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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10858
MANOR CARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1687107
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
333 N. SUMMIT STREET, TOLEDO, OHIO 43604-2617
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 252-5500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on April 30, 2001.
Common stock, $0.01 par value -- 102,887,589 shares
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
------
Consolidated Balance Sheets -
March 31, 2001 and December 31, 2000.................. 3
Consolidated Statements of Operations-
Three months ended March 31, 2001 and 2000............ 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 2001 and 2000............ 5
Notes to Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 12
Item 2. Changes in Securities................................. 15
Item 3. Defaults Upon Senior Securities....................... 15
Item 4. Submission of Matters to a Vote of Security Holders... 15
Item 5. Other Information..................................... 15
Item 6. Exhibits and Reports on Form 8-K...................... 16
SIGNATURES ........................................................ 17
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
MANOR CARE, INC.
Consolidated Balance Sheets
March 31, December 31,
2001 2000
---- ----
(Unaudited) (Note 1)
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 23,453 $ 24,943
Receivables, less allowances for doubtful
accounts of $62,685 and $61,137, respectively 387,808 389,943
Receivable from sale of assets 1,766 3,107
Prepaid expenses and other assets 24,425 24,867
Deferred income taxes 62,019 62,019
----------- -----------
Total current assets 499,471 504,879
Property and equipment, net of accumulated
depreciation of $672,389 and $646,478 respectively 1,567,691 1,577,378
Intangible assets, net of amortization 102,382 100,022
Other assets 189,573 176,189
----------- -----------
Total assets $2,359,117 $2,358,468
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 86,516 $ 90,390
Employee compensation and benefits 85,167 81,065
Accrued insurance liabilities 64,306 65,165
Income tax payable 44,192 27,274
Other accrued liabilities 51,678 48,172
Revolving loans 155,000
Long-term debt due within one year 5,491 5,479
----------- -----------
Total current liabilities 337,350 472,545
Long-term debt 752,257 644,054
Deferred income taxes 108,916 108,916
Other liabilities 127,745 120,224
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 323,109 335,609
Retained earnings 862,106 837,123
Other comprehensive income (256)
----------- -----------
1,186,069 1,173,842
Less treasury stock, at cost (8.1 and 8.4 million shares, respectively) (153,220) (161,113)
----------- -----------
Total shareholders' equity 1,032,849 1,012,729
----------- -----------
Total liabilities and shareholders' equity $2,359,117 $2,358,468
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See notes to consolidated financial statements.
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MANOR CARE, INC.
Consolidated Statements Of Operations
(Unaudited)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
(In thousands, except earnings per share)
Revenues $638,193 $569,918
Expenses:
Operating 527,197 503,374
General and administrative 26,575 25,363
Depreciation and amortization 30,839 29,675
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584,611 558,412
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Income before other income (expenses), income taxes and minority interest 53,582 11,506
Other income (expenses):
Interest expense (14,221) (14,367)
Equity in earnings (losses) of affiliated companies (297) 564
Interest income and other 1,101 993
---------- ----------
Total other expenses, net (13,417) (12,810)
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Income (loss) before income taxes and minority interest 40,165 (1,304)
Income taxes (benefit) 15,182 (676)
Minority interest income 155
---------- ----------
Net income (loss) $ 24,983 $ (783)
========== ==========
Earnings per share - basic and diluted $0.24 $(0.01)
Weighted average shares:
Basic 102,152 102,318
Diluted 103,760 102,318
See notes to consolidated financial statements.
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MANOR CARE, INC.
Consolidated Statements Of Cash Flows
(Unaudited)
Three Months Ended March 31
---------------------------
2001 2000
---- ----
(In thousands)
OPERATING ACTIVITIES
Net income (loss) $ 24,983 $ (783)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 30,839 29,675
Provision for bad debts 10,552 9,131
Net gain on sale of assets (798) (442)
Equity in (earnings) losses of affiliated companies 297 (564)
Minority interest income 155
Changes in assets and liabilities, excluding sold facilities and acquisitions:
Receivables (7,076) (2,303)
Prepaid expenses and other assets (11,700) (12,058)
Liabilities 24,167 25,542
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Total adjustments 46,281 49,136
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Net cash provided by operating activities 71,264 48,353
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INVESTING ACTIVITIES
Investment in property and equipment (18,184) (30,896)
Investment in systems development (2,089) (3,550)
Acquisitions (3,472) (6,479)
Proceeds from sale of assets 3,005 4,331
Consolidation of subsidiary 15,701
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Net cash used in investing activities (20,740) (20,893)
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FINANCING ACTIVITIES
Net repayments under bank credit agreements (244,200) (10,500)
Principal payments of long-term debt (2,585) (2,743)
Proceeds from issuance of senior notes 200,000
Payment of deferred financing costs (2,712)
Proceeds from exercise of stock options 1,002 48
Purchase of common stock for treasury (3,519) (1,066)
------- -------
Net cash used in financing activities (52,014) (14,261)
------- -------
Net increase (decrease) in cash and cash equivalents (1,490) 13,199
Cash and cash equivalents at beginning of period 24,943 12,287
------- -------
Cash and cash equivalents at end of period $23,453 $25,486
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See notes to consolidated financial statements.
