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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 2001.
Common stock, $0.01 par value -- 103,106,251 shares
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TABLE OF CONTENTS
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000........................ 3
Consolidated Statements of Operations -
Three months and six months ended June 30, 2001 and 2000... 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 2001 and 2000.................... 5
Notes to Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 14
Item 2. Changes in Securities...................................... 17
Item 3. Defaults Upon Senior Securities............................ 17
Item 4. Submission of Matters to a Vote of Security Holders........ 17
Item 5. Other Information.......................................... 17
Item 6. Exhibits and Reports on Form 8-K........................... 17
SIGNATURES ........................................................... 18
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
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MANOR CARE, INC.
Consolidated Balance Sheets
June 30, December 31,
2001 2000
----------- -----------
(Unaudited) (Note 1)
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 19,312 $ 24,943
Receivables, less allowances for
doubtful accounts of $64,814 and $61,137, respectively 388,091 389,943
Receivable from sale of assets 1,766 3,107
Prepaid expenses and other assets 26,870 24,867
Deferred income taxes 62,019 62,019
----------- -----------
Total current assets 498,058 504,879
Property and equipment, net of accumulated
depreciation of $701,250 and $646,478, respectively 1,568,990 1,577,378
Intangible assets, net of amortization 100,990 100,022
Other assets 181,984 176,189
----------- -----------
Total assets $ 2,350,022 $ 2,358,468
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 84,172 $ 90,390
Employee compensation and benefits 99,803 81,065
Accrued insurance liabilities 65,279 65,165
Income tax payable 26,157 27,274
Other accrued liabilities 53,371 48,172
Revolving loans 155,000
Long-term debt due within one year 5,480 5,479
----------- -----------
Total current liabilities 334,262 472,545
Long-term debt 711,237 644,054
Deferred income taxes 108,916 108,916
Other liabilities 133,936 120,224
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 316,416 335,609
Retained earnings 892,318 837,123
Other comprehensive income (247)
----------- -----------
1,209,597 1,173,842
Less treasury stock, at cost (8.0 and 8.4 million shares, respectively) (147,926) (161,113)
----------- -----------
Total shareholders' equity 1,061,671 1,012,729
----------- -----------
Total liabilities and shareholders' equity $ 2,350,022 $ 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 June 30 Six Months Ended June 30
--------------------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands, except earnings per share)
Revenues $ 663,336 $ 581,247 $ 1,301,529 $ 1,151,165
Expenses:
Operating 541,058 497,575 1,068,255 1,000,949
General and administrative 29,737 24,844 56,312 50,207
Depreciation and amortization 32,145 30,023 62,984 59,698
----------- ----------- ----------- -----------
602,940 552,442 1,187,551 1,110,854
----------- ----------- ----------- -----------
Income before other income (expenses),
income taxes and minority interest 60,396 28,805 113,978 40,311
Other income (expenses):
Interest expense (12,212) (15,505) (26,433) (29,872)
Impairment of investments (20,000) (20,000)
Equity in earnings (losses) of affiliated companies 606 (115) 309 449
Interest income and other 33 755 1,134 1,748
----------- ----------- ----------- -----------
Total other expenses, net (11,573) (34,865) (24,990) (47,675)
----------- ----------- ----------- -----------
Income (loss) before income taxes and minority interest 48,823 (6,060) 88,988 (7,364)
Income taxes (benefit) 18,611 (4,020) 33,793 (4,696)
Minority interest income 1,389 1,544
----------- ----------- ----------- -----------
Net income (loss) $ 30,212 $ (3,429) $ 55,195 $ (4,212)
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.30 $ (0.03) $ 0.54 $ (0.04)
Diluted $ 0.29 $ (0.03) $ 0.53 $ (0.04)
Weighted average shares:
Basic 102,265 102,276 102,209 102,297
Diluted 103,992 102,276 103,876 102,297
See notes to consolidated financial statements.
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MANOR CARE, INC.
