manner in which we handle health data
and communicate with payors, based on our current knowledge, we believe that the
cost of our compliance will not have a material adverse effect on our business,
financial condition or results of operations.
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COMPETITIVE CONDITIONS
Our nursing facilities compete primarily on a local and regional basis with many
long-term care providers, some of whom may own as few as a single nursing
center. Our ability to compete successfully varies from location to location and
depends on a number of factors, which include:
- the number of competing centers in the local market;
- the types of services available;
- quality of care;
- reputation, age and appearance of each center; and
- the cost of care in each locality.
In general, we seek to compete in each market by establishing a reputation
within the local community for quality and caring health services, attractive
and comfortable facilities, and providing specialized health care.
We also compete with a variety of other companies in providing assisted living
services, rehabilitation therapy services and home health care services. Given
the relatively low barriers to entry and continuing health care cost containment
pressures in the assisted living industry, we expect that the assisted living
industry will become increasingly competitive in the future. Increased
competition in the future could limit our ability to attract and retain
residents, to maintain or increase resident service fees, or to expand our
business.
EMPLOYEES
As of December 31, 2000, we had approximately 54,000 full- and part-time
employees. Approximately 6,000 of our employees are salaried and we pay the
remainder on an hourly basis. Approximately 2,000 of our employees are members
of labor unions.
ITEM 2. PROPERTIES
Our principal properties and those of our subsidiaries, which are of material
importance to the conduct of our and their business, consist of 354 long-term
care centers located in 32 states. The centers are predominately single-story
structures with brick or stucco facades, dry wall partitions and attractive
interior finishes. Common areas of the skilled nursing facilities include
dining, therapy, personal care and activity rooms, and resident and visitor
lounges, as well as administrative offices and employee lounges. We believe that
all of our centers have been well maintained and are suitable for the conduct of
our business. For the year ended December 31, 2000, approximately 86 percent of
the beds were utilized.
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The following table shows the number and location of centers and beds we
operated as of December 31, 2000.
Number of Centers
-----------------
Assisted
Skilled Living Number of Beds
------- ------ --------------
Pennsylvania 46 10 8,146
Florida 36 11 6,005
Ohio 43 6 5,996
Illinois 29 6 4,194
Michigan 26 1 3,490
Texas 19 2 3,122
Maryland 13 8 2,570
California 9 1 1,388
Wisconsin 10 1,154
Indiana 5 1 1,061
Virginia 6 1 978
West Virginia 7 940
South Carolina 7 853
New Jersey 4 4 736
Oklahoma 6 714
Washington 4 483
Kansas 3 466
New Mexico 3 455
Missouri 3 430
Iowa 4 406
Delaware 2 1 347
Colorado 2 300
Kentucky 1 1 264
Georgia 2 257
North Dakota 2 215
Tennessee 1 211
Connecticut 3 180
Nevada 1 180
Utah 1 140
Arizona 1 120
North Carolina 1 120
South Dakota 1 99
---- ---- --------
298 56 46,020
==== ==== ========
We own 332 of these centers, lease 19, and have partnerships in three centers.
We operate 56 assisted living facilities with a total of 4,699 beds. Sixteen of
our properties are subject to liens that encumber the properties in an aggregate
amount of $41,382,000.
We lease space for our corporate headquarters in Toledo, Ohio. We also lease
space for our outpatient therapy clinics and home health care offices. In
addition, we own one hospital in Texas.
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ITEM 3. LEGAL PROCEEDINGS
Since May of 1999, we and other related persons and entities have been parties
to several actions by or against Genesis Health Ventures, Inc. and its
subsidiary, NeighborCare Pharmacy Services, Inc. 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 as follows:
First Action. On May 7, 1999, Genesis filed suit in federal district court
in Delaware against us, our wholly owned subsidiary, Manor Care of America,
Inc., formerly known as Manor Care, Inc., or MCA, our Chief Executive Officer,
Paul A. Ormond, and our 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., an approximately 50
percent-owned subsidiary of MCA. The complaint further alleges that the
defendants' alleged conduct constituted violations of Section 10(b) of the
Securities Exchange Act of 1934, and constituted common law fraudulent
misrepresentation and negligent misrepresentation. The suit also alleges that
our ownership in a partnership known as Heartland Healthcare Services violates a
non-compete provision signed by MCA. The suit seeks compensatory and punitive
damages in excess of $100 million and preliminary and permanent injunctive
relief enforcing the covenant not to compete.
On June 29, 1999, the defendants moved to dismiss or, in the alternative, to
stay the lawsuit in its entirety. On 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. We intend 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 our financial condition.
Second Action. On August 27, 1999, MCA filed a separate action in federal
district court in Delaware against Genesis concerning Genesis's 1998 acquisition
of Vitalink. MCA's lawsuit charges that Genesis violated Section 11 and Section
12 of the Securities Act of 1933, when Genesis issued approximately $293 million
of Genesis Preferred Stock to MCA for MCA's interest in Vitalink. The suit
alleges that Genesis misrepresented and/or omitted material facts. MCA seeks,
among other things, compensatory damages and recission, which would void MCA's
purchase of the Genesis Preferred Stock and require Genesis to return to MCA 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 MCA'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.
On October 6, 2000, MCA advised the court by letter that the automatic stay in
bankruptcy--a provision of the bankruptcy laws that prevents creditors from
taking collection and other actions against a bankrupt debtor outside of the
bankruptcy courts--had stayed MCA's lawsuit. However, pursuant to 11 U.S.C. ss.
108(c), MCA reserved any and all rights it may have concerning the September 29,
2000 order and the MCA litigation,
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including the right to seek clarification and reconsideration of the order,
following termination or expiration of the automatic stay. We intend to
vigorously prosecute this lawsuit following relief from the bankruptcy stay.
Third Action. Additionally, on May 7, 1999, NeighborCare instituted a
lawsuit in the Circuit Court for Baltimore City, Maryland against us, MCA and
ManorCare Health Services, Inc. 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
between Vitalink, now known as NeighborCare, and ManorCare Health Services, Inc.
NeighborCare also instituted arbitration proceedings against the same
defendants. These proceedings seek substantially the same relief as sought in
the Maryland action with respect to one of the Master Service Agreements 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:
- to consolidate the Maryland action into the arbitration;
- to dismiss the Maryland action with prejudice as to jurisdiction and
without prejudice as to the merits; and
- 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. They subsequently moved to dismiss
three of the six claims alleged in the amended demand. On or about May 17, 2000,
the arbitrator, in response to the defendants' motion, dismissed 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. NeighborCare's June 22, 2000 bankruptcy effectively stayed the matter.
The defendants then asked the bankruptcy court to enforce the arbitration clause
and relieve them from the automatic stay to the extent necessary to complete the
arbitration. NeighborCare, in turn, opposed this motion and filed its own motion
to assume the Master Service Agreements in the bankruptcy.
On or about February 6, 2001, the bankruptcy court granted the defendants'
motion to enforce the arbitration clause and for relief from the automatic stay,
returning the matter to arbitration for hearing. The bankruptcy court deferred
consideration of NeighborCare's motion to assume the Master Service Agreements
until the arbitration is complete. The arbitration hearing is scheduled to begin
on July 30, 2001. We intend to vigorously defend the arbitration demand and to
vigorously prosecute our counterclaim following relief from the automatic stay.
Although we cannot predict the ultimate outcome of the arbitration, management
believes that it is not likely to have a material adverse effect on our
financial condition.
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Additional NeighborCare Complaint. 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. seeking
injunctive relief and compensatory and punitive damages. Heartland Healthcare
Services, Inc. is a partnership between us and subsidiaries of Omnicare. The
complaint includes counts for tortious interference with Vitalink's purported
contractual rights under the Master Service Agreements. 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 we cannot predict the ultimate outcome of the case,
management believes that it is not likely to have a material adverse effect on
our financial condition.
Fourth Action. On December 22, 1999, MCA 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 MCA 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.
See the "Commitments and Contingencies" section on pages 31-32 under Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, for a discussion of litigation related to environmental matters and
patient-care related claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our common stock is listed under the symbol "HCR" on the New York Stock
Exchange, which is the principal market on which the stock is traded.
NYSE MARKET PRICE HISTORY
LOW HIGH
1999
First Quarter.................... $21.9375 $33.5000
Second Quarter................... $22.0000 $30.2500
Third Quarter.................... $15.6875 $24.7500
Fourth Quarter................... $12.7500 $21.2500
2000
First Quarter.................... $8.2500 $17.3750
Second Quarter................... $6.5000 $13.7500
Third Quarter.................... $6.8750 $16.1875
Fourth Quarter................... $13.4375 $21.1875
We have not declared or paid any cash dividends on our common stock.
On January 31, 2001, we had 3,777 stockholders of record. Approximately 93% of
our outstanding shares were registered in the name of The Depository Trust
Company, or Cede & Co., which held these shares on behalf of several hundred
brokerage firms, banks and other financial institutions. We estimate that the
shares attributed to these financial institutions represent the interests of
nearly 20,000 beneficial owners.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL HISTORY
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands, except per share and Other Data)
RESULTS OF OPERATIONS
Revenues ............................................... $ 2,380,578 $ 2,135,345 $ 2,209,087 $ 2,228,534 $ 2,022,710
Expenses:
Operating ............................................ 2,016,258 1,697,459 1,715,575 1,760,923 1,598,826
General and administrative ........................... 104,027 89,743 96,017 99,881 100,971
Depreciation and amortization ........................ 121,208 114,601 119,223 112,723 99,165
Provision for restructuring charge, merger expenses,
asset impairment and other related charges .... 14,787 278,261 26,300
----------- ----------- ----------- ----------- -----------
2,241,493 1,916,590 2,209,076 1,973,527 1,825,262
----------- ----------- ----------- ----------- -----------
Income from continuing operations before other income
(expenses), income taxes, and minority interest ...... 139,085 218,755 11 255,007 197,448
Other income (expenses):
Interest expense ..................................... (60,733) (54,082) (46,587) (56,805) (47,799)
Impairment of investments ............................ (20,000) (274,120)
Equity in earnings of affiliated companies ........... 812 1,729 5,376 2,806 1,500
Other income ......................................... 2,505 5,322 16,635 23,289 11,353
Interest income from advances to discontinued
lodging segment ................................... 16,058 20,314
----------- ----------- ----------- ----------- -----------
Total other expenses, net ........................... (77,416) (321,151) (24,576) (14,652) (14,632)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and minority interest ................... 61,669 (102,396) (24,565) 240,355 182,816
Income taxes (benefit) ................................. 21,489 (47,238) 21,597 85,064 64,177
Minority interest income ............................... 1,125
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations ............... $ 39,055 $ (55,158) $ (46,162) $ 155,291 $ 118,639
=========== =========== =========== =========== ===========
Earnings per share -
Income (loss) from continuing operations:
Basic ................................................ $ .38 $ (.51) $ (.42) $ 1.44 $ 1.10
Diluted .............................................. $ .38 $ (.51) $ (.42) $ 1.40 $ 1.06
Manor Care of America, Inc. dividends per share ........ $ .04 $ .09 $ .09
FINANCIAL POSITION
Total assets ........................................... $ 2,358,468 $ 2,289,777 $ 2,722,727 $ 2,568,368 $ 2,382,038
Long-term debt ......................................... 644,054 687,502 693,180 751,281 731,346
Shareholders' equity ................................... 1,012,729 980,037 1,199,168 1,163,029 994,690
OTHER DATA (UNAUDITED)
Number of skilled nursing and assisted living facilities 354 346 360 335 323
The financial results represent the combined results of Health Care and
Retirement Corporation, or HCR, and Manor Care of America, Inc., or MCA, for all
periods presented. For 1998 and forward, the financial information was based on
a year ended December 31. For 1997 and 1996, HCR's financial information for the
years ended December 31, 1997 and 1996 was combined with MCA's financial
information for the 12 months ended November 30, 1997 and 1996, respectively,
due to different fiscal year ends.
We changed our method of accounting for our investment in In Home Health, Inc.,
or IHHI, over the past five years due to changes in ownership or control. See
Note 1 to our consolidated financial statements for further discussion. We
consolidated IHHI's financial results in 2000, 1997 and 1996 and recorded them
under the equity method in 1999 and 1998. IHHI's results are not included on the
individual line items when recording under the equity method. For a consistent
trend, you
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must add the amounts above with IHHI's revenues of $84.3 million for 1999 and
$87.7 million for 1998, and IHHI's operating expenses of $72.2 million for 1999
and $83.7 million for 1998.
On November 1, 1996, MCA completed the spin-off of its lodging segment, and the
financial results above reflect this segment as a discontinued operation in
1996. MCA recorded interest income related to cash advances provided to the
discontinued lodging segment for the acquisition and renovation of lodging
assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - OVERVIEW
On September 24, 1998, the shareholders of Health Care and Retirement
Corporation, or HCR, and the shareholders of the former Manor Care, Inc., or
MCA, now known as Manor Care of America, Inc., separately approved the merger of
MCA into a subsidiary of HCR, effective September 25, 1998. As a result, MCA
became a wholly owned subsidiary of HCR and HCR changed its name to HCR Manor
Care, Inc. and then to Manor Care, Inc. in 1999. We accounted for the merger by
the pooling-of-interests method. Accordingly, our consolidated financial
statements give retroactive effect to the merger and include the combined
operations for all periods.
We provide a range of health care services, including skilled nursing care,
assisted living, subacute medical and rehabilitation care, rehabilitation
therapy, home health care, hospice care and management services for subacute
care and rehabilitation therapy. The most significant portion of our business
relates to skilled nursing care and assisted living. At December 31, 2000, we
operated 298 skilled nursing facilities and 56 assisted living facilities in 32
states with more than 60 percent of our facilities located in Ohio, Michigan,
Illinois, Pennsylvania and Florida. Within some of our centers, we have medical
specialty units, which provide subacute medical and rehabilitation care and/or
Alzheimer's care programs.
Some of our assisted living facilities operate under the brand names "Arden
Courts" and "Springhouse." The Arden Courts facilities focus specifically on
providing care to persons suffering from early to middle-stage Alzheimer's
disease and related memory impairment. The Springhouse facilities serve the
general assisted living population of frail elderly. Our assisted living
facilities provide housing, personalized support and health care services in a
non-institutional setting designed to address the needs of the elderly or
Alzheimer's patients.
Expansion
Growth in our long-term care segment continued as we constructed new facilities.
The table below details the number of skilled nursing and assisted living
facilities and beds that we built or sold during the past three years. We have
not included in the table (1) the sixteen facilities that we sold to either
Alterra or the joint venture that were not open at the time of sale or (2) any
activity related to managed facilities.