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MANOR CARE, INC.
Notes To Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of Manor Care, Inc. (the
Company), the interim data includes all adjustments necessary for a fair
statement of the results of the interim periods and all such adjustments are of
a normal recurring nature. Operating results for the three months ended March
31, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in Manor Care, Inc.'s annual
report on Form 10-K/A for the year ended December 31, 2000.
At March 31, 2001, the Company operated 298 skilled nursing and 57 assisted
living facilities, 88 outpatient therapy clinics, one acute care hospital and 78
home health offices.
NOTE 2 - DEBT
In March 2001 the Company issued $200 million of 8% Senior Notes due in 2008
that are guaranteed by substantially all of its subsidiaries. The net proceeds
of $197.3 million from the Senior Notes were used to repay borrowings
outstanding under the existing bank credit agreements. The Company is in the
process of registering identical Senior Notes with the Securities and Exchange
Commission, which will be exchanged for the Senior Notes issued in March. Debt
consists of the following:
March 31, December 31,
2001 2000
---- ----
(In thousands)
Five Year Agreement $362,800 $452,000
364 Day Agreement (revolving loans) 155,000
8% Senior Notes 200,000
7 1/2% Senior Notes, net of discount 149,690 149,675
Mortgages and other notes 39,889 42,456
Capital lease obligations 5,369 5,402
-------- --------
757,748 804,533
Less:
364 Day Agreement 155,000
Amounts due within one year 5,491 5,479
-------- --------
Long-term debt $752,257 $644,054
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NOTE 3 - CONTINGENCIES
One or more subsidiaries or affiliates of Manor Care of America, Inc. (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 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 $28.0 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.
The Company, Alterra Healthcare Corporation (Alterra) and the development joint
venture jointly and severally guaranteed a revolving line of credit that has an
outstanding balance and is capped at $57.0 million, which matures June 29, 2001.
The Company and Alterra are undertaking efforts to sell the thirteen facilities.
The debt will be repaid upon the sale of each facility.
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 $34.0
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.
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NOTE 4 - EARNINGS PER SHARE
The calculation of earnings per share (EPS) is as follows for the three months
ended March 31:
2001 2000
---- ----
(In thousands, except earnings per share)
Numerator:
Net income (loss) [income available to common shareholders] $24,983 $(783)
======= ======
Denominator:
Denominator for basic EPS - weighted-average shares 102,152 102,318
Effect of dilutive securities:
Stock options 1,368
Non-vested restricted stock 240
------- -------
Denominator for diluted EPS - adjusted for weighted-
average shares and assumed conversions 103,760 102,318
======= =======
EPS - basic and diluted $0.24 $(0.01)
In 2000, the dilutive effect of stock options would have been 733,000 shares.
These shares were not included in the calculation because the effect would be
anti-dilutive with a net loss.
NOTE 5 - SEGMENT INFORMATION
The Company provides a range of health care services. The Company has one
reportable operating segment, long-term care, which includes the operation of
skilled nursing and assisted living facilities. The "Other" category includes
the non-reportable segments and corporate items not considered to be an
operating segment. The revenues in the "Other" category include services for
rehabilitation, home health and hospital care. Asset information, including
capital expenditures, is not provided to the Company's chief operating decision
maker. Operating performance represents revenues less operating expenses and
does not include general and administrative expense, depreciation and
amortization, other income and expense items, and income taxes. See Management's
Discussion and Analysis for further discussion of general and professional
liability expenses recorded in the first quarter of 2000.