Consolidated Statements Of Cash Flows
(Unaudited)
Six Months Ended June 30
------------------------
2001 2000
---- ----
In thousands)
OPERATING ACTIVITIES
Net income (loss) $ 55,195 $ (4,212)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 62,984 59,698
Impairment of investments 20,000
Provision for bad debts 19,739 14,747
Deferred income taxes (9,822)
Net gain on sale of assets (643) (447)
Equity in earnings of affiliated companies (309) (449)
Minority interest income 1,544
Changes in assets and liabilities, excluding sold facilities and acquisitions:
Receivables (15,713) (9,179)
Prepaid expenses and other assets (6,570) 1,419
Liabilities 24,842 41,417
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Total adjustments 84,330 118,928
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Net cash provided by operating activities 139,525 114,716
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INVESTING ACTIVITIES
Investment in property and equipment (40,114) (64,982)
Investment in systems development (3,375) (5,544)
Acquisitions (12,534) (12,402)
Proceeds from sale of assets 3,790 4,809
Consolidation of subsidiary 15,701
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Net cash used in investing activities (52,233) (62,418)
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FINANCING ACTIVITIES
Net repayments under bank credit agreements (281,000) (28,500)
Principal payments of long-term debt (6,816) (4,217)
Proceeds from issuance of senior notes 200,000
Payment of deferred financing costs (3,316)
Proceeds from stock options and common stock 1,997 111
Purchase of common stock for treasury (3,788) (1,066)
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Net cash used in financing activities (92,923) (33,672)
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Net increase (decrease) in cash and cash equivalents (5,631) 18,626
Cash and cash equivalents at beginning of period 24,943 12,287
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Cash and cash equivalents at end of period $ 19,312 $ 30,913
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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 accounting principles generally accepted in the United States
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 accounting principles generally accepted
in the United States 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 six months ended June 30, 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 accounting principles generally accepted in the United
States 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 June 30, 2001, the Company operated 299 skilled nursing and 57 assisted
living facilities, 91 outpatient therapy clinics, one acute care hospital and 81
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 $196.7 million from the Senior Notes were used to repay borrowings
outstanding under the existing bank credit agreements. In May 2001, the Company
registered identical Senior Notes with the Securities and Exchange Commission,
which were exchanged for the Senior Notes issued in March. Debt consists of the
following:
June 30, December 31,
2001 2000
---- ----
(In thousands)
Five Year Agreement $326,000 $452,000
364 Day Agreement (revolving loans) 155,000
8% Senior Notes 200,000
7 1/2% Senior Notes, net of discount 149,705 149,675
Mortgages and other notes 35,667 42,456
Capital lease obligations 5,345 5,402
-------- --------
716,717 804,533
Less:
364 Day Agreement 155,000
Amounts due within one year 5,480 5,479
-------- --------
Long-term debt $711,237 $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 and Alterra Healthcare Corporation (Alterra) have jointly and
severally guaranteed a development joint venture's revolving line of credit that
had an outstanding balance and was capped at $57.0 million, which matured June
29, 2001. On July 2, 2001 the Company paid in full the revolving line of credit
balance including accrued interest for a total of $57.7 million. As a result of
the repayment, the Company has been assigned the full rights and privileges of
the lenders including security interests in the 13 Alzhiemer's assisted living
facilities. The Company will consolidate the results of these facilities in the
third quarter that were previously recorded under the equity method. The Company
intends to sell these facilities through the exercise of its rights as
lienholders.
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 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.
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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.
NOTE 4 - EARNINGS PER SHARE
The calculation of earnings per share (EPS) is as follows:
Three months ended June 30 Six months ended June 30
-------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands, except earnings per share)
Numerator:
Net income (loss) [income (loss)
available to common shareholders] $ 30,212 $ (3,429) $ 55,195 $ (4,212)
========= ========= ========= =========
Denominator:
Denominator for basic EPS -
weighted-average shares 102,265 102,276 102,209 102,297
Effect of dilutive securities:
Stock options 1,459 1,413
Non-vested restricted stock 268 254
--------- --------- --------- ---------
Denominator for diluted EPS -
adjusted for weighted-average
shares and assumed conversions 103,992 102,276 103,876 102,297
========= ========= ========= =========
EPS:
Basic $ 0.30 $ (0.03) $ 0.54 $ (0.04)
Diluted $ 0.29 $ (0.03) $ 0.53 $ (0.04)
Options to purchase 2.3 million shares of the Company's common stock at an
average price of $34 were not included in the computation of diluted EPS for
2001 because the options' exercise prices were greater than the average market
price of the common shares.
The dilutive effect of stock options would have been 442,000 shares and 587,000
shares for the three months and six months ended June 30, 2000, respectively.
These shares were not included in the calculation because the effect would be
anti-dilutive with a net loss.
NOTE 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,
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depreciation and amortization, other income and expense items, and income taxes.
See Management's Discussion and Analysis for a discussion of unusual expenses
recorded in the first and second quarter of 2000.