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2000 1999 1998
FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS
Skilled nursing facilities:
Built/Acquired..................... -- -- 3 414 2 240
Closed/Lease expired............... 2 349 -- -- -- --
Assisted living facilities:
Built/Acquired..................... 12 728 12 752 26 1,680
Sold/Leased to others.............. -- -- 31 2,602 2 185
In 1998 and 1999, we owned 41 percent of the common stock of In Home Health,
Inc., or IHHI, and accounted for our investment under the equity method. In June
2000, we increased our ownership to 61 percent and changed our accounting to
consolidation. Retroactive to January 1, 2000, we began consolidating IHHI's
results and deducting the minority owners' share of earnings on an after-tax
basis. On December 31, 2000, pursuant to a merger agreement approved by the IHHI
stockholders, we purchased the remaining shares of IHHI to increase our
ownership to 100 percent.
Medicare Legislation
In the last three years, major changes in Medicare legislation affected our
results. The Balanced Budget Act of 1997, or the Budget Act, initialized a new
Medicare prospective payment system on July 1, 1998. The new payment system
became effective for different types of health care providers (hospitals,
skilled nursing, home health, etc.) at different times and at different dates
for different nursing facilities. Although we believed that the prospective
payment system would ultimately be a net positive for our skilled nursing
business, this was not believed to be true in 1998 for our other businesses and
customers. MileStone Healthcare, Inc., one of our wholly owned subsidiaries,
provides management services to skilled nursing, subacute care and acute
rehabilitation programs, primarily in hospitals. MileStone lost certain
contracts during the second and third quarters of 1998 that have not been
replaced due to the impact of the prospective payment system on its customers.
In addition, the Budget Act had an unfavorable impact on home health care
reimbursement because of an interim payment system that was effective in October
1997 for IHHI and in January 1998 for our home health subsidiary. This interim
payment system reduced reimbursement rates by revising the rate ceilings and
establishing an annual payment limitation per individual. Accordingly, we have
been focusing on reducing our costs to offset these revenue reductions. The
prospective payment system replaced the interim payment system for home health
reimbursement in October 2000. However, a reduction in the base payment rate has
been delayed by BBRA 99, which we discuss in the "Business" section. We do not
believe that the impact of the prospective payment system on our home health
business will have a significant effect on our results. In April 1998, Medicare
implemented reimbursement ceilings for speech and occupational therapy salaries,
which reduced reimbursement to our rehabilitation business. See our discussion
below for the impairment charges in 1998 on these businesses.
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YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
As we explained in the overview, we changed the accounting for our investment in
IHHI retroactive to January 1, 2000. In the table below, we include IHHI's
actual financial results in our revenues and expenses for 1999 so that you may
compare these numbers to our 2000 revenues and expenses in a more meaningful
way. The narrative that follows includes IHHI in 1999 only for these four line
items in the table.
Percent
2000 1999 Change
---- ---- ------
(In thousands)
Revenues............................... $2,380,578 $2,219,651 7%
Expenses:
Operating............................ 2,016,258 1,769,706 14%
General and administrative........... 104,027 96,749 8%
Depreciation and amortization........ 121,208 116,079 4%
Revenues. Our revenues increased $160.9 million, or 7 percent, from 1999 to
2000. By excluding the facilities we sold or leased in 1999, our revenues
increased $181.9 million, or 8 percent. Our revenues from skilled nursing and
assisted living facilities that are included in 2000 operations increased $147.2
million, or 8 percent. This increase was due to increases in rates--$123.0
million and increases in bed capacity--$33.1 million, which increases were
partially offset by a decrease in occupancy--$8.9 million. Our revenues from the
combined home health businesses increased $41.1 million primarily because of an
increase in hospice services and home health visits.
Our rate increases for the skilled nursing and assisted living facilities relate
to private pay, Medicaid and Medicare sources. The Medicare rate increase
related to BBRA 99 provisions. Our bed capacity grew between 1999 and 2000
primarily because we opened eleven assisted living facilities in 2000, and added
other skilled nursing beds. Our occupancy levels for facilities in operation in
2000 were 87 percent for 1999 compared with 86 percent for 2000. When excluding
start-up facilities, our occupancy levels were 87 percent for both years. Our
occupancy levels for skilled nursing facilities were 87 percent for both years.
In addition, our skilled nursing occupancy increased to 88 percent in the fourth
quarter of 2000. The quality mix of revenue from Medicare, private pay and
insured patients that related to skilled nursing and assisted living facilities
and rehabilitation operations remained constant at 67 percent for 1999 and 2000.
Operating Expenses. Our operating expenses in 2000 increased $246.6
million, or 14 percent, compared with 1999. If we exclude facilities sold or
leased in 1999, operating expenses increased $265.4 million, or 15 percent.
Operating expenses from our home health businesses increased $36.5 million,
which is consistent with the revenues increase mentioned above. Operating
expenses from skilled nursing and assisted living facilities increased $208.4
million. We attribute the largest portion of this skilled nursing and assisted
living operating expense increase to labor costs and temporary staffing in the
amount of $88.8 million.
An additional $57.0 million of the skilled nursing and assisted living operating
expense increase resulted from our recording an increased general and
professional liability expense in
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2000 compared with 1999. This increase related to a change in estimate
incorporating industry experience. Despite our continuing good quality record
and generally low historical claims experience, we decided to obtain independent
evaluations of our growing potential liability for patient-related litigation in
response to the dramatic increases in the average cost per claim and volume of
lawsuits filed against us and the long-term care industry in general. We
adjusted our expenses to reflect the additional litigation and settlement costs
we could incur if there is no change in the current environment, particularly in
the state of Florida.
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 increased to three times higher in 2000.
Florida industry providers experienced three times the number of claims in 1999
and four times the number of claims in 2000 compared to the national average.
We, along with other affected providers, are actively pursuing legislative and
regulatory changes, that include tort reform. However, we cannot assure you that
legislative changes will be made, or that any such changes will have a positive
impact on the current trend.
General and Administrative Expenses. Our general and administrative
expenses, which approximated 4 percent of revenues, increased $7.3 million
compared with 1999, primarily as a result of legal expenses, other professional
services and general cost increases.
Depreciation and Amortization. Our depreciation and amortization increased
$5.1 million primarily due to computer software amortization.
Interest Expense. Although our average debt outstanding has declined, our
interest expense increased $6.7 million compared with the prior year due to an
increase in interest rates.
Impairment of Investments. On April 26, 1998, Vitalink Pharmacy Services,
Inc. entered into an Agreement and Plan of Merger with Genesis Health Ventures,
Inc. Pursuant to the Vitalink merger agreement, which was effective on August
28, 1998, MCA and one of its subsidiaries received 586,240 shares of Genesis
Series G Cumulative Convertible Preferred Stock valued at $293.1 million as
consideration for all of MCA's common stock of Vitalink. After a third-party
valuation, we reduced the carrying value of our Genesis stock investment by
$274.1 million in 1999 because of Genesis' inability to pay dividends and its
operating performance. Because of Genesis' bankruptcy filing on June 22, 2000,
we reduced the carrying value of our investment by $19.0 million to zero and
wrote off a separate Genesis-related investment of $1.0 million in 2000.
Dividend Income. The Genesis Series G Preferred Stock bears cash dividends
at the initial rate of 5.9375 percent. In 1999, we recorded $4.4 million of
dividend income each quarter and then fully reserved the dividends at the end of
the year due to non-payment. Because Genesis did not pay cumulative dividends
for four consecutive quarters, all future dividends beginning in 2000 are
payable in additional shares of Genesis Series G Preferred Stock. Based on
Genesis' inability to pay cash dividends and its bankruptcy filing, we fully
reserved the dividends of $17.4 million in 2000.
We own 100 percent of the IHHI preferred stock, which has a 12 percent annual
dividend. As a result of changing the accounting for our investment in IHHI in
2000, we eliminated the preferred
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stock dividend of $2.4 million in consolidation. In 1999, however, we fully
reported the dividend on the line item, "Other income."
Minority Interest Income. The minority interest income for 2000 represented
the minority owners' share of IHHI's net income. In 1999, we did not consolidate
IHHI's financial results with our financial results. Instead, we recorded our
share of IHHI's earnings on the line item, "Equity in earnings of affiliated
companies."
Extraordinary Item. During 1999, we sold assets for a net after tax gain of
$11.5 million. We recorded the net gain as an extraordinary item, as is required
after a business combination accounted for as a pooling of interests. We sold 26
facilities to Alterra for $154.5 million, realizing a gain of $6.1 million--$3.7
million after tax. We also exercised a purchase option on MCA's corporate
headquarters in Gaithersburg, Maryland, and sold the property, realizing net
proceeds of $24.5 million and a $10.1 million gain--$6.1 million after tax.
Inflation. We believe that inflation has had no material impact on our
results of operations.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Our revenues decreased $73.7 million, or 3 percent, from the
prior year. Revenues from skilled nursing and assisted living facilities
decreased $76.1 million, or 4 percent, due to decreases in rates--$64.9 million
and occupancy--$65.2 million, which were partially offset by an increase in bed
capacity--$54.0 million.
We primarily attribute the decline in rates to transitioning onto the Medicare
prospective payment system in 1999. The occupancy level for all facilities
including start-up facilities was 89 percent in 1998 compared with 86 percent in
1999. Our skilled nursing facilities' occupancy declined from 89 percent in 1998
to 87 percent in 1999, reflecting a decline in Medicare patients and private pay
patients. Our bed capacity grew between 1999 and 2000 primarily because we
opened 3 skilled nursing and 12 assisted living facilities in 1999 and 2 skilled
nursing and 26 assisted living facilities in 1998, our divestiture of 31
assisted living facilities in 1999 partially offset our capacity.
The quality mix of revenue from Medicare, private pay and insured patients
related to skilled nursing and assisted living facilities and rehabilitation
operations declined from 71 percent in 1998 to 67 percent in 1999. This decline
was primarily because Medicare rates and number of Medicare patients decreased
due to the Medicare prospective payment system, and the number of private pay
patients also declined.
Operating Expenses. Our operating expenses decreased $18.1 million, or
1 percent, compared to 1998. Operating expenses from skilled nursing and
assisted living facilities decreased $31.2 million, or 2 percent. If we exclude
the effect of start-up facilities in 1999 and 1998, operating expenses for the
mature facilities decreased $28.1 million. We attribute the decrease to a
decline in ancillary costs as we found alternate methods of service that
resulted in lower costs. The decrease was partially offset by an increase in
labor costs, primarily as a result of temporary
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staffing in certain markets. Operating expenses increased $12.4 million in 1999
because of start-up losses related to our medical transcription business.
General and Administrative Expenses. Our general and administrative
expenses decreased $6.3 million in 1999 from 1998. By excluding the net gains
from the sale of assets in 1998, general and administrative expenses decreased
$11.7 million as a result of synergies obtained from combining HCR and MCA. In
1998, we included in general and administrative expenses, a gain of $7.4 million
from the sale of three former MCA corporate office buildings and a loss of $2.0
million from the sale of two Springhouse facilities.
Depreciation and Amortization. Depreciation decreased $2.2 million from the
prior year because we sold some of our property and equipment as previously
mentioned. Amortization decreased $2.4 million because we wrote down assets in
1998.
Restructuring Charge, Merger Expenses, Asset Impairment and Other Related
Charges. The table and narrative below disclose the components of the
restructuring charge, merger expenses, asset impairment and other charges for
1998 and 1999. In 2000, we paid the liability outstanding at December 31, 1999
related to these charges.
Cash 1998 1998 Liability 1999 1999 Liability
Non-cash Charge Activity At 12/31/98 Charge Activity At 12/31/99
-------- ------ -------- ----------- ------ -------- -----------
(In thousands)
MCA planned spin-off:
Employee benefits.............. cash $5,917 $(5,300) $617 $219 $(836)
Transaction costs.............. cash 6,805 (6,805)
Write-down of assets........... non-cash 778 (778)
------- -------- ------- ------- -------- -------
13,500 (12,883) 617 219 (836)
------- -------- ------- ------- -------- -------
HCR and MCA transaction:
Employee benefits.............. cash 41,028 (12,734) 28,294 (27,184) $1,110
Deferred compensation.......... non-cash 11,867 (11,867)
Other exit costs............... cash 4,234 4,234 (3,314) 920
Merger transaction costs....... cash 21,122 (21,122)
Write-down of assets........... non-cash 56,468 (56,468)
------- -------- ------- ------- -------- -------
134,719 (102,191) 32,528 (30,498) 2,030
------- -------- ------- ------- -------- -------
Other costs:
Amortization................... non-cash 7,863 (7,863) 10,554 (10,554)
Duplicate costs................ cash 5,725 (5,725) 2,328 (2,328)
Other.......................... cash 1,685 (685) 1,000 (1,000)
Asset impairment unrelated
to merger...................... non-cash 114,769 (114,769) 1,686 (1,686)
------- -------- ------- ------- -------- -------
130,042 (129,042) 1,000 14,568 (15,568)
------- -------- ------- ------- -------- -------
Total.......................... $278,261 $(244,116) $34,145 $14,787 $(46,902) $2,030
======== ========= ======= ======= ======== ======
In 1998, we recorded a $278.3 million charge related to restructuring, merger
expenses, asset impairment and other related charges. One component pertains to
MCA's $13.5 million charge in connection with its plan to separate its skilled
nursing facility management, assisted living and home health businesses from its
skilled nursing facility ownership, real estate and health care facility
development business. MCA recorded this charge in the second quarter of 1998.
Because of the transaction with HCR, the separation of MCA's businesses did not
occur.
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29
Charges related to the HCR and MCA transaction totaled $134.7 million. In
connection with the merger, we developed a plan to integrate the businesses of
both companies, which included closing MCA's corporate office in Gaithersburg,
Maryland, and realigning the operating divisions from eight to six. The
remaining $130.0 million of the charge related to other unusual costs as a
result of the merger and asset impairment unrelated to the restructuring.
In 1999, we recorded a $14.8 million charge. The major portion of this charge
related to the amortization of MCA's software applications before the final
transition to HCR's software applications. We amortized the carrying value of
the software over its estimated useful life ranging from six to nine months. We
recorded the outstanding liability relating to all restructuring and other
charges in other accrued liabilities.
In MCA's planned spin-off of its non-health care businesses, it terminated a
total of 208 employees. The employees did not receive a lump-sum severance
payment upon termination, but rather received their severance as biweekly
payments through 1999. The transaction costs primarily included financial
advisory, legal, and accounting fees and expenses, and printing and mailing
costs.