LONG-TERM CARE OTHER TOTAL
-------------- ----- -----
(In thousands)
Three months ended March 31, 2001
Revenues from external customers $540,205 $97,988 $638,193
Intercompany revenues 9,035 9,035
Depreciation and amortization 27,925 2,914 30,839
Operating margin 96,348 14,648 110,996
Three months ended March 31, 2000
Revenues from external customers 488,375 81,543 569,918
Intercompany revenues 6,408 6,408
Depreciation and amortization 26,042 3,633 29,675
Operating margin 56,809 9,735 66,544
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NOTE 6 - COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income (loss) plus other
comprehensive income (loss). Comprehensive income totaled $24,727,000 and
$(783,000) for the first quarter of 2001 and 2000, respectively. The other
comprehensive loss of $256,000 in the first quarter of 2001 represents the after
tax loss of the terminated treasury lock agreement that the Company entered into
as a hedge of interest rates on the future issuance of the Senior Notes in March
2001.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS -
QUARTER ENDED MARCH 31, 2001 COMPARED TO QUARTER ENDED MARCH 31, 2000
Revenues. Our revenues increased $68.3 million, or 12 percent, from the
first quarter of 2000 to 2001. Revenues from skilled nursing and assisted living
facilities increased $51.8 million, or 11 percent, due to increases in
rates--$50.2 million and occupancy--$4.8 million, which were partially offset by
a decrease in bed capacity--$3.2 million. Our revenues from the home health
business increased $12.9 million primarily because of an increase in home health
visits and hospice services.
Our rate increases for the skilled nursing and assisted living facilities relate
to private pay, Medicaid and Medicare. The Medicare rate increase related to the
positive effect of the Medicare, Medicaid and SCHIP Balanced Budget Act of 1999
with many of the provisions beginning April 1, 2000. Our bed capacity declined
between the first quarter of 2000 and 2001 because there was one additional day
in 2000 as a result of leap year. Our occupancy levels were 86 percent for the
first quarter of 2000 compared with 87 percent for the first quarter of 2001.
When excluding start-up facilities, our occupancy levels were 87 percent for the
first quarter of 2000 compared with 88 percent for the first quarter of 2001.
Our occupancy levels for skilled nursing facilities were 87 percent for the
first quarter of 2000 compared with 88 percent for the first quarter of 2001.
The quality mix of revenue from Medicare, private pay and insured patients
related to skilled nursing and assisted living facilities and rehabilitation
operations increased from 67 percent for the first quarter of 2000 to 68 percent
for the first quarter of 2001.
Operating Expenses. Our operating expenses in the first quarter of 2001
increased $23.8 million, or 5 percent, compared with the first quarter of 2000.
Operating expenses from skilled nursing and assisted living facilities increased
$12.3 million. Our operating expenses from our home health business increased
$7.0 million, which corresponds with the increase in revenues mentioned above.
Operating expenses for our transcription business increased $1.6 million.
In the first quarter of 2000, we recorded an additional $33.6 million of general
and professional liability expense related to a change in estimate incorporating
industry experience for claims originating in policy years 1994 through 1999.
When excluding this additional expense, operating expenses for the skilled
nursing and assisted living facilities increased $45.9 million, or 12 percent.
We attribute the largest portion of this operating expense increase to labor
costs and temporary staffing of $29.6 million. General and professional
liability expense increased $3.9 million in the first quarter of 2001 compared
with the current period expense in the first quarter of 2000.
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General and professional liability costs for the long-term care industry,
especially in the state of Florida, have become increasingly expensive. Industry
sources report the average cost of a claim in Florida in 2000 was three times
higher than the rest of the country and industry providers in the state
experienced four times the number of claims compared to the national average. In
May 2001 the Florida legislature passed a tort reform bill, which the governor
is expected to sign. Due to the nature of the caps and limits in that
legislation, the specific impact remains uncertain; but, we are hopeful that it
will slow the rate of increases in general and professional liability claims and
costs in Florida.
General and Administrative Expenses. Our general and administrative
expenses, which approximated 4 percent of revenues, increased $1.2 million from
the first quarter of 2000 to 2001. This increase related to general cost
increases.
Depreciation and Amortization. Depreciation remained constant.
Amortization increased primarily as a result of software amortization.
Interest Expense. Interest expense remained constant. When excluding
capitalized interest, our interest expense decreased $0.9 million due to lower
debt levels.
Equity in earnings (losses) of affiliated companies. During the first
quarter of 2001, we recorded equity losses of $1.2 million related to our
development joint venture with Alterra Healthcare Corporation. Our share of a
pharmacy partnership's earnings increased $0.4 million.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2001, we satisfied our cash requirements from cash
generated from operating activities. Cash flows from operating activities were
$71.3 million for the first quarter of 2001, an increase of $22.9 million from
the first quarter of 2000. Our operating cash flows increased because of the
increase in net income. We used the cash principally for capital expenditures,
to acquire businesses and to repay debt. Expenditures for property and equipment
of $18.2 million in the first quarter of 2001 included $4.9 million to construct
new facilities.