Long-term Care Other Total
-------------- ----- -----
(In thousands)
Three months ended June 30, 2001
Revenues from external customers $563,041 $100,295 $663,336
Intercompany revenues 9,357 9,357
Depreciation and amortization 29,100 3,045 32,145
Operating margin 109,080 13,198 122,278
Three months ended June 30, 2000
Revenues from external customers 496,497 84,750 581,247
Intercompany revenues 6,992 6,992
Depreciation and amortization 28,321 1,702 30,023
Operating margin 89,157 (5,485) 83,672
Six months ended June 30, 2001
Revenues from external customers 1,103,246 198,283 1,301,529
Intercompany revenues 18,392 18,392
Depreciation and amortization 57,025 5,959 62,984
Operating margin 205,428 27,846 233,274
Six months ended June 30, 2000
Revenues from external customers 984,872 166,293 1,151,165
Intercompany revenues 13,400 13,400
Depreciation and amortization 54,363 5,335 59,698
Operating margin 145,966 4,250 150,216
NOTE 6 - COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income (loss) plus other
comprehensive income (loss). Comprehensive income was $30,221,000 and
$54,948,000 for the three and six months ended June 30, 2001 and $(3,429,000)
and $(4,212,000) for the three months and six months ended June 30, 2000. 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.
NOTE 7 - NEW ACCOUNTING STANDARD
In July 2001, the Financial Accounting Standards Board issued Statement No. 142,
"Goodwill and Other Intangible Assets" that the Company is required to adopt
beginning January 1, 2002. Under this Statement, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually, or more
frequently if impairment indictors arise, for impairment. The Company's annual
amortization of goodwill is $3.4 million.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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RESULTS OF OPERATIONS
Revenues. Our revenues increased $82.1 million, or 14 percent, from the
second quarter of 2000 to 2001. Revenues from skilled nursing and assisted
living facilities increased $66.5 million, or 13 percent, due to increases in
rates--$57.6 million, capacity--$5.8 million and occupancy--$3.1 million. Our
revenues from the home health business increased $12.0 million primarily because
of an increase in home health visits and hospice services.
Our revenues in the first half of 2001 increased $150.4 million, or 13 percent,
compared with the first half of 2000. Revenues from skilled nursing and assisted
living facilities increased $118.4 million, or 12 percent, due to increases in
rates--$108.0 million, occupancy--$7.9 million and capacity--$2.5 million. Our
revenues from the home health business increased $24.9 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 Refinement
Act of 1999 with many of the provisions beginning April 1, 2000, as well as the
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000
with many of the provisions beginning April 1, 2001.
Our occupancy levels were 86 percent for the second quarter and first half of
2000 compared with 87 percent for the second quarter and first half of 2001.
When excluding start-up facilities, our occupancy levels were 87 percent for the
second quarter and first half of 2000 compared with 88 percent for the second
quarter and first half of 2001. Our occupancy levels for skilled nursing
facilities were 87 percent for the second quarter and first half of 2000
compared with 88 percent for the second quarter and first half 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 second quarter and first half of 2000 to 68
percent for the second quarter and first half of 2001.
Our bed capacity increased between the first half of 2000 and 2001 primarily
because we opened ten assisted living facilities with 612 beds.
Operating expenses. Our operating expenses increased $43.5 million, or
9 percent, from the second quarter of 2000 to 2001. During the second quarter of
2000, there were unusual operating expenses of $17.7 million that included $3.2
million for the terminated Company buy-out transaction costs and $14.5 million
for the write off of amounts due from Genesis Health Ventures, Inc., Alterra
Healthcare Corporation (Alterra) and our development joint venture with Alterra.
When excluding these unusual expenses, operating expenses increased $61.2
million, or 13 percent.
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Operating expenses from skilled nursing and assisted living facilities increased
$46.6 million, or 11 percent from the second quarter of 2000 to 2001. These
increases primarily related to labor costs, including temporary staffing, of
$29.3 million; ancillary costs, excluding internal labor costs, of $6.4 million;
and general and professional liability costs of $4.9 million. Ancillary costs,
which include various types of therapies, medical supplies and prescription
drugs, increased as a result of the more medically complex patients. Operating
expenses increased $10.0 million from our home health business due to an
increase in services and $1.3 million from our transcription business due to an
increase in capacity.
Operating expenses for the first half of 2001 increased $67.3 million, or 7
percent, from the first half of 2000. Operating expenses from skilled nursing
and assisted living facilities increased $58.9 million, as discussed below.
Operating expenses increased $17.0 million from our home health business and
$3.0 million from our transcription business, which were partially offset by the
decrease of $17.7 million of unusual expenses recorded in the second quarter of
2000, as discussed previously.
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 $92.5 million, or 11 percent,
from the first half of 2000 to 2001. We attribute the largest portion of this
operating expense increase to labor costs and temporary staffing of $58.9
million. Ancillary costs, excluding internal labor costs, increased $11.2
million and general and professional liability expense increased $8.8 million in
the first half of 2001 compared with the first half of 2000.
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.