The employee benefit costs in the transaction between HCR and MCA related to
severance payments and retention bonuses for 505 corporate employees and 26
field employees of MCA who were terminated. At December 31, 1998, 364 employees,
who received termination notices, were no longer working for us, but we
continued to pay 269 of these employees their severance payments on a biweekly
basis. The majority of the MCA employees, who received termination notices, and
were working for us at December 31, 1998 had termination dates in the first
quarter of 1999. At December 31, 1999, all but three employees who received
termination notices had left Manor Care. The cash severance payments continued
through 2000. We also recorded deferred compensation expense of $11.9 million
because restrictions on HCR's restricted stock lapsed due to the merger. The
other exit costs pertain to various lease agreements and hardware and software
contracts that were terminated in 1999 or 2000. The merger transaction costs
primarily included financial advisory, legal, and accounting fees and expenses,
and printing and mailing costs.
We identified two groups of assets that were impaired as a result of the merger.
We have integrated the information systems of the companies, which resulted in
the write-off of the net book value--$45.2 million--of MCA's computer hardware
and software that was no longer being utilized by us as of December 31, 1998. We
have abandoned some construction development projects due to a change in
strategy, at a cost of $11.3 million excluding the land value.
We recorded other unusual costs as a result of the merger. Certain general and
administrative costs of $5.7 million in 1998 and $2.3 million in 1999
represented salaries and benefits for employees performing duplicate services in
Toledo or Gaithersburg.
In 1998, we also recorded a charge for impairment of certain assets based on our
quarterly review of long-lived and intangible assets. Management determined that
MileStone's intangible assets with a net book value of $52.5 million were
impaired based on the effects of changes in the Medicare reimbursement system
discussed above. Therefore, we reduced the book value by $44.6 million to the
assets' estimated fair value. We determined the fair value based on a multiple
of projected annual earnings, and adjusted the remaining useful life from 38
years to 18 years.
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30
The asset impairment of our home health businesses was also largely related to
the Medicare reimbursement changes discussed above. Based on the impact of the
interim payment system in 1998 and the anticipated effects of the prospective
payment system after October 2000, management determined that the expected
future earnings did not support the carrying value of these assets. Therefore,
we reduced the book value of the related goodwill by $22.0 million to zero in
1998. We determined the estimated fair value of this goodwill based on a
multiple of projected annual earnings.
Management determined that the fixed assets for five skilled nursing facilities
and two assisted living facilities were impaired because the carrying value
exceeded the undiscounted cash flows. The skilled nursing facilities were
generating negative cash flows, and we wrote off the fixed assets except for the
land. We determined the estimated fair value of the assisted living facilities
based on a multiple of projected annual earnings. The fixed assets of the
skilled nursing and assisted living facilities had a carrying value of $26.8
million and we wrote them down by $19.9 million in 1998.
We determined that three of our vision management businesses had impaired
assets. The first business was a start-up business in 1995 that had $4.6 million
in advances and $1.0 million in fixed assets. Because the business had not been
able to generate cash flows to cover its expenses, we wrote off the assets in
1998. We made advances to the second business of $1.5 million, which we wrote
down by $1.1 million in 1998. The third business had a 40-year management
contract with a carrying value of $11.8 million. Based on a multiple of
projected annual earnings, we determined that the estimated fair value was $3.4
million and reduced the remaining estimated useful life from 36 years to 16
years. The primary reason for the decrease in projected annual earnings was
declining reimbursement.
Management determined that the intangible assets for six rehabilitation
businesses were impaired because the carrying value exceeded the undiscounted
cash flows. The businesses were generating negative cash flows, and we had
exhausted all measures to return the operations to a level of profitability. We
reduced the book value of the related intangible assets from $8.4 million to
zero in 1998.
Interest Expense. Our interest expense increased $7.5 million compared with
1998 due to an increase in average debt outstanding under the bank credit
facilities and a decrease in the amount of interest capitalized for construction
projects.
Dividend Income. We accrued $5.8 million of dividend income for the Genesis
Series G Preferred Stock in 1998 for four months, which we recorded on the line
item, "Other income." Genesis paid these dividends in 1999. We continued to
accrue dividend income of $4.4 million each quarter in 1999. At December 31,
1999, Genesis had failed to pay dividends on the preferred stock for four
consecutive quarters. After a third-party valuation, we recorded a reserve of
$17.4 million for accrued 1999 dividends and reduced the carrying value of our
preferred stock investment by $274.1 million because of Genesis' inability to
pay dividends and its current operating performance.
Income Taxes. The income taxes recorded in 1999 included the tax effects of
the impairment of the Genesis investment and an adjustment of our prior years'
estimated tax liabilities.
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31
The income taxes recorded in 1998 included the tax effects of the provision for
restructuring charge, merger expenses, asset impairment and other related
charges, some of which were not deductible for income tax purposes. The
effective tax rate, excluding these items, was 39.5 percent in 1999 compared
with 36.1 percent in 1998. Our effective tax rate increased because our
deductions for corporate-owned life insurance and our dividend received
deduction declined and state and local income taxes increased.
Discontinued Operations. During 1998, we recorded a gain of $99.8 million,
or $59.9 million after tax, from converting our Vitalink common stock to Genesis
Series G Preferred Stock. We recorded the financial results of Vitalink as
income from discontinued pharmacy operations.
Extraordinary Item. During 1998, we recorded an extraordinary loss from the
early extinguishment of debt totaling $31.7 million, or $19.0 million after tax.
On September 25, 1998, we repaid the outstanding debt under HCR's and MCA's
prior credit arrangements. When we repaid the debt, we terminated three interest
rate swaps with a total notional amount of $350 million, which were designated
as a hedge of MCA's debt. The extraordinary loss primarily related to the
termination of these swaps but also included the unamortized debt issue costs.
Cumulative Effect. During 1998, we elected to adopt Statement of Position
98-5, "Reporting on the Costs of Start-up Activities," which requires start-up
costs to be expensed as incurred. The cumulative effect of expensing start-up
costs capitalized as of January 1, 1998, was $9.4 million, or $5.6 million after
tax.
Inflation. We believe that inflation has had no material impact on our
results of operations.
FINANCIAL CONDITION - DECEMBER 31, 2000, AND 1999
Our December 31, 2000 balance sheet included the balances of IHHI due to
consolidation as of January 1, 2000. The most significant IHHI line items were
current assets of $34.5 million, which included receivables of $29.3 million,
and current liabilities of $27.6 million.
Property and equipment increased $26.9 million in 2000, primarily because we
added $116.9 million of property and equipment and transferred $19.2 million
from receivables for facilities purchased from the development joint venture
with Alterra. These additions and transfers were partially offset by
depreciation of $111.2 million.
Net intangible assets of $102.7 million at December 31, 2000 include $80.6
million of goodwill related to numerous acquisitions over the past nine years.
When we acquired IHHI in 2000, we recorded $13.0 million of goodwill.
Accrued insurance liabilities increased $64.9 million to $107.8 million at
December 31, 2000, with $42.6 million classified as other long-term liabilities.
The increase resulted primarily from the accrual for general and professional
liabilities, as we discussed previously.
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NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
postponed in Statement No. 137 and is now effective January 1, 2001. This
statement requires us to recognize all derivatives on the balance sheet at fair
value. Because we currently do not use derivatives, management believes that the
adoption of this statement will have no effect on our earnings or our financial
position.
CAPITAL RESOURCES AND LIQUIDITY
During 2000, we satisfied our cash requirements from cash generated from
operating activities. Cash flows from operating activities were $210.1 million
for 2000, an increase of $73.0 million from 1999. Liabilities increased because
of the additional accrual for general and professional liability claims
discussed previously. We used the cash principally for capital expenditures, to
acquire businesses and to repay debt. Expenditures for property and equipment
during 2000 were $116.9 million, which included $51.8 million to construct new
facilities. We expect planned capital expenditures in 2001, excluding
acquisitions, to approximate $125 million, of which 50 percent relates to
renovations and capital improvements to our long-term care facilities. As part
of our diversification into other health care services, we paid $14.0 million
for the acquisition of IHHI and paid $8.3 million for the acquisition of various
businesses and contingent consideration for prior years' acquisitions. Payment
of long-term debt of $18.6 million included a prepayment of $12.5 million.
We have a five-year, $500 million credit agreement and a 364-day, $200 million
credit agreement with a group of banks. At December 31, 2000, outstanding
borrowings aggregated $452 million under the five year agreement and $155
million under the 364 day agreement for a total of $607 million. We plan to
annually refinance the 364 day agreement unless longer term financing becomes
available. At December 31, 2000, after consideration of usage for letters of
credit, the remaining credit availability under the combined agreements totaled
$66.7 million.
On May 4, 1999, our board of directors authorized us to purchase up to $200
million of our common stock through December 31, 2000. On February 8, 2000, the
board authorized an additional $100 million through December 31, 2001. We
purchased 440,000 shares in 2000 for $6.2 million and a total of 9.1 million
shares for $186.5 million since May 1999. We may use the shares for internal
stock option and 401(k) match programs and for other uses, such as possible
future acquisitions.
We believe that our cash flow from operations will be sufficient to cover debt
payments, future capital expenditures and operating needs. It is likely that we
will pursue growth from acquisitions, partnerships and other ventures, that we
would fund 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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COMMITMENTS AND CONTINGENCIES
As of December 31, 2000, we had contractual commitments of $8.4 million relating
to our internal construction program. We had total letters of credit of $32.9
million at December 31, 2000, that benefit certain third-party insurers and
bondholders of certain industrial revenue bonds, and 89 percent of these letters
of credit relate to recorded liabilities. We had obligations under
non-cancelable operating leases totaling $80.4 million at December 31, 2000.
Joint Venture. In 1999, we, along with Alterra and the development joint
venture jointly and severally guaranteed a $200 million revolving credit
agreement, which was to mature September 30, 2002. Together with Alterra, we
reduced the line of credit to $60 million in March 2000. In January 2001, we and
Alterra further reduced the line of credit to $57 million and adjusted the
maturity date to June 29, 2001. We and Alterra each have a 50 percent interest
in the development joint venture, which is the 10 percent owner and managing
owner or partner in the various project companies and partnerships that are
entitled to borrow under the credit agreement. There was $57 million of
guaranteed debt outstanding under the revolving credit agreement at December 31,
2000. The joint venture used the funds to construct and support start-up working
capital for assisted living residences. We and Alterra are undertaking efforts
to sell the facilities. The joint venture will repay the debt upon the sale of
each facility. Although it is impossible to determine the ultimate results of
the sale of these facilities, we do not presently anticipate any loss associated
with the guarantee of the debt related to these properties. Beginning January 1,
2001, we will record 50 percent of the joint venture's expected losses as
compared to approximately 10 percent in 2000 due to the elimination of
third-party equity. We anticipate our share of net losses to be approximately
$1.0 million per quarter through June 2001.
Acquisition Agreements. Certain acquisition agreements provide for
additional consideration to be paid contingent upon the future financial results
of the businesses. The maximum contingent consideration aggregates $14.9 million
and will, if earned, be paid over the next five years and treated as additions
to the purchase price of the businesses.
Environmental Liabilities. One or more subsidiaries or affiliates of MCA
have been identified as potentially responsible parties in a variety of actions
relating to waste disposal sites that allegedly are subject to remedial action
under the federal Comprehensive Environmental Response Compensation Liability
Act, or CERCLA, and similar state laws. CERCLA imposes retroactive, strict joint
and several liability on potentially responsible parties 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 was
acquired in 1981 by a wholly owned subsidiary of MCA. The actions allege that
Cenco transported or generated hazardous substances that came to be located at
the sites in question. Environmental proceedings may involve owners and/or
operators of the hazardous waste site, multiple waste generators and multiple
waste transportation disposal companies. These proceedings involve efforts by
governmental entities or private parties to allocate or recover site
investigation and clean-up costs, which costs may be substantial. We cannot
quantify with precision the potential liability exposure for currently pending
environmental claims and litigation, without regard to insurance coverage,
because of the inherent uncertainties of litigation and because the ultimate
cost of the remedial actions for some of the waste disposal sites where MCA is
31
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alleged to be a potentially responsible party has not yet been determined. Based
upon our current assessment of the likely outcome of the actions, we believe
that our future environmental liabilities will be approximately $22.5 to $28
million. We have received or expect to receive between $18.0 million and $23.5
million of insurance proceeds, depending upon the ultimate liabilities, which
will offset some of our potential liability.
Corporate-owned Life Insurance. Legislation phased out interest
deductions on certain policy loans related to corporate-owned life insurance as
of January 1, 1999. We have recorded a cumulative reduction to income tax
expense of approximately $34 million resulting from interest deductions for tax
periods prior to 1999. While the Internal Revenue Service has not asserted any
claim challenging our corporate-owned life insurance interest expense
deductions, the IRS has challenged other taxpayers' corporate-owned life
insurance interest deductions and has prevailed in certain lower court
decisions. We intend to vigorously defend our right to deduct the entire amount
of these interest payments, were the IRS to challenge these deductions. However,
we cannot assure you that we would ultimately be able to deduct these amounts.
Furthermore, if we owe additional taxes, we may have to pay interest on the
additional taxes and possibly penalties.
We are party to various other legal matters arising in the ordinary course of
business, including patient care-related claims and litigation. We believe that
the resolution of such matters will not result in liability materially in excess
of established accounting accruals.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. We identify forward-looking statements in this report by using
words or phrases such as "anticipate," "believe," "estimate," "expect,"
"intend," "may be," "objective," "plan," "predict," "project," and "will be" and
similar words or phrases, or the negative thereof.
These forward-looking statements are subject to numerous assumptions, risks and
uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by us in those statements include, among
others, the following:
- our existing and future debt which may affect our ability to obtain
financing in the future or compliance with current debt covenants;
- integration of acquired businesses;
- changes in Medicare, Medicaid and certain private payors'
reimbursement levels;
- existing government regulations and changes in, or the failure to
comply with, governmental regulations;
- changes in, or the failure to comply with, regulations governing the
transmission and privacy of health information;
- state regulation of the construction or expansion of health care
providers;
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- legislative proposals for health care reform;
- competition;
- the ability to attract and retain qualified personnel;
- the failure to comply with occupational health and safety regulations;
- changes in the treatment of interest deductions on certain policy
loans related to corporate-owned life insurance;
- changes in current trends in the cost and volume of general and
professional liability claims;
- the ability to enter into managed care provider arrangements on
acceptable terms;
- litigation;
- a reduction in cash reserves and shareholders' equity upon our
repurchase of our stock; and
- an increase in senior debt or reduction in cash flow upon our purchase
or sale of assets.
Although we believe the expectations reflected in our forward-looking statements
are based upon reasonable assumptions, we can give no assurance that we will
attain these expectations or that any deviations will not be material. Except as
otherwise required by the federal securities laws, we disclaim any obligations
or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this report to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in U.S. interest rates expose us to market risks inherent with
derivatives and other financial instruments. We are not a party to any material
derivative financial instruments. Our interest expense is most sensitive to
changes in the general level of U.S. interest rates applicable to our U.S.
dollar indebtedness. To lessen the impact of fluctuations in variable interest
rates, we could, at our option, convert to fixed interest rates by either
refinancing variable rate debt with fixed rate debt or entering into interest
rate swaps.