In March 2001 we issued $200 million of 8% Senior Notes due in 2008. We used the
net proceeds of $197.3 million from the Senior Notes to repay borrowings
outstanding under our existing bank credit agreements. Following the repayment
of borrowings under the credit agreements, we reduced the commitment under the
364-day agreement from $200 million to $50 million. At March 31, 2001,
outstanding borrowings totaled $362.8 million under the five year agreement. We
had no outstanding borrowings under the 364-day agreement. At March 31, 2001,
after consideration of usage for letters of credit, the remaining credit
availability under the combined agreements totaled $158.8 million. Future
borrowings under these facilities are subject to certain financial ratio tests.
We do not intend to renew the remaining $50 million 364-day agreement when it
matures on September 21, 2001.
On February 8, 2000, our board of directors authorized us to spend up to $100
million to purchase our common stock through December 31, 2001. We purchased
175,000 shares for $3.5 million in the first quarter of 2001. We may use the
shares for internal stock option and 401(k) match
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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 would
be funded from excess cash from operations, credit available under the bank
credit agreement and other financing arrangements that are normally available in
the marketplace.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report may include 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: changes in Medicare, Medicaid and certain private payors' reimbursement
levels; existing government regulations, including applicable health care, tax
and health and safety regulations, and changes in, or the failure to comply
with, governmental regulations or the interpretations thereof; legislative
proposals for health care reform; competition and general economic and business
conditions; the ability to attract and retain qualified personnel; changes in
current trends in the cost and volume of general and professional liability
claims and other litigation.
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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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion of our market risk in our Form 10-K/A for the year ended
December 31, 2000. In addition, in March 2001 we issued $200 million of 8%
Senior Notes due in 2008. The carrying value of the Senior Notes approximates
fair value. We used the net proceeds from the Senior Notes to repay borrowings
outstanding under our existing bank credit agreements.
PART II. OTHER INFORMATION
Item 1. 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.
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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, 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
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- 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 issued an opinion finding in
favor of the defendants' motion and deferring consideration of NeighborCare's
motion to assume the Master Service Agreements until the arbitration is
complete. No order was entered. Shortly thereafter, the defendants tendered a
proposed order to the bankruptcy court, which granted the defendants' motion in
accordance with the opinion. On or about February 22, 2001, NeighborCare moved
the bankruptcy court to reconsider the February 6, 2001 opinion. Following
briefing and a hearing on NeighborCare's motion to reconsider, the Court entered
an order on March 20, 2001 denying the motion to reconsider, affirming and
incorporating the February 6, 2001 opinion and granting relief from the
automatic stay to permit the arbitration to proceed to final judgment in
accordance with that Opinion. Hearing in the arbitration has also been
rescheduled and is set to begin July 30, 2001. The defendants intend to
vigorously defend the arbitration demand and to vigorously prosecute their
counterclaim at the arbitration. 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.
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
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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 Note 3 - Contingencies in the notes to the consolidated financial statements
for a discussion of litigation related to environmental matters and patient-care
related claims.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 8, 2001 the
stockholders approved the following items: a) elect Stewart Bainum, Jr. as a
director, b) elect William H. Longfield as a director, c) elect Paul A. Ormond
as a director, d) approve the amendments to the Amended Stock Option Plan for
Key Employees, e) approve the Equity Incentive Plan and f) ratify the selection
of Ernst & Young LLP as independent public accountants for the year ending
December 31, 2001. The items were approved by a vote as follows:
Item For Against Withheld Abstain
---- --- ------- -------- -------
a 92,443,488 1,878,464
b 92,442,866 1,879,086
c 92,339,374 1,982,578
d 76,152,884 14,003,077 4,165,991
e 73,462,345 16,667,320 4,192,287
f 90,069,010 391,754 3,861,188
Item 5. OTHER INFORMATION
None
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
S-K Item
601 No.
--------
4.1 Indenture, dated March 8, 2001, among Manor Care, Inc., the subsidiary
guarantors as named therein and National City Bank, Trustee (filed as
Exhibit 4.1 to Manor Care, Inc.'s Form S-4 filed on May 3, 2001 and
incorporated by reference.)
10.1 Fourth and Fifth Amendment to the Amended Stock Option Plan for Key
Employees (filed as Appendix B to Manor Care, Inc.'s Proxy Statement
dated April 6, 2001 in connection with its Annual Meeting held on May
8, 2001 and incorporated herein by reference.)
10.2 Equity Incentive Plan of Manor Care, Inc. (filed as Appendix C to
Manor Care, Inc.'s Proxy Statement dated April 6, 2001 in connection
with its Annual Meeting held on May 8, 2001 and incorporated herein by
reference.)
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Manor Care, Inc.
(Registrant)
Date MAY 14, 2001 By /s/ GEOFFREY G. MEYERS
------------------- ----------------------
Geoffrey G. Meyers, Executive Vice-President
and Chief Financial Officer
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