The long-term care industry received minor assistance with the passage of a
measure of tort reform in Florida in May 2001. The industry did not benefit from
previously passed tort reform in Florida as did other health care providers, and
this new legislation still will not put the industry on the same judicial
footing as these providers. However, it is hoped that the legislation that was
passed, which includes caps on punitive damages, limits to add-on legal fees,
tougher rules of evidence and a reduced statute of limitations, will be the
first step when fully implemented in October 2001 in reducing the long-term care
industry's current litigation burden.
General and administrative expenses. Our general and administrative
expenses, which approximated 4 percent of revenues, increased $4.9 million and
$6.1 million from the second quarter and first half of 2000 to 2001,
respectively, because of deferred compensation plans, stock appreciation rights
and general cost increases.
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Depreciation and amortization. Amortization increased $0.9 million and
$2.2 million from the second quarter and first half of 2000 to 2001 primarily
due to computer software amortization.
Interest expense. When excluding capitalized interest, our interest
expense in the second quarter and first half of 2001 decreased $3.8 million and
$4.6 million compared with the same periods in 2000 because of lower debt levels
and interest rates.
Impairment of investments. Because of Genesis' bankruptcy filing on
June 22, 2000, we reduced the carrying value of our Genesis preferred stock
investment by $19.0 million to zero and wrote off a separate Genesis-related
investment of $1.0 million in the second quarter of 2000.
Equity in earnings (losses) of affiliated companies. During the second
quarter and first half of 2001, we recorded equity losses of $1.9 million and
$3.1 million, respectively, related to our development joint venture with
Alterra. For the same periods in 2000, we recorded equity losses of $0.2 million
and $0.3 million, respectively. We and Alterra jointly and severally guaranteed
a development joint venture's revolving line of credit that had an outstanding
balance and was capped at $57.0 million, which matured June 29, 2001. On July 2,
2001 we paid in full the revolving line of credit balance including accrued
interest for a total of $57.7 million. As a result of the repayment, we have
been assigned the full rights and privileges of the lenders including security
interests in the 13 Alzhiemer's assisted living facilities. We will consolidate
the results of these facilities in the third quarter and classify them as held
for sale. The facilities' operating income is currently at break even.
We were a 50 percent owner in a partnership that sold its only nursing home in
June 2001. During the second quarter of 2001, we reversed $1.5 million of
previously recorded losses for this partnership. These losses were booked in
excess of our investment because we had guaranteed the partnership's debt, which
was paid off with the sale of the nursing home.
Our share of a pharmacy partnership's earnings increased $0.6 million and $1.1
million for the second quarter and first half of 2001 compared to 2000,
respectively.
Minority interest income. The minority interest income for the second
quarter and first half of 2000 represented the minority owners' share of In Home
Health, Inc.'s (IHHI) net income for those periods. In December 2000, we
purchased the remaining shares of IHHI to increase our ownership to 100 percent.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 2001, we satisfied our cash requirements from cash
generated from operating activities. Cash flows from operating activities were
$139.5 million for the first half of 2001, an increase of $24.8 million from the
first half of 2000. Our operating cash flows increased because of an 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 $40.1
million in the first half of 2001 included $11.1 million to construct new
facilities.
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In March 2001 we issued $200 million of 8% Senior Notes due in 2008. We used the
net proceeds of $196.7 million from the Senior Notes to repay borrowings
outstanding under our existing bank credit agreements. Immediately following the
repayment of borrowings under the credit agreements, we reduced the commitment
under the 364-day agreement from $200 million to $50 million. Effective August
1, 2001, we canceled the remaining $50 million commitment. At June 30, 2001,
outstanding borrowings totaled $326.0 million under the five year agreement. We
had no outstanding borrowings under the 364-day agreement.
As discussed previously, we paid in full a development joint venture's revolving
line of credit balance including accrued interest for a total of $57.7 million
on July 2, 2001. At July 31, 2001, outstanding borrowings totaled $381.0 million
under the five year agreement. After consideration of usage for letters of
credit, we had $88.8 million remaining credit available under the five year
agreement on July 31, 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
186,000 shares for $3.8 million in the first half of 2001. 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 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. There are no changes in debt instruments since year end other
than the $200 million, 8% Senior Notes issued in March 2001. The Senior Notes
are due in 2008 and the carrying value approximated fair value.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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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.
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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.
Section 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
- 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
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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 was rescheduled and
began 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 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,
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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.
----------------------------------------------------
None
Item 5. Other Information.
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None
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a)Exhibits
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Manor Care, Inc.
(Registrant)
Date August 8, 2001 By /s/ Geoffrey G. Meyers
----------------- ------------------------------------------------
Geoffrey G. Meyers, Executive Vice President
and Chief Financial Officer
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