The following table provides information about our significant interest rate
risk at December 31:
2000 1999
---- ----
Fair Fair
Outstanding Value Outstanding Value
----------- ----- ----------- -----
(In thousands)
Variable rate debt:
364 day credit agreement, matures
September 2001 and 2000, interest at a
Eurodollar based rate plus 1.625% and
1.00%, respectively $155,000 $155,000 $179,000 $179,000
Five year credit agreement, matures
September 2003, interest at a
Eurodollar based rate plus .80% and
.50%, respectively 452,000 452,000 476,500 476,500
Fixed rate debt:
Senior notes, due June 2006,
interest rate at 7.5% 150,000 141,003 150,000 143,020
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Report of Ernst & Young LLP, Independent Auditors 35
Consolidated Balance Sheets 36
Consolidated Statements of Operations 37
Consolidated Statements of Cash Flows 38
Consolidated Statements of Shareholders' Equity 39
Notes to Consolidated Financial Statements 40
Supplementary Data (Unaudited) - Summary of Quarterly Results 62
34
37
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Manor Care, Inc.
We have audited the accompanying consolidated balance sheets of Manor Care, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also include the
financial statement schedule listed in the Index at Item 14. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Manor Care, Inc.
and subsidiaries at December 31, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Toledo, Ohio
January 25, 2001
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38
MANOR CARE, INC.
Consolidated Balance Sheets
December 31, December 31,
2000 1999
---- ----
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 24,943 $ 12,287
Receivables, less allowances for
doubtful accounts of $61,137 and $58,975, respectively 389,943 294,449
Receivable from sale of assets 3,107 44,467
Prepaid expenses and other assets 24,867 28,409
Deferred income taxes 62,019 51,539
----------- ----------
Total current assets 504,879 431,151
Net property and equipment 1,577,378 1,550,507
Intangible assets, net of amortization of $20,921 and $13,513, respectively 102,711 88,286
Investment in Genesis preferred stock 19,000
Other assets 173,500 200,833
----------- -----------
Total assets $2,358,468 $2,289,777
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,390 $ 86,614
Employee compensation and benefits 81,065 52,376
Accrued insurance liabilities 65,165 35,870
Income tax payable 27,274 14,906
Other accrued liabilities 48,172 33,266
Revolving loans 155,000 179,000
Long-term debt due within one year 5,479 6,617
----------- -----------
Total current liabilities 472,545 408,649
Long-term debt 644,054 687,502
Deferred income taxes 108,916 126,754
Other liabilities 120,224 86,835
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 335,609 358,958
Retained earnings 837,123 798,068
---------- ----------
1,173,842 1,158,136
Less treasury stock, at cost (8.4 and 8.7 million shares, respectively) (161,113) (178,099)
----------- ----------
Total shareholders' equity 1,012,729 980,037
----------- -----------
Total liabilities and shareholders' equity $2,358,468 $2,289,777
========== ==========
See accompanying notes.
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MANOR CARE, INC.
Consolidated Statements of Operations
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
(In thousands, except per share data)
Revenues $2,380,578 $2,135,345 $2,209,087
Expenses:
Operating 2,016,258 1,697,459 1,715,575
General and administrative 104,027 89,743 96,017
Depreciation and amortization 121,208 114,601 119,223
Provision for restructuring charge, merger expenses,
asset impairment and other related charges 14,787 278,261
---------- ---------- ----------
2,241,493 1,916,590 2,209,076
---------- ---------- ----------
Income from continuing operations before other
income (expenses), income taxes and minority interest 139,085 218,755 11
Other income (expenses):
Interest expense (60,733) (54,082) (46,587)
Impairment of investments (20,000) (274,120)
Equity in earnings of affiliated companies 812 1,729 5,376
Other income 2,505 5,322 16,635
---------- ---------- ----------
Total other expenses, net (77,416) (321,151) (24,576)
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes and minority interest 61,669 (102,396) (24,565)
Income taxes (benefit) 21,489 (47,238) 21,597
Minority interest income 1,125
---------- ---------- ----------
Income (loss) from continuing operations 39,055 (55,158) (46,162)
Discontinued operations:
Income from discontinued pharmacy operations
(net of taxes of $7,256) 8,044
Gain on conversion of Vitalink stock (net of taxes of $39,908) 59,861
---------- ---------- ----------
Income (loss) before extraordinary item and cumulative effect 39,055 (55,158) 21,743
Extraordinary item (net of taxes of $7,508 and $12,690, respectively) 11,500 (19,036)
Cumulative effect of change in accounting principle
(net of taxes of $3,759) (5,640)
---------- ---------- ----------
Net income (loss) $39,055 $(43,658) $ (2,933)
========== ========== ==========
Earnings per share - basic and diluted
Income (loss) from continuing operations $.38 $(.51) $(.42)
Income from discontinued operations (net of taxes) .62
Extraordinary item (net of taxes) .11 (.17)
Cumulative effect (net of taxes) (.05)
---------- ---------- ----------
Net income (loss) $.38 $(.41)* $(.03)*
========== ========== ==========
Weighted-average shares:
Basic 102,203 107,627 108,958
Diluted 103,126 107,627 108,958
*Doesn't add due to rounding
See accompanying notes.
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MANOR CARE, INC.
Consolidated Statements of Cash Flows
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
(In thousands)
OPERATING ACTIVITIES
Net income (loss) $39,055 $ (43,658) $(2,933)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Income from discontinued operations (67,905)
Depreciation and amortization 121,208 115,910 119,329
Asset impairment and other non-cash charges 12,240 191,745
Impairment of investments 20,000 274,120
Provision for bad debts 32,911 29,005 39,485
Deferred income taxes (26,518) (112,984) (46,537)
Net gain on sale of assets (506) (18,963) (6,545)
Equity in earnings of affiliated companies (812) (1,729) (5,376)
Minority interest income 1,125
Changes in assets and liabilities, excluding sold facilities and acquisitions:
Receivables (91,649) (69,974) (83,798)
Prepaid expenses and other assets 10,371 (6,355) 23,956
Liabilities 104,964 (40,502) (26,018)
------- -------- --------
Total adjustments 171,094 180,768 138,336
------- ------- --------
Net cash provided by operating activities 210,149 137,110 135,403
------- ------- -------
INVESTING ACTIVITIES
Investment in property and equipment (116,941) (166,503) (295,578)
Investment in systems development (10,067) (11,122) (22,158)
Acquisitions (22,263) (9,229) (9,841)
Proceeds from sale of assets 8,893 263,941 24,137
Consolidation (deconsolidation) of subsidiary 15,701 (13,948)
Other, net (9,646)
------- ------- -------
Net cash provided by (used in) investing activities (124,677) 77,087 (327,034)
------- ------- -------
FINANCING ACTIVITIES
Net borrowings (repayments) under bank credit agreements (48,500) (50,500) 191,940
Principal payments of long-term debt (18,630) (6,712) (6,788)
Proceeds from stock options and common stock 474 1,954 3,120
Purchase of common stock for treasury (6,160) (180,370) (4,838)
Dividends paid by Manor Care of America, Inc. (2,805)
------- ------- -------
Net cash provided by (used in) financing activities (72,816) (235,628) 180,629
------- ------- -------
Net increase (decrease) in cash and cash equivalents 12,656 (21,431) (11,002)
Net Manor Care of America, Inc. cash flows for December 1997 (3,213)
Cash and cash equivalents at beginning of period 12,287 33,718 47,933
------- ------- -------
Cash and cash equivalents at end of period $24,943 $12,287 $33,718
======= ======= =======
See accompanying notes.
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MANOR CARE, INC.
Consolidated Statements of Shareholders' Equity
Capital Total
Common Stock in Excess Treasury Stock Share-
------------ of Par Retained -------------- holders'
Shares Amount Value Earnings Shares Amount Equity
------ ------ ----- -------- ------ ------ ------
(In thousands, except per share data)
Balance at January 1, 1998 115,868 $7,199 $471,930 $850,539 (7,845) $(166,639) $1,163,029
Adjustment to conform Manor
Care of America, Inc.'s fiscal year 9 121 4,627 4,748
Issue and vesting of restricted stock 339 3 13,110 13,113
Purchase of treasury stock (369) (16,056) (16,056)
Exercise of stock options 218 6 2,138 (6,993) 577 10,742 5,893
Tax benefit from restricted stock
and exercise of stock options 34,997 34,997
Net loss (2,933) (2,933)
Manor Care of America, Inc.
cash dividends ($.044 per share) (2,805) (2,805)
Exchange of Manor Care of
America, Inc. common
stock and stock options for the
Company's common stock (5,488) (6,099) (165,854) 7,637 171,953
Other (109) (709) (818)
------- ------ -------- -------- ------- ---------- ----------
Balance at December 31, 1998 110,946 1,109 356,333 841,726 1,199,168
Purchase of treasury stock (8,793) (181,268) (181,268)
Exercise of stock options 87 1 (1,165) 125 3,169 2,005
Tax benefit from restricted stock
and exercise of stock options 3,790 3,790
Net loss (43,658) (43,658)
------- ------ -------- -------- ------- ---------- ----------
Balance at December 31, 1999 111,033 1,110 358,958 798,068 (8,668) (178,099) 980,037
Issue and vesting of restricted stock (14,451) 550 14,656 205
Purchase of treasury stock (777) (11,409) (11,409)
Exercise of stock options (10,840) 507 13,739 2,899
Tax benefit from restricted stock
and exercise of stock options 1,942 1,942
Net income 39,055 39,055
------- ------ -------- -------- ------- ---------- ----------
Balance at December 31, 2000 111,033 $1,110 $335,609 $837,123 (8,388) $(161,113) $1,012,729
======= ====== ======== ======== ======= ========== ==========
See accompanying notes.
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MANOR CARE, INC.
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES
NATURE OF OPERATIONS
Manor Care, Inc. (the Company) is a provider of a range of health care services,
including skilled nursing care, assisted living, subacute medical and
rehabilitation care, rehabilitation therapy, home health care, hospice care, and
management services for subacute care and rehabilitation therapy. The most
significant portion of the Company's business relates to skilled nursing care
and assisted living, operating 354 centers in 32 states with more than 60
percent located in Ohio, Michigan, Illinois, Pennsylvania and Florida. The
Company provides rehabilitation therapy in nursing centers of its own and
others, and in the Company's 87 outpatient therapy clinics serving the
Midwestern and Mid-Atlantic states, Texas and Florida. The home health care
business specializes in all levels of home health, hospice care and
rehabilitation therapy from 78 offices located in 18 states. The Company
operates one hospital in Texas. In addition, the Company owns a majority of a
start-up medical transcription business, which converts medical dictation into
electronically formatted patient records.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. As a result of the merger of Vitalink Pharmacy
Services, Inc. (Vitalink) with and into Genesis Health Ventures, Inc. (Genesis)
in 1998, the accompanying consolidated financial statements reflect the pharmacy
segment as discontinued operations. Significant intercompany accounts and
transactions have been eliminated in consolidation.
On September 24, 1998, the shareholders of Health Care and Retirement
Corporation (HCR) and the shareholders of the former Manor Care, Inc., now known
as Manor Care of America, Inc. (MCA), separately approved the merger of MCA into
a subsidiary of HCR, effective September 25, 1998. In accordance with the merger
agreement, each share of MCA common stock was converted into one share of HCR
common stock for a total of approximately 63.9 million shares, and MCA stock
options outstanding were converted into approximately 2.1 million shares of HCR
common stock. As a result of the transaction, MCA became a wholly owned
subsidiary of HCR and HCR changed its name to HCR Manor Care, Inc and then to
Manor Care, Inc. in 1999. The merger has been accounted for by the
pooling-of-interests method. Accordingly, the accompanying consolidated
financial statements give retroactive effect to the merger and include the
combined operations for all periods presented.
The Company uses the equity method to account for investments in entities in
which it has less than a majority interest but can exercise significant
influence. These investments are classified on the accompanying balance sheets
as other long-term assets. Under the equity method, the investment, originally
recorded at cost, is adjusted to recognize the Company's share of the net
earnings or losses of the affiliate as it occurs. Losses are limited to the
extent of the Company's investments in, advances to and guarantees for the
investee.
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The Company has controlling investments in certain entities which are not wholly
owned. Amounts reflected as minority interest represent the minority owners'
share of income in these entities. Minority interest liability represents the
cumulative minority owners' share of income in these entities and is classified
as other long-term liabilities.
In June 2000, the Company changed the accounting method 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 the results of IHHI and deducting the
minority interest share on an after-tax basis. On December 28, 2000, pursuant to
a merger agreement approved by IHHI stockholders, the Company purchased the
remaining shares of IHHI to increase its ownership to 100 percent. In 1998, the
Company changed the accounting for its investment in IHHI from consolidation to
the equity method, retroactive to January 1, 1998, as a result of modifications
to the preferred stock agreement that changed the Company's voting rights
related to its preferred stock ownership.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH EQUIVALENTS
Investments with a maturity of three months or less when purchased are
considered cash equivalents for purposes of the statements of cash flows.
RECEIVABLES AND REVENUES
Revenues are recognized when the related patient services are provided.
Receivables and revenues are stated at amounts estimated by management to be the
net realizable value. See Note 5 for further discussion.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided by the
straight-line method over the estimated useful lives of the assets, generally
three to 20 years for equipment and furnishings and 10 to 40 years for buildings
and improvements.
Direct incremental costs are capitalized for major development projects and are
amortized over the lives of the related assets. The Company capitalizes interest
on borrowings applicable to facilities in progress.
INTANGIBLE ASSETS
Goodwill and other intangible assets of businesses acquired are amortized by the
straight-line method over periods ranging from five to 15 years for non-compete
agreements, 20 to 40 years for management contracts and 20 to 40 years for
goodwill. Deferred financing costs are amortized to interest expense over the
life of the related borrowings, using the interest method.
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INVESTMENT
The Company's investment in Genesis preferred stock is recorded at the lower of
cost or net realizable value. Unrealized losses that are other than temporary
are recognized in net income. See Note 4 for further discussion.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying value of long-lived and intangible assets is reviewed quarterly to
determine if facts and circumstances suggest that the assets may be impaired or
that the amortization period may need to be changed. The Company considers
external factors relating to each asset, including contract changes, local
market developments, national health care trends and other publicly available
information. If these external factors and the projected undiscounted cash flows
of the company over the remaining amortization period indicate that the asset
will not be recoverable, the carrying value will be adjusted to the estimated
fair value. See Note 2 for further discussion of impairment charges in 1998.
SYSTEMS DEVELOPMENT COSTS
Costs incurred for systems development include direct payroll and consulting
costs. These costs are capitalized and are amortized over the estimated useful
lives of the related systems.
START-UP COSTS
Prior to 1998, the Company capitalized start-up costs and amortized the costs
over two years. In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" (SOP 98-5), which requires start-up costs to be expensed as
incurred. In the fourth quarter of 1998, the Company elected to adopt SOP 98-5
as of January 1, 1998. The cumulative effect of expensing all capitalized
start-up costs as of January 1 was $9.4 million, or $5.6 million after tax.
INVESTMENT IN LIFE INSURANCE
Investment in corporate-owned life insurance policies is recorded net of policy
loans in other assets. The net life insurance expense, which includes premiums
and interest on cash surrender borrowings, net of all increases in cash
surrender values, is included in operating expenses.
INTEREST RATE SWAPS
Gains and losses on terminations of interest rate swap agreements are deferred
as an adjustment to the carrying amount of the outstanding debt and amortized as
an adjustment to interest expense related to the debt over the remaining term of
the original contract life of the terminated swap agreement. In the event of the
early extinguishment of a designated debt obligation and its associated interest
rate swap, any realized or unrealized gain or loss from the swap is recognized
in income coincident with the extinguishment gain or loss.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred $9.9
million, $9.5 million and $20.3 million in advertising costs for the years ended
December 31, 2000, 1999 and 1998, respectively.
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TREASURY STOCK
The Company records the purchase of its common stock for treasury at cost. The
treasury stock is reissued on a first-in, first-out method. If the proceeds from
reissuance of treasury stock exceed the cost of the treasury stock, the excess
is recorded in capital in excess of par value. If the cost of the treasury stock
exceeds the proceeds from reissuance of the treasury stock, the difference is
first charged against any excess previously recorded in capital in excess of par
value and any remainder is charged to retained earnings.
STOCK-BASED COMPENSATION
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair market value of the shares at the date of
grant. The Company accounts for the stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, the Company recognizes no compensation expense for
the stock options.
EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income (income
available to common shareholders) by the weighted-average number of common
shares outstanding during the period. The computation of diluted EPS is similar
to basic EPS except that the number of shares is increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. Dilutive potential common shares for
the Company include shares issuable upon exercise of the Company's non-qualified
stock options and restricted stock that has not vested.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board 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.
RECLASSIFICATIONS
Certain reclassifications affecting other assets, other liabilities and
operating expenses have been made in the 1999 financial statements to conform
with the 2000 presentation.
2. RESTRUCTURING CHARGE, MERGER EXPENSES, ASSET IMPAIRMENT AND OTHER CHARGES
The components of the restructuring charge, merger expenses, asset impairment
and other charges in 1998 of $278.3 million and in 1999 of $14.8 million are
disclosed in the table below. The liability outstanding at December 31, 1999
related to these charges was included in other accrued liabilities and paid in
2000.
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Cash 1998 1998 Liability 1999 1999 Liability
Non-cash Charge Activity At 12/31/98 Charge Activity At 12/31/99
-------- ------ -------- ----------- ------ -------- -----------
(In thousands)
MCA planned spin-off:
Employee benefits cash $5,917 $(5,300) $617 $219 $(836)
Transaction costs cash 6,805 (6,805)
Write-down of assets non-cash 778 (778)
-------- --------- ------- ------- -------- ------
13,500 (12,883) 617 219 (836)
-------- --------- ------- ------- -------- ------
HCR and MCA transaction:
Employee benefits cash 41,028 (12,734) 28,294 (27,184) $1,110
Deferred compensation non-cash 11,867 (11,867)
Other exit costs cash 4,234 4,234 (3,314) 920
Merger transaction costs cash 21,122 (21,122)
Write-down of assets non-cash 56,468 (56,468)
-------- --------- ------- ------- -------- ------
134,719 (102,191) 32,528 (30,498) 2,030
-------- --------- ------- ------- -------- ------
Other costs:
Amortization non-cash 7,863 (7,863) 10,554 (10,554)
Duplicate costs cash 5,725 (5,725) 2,328 (2,328)
Other cash 1,685 (685) 1,000 (1,000)
Asset impairment unrelated
to merger non-cash 114,769 (114,769) 1,686 (1,686)
-------- --------- ------- ------- -------- ------
130,042 (129,042) 1,000 14,568 (15,568)
-------- --------- ------- ------- -------- ------
Total $278,261 $(244,116) $34,145 $14,787 $(46,902) $2,030
======== ========= ======= ======= ======== ======
One component of the 1998 charge pertains to MCA's $13.5 million charge in
connection with its plan to separate its skilled nursing facility management,
assisted living and home health businesses from its skilled nursing facility
ownership, real estate and health care facility development business. As a
result of the transaction with HCR, the separation of MCA's businesses did not
occur. Under the planned spin-off, 208 employees were terminated and received
their severance as biweekly payments.
Charges related to the HCR-MCA transaction totaled $134.7 million in 1998. In
connection with the merger, the Company developed a plan to integrate the
businesses of both companies that included closing MCA's corporate office in
Gaithersburg, Maryland and realigning the operating divisions from eight to six.
The employee benefit costs related to severance payments and retention bonuses
for 505 corporate employees and 26 field employees of MCA who received
termination notices. The terminated employees received their severance as
biweekly payments. The deferred compensation expense of $11.9 million was
attributable to the lapsing of restrictions on HCR's restricted stock due to the
merger. The other exit costs pertained to various lease agreements and hardware
and software contracts that have been terminated. The merger transaction costs
primarily included financial advisory, legal, and accounting fees and expenses,
and printing and mailing costs. The write-down of assets as a result of the
merger included MCA's computer hardware and software that was no longer being
utilized by the Company and certain abandoned construction development projects.
Of the charges, $130.0 million in 1998 and $14.6 million in 1999 related to
other unusual costs as a result of the merger and asset impairment unrelated to
the restructuring. The non-cash charge primarily related to the amortization of
certain MCA software applications until the transition to HCR's applications.
Certain general and administrative costs represented salaries and benefits for
employees performing duplicate services in Toledo or Gaithersburg.
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In 1998, the Company also recorded a charge for impairment of certain assets
based on its quarterly review of long-lived and intangible assets. The charge of
$114.8 million consisted of a majority of the goodwill related to the Company's
program management service business, all of the goodwill related to the
Company's home health businesses, the intangible assets related to six of the
Company's rehabilitation businesses, a majority of the fixed assets related to
seven facilities and certain assets relating to the Company's vision management
businesses. A significant feature of the Company's evaluation was the evolving
impact of the Balanced Budget Act of 1997 (Budget Act) under which a new
Medicare prospective payment system (PPS) commenced on July 1, 1998 and an
interim payment system (IPS) for home health businesses that commenced on
October 1, 1997 for the Company. These new reimbursement systems had an
unfavorable impact on the program management service, home health and vision
management businesses, resulting in an impairment loss. The write-off of the
facility fixed assets and the rehabilitation company intangible assets resulted
from specific entities, which were not generating cash flow despite efforts by
the Company to return the operations to a level of profitability. The estimated
fair value of the impaired assets was based on a multiple of projected annual
earnings.
3. ACQUISITIONS/DIVESTITURES
The Company owned 41 percent of In Home Health, Inc (IHHI) at December 31, 1999
and acquired the remaining interest in 2000 for $14.0 million. The acquisition
was recorded under the purchase method of accounting, and the Company recorded
$13.0 million of goodwill which will be amortized over 20 years. The pro forma
unaudited results of operations for the years ended December 31, 2000 and 1999,
assuming the purchase of IHHI had been consummated as of January 1, 1999,
follows:
2000 1999
---- ----
(In thousands, except per share data)
Revenues $2,380,578 $2,219,651
Operating expenses 2,016,258 1,769,706
Income (loss) before extraordinary
item and cumulative effect 39,305 (53,332)
Net income (loss) 39,305 (41,832)
Net income (loss) per share -
basic and diluted $.38 $(.39)
The Company also paid $8.3 million, $9.2 million and $9.8 million in 2000, 1999
and 1998, respectively, for the acquisition of rehabilitation therapy
businesses, home health businesses and additional consideration for prior
acquisitions. The acquisitions were accounted for under the purchase method of
accounting. Certain acquisition agreements contain a provision for additional
consideration contingent upon the future financial results of the businesses.
The maximum contingent consideration aggregates $14.9 million and will, if
earned, be paid over the next five years and treated as additions to the
purchase price of the businesses. The results of operations of the acquired
businesses are included in the consolidated statements of income from the date
of acquisition. The pro forma consolidated results of operations would not be
materially different from the amounts reported in prior years.
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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 the 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. In 1999, the Company completed the
sale of 26 facilities for $154.5 million, realizing a gain of $6.1 million ($3.7
million after tax). As part of the development joint venture, the Company
contributed 20 facilities to various project companies or partnerships of which
the joint venture has a 10 percent equity interest. The facilities had a net
book value of $77.8 million, and the Company recognized no gain or loss on the
sale. Due to a change in development intentions of the partners, the Company
purchased seven facilities in 2000 that were originally contributed by the
Company in 1999. The Company reclassified its receivable of $26.4 million
related to developing these assets to property and equipment. Of this amount,
$19.2 was a receivable at December 31, 1999.
During 1999, the Company exercised a purchase option on MCA's corporate
headquarters in Gaithersburg, Maryland and sold the property, realizing net
proceeds of $24.5 million and a $10.1 million gain ($6.1 million after tax). The
gains on asset sales in 1999 have all been recorded as extraordinary items as
required after a business combination accounted for as a pooling of interests.
4. DISCONTINUED PHARMACY OPERATIONS
MCA and one of its subsidiaries owned approximately 50 percent of Vitalink
Pharmacy Services, Inc. (Vitalink) common stock. On April 26, 1998, Vitalink
entered into an Agreement and Plan of Merger (Vitalink Merger Agreement) with
Genesis Health Ventures, Inc. (Genesis). Pursuant to the Vitalink Merger
Agreement, on August 28, 1998, MCA received .045 shares of Series G Cumulative
Convertible Preferred Stock of Genesis (Series G Preferred Stock) for each share
of Vitalink common stock. MCA received 586,240 preferred shares valued at $293.1
million as consideration for all of its common stock of Vitalink. As a result of
the conversion of stock, MCA recorded a gain of $99.8 million ($59.9 million
after tax). Accordingly, the Vitalink results are reported as discontinued
operations for all periods presented.
The Series G Preferred Stock bears cash dividends at an initial annual rate of
5.9375 percent. The Company accrued $5.8 million of dividend income in 1998
which was paid in 1999. The Company continued to accrue dividend income of $4.4
million each quarter in 1999. At December 31, 1999, Genesis had failed to pay
dividends on the Series G Preferred Stock for four consecutive quarters. Based
on Genesis' inability to pay dividends and its operating performance in 1999,
the Company recorded a reserve of $17.4 million for accrued 1999 dividends and
reduced the basis of its $293.1 million investment by $274.1 million.
As a result of the non-payment of the cumulative dividends for four consecutive
quarters, all future dividends are payable in additional shares of Series G
Preferred Stock valued at $500 per share, and the holders of Series G Preferred
Stock elected two additional directors to the Genesis board until such time as
all accrued and unpaid dividends are paid in full in cash. Subsequent to their
election, the additional directors resigned and replacement directors have
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not been named as of December 31, 2000. In 2000, the Company recorded a reserve
of $17.4 million for the dividends paid in additional shares of Series G
Preferred Stock and due to Genesis' bankruptcy filing on June 22, 2000, reduced
the basis of its investment by $19.0 million to zero.
Series G Preferred Stock holders are initially entitled to 13.441 votes per
share of Series G Preferred Stock, and will vote together with the holders of
Genesis common stock and as a separate class on matters as to which the
Pennsylvania Business Corporation Law requires a separate class vote.
At the option of MCA, each share of Series G Preferred Stock is convertible at
any time into Genesis common stock at a conversion price of $37.20 per share,
subject to adjustment under certain circumstances. Beginning April 26, 2001,
Genesis may, under certain circumstances, force conversion of the Series G
Preferred Stock, at conversion prices ranging from $37.20 to $38.87 per share of
Genesis common stock. Dividends will cease to accrue in respect to the Series G
Preferred Stock as of the date of the conversion.
The financial results for the discontinued pharmacy operations for the year
ended December 31, 1998 are as follows: revenues of $381.1 million that includes
sales to MCA's skilled nursing and assisted living facilities of $31.8 million,
income before income taxes of $15.3 million and net income of $8.0 million.
5. REVENUES
The Company receives reimbursement under the federal Medicare program and
various state Medicaid programs. Revenues under these programs totaled $1.4
billion, $1.1 billion and $1.1 billion for the years ended December 31, 2000,
1999 and 1998, respectively. Medicare and certain Medicaid program revenues are
subject to audit and retroactive adjustment by government representatives. In
the opinion of management, any differences between the net revenue recorded and
final determination will not materially affect the consolidated financial
statements. Net third-party settlements amounted to a $4.2 million receivable
and $9.6 million payable at December 31, 2000 and 1999, respectively. There were
no non-governmental receivables which represented amounts in excess of 10
percent of total receivables at December 31, 2000 and 1999.
Revenues for certain health care services are as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Skilled nursing and assisted living services $2,037,959 $1,911,720 $1,987,815
Rehabilitation services 71,111 63,767 70,522
Home health services 186,475 61,062 48,416
Other services 85,033 98,796 102,334
---------- ---------- ----------
$2,380,578 $2,135,345 $2,209,087
========== ========== ==========
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6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2000 1999
---- ----
(In thousands)
Land and improvements $ 234,719 $ 217,457
Buildings and improvements 1,579,336 1,473,425
Equipment and furnishings 341,412 347,455
Capitalized leases 29,974 31,329
Construction in progress 38,415 77,232
------------ -----------
2,223,856 2,146,898
Less accumulated depreciation 646,478 596,391
----------- -----------
Net property and equipment $1,577,378 $1,550,507
========== ==========
Depreciation expense, including amortization of capitalized leases, amounted to
$111.2 million, $108.5 million and $110.8 million for the years ended December
31, 2000, 1999 and 1998, respectively. Accumulated depreciation includes $11.9
million and $10.8 million at December 31, 2000 and 1999, respectively, relating
to capitalized leases.
7. DEBT
Debt consists of the following at December 31:
2000 1999
---- ----
(In thousands)
Five Year Agreement $452,000 $476,500
364 Day Agreement (revolving loans) 155,000 179,000
Senior Notes, net of discount 149,675 149,615
Mortgages and other notes 42,456 61,135
Capital lease obligations (see Note 8) 5,402 6,869
-------- --------
804,533 873,119
Less:
364 Day Agreement 155,000 179,000
Amounts due within one year 5,479 6,617
--------- ---------
Long-term debt $644,054 $687,502
======== ========
Concurrent with the merger, a five-year, $500 million credit agreement (Five
Year Agreement) and a 364-day, $300 million credit agreement (364 Day Agreement)
were established with a group of banks, under which both the Company and MCA are
borrowers. The credit agreements were established to repay borrowings of HCR and
MCA under prior credit arrangements, as discussed below, to provide additional
credit capacity for future developments and to provide credit back-up for the
issuance of commercial paper. The credit agreements contain various covenants,
restrictions and events of default. Among other things, these provisions require
the Company to maintain certain financial ratios and impose certain
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limits on its ability to incur indebtedness, create liens, pay dividends,
repurchase stock, dispose of assets and make acquisitions.
The Company's $300 million credit agreement was amended in 1999 and now provides
for a $200 million credit agreement (364 Day Agreement). Loans under the amended
364 Day Agreement, which mature September 21, 2001, bear interest at variable
rates that reflect, at the election of the Company, either the agent bank's base
lending rate or an increment over Eurodollar indices of .50 percent to 1.275
percent, depending on the quarterly performance of a key ratio. In addition, the
364 Day Agreement provides for a fee on the total amount of the facility,
ranging from .125 percent to .225 percent, depending on the performance of the
same ratio.
Loans under the Five Year Agreement, which mature September 24, 2003, bear
interest at variable rates that reflect, at the election of the Company, the
agent bank's base lending rate, rates offered by any of the participating banks
under bid procedures or an increment over Eurodollar indices of .15 percent to
.50 percent, depending on the quarterly performance of a key ratio. In addition
to direct borrowings, the Five Year Agreement may be used to support the
issuance of up to $100 million of letters of credit. The Five Year Agreement
also provides for a fee on the total amount of the facility, ranging from .125
percent to .25 percent, depending on the performance of the same key ratio.
Whenever the aggregate utilization of both credit facilities exceeds $350
million, an additional fee of .05 percent is charged on loans due under the Five
Year Agreement and an additional fee ranging from .10 percent to .125 percent is
charged on loans under the 364 Day Agreement, based on the performance of a key
ratio. The average interest rate on loans under the Five Year and 364 Day Credit
Agreements was 7.48 percent at December 31, 2000, excluding the fee on the total
facility. After consideration of usage for letters of credit, the remaining
credit availability under the combined agreements totaled $66.7 million.
In 1999, the Company, Alterra and the development joint venture jointly and
severally guaranteed a $200 million revolving credit agreement, which was to
mature September 30, 2002. The line of credit was reduced to $60 million in
March 2000. In January 2001, the line of credit was further reduced to $57
million and the maturity date was adjusted to June 29, 2001. The Company and
Alterra each have a 50 percent interest in the development joint venture which
is the 10 percent owner and managing owner or partner in the various project
companies and partnerships which are entitled to borrow under the credit
agreement. There was $57 million and $48 million of guaranteed debt outstanding
under the revolving credit agreement at December 31, 2000 and 1999,
respectively. Funds were used to construct and support start-up working capital
for assisted living residences. The Company and Alterra are undertaking efforts
to sell the facilities. The debt will be repaid upon the sale of each facility.
On September 25, 1998, the Company repaid $264 million outstanding under HCR's
prior credit agreement and $325 million on MCA's prior credit arrangements. The
repayment of the prior credit facilities was accounted for as an early
extinguishment of debt. In conjunction with the extinguishment of debt, the
Company terminated three interest rate swaps with a total notional amount of
$350 million that were designated as a hedge of MCA's debt. The loss on
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terminating the swaps of $31.3 million along with the unamortized debt issue
costs was recorded as an extraordinary item that totaled $31.7 million ($19.0
million after tax).
In June 1996, MCA issued $150 million of 7.5% Senior Notes due 2006. These notes
are redeemable at the option of MCA at any time at a price equal to the greater
of (a) the principal amount or (b) the sum of the present values of the
remaining scheduled payments of principal and interest, discounted with an
applicable treasury rate plus 15 basis points, plus accrued interest to the date
of the redemption. The proceeds of the offering were used to repay borrowings
under MCA's prior credit facility.
Interest rates on mortgages and other long-term debt ranged from 5.40 percent to
10.75 percent. Maturities ranged from 2001 to 2018. Owned property with a net
book value of $93.0 million was pledged or mortgaged. Interest paid on all debt
amounted to $63.7 million, $56.4 million and $47.1 million for the years ended
December 31, 2000, 1999 and 1998, respectively. Capitalized interest costs
amounted to $4.5 million, $3.2 million and $8.6 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
Debt maturities for the five years subsequent to December 31, 2000 are as
follows: 2001 - $160.5 million; 2002 - $5.6 million; 2003 - $460.7 million; 2004
- $3.5 million; and 2005 - $3.7 million.
8. LEASES
The Company leases certain property and equipment under both operating and
capital leases, which expire at various dates to 2036. Certain of the facility
leases contain purchase options, and the Company's headquarters lease includes a
residual guarantee of $22.8 million. Payments under non-cancelable operating
leases, minimum lease payments and the present value of net minimum lease
payments under capital leases as of December 31, 2000 are as follows:
Operating Capital
Leases Leases
--------- ------
(In thousands)
2001 $ 15,610 $ 645
2002 12,962 659
2003 10,810 654
2004 4,268 615
2005 2,416 620
Later years 34,301 11,716
------- ------
Total minimum lease payments $80,367 14,909
=======
Less amount representing interest 9,507
-------
Present value of net minimum
lease payments (included in
long-term debt - see Note 7) $ 5,402
=======
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Rental expense was $22.4 million, $17.8 million and $18.0 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
2000 1999 1998
---- ---- ----
(In thousands)
Current:
Federal $41,353 $51,865 $58,885
State and local 8,453 15,641 9,249
------ -------- -------
49,806 67,506 68,134
Deferred:
Federal (22,947) (93,983) (39,782)
State and local (5,370) (20,761) (6,755)
------- -------- -------
(28,317) (114,744) (46,537)
------- -------- -------
Provision (benefit) for income taxes from
continuing operations 21,489 (47,238) 21,597
Provision for income taxes from
discontinued operations 47,164
Provision (benefit) for income taxes from
extraordinary items 7,508 (12,690)
Benefit for income taxes from cumulative
effect of change in accounting principle (3,759)
------- -------- -------
Total provision (benefit) for income taxes $21,489 $(39,730) $52,312
======= ======== =======
The reconciliation of the amount computed by applying the statutory federal
income tax rate to income (loss) from continuing operations before income taxes
to the provision (benefit) for income taxes from continuing operations is as
follows:
2000 1999 1998
---- ---- ----
(In thousands)
Income taxes (benefit) computed at statutory rate $21,584 $(35,839) $(8,598)
Differences resulting from:
Write-off of non-deductible goodwill 22,028
Non-deductible transaction costs 7,217
State and local income taxes 2,004 (3,328) 1,621
Non-deductible compensation 911 1,870 2,028
Exclusion of dividends received (588) (2,093)
Jobs tax credits (1,770) (1,520) (1,484)
Corporate-owned life insurance (163) (1,079)
Unrealized losses of subsidiary 4,340
Reversal of valuation allowance (3,931)
Adjustment to prior years' estimated tax liabilities (11,653)
Other 2,691 (357) 1,957
------- -------- -------
Provision (benefit) for income taxes from
continuing operations $21,489 $(47,238) $21,597
======= ======== =======
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The Internal Revenue Service has examined the Company's federal income tax
returns for all years through May 31, 1995 for MCA and through December 31, 1996
for HCR. The years have been closed through May 31, 1995 for MCA and through
December 31, 1992 for HCR. The Company believes that it has made adequate
provision for income taxes that may become payable with respect to open tax
years.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
the Company's federal and state deferred tax assets and liabilities are as
follows:
2000 1999
---- ----
(In thousands)
Deferred tax assets:
Accrued insurance reserves $44,305 $16,890
Net loss on Genesis investment 43,526 35,499
Allowances for receivables and settlements 33,433 31,565
Employee compensation and benefits 27,610 27,998
Net operating loss carryover 11,622 11,553
Other 3,932 4,471
--------- ---------
$164,428 $127,976
========= =========
Deferred tax liabilities:
Fixed asset and intangible asset
bases differences $155,784 $150,588
Leveraged leases 35,978 36,646
Pension receivable 8,984 7,832
Other 10,579 8,125
--------- ---------
$211,325 $203,191
========= =========
Net deferred tax liabilities $ (46,897) $ (75,215)
========= =========
At December 31, 2000, the Company had approximately $45.4 million of net
operating loss carryforwards for tax purposes which expire in 2017-2019, and the
maximum amount to be used in any year is $6.8 million. Net income taxes paid
amounted to $33.7 million, $50.0 million and $9.0 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
10. COMMITMENTS/CONTINGENCIES
One or more subsidiaries or affiliates of MCA have been identified as
potentially responsible parties (PRPs) in a variety of actions (the Actions)
relating to waste disposal sites which allegedly are subject to remedial action
under the Comprehensive Environmental Response Compensation Liability Act, as
amended, 42 U.S.C. Sections 9601 et seq. (CERCLA) and similar state laws. CERCLA
imposes retroactive, strict joint and several liability on PRPs for the costs of
hazardous waste clean-up. The Actions arise out of the alleged activities of
Cenco, Incorporated and its subsidiary and affiliated companies (Cenco). Cenco
was acquired in 1981 by a wholly owned subsidiary of MCA. The Actions allege
that Cenco transported
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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 MCA is alleged to be a potentially responsible party has
not yet been quantified. Based upon its current assessment of the likely outcome
of the Actions, the Company believes that its future environmental liabilities
will be approximately $22.5 to $28 million. The Company has received or expects
to receive between $18.0 million and $23.5 million of insurance proceeds,
depending upon the ultimate liabilities, which will offset amounts due as a
result of these exposures.
Legislation phased out interest deductions on certain policy loans related to
corporate-owned life insurance (COLI) as of January 1, 1999. The Company has
recorded a cumulative reduction to income tax expense of approximately $34
million resulting from interest deductions for tax periods prior to 1999. While
the Internal Revenue Service (IRS) has not asserted any claim challenging the
Company's COLI interest expense deductions, the IRS has challenged other
taxpayers' COLI interest deductions and has prevailed in certain lower court
decisions. Management understands that these decisions and the IRS's position
are being subjected to extensive challenges in court. The Company intends to
defend vigorously its right to deduct the entire amount of such interest
payments, were the IRS to challenge these deductions.
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.
As of December 31, 2000, the Company had contractual commitments of $8.4 million
relating to its internal construction program. As of December 31, 2000, the
Company has total letters of credit of $32.9 million that benefit certain
third-party insurers and bondholders of certain industrial revenue bonds, and 89
percent of such letters of credit relate to recorded liabilities.
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11. EARNINGS PER SHARE
The calculation of earnings per share (EPS) is as follows:
2000 1999 1998
---- ---- ----
(In thousands, except EPS)
Numerator:
Income (loss) from continuing operations
(income available to common shareholders) $39,055 $(55,158) $(46,162)
Denominator:
Denominator for basic EPS - weighted-
average shares 102,203 107,627 108,958
Effect of dilutive securities:
Stock options 839
Non-vested restricted stock 84
------- ------- -------
Denominator for diluted EPS -
adjusted for weighted-average
shares and assumed conversions 103,126 107,627 108,958
======= ======= =======
EPS- income (loss) from continuing operations
Basic and diluted $.38 $(.51) $(.42)
Options to purchase 2,950,000 shares of the Company's common stock at an average
price of $30.47 were not included in the computation of diluted EPS for 2000
because the options' exercise prices were greater than the average market price
of the common shares. In 1999 and 1998, the dilutive effect of stock options
would have been 1,121,000 and 2,349,000 shares, respectively. These shares were
not included in the calculation because the effect would be anti-dilutive with a
loss from continuing operations.
12. STOCK PLANS
The Company has stock option plans for key employees and for outside directors
which authorize the grant of options for up to 11,199,000 and 800,000 shares,
respectively. There were 2,486,684 and 3,962,016 shares available for future
grant at December 31, 2000 and 1999, respectively. Generally, the exercise price
of each option equals the market price of the Company's stock on the date of
grant, and an option's maximum term is 10 years. The options for key employees
vest between three and five years, and the options for outside directors vest
immediately.
The Company has elected to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans, and, accordingly, did not recognize compensation
expense for options granted in 1995 through 2000. If the Company had accounted
for its 1995 through 2000 options under the fair value method, net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
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2000 1999 1998
---- ---- ----
(In thousands, except earnings per share)
Net income (loss) - as reported $39,055 $(43,658) $(2,933)
Net income (loss) - pro forma $36,039 $(46,346) $(17,581)
Earnings per share - as reported:
Basic and diluted $.38 $(.41) $(.03)
Earnings per share - pro forma:
Basic and diluted $.35 $(.43) $(.16)
The pro forma effect on net income for 2000, 1999 and 1998 is not representative
of the pro forma effect on net income in future years because a limited number
of options were granted in 1999 and the vesting of options were accelerated in
1998. In 1998, all outstanding MCA options were converted, under their original
terms, into the right to receive shares of the Company's common stock.
Therefore, the remaining fair value of 1995 through 1998 grants was expensed in
1998 on a pro forma basis. Also, the vesting was accelerated for stock options
granted in 1996 and 1997 for certain HCR executive officers, which required the
remaining fair value to be expensed in 1998 on a pro forma basis.
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998, respectively: dividend yield
of 0 percent for the Company in 2000 and 1999 and HCR in 1998; dividend yield
based on historical dividends of $.088 per share annually for MCA in 1998;
expected volatility of 46 percent, 35 percent and 28 percent; risk-free interest
rates of 6.18 percent, 5.35 percent and 4.72 percent; and expected lives of 4.2,
4.8 and 4.5 years. The weighted-average fair value of options granted is $3.36,
$10.25 and $10.53 per share in 2000, 1999 and 1998, respectively. The option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Since the Company's
stock options have characteristics significantly different from those of traded
options, and since variations in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
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Information regarding these option plans for 1998, 1999 and 2000 is as follows:
Weighted-
Average
Exercise
Shares Price
------ -----
Options outstanding at
January 1, 1998 8,373,945 $15.53
Options granted 1,808,370 $34.22
Options forfeited (256,838) $29.01
Options exercised (804,489) $7.47
Converted to stock (see Note 1) (3,313,467)
----------
Options outstanding at
December 31, 1998 5,807,521 $20.04
Options granted 38,001 $26.31
Options forfeited (227,226) $31.59
Options exercised (211,679) $9.33
----------
Options outstanding at
December 31, 1999 5,406,617 $20.02
Options granted 1,635,444 $9.11
Options forfeited (160,112) $30.76
Options exercised (506,800) $5.41
----------
Options outstanding at
December 31, 2000 6,375,149 $18.11
=========
Options exercisable at
December 31, 1998 3,984,996 $14.24
December 31, 1999 3,952,392 $15.14
December 31, 2000 3,936,324 $17.56
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The following tables summarize information about options outstanding and options
exercisable at December 31, 2000:
OPTIONS OUTSTANDING
-------------------
Weighted-
Weighted- Average
Range of Average Remaining
Exercise Number Exercise Contractual
Prices Outstanding Price Life
------ ----------- ----- ----
$ 5 - $10 2,899,334 $ 6.46 4.8
$10 - $20 967,185 $15.78 3.1
$20 - $30 673,498 $24.67 5.5
$30 - $45 1,835,132 $35.34 6.6
---------
6,375,149 $18.11 5.1
=========
OPTIONS EXERCISABLE
-------------------
Weighted-
Range of Average
Exercise Number Exercise
Prices Exercisable Price
------ ----------- -----
$ 5 - $10 1,619,334 $ 6.04
$10 - $20 967,185 $15.78
$20 - $30 673,498 $24.67
$30 - $45 676,307 $40.64
---------
3,936,324 $17.56
=========
The Company has a restricted stock plan for corporate officers and certain key
senior management employees which authorizes up to 1,892,866 restricted shares
to be issued. There were 112,250 restricted shares available for future grant at
December 31, 2000. During 2000, certain executive officers were issued 550,000
restricted shares with a fair value of $7.00 that vest at retirement. During
1998, certain executive officers and key senior management employees were issued
339,500 restricted shares with a fair value of $38.63. The restrictions
associated with the 1998 restricted stock lapsed as a result of the merger, and
the total deferred compensation expense of $11.9 million was recorded in the
provision for restructuring charge. Compensation expense related to restricted
stock was $0.2 million and $12.7 million for the years ended December 31, 2000
and 1998, respectively.
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13. EMPLOYEE BENEFIT PLANS
The Company has two qualified defined benefit pension plans which were amended
in 1994 and 1996 to freeze all future benefits.
The funded status of these plans is as follows:
2000 1999
---- ----
(In thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $35,512 $39,298
Interest cost 2,341 2,575
Actuarial gains (2,486) (1,957)
Benefits paid (4,058) (4,404)
------- -------
Benefit obligation at end of year 31,309 35,512
------ ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 65,132 61,965
Actual return on plan assets 1,228 7,571
Benefits paid (4,058) (4,404)
------ ------
Fair value of plan assets at end of year 62,302 65,132
------ ------
Excess funded status of the plans 30,993 29,620
Unrecognized net actuarial gains (8,410) (10,103)
-------- --------
Prepaid benefit cost $22,583 $19,517
======= =======
Both plans have prepaid benefit costs at December 31, 2000. The prepaid benefit
under one plan was $19.7 million at December 31, 1999. The accrued pension cost
under the other plan was $0.2 million at December 31, 1999. At December 31, 2000
and 1999, the fair value of one plan's assets was $15.0 million and $16.4
million, respectively, with an associated accumulated benefit obligation of
$15.5 million and $17.7 million, respectively.
The components of the net pension income for these plans are as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Interest cost $2,341 $ 2,575 $ 2,528
Expected return on plan assets (5,408) (5,395) (4,691)
------ ------ ------
Net pension income $(3,067) $(2,820) $(2,163)
======= ======= =======
The actuarial present value of benefit obligations is based on an average
discount rate of 7.75 percent at December 31, 2000 and 1999. The freezing of
future pension benefits eliminated any future salary increases from the
computation. The average expected long-term rate of return on assets is 10
percent for 2000 and 1999.
The Company has two senior executive retirement plans which are non-qualified
plans designed to provide pension benefits and life insurance for certain
officers. Pension benefits
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are based on compensation and length of service. The benefits under one of the
plans are provided from a combination of the benefits to which the corporate
officers are entitled under a defined benefit pension plan and from life
insurance policies that are owned by certain officers who have assigned the
corporate interest (the Company's share of premiums paid) in the policies to the
Company. The Company's share of the cash surrender value of the policies was
$36.2 million and $30.1 million at December 31, 2000 and 1999, respectively, and
was included in other assets. The other plan is unfunded. During 2000, the
unfunded plan recognized a curtailment gain of $1.8 million due to the
resignation of employees which reduced accrued benefits. The accrued liability
for both plans was $8.1 million and $9.4 million at December 31, 2000 and 1999,
respectively, and was included in other long-term liabilities.
The Company maintains three savings programs qualified under Section 401(k) of
the Internal Revenue Code (401(k)) and two non-qualified, deferred compensation
programs. The Company contributes up to a maximum matching contribution ranging
from 2 percent to 6 percent of the participant's compensation, as defined in
each plan. The Company's expense for these plans amounted to $6.5 million, $11.1
million and $8.8 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The decrease in expense for 2000 and 1998 was primarily due to a
decline in earnings on the non-qualified, deferred compensation programs.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and fair value of the financial instruments are as follows:
2000 1999
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(In thousands)
Cash and cash equivalents $ 24,943 $ 24,943 $ 12,287 $ 12,287
Debt, excluding capitalized leases 799,131 790,086 866,250 861,255
The carrying amount of cash and cash equivalents is equal to its fair value due
to the short maturity of the investments.
The carrying amount of debt, excluding capitalized lease obligations,
approximates its fair value due to the significant amount of variable rate debt.
The fair value is estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates.
15. SHAREHOLDER RIGHTS PLAN
Each outstanding share of the Company's common stock includes an exercisable
Right which, under certain circumstances, will entitle the holder to purchase
from the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock for an exercise price of $150, subject to adjustment. The Rights
expire on May 2, 2005. Such rights will not be
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exercisable nor transferable apart from the common stock until 10 days after a
person or group acquires 15 percent, except as noted below, of the Company's
common stock or initiates a tender offer or exchange offer that would result in
ownership of 15 percent of the Company's common stock. In the event that the
Company is merged, and its common stock is exchanged or converted, the Rights
will entitle the holders to buy shares of the acquirer's common stock at a 50
percent discount. Under certain other circumstances, the Rights can become
rights to purchase the Company's common stock at a 50 percent discount. The
Rights may be redeemed by the Company for one cent per Right at any time prior
to the first date that a person or group acquires a beneficial ownership of 15
percent of the Company's common stock.
The description and terms of the Rights are set forth in a Rights Agreement,
dated as of May 2, 1995, and amended on June 10, 1998 (Rights Agreement),
between the Company and Harris Trust and Savings Bank, as Rights Agent. Pursuant
to the Rights Agreement, the trigger percentage is raised to 20 percent in the
case of a Bainum Family Member or Bainum Family Entity, as defined in the Rights
Agreement.
16. 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 by segment,
including capital expenditures, is not provided to the Company's chief operating
decision maker.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (see Note 1). The
Company evaluates performance and allocates resources based on operating margin
which represents revenues less operating expenses. The operating margin 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 and 1998. The
Company recorded an additional $57 million of general and professional liability
expense in 2000 in comparison to 1999. The change in estimate incorporates
industry experience and relates to the long-term care segment.
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Long-term Care Other Total
-------------- ----- -----
(In thousands)
Year ended December 31, 2000
Revenues from external customers $2,037,959 $342,619 $2,380,578
Intercompany revenues 27,825 27,825
Depreciation and amortization 109,213 11,995 121,208
Operating margin 335,291 29,029 364,320
Year ended December 31, 1999
Revenues from external customers $1,911,720 $223,625 $2,135,345
Intercompany revenues 20,993 20,993
Depreciation and amortization 107,185 7,416 114,601
Operating margin 398,668 39,218 437,886
Year ended December 31, 1998
Revenues from external customers $1,987,815 $221,272 $2,209,087
Intercompany revenues 38,319 38,319
Depreciation and amortization 94,506 24,717 119,223
Operating margin 443,609 49,903 493,512
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MANOR CARE, INC.
Supplementary Data (Unaudited)
Summary Of Quarterly Results
Year Ended December 31, 2000
----------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(In thousands, except per share amounts)
Revenues $569,918 $581,247 $604,531 $624,882 $2,380,578
Income from continuing operations before other
income (expenses), income taxes and minority interest 11,948 28,810 45,869 52,458 139,085
Net income (loss) (783) (3,429) 20,373 22,894 39,055
Earnings per share - net income (loss):
Basic and diluted $(.01) $(.03) $.20 $.22 $.38
Year Ended December 31, 1999
----------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(In thousands, except per share amounts)
Revenues $531,848 $530,454 $536,732 $536,311 $2,135,345
Income from continuing operations before other
income (expenses), income taxes, and minority interest 66,571 55,687 55,837 40,660 218,755
Income (loss) before extraordinary item and cumulative effect 41,028 33,616 33,497 (163,299) (55,158)
Net income (loss) 41,028 40,506 39,544 (164,736) (43,658)
Earnings per share - Income (loss) before extraordinary item
and cumulative effect:
Basic $.37 $.30 $.32 $(1.59) $(.51)
Diluted $.37 $.30 $.31 $(1.59) $(.51)
The results for the first quarter of 2000 differ from the amounts in the
respective 10-Q due to the change in the accounting for the Company's investment
in In Home Health, Inc. (IHHI) from the equity method to consolidation,
retroactive to January 1, 2000. The Company increased its ownership in IHHI in
June 2000. See Note 1 to the consolidated financial statements for additional
discussion.
In the first quarter of 2000, the Company recorded general and professional
liability expense of $33.6 million ($21.5 million after tax) that related to a
change in estimate incorporating industry experience. In the second quarter of
2000, the Company reduced the basis of its investment in Genesis preferred stock
and another Genesis investment by $20.0 million ($12.8 million after tax). See
the Management's Discussion and Analysis for further discussion of these items.
In the fourth quarter of 1999, the Company reduced the basis of its investment
in Genesis preferred stock by $274.1 million ($165.8 million after tax) and
recorded a reserve of $17.4 million ($16.2 million after tax) related to accrued
1999 dividend income. See Note 4 to the consolidated financial statements for
further discussion. In the fourth quarter of 1999, the Company also recorded
losses of $12.4 million related to a start-up business. In the first, second and
third quarters of 1999, the Company recorded a provision for restructuring
charge, merger expenses, asset impairment and other related charges of $6.9
million ($4.6 million after tax), $3.8 million ($2.5 million after tax) and $4.1
million ($2.7 million after tax), respectively.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We incorporate by reference information on our directors under the heading
"Election of Directors" in our Proxy Statement which we filed pursuant to
Regulation 14A with the Commission on April 5, 2001. The names, ages, offices
and positions held during the last five years of each of our executive officers
are as follows:
EXECUTIVE OFFICERS
NAME AGE OFFICE AND EXPERIENCE
PAUL A. ORMOND 51 President and Chief Executive Officer of
Manor Care since August 1991 and Chairman of
the Board of Manor Care from August 1991 to
September 1998. Member of Class I of the
Board of Directors of Manor Care, with a
term expiring in 2001.
M. KEITH WEIKEL 62 Senior Executive Vice President and Chief
Operating Officer of Manor Care since August
1991. Member of Class III of the Board of
Directors of Manor Care, with a term
expiring in 2003.
GEOFFREY G. MEYERS 56 Executive Vice President and Chief Financial
Officer of Manor Care since August 1991 and
Treasurer of Manor Care from August 1991 to
August 1998.
R. JEFFREY BIXLER 55 Vice President and General Counsel of Manor
Care since November 1991 and Secretary of
Manor Care since December 1991.
NANCY A. EDWARDS 50 Vice President and General Manager of Central
Division of Manor Care since December 1993.
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66
JOHN K. GRAHAM 40 Vice President and Director of Rehabilitation
Services of Manor Care since September 1998,
Assistant Vice President and General Manager
of Vision Management and Ancillary
Businesses of Health Care and Retirement
Corporation of America, or HCRA, a
subsidiary of Manor Care, from January 1997
to August 1998, and Assistant Vice President
and Director of Planning and Marketing of
HCRA from January 1996 to December 1996.
JEFFREY A. GRILLO 42 Vice President and General Manager of
Mid-Atlantic Division of Manor Care since
February 1999, Regional Director of
Operations in Mid-Atlantic District of
ManorCare Health Services, Inc., or MCHS, a
subsidiary of Manor Care, from 1996 to
January 1999, and Regional Director of
Operations in Southeast District of MCHS
from 1994 to 1996.
LARRY C. LESTER 58 Vice President and General Manager of Midwest
Division of Manor Care since January 2000,
Regional Director of Operations in Midwest
Region of HCRA, from January 1998 to
December 1999, and Vice President of Oakwood
Healthcare System from January 1993 to
December 1997.
SPENCER C. MOLER 53 Vice President and Controller of Manor Care
since August 1991.
O. WILLIAM MORRISON 62 Vice President and General Manager of Eastern
Division of Manor Care since March 1999,
Assistant Vice President and General Manager
of Texas of Manor Care from October 1998 to
February 1999, and Regional Manager in the
Central Division of HCRA from September 1995
to September 1998.
RICHARD W. PARADES 44 Vice President and General Manager of
Mid-States Division of Manor Care since
January 1999, District Vice President and
General Manager of Mid-States of MCHS from
February 1997 to December 1998, and Regional
Director of Operations in Mid-States
District of MCHS from 1994 to January 1997.
F. JOSEPH SCHMITT 52 Vice President and General Manager of
Southern Division of Manor Care since
December 1993.
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JO ANN YOUNG 51 Vice President and General Manager of
Assisted Living Division of Manor Care since
June 2000, Vice President and Director of
Assisted Living of Manor Care from September
1998 to May 2000, Vice President and
Director of Assisted Living of MCHS from
February 1997 to August 1998, and Vice
President of Operations of Caretenders
HealthCorp from 1996 to January 1997.
ITEM 11. EXECUTIVE COMPENSATION
We incorporate by reference information on executive compensation under the
heading "Executive Compensation" in our Proxy Statement, which we filed with the
Commission on April 5, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate by reference information on security ownership of some beneficial
owners under the heading "Security Ownership of Certain Management and
Beneficial Owners" in our Proxy Statement, which we filed with the Commission on
April 5, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We incorporate by reference information on certain relationships and related
transactions under the heading "Election of Directors" in our Proxy Statement
which we filed with the Commission on April 5, 2001.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Manor Care filed the following consolidated financial statements of Manor Care,
Inc. and subsidiaries as part of this Form 10-K/A in Item 8 on the pages
indicated:
PAGE
Report of Ernst & Young LLP, Independent Auditors 35
Consolidated Balance Sheets - December 31, 2000 and 1999 36
Consolidated Statements of Operations -
Years ended December 31, 2000, 1999 and 1998 37
Consolidated Statements of Cash Flows -
Years ended December 31, 2000, 1999 and 1998 38
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 2000, 1999 and 1998 39
Notes to Consolidated Financial Statements - December 31, 2000 40
Manor Care includes the following consolidated financial statement schedule of
Manor Care, Inc. and subsidiaries in this Form 10-K/A on page 67:
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
66
69
MANOR CARE, INC.
Schedule II - Valuation and Qualifying Accounts
Charged Additions
Balance at to Costs Deduc- From Balance
Beginning Other and tions Acquisi- at End of
of Period (Note 1) Expenses (Note 2) Tions Period
---------- -------- -------- -------- --------- -------
(In thousands)
Year ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $58,975 $32,911 $(31,868) $1,119 $61,137
======= ======= ======== ====== =======
Reserve of Genesis dividend $17,404 $17,404 $34,808
======= ======= =======
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $58,125 $29,005 $(28,230) $75 $58,975
======= ======= ======== === =======
Reserve of Genesis dividend $ $17,404 $17,404
======= ======= =======
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $52,590 $(469) $39,485 $(33,481) $58,125
======= ===== ======= ======== =======
(1) Amount includes $1,725,000 for MCA's December 1997 net activity offset by
the removal of In Home Health, Inc.'s (IHHI) allowance for doubtful accounts of
$2,194,000 as of January 1, 1998 due to the deconsolidation of IHHI.
(2) Uncollectible accounts written off, net of recoveries.
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EXHIBITS
S-K Item 601
No. Document
-------------
2.1 -- Amended and Restated Agreement and Plan of Merger, dated as
of June 10, 1998, by and among Manor Care, Inc., Catera
Acquisition Corp. and the Registrant (filed as Annex A to
Health Care and Retirement Corporation's (HCR) Registration
Statement on Form S-4, File No. 333-61677 and incorporated
herein by reference).
3.1 -- Certificate of Incorporation of Health Care and Retirement
Corporation (filed as Exhibit 4.1 to HCR's Registration
Statement on Form S-1, File No. 33-42535 and incorporated
herein by reference).
3.2 -- Form of Certificate of Amendment of Certificate of
Incorporation of the Registrant (filed as Annex D to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
3.3 -- Form of Amended and Restated By-laws of the Registrant (filed
as Exhibit 3 to Manor Care, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 and
incorporated herein by reference).
4.1 -- Rights Agreement, dated as of May 2, 1995, between Health
Care and Retirement Corporation and Harris Trust and Savings
Bank (filed as Exhibit 1 to HCR's Registration Statement on
Form 8-A and incorporated herein by reference).
4.2 -- Second Amendment to Rights Agreement dated as of June 10,
1998 between Health Care and Retirement Corporation and
Harris Trust and Savings Bank (filed as Exhibit 4.1 to HCR
Manor Care Inc.'s Form 8-K filed on October 1, 1998 and
incorporated herein by reference).
4.3 -- Third Amendment to Rights Agreement dated as of March 11,
2000 between Manor Care, Inc., as successor to Health Care
and Retirement Corporation, and Harris Trust and Savings
Bank (filed as Exhibit 4.1 to Manor Care Inc.'s Form 8-K
filed on March 14, 2000 and incorporated herein by
reference).
4.4 -- Registration Rights Amendment dated as of September 25, 1998
between HCR Manor Care, Inc. and Stewart Bainum, Stewart
Bainum, Jr., Bainum Associates Limited Partnership, MC
Investment Limited Partnership, Realty Investment Company,
Inc., Mid Pines Associates Limited Partnership, The Stewart
Bainum Declaration of Trust and The Jane L. Bainum
Declaration of Trust (filed as Exhibit 4.2 to HCR Manor
Care, Inc.'s Form 8-K filed on October 1, 1998 and
incorporated herein by reference).
4.5 -- Credit Agreement dated as of September 25, 1998 among HCR
Manor Care, Inc., Manor Care, Inc., Bank of America National
Trust and Savings Association, The Chase Manhattan Bank, TD
Securities (USA) Inc., and the Other Financial Institutions
Party Hereto (filed as Exhibit 4 to HCR Manor Care, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 and incorporated herein by reference).
4.6 -- First Amendment to Five Year Credit Agreement dated as of
February 9, 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 (filed as
Exhibit 4.6 to Manor Care, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1999 and incorporated herein
by reference).
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71
4.7 -- 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 (filed as
Exhibit 4 to Manor Care, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 and
incorporated herein by reference).
4.8 -- 364 Day Credit Agreement dated as of September 25, 1998 among
HCR Manor Care, Inc., Manor Care, Inc., Bank of America
National Trust and Savings Association, The Chase Manhattan
Bank, TD Securities (USA) Inc., and the Other Financial
Institutions Party Hereto (filed as Exhibit 4.1 to HCR Manor
Care, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 and incorporated herein by
reference).
4.9 -- 364 Day Credit Agreement dated as of September 25, 1998, as
amended as of September 24, 1999, among HCR Manor Care,
Inc., Manor Care, Inc., Bank of America, National
Association, the Chase Manhattan Bank, Deutsche Bank and the
Other Financial Institutions Party Hereto (filed as Exhibit
4 to Manor Care, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999 and incorporated herein
by reference).
4.10 -- The Second Amendment to the 364 Day Credit Agreement dated as
of February 9, 2000 among Manor Care, Inc. (formerly HCR
Manor Care, Inc.), Manor Care of America, Inc. (formerly
Manor Care, Inc.), various financial institutions, and Bank
of America, N.A., as Administrative Agent (filed as Exhibit
4.9 to Manor Care, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by
reference).
4.11 -- The Third Amendment to the 364 Day Credit Agreement dated as
of September 22, 2000 among Manor Care, Inc. (formerly HCR
Manor Care, Inc.), Manor Care of America, Inc. (formerly
Manor Care, Inc.), various financial institutions, and Bank
of America, N.A., as Administrative Agent (filed as Exhibit
4.1 to Manor Care, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000 and incorporated herein
by reference).
4.12 -- Indenture dated as of June 4, 1996 between Manor Care, Inc.
and Wilmington Trust Company, Trustee (filed as Exhibit 4.1
to Manor Care of America, Inc.'s (MCA), formerly known as
Manor Care, Inc., Form 8-K dated June 4, 1996 and
incorporated herein by reference).
4.13 -- Supplemental Indentures dated as of June 4, 1996 between
Manor Care, Inc. and Wilmington Trust Company, Trustee
(filed as Exhibit 4.2 to MCA's Form 8-K dated June 4, 1996
and incorporated herein by reference).
10.1 -- Stock Purchase Agreement and amendment among HCR, HCRC Inc.,
O-I Health Care Holding Corp. and Owens-Illinois, Inc. dated
as of August 30, 1991 (filed as Exhibit 10.1 and 10.1(a) to
HCR's Registration Statement on Form S-1, File No. 33-42535
and incorporated herein by reference).
10.2 -- Form of Annual Incentive Award Plan (filed as Exhibit 10.2 to
HCR's Registration Statement on Form S-1, File No. 33-42535
and incorporated herein by reference).
10.3 -- Performance Award Plan (filed on pages A1 to A3 of Manor
Care, Inc.'s Proxy Statement dated March 30, 2000 in
connection with its Annual Meeting held on May 2, 2000 and
incorporated herein by reference).
10.4 -- Amended Stock Option Plan for Key Employees (filed as Exhibit
4 to HCR's Registration Statement on Form S-8, File No.
33-83324 and incorporated herein by reference).
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10.5 -- First Amendment, Second Amendment and Third Amendment to
the Amended Stock Option Plan for Key Employees (filed as
Exhibits 4.1, 4.2 and 4.3, respectively, to HCR's
Registration Statement on Form S-8, File No. 333-64181 and
incorporated herein by reference).
10.6 -- Revised form of Non-Qualified Stock Option Agreement between
HCR and various Key Employees participating in the Stock
Option Plan for Key Employees (filed as Exhibit 4.7 to HCR's
Registration Statement on Form S-8, File No.33-48885 and
incorporated herein by reference).
10.7 -- Amended Restricted Stock Plan (filed on pages A1 to A9 of
HCR's Proxy Statement dated March 25, 1997 in connection
with its Annual Meeting held on May 6, 1997 and incorporated
herein by reference).
10.8 -- First Amendment to Amended Restricted Stock Plan (filed as
Exhibit 4.2 to HCR's Registration Statement on Form S-8,
File No. 333-64235 and incorporated herein by reference).
10.9 -- Revised form of Restricted Stock Plan Agreement between
Manor Care, Inc. and officers participating in the Amended
Restricted Stock Plan (filed as Exhibit 10.9 to Manor Care,
Inc.'s Annual Report on Form 10-K for the year ended December
31, 2000 and incorporated herein by reference).
10.10 -- Executive Officer Deferred Compensation Plan dated December
18, 1991 (filed as Exhibit 10.12 to HCR's Annual Report on
Form 10-K for the period ended December 31, 1991 and
incorporated herein by reference).
10.11 -- Form of Indemnification Agreement between HCR and various
officers and directors (filed as Exhibit 10.9 to HCR's
Registration Statement on Form S-1, File No. 33-42535 and
incorporated herein by reference).
10.12 -- Amended and Restated Health Care and Retirement Corporation
Senior Executive Retirement Plan, effective October 1, 1992,
restated January 1, 1998 (filed as Exhibit 10.12 to Manor
Care, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference)
10.13 -- First Amendment to Amended and Restated Health Care and
Retirement Corporation Senior Executive Retirement Plan,
effective January 1, 1998 (filed as Exhibit 10.13 to Manor
Care, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference).
10.14 -- Senior Management Savings Plan dated December 17, 1992
(filed as Exhibit 10.16 to HCR's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein
by reference).
10.15 -- Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA, and Paul A. Ormond (filed as Exhibit 10.14 to Manor
Care, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference).
10.16 -- Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA and M. Keith Weikel (filed as Exhibit 10.15 to Manor
Care, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference).
10.17 -- Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA and Geoffrey G. Meyers (filed as Exhibit 10.16 to Manor
Care, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference).
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10.18 -- Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA and R. Jeffrey Bixler (filed as Exhibit 10.17 to Manor
Care, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference).
10.19 -- Form of Executive Retention Agreement among the Registrant,
HCRA and Paul A. Ormond (filed as Exhibit 10.1 to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
10.20 -- Form of Executive Retention Agreement among the Registrant,
HCRA and M. Keith Weikel (filed as Exhibit 10.2 to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
10.21 -- Form of Executive Retention Agreement among the Registrant,
HCRA and Geoffrey G. Meyers (filed as Exhibit 10.3 to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
10.22 -- Form of Executive Retention Agreement among the Registrant,
HCRA and R. Jeffrey Bixler (filed as Exhibit 10.4 to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
10.23 -- Form of Retention Agreement among the Registrant, Manor Care,
Inc. and Stewart Bainum, Jr. (filed as Exhibit 10.13 to
MCA's Annual Report on Form 10-K for the year ended May 31,
1998 and incorporated herein by reference).
10.24 -- Form of Noncompetition Agreement among the Registrant,
Manor Care, Inc. and Stewart Bainum, Jr.(filed as Exhibit
10.12 to MCA's Annual Report on Form 10-K for the year ended
May 31, 1998 and incorporated herein by reference).
10.25 -- Form of Chairman's Service Agreement between the Registrant
and Stewart Bainum, Jr. (filed as Exhibit 10.7 to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
10.26 -- Stock Option Plan for Outside Directors (filed as Exhibit 4.4
to HCR's Registration Statement on Form S-8, File No.
33-48885 and incorporated herein by reference).
10.27 -- First Amendment, Second Amendment and Third Amendment to the
Stock Option Plan for Outside Directors (filed as Exhibits
4.4, 4.5 and 4.6, respectively, to HCR's Registration
Statement on Form S-8, File No. 333-64181 and incorporated
herein by reference).
10.28 -- Form of Non-Qualified Stock Option Agreement between HCR and
various outside directors participating in Stock Option Plan
for Outside Directors (filed as Exhibit 4.6 to HCR's
Registration Statement on Form S-8, File No. 33-48885 and
incorporated herein by reference).
10.29 -- Manor Care, Inc.'s Non-Employee Director Stock Compensation
Plan (filed as Exhibit A to MCA's Proxy Statement dated
August 28, 1996 which is Exhibit 99 to the Annual Report on
Form 10-K for the year ended May 31, 1997 and incorporated
herein by reference).
21 -- Subsidiaries of the Registrant (filed as Exhibit 21 to Manor
Care, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference)
*23 -- Consent of Independent Auditors
*24 -- Power of Attorney
--------------------
* Filed herewith.
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REPORTS ON FORM 8-K
Manor Care filed a Form 8-K on December 28, 2000 regarding the completion of the
merger of In Home Health, Inc. with a subsidiary of Manor Care, Inc.
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SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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)
by /s/ R. Jeffrey Bixler
--------------------------------------
R. Jeffrey Bixler
Vice President, General Counsel
and Secretary
Date: April 30, 2001
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76
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on April 30, 2001 on behalf of
Manor Care, Inc. and in the capacities indicated.
SIGNATURE TITLE
--------- -----
*
-----------------------------
Stewart Bainum, Jr. Chairman of the Board, Director
*
-----------------------------
Joseph H. Lemieux Director
*
-----------------------------
William H. Longfield Director
*
-----------------------------
Frederic V. Malek Director
*
-----------------------------
Geoffrey G. Meyers Executive Vice President and Chief
Financial Officer (Principal Financial Officer)
*
-----------------------------
Spencer C. Moler Vice President and Controller (Principal
Accounting Officer)
*
-----------------------------
Paul A. Ormond President and Chief Executive Officer
(Principal Executive Officer); Director
*
-----------------------------
John T. Schwieters Director
*
-----------------------------
Robert G. Siefers Director
*
-----------------------------
M. Keith Weikel Senior Executive Vice President and
Chief Operating Officer; Director
*
-----------------------------
Gail R. Wilensky Director
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*
-----------------------------
Thomas L. Young Director
-------------------
* R. Jeffrey Bixler, signing his name hereto, does sign this document on
behalf of each of the above named officers and/or directors of the Company
pursuant to powers of attorney duly executed by such persons.
By: /s/ R. Jeffrey Bixler
------------------------------------
R. Jeffrey Bixler, Attorney-in-fact
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EXHIBIT INDEX
Exhibit
Number Description
------- -----------
23 Consent of Independent Auditors
24 Power of Attorney
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