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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2001.
Common stock, $0.01 par value - 102,368,975 shares
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
------
Consolidated Balance Sheets -
September 30, 2001 and December 31, 2000 ........................3
Consolidated Statements of Operations -
Three months and nine months ended September 30, 2001 and 2000 ..4
Consolidated Statements of Cash Flows -
Nine months ended September 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 ...........................................18
Item 3. Defaults Upon Senior Securities .................................18
Item 4. Submission of Matters to a Vote of Security Holders .............18
Item 5. Other Information ...............................................18
Item 6. Exhibits and Reports on Form 8-K ................................18
SIGNATURES ........................................................................18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
MANOR CARE, INC.
Consolidated Balance Sheets
September 30, December 31,
2001 2000
----- ----
(Unaudited) (Note 1)
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 36,244 $ 24,943
Receivables, less allowances for
doubtful accounts of $68,609 and $61,137, respectively 393,605 389,943
Receivable from sale of assets 3,107
Prepaid expenses and other assets 24,599 24,867
Assets held for sale 58,809
Deferred income taxes 62,019 62,019
---------- ----------
Total current assets 575,276 504,879
Property and equipment, net of accumulated
depreciation of $729,793 and $646,478, respectively 1,562,991 1,577,378
Intangible assets, net of amortization 99,751 100,022
Other assets 177,291 176,189
---------- ----------
Total assets $2,415,309 $2,358,468
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 88,958 $ 90,390
Employee compensation and benefits 102,052 81,065
Accrued insurance liabilities 73,905 65,165
Income tax payable 42,847 27,274
Other accrued liabilities 52,860 48,172
Revolving loans 155,000
Long-term debt due within one year 5,398 5,479
---------- ----------
Total current liabilities 366,020 472,545
Long-term debt 753,643 644,054
Deferred income taxes 108,916 108,916
Other liabilities 129,998 120,224
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 333,174 335,609
Retained earnings 899,177 837,123
Cumulative other comprehensive income (238)
---------- ----------
1,233,223 1,173,842
Less treasury stock, at cost (8.6 and 8.4 million shares, respectively) (176,491) (161,113)
---------- ----------
Total shareholders' equity 1,056,732 1,012,729
---------- ----------
Total liabilities and shareholders' equity $2,415,309 $2,358,468
========== ==========
See notes to consolidated financial statements.
3
MANOR CARE, INC.
Consolidated Statements Of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands, except earnings per share)
Revenues $687,639 $604,531 $1,989,168 $1,755,696
Expenses:
Operating 563,627 501,058 1,631,882 1,502,007
General and administrative 29,294 26,835 85,606 77,042
Depreciation and amortization 33,097 30,683 96,081 90,381
-------- -------- ---------- ----------
626,018 558,576 1,813,569 1,669,430
-------- -------- ---------- ----------
Income before other income (expenses),
income taxes and minority interest 61,621 45,955 175,599 86,266
Other income (expenses):
Interest expense (11,994) (15,369) (38,427) (45,241)
Impairment of investments (20,000)
Equity in earnings of affiliated companies 730 821 1,039 1,270
Interest income and other 199 694 1,333 2,442
-------- -------- ---------- ----------
Total other expenses, net (11,065) (13,854) (36,055) (61,529)
-------- -------- ---------- ----------
Income before income taxes and minority interest 50,556 32,101 139,544 24,737
Income taxes 19,338 11,556 53,131 6,860
Minority interest income 172 1,716
-------- -------- ---------- ----------
Net income $ 31,218 $ 20,373 $ 86,413 $ 16,161
======== ======== ========== ==========
Earnings per share:
Basic $0.31 $0.20 $0.85 $0.16
Diluted $0.30 $0.20 $0.83 $0.16
Weighted average shares:
Basic 102,250 102,205 102,222 102,266
Diluted 104,110 103,276 103,954 103,015
See notes to consolidated financial statements.
4
MANOR CARE, INC.
Consolidated Statements Of Cash Flows
(Unaudited)
Nine Months Ended September 30
------------------------------
2001 2000
---- ----
(In thousands)
OPERATING ACTIVITIES
Net income $ 86,413 $ 16,161
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 96,081 90,381
Impairment of investments 20,000
Provision for bad debts 32,137 22,502
Deferred income taxes (9,822)
Net gain on sale of assets (630) (361)
Equity in earnings of affiliated companies (1,039) (1,270)
Minority interest income 1,716
Changes in assets and liabilities,
excluding sold facilities and acquisitions:
Receivables (33,605) (37,481)
Prepaid expenses and other assets 2,135 6,961
Liabilities 43,676 74,869
-------- ---------
Total adjustments 138,755 167,495
-------- --------
Net cash provided by operating activities 225,168 183,656
-------- --------
INVESTING ACTIVITIES
Investment in property and equipment (65,492) (91,006)
Investment in systems development (6,244) (8,402)
Acquisitions (12,597) (12,402)
Proceeds from sale of assets 5,507 5,235
Consolidation of subsidiary 15,701
-------- --------
Net cash used in investing activities (78,826) (90,874)
-------- --------
FINANCING ACTIVITIES
Net repayments under bank credit agreements (237,300) (61,500)
Principal payments of long-term debt (8,192) (4,537)
Payment of guaranteed debt of development joint venture (57,063)
Proceeds from issuance of senior notes 200,000
Payment of deferred financing costs (3,397)
Proceeds from stock options and common stock 3,797 267
Purchase of common stock for treasury (32,886) (2,669)
-------- --------
Net cash used in financing activities (135,041) (68,439)
--------- --------
Net increase in cash and cash equivalents 11,301 24,343
Cash and cash equivalents at beginning of period 24,943 12,287
-------- --------
Cash and cash equivalents at end of period $ 36,244 $ 36,630
======== ========
See notes to consolidated financial statements.
5
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 nine months ended September 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 September 30, 2001, the Company operated 299 skilled nursing and 57 assisted
living facilities, 94 outpatient therapy clinics, one acute care hospital and 81
home health offices. In addition, there are 13 assisted living facilities held
for sale.
NOTE 2 - ASSETS HELD FOR SALE
On July 2, 2001, the Company paid in full a $57 million revolving line of
credit, which it had guaranteed, of a development joint venture. 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 and intends to sell these facilities within the next year.
Accordingly, the Company has classified the net assets of $58.8 million for
these assisted living facilities as held for sale in the consolidated balance
sheet at September 30, 2001. The results of operations for these facilities,
which are included in the Company's third quarter results, are not material and
are at a breakeven operating level. Prior to the third quarter of 2001, the
results of these facilities were recorded under the equity method.
NOTE 3 - 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 $196.6 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.
6
Debt consists of the following:
September 30, December 31,
2001 2000
---- ----
(In thousands)
Five Year Agreement $369,700 $452,000
364 Day Agreement (revolving loans) 155,000
8% Senior Notes 200,000
7 1/2% Senior Notes, net of discount 149,720 149,675
Mortgages and other notes 34,308 42,456
Capital lease obligations 5,313 5,402
-------- --------
759,041 804,533
Less:
364 Day Agreement 155,000
Amounts due within one year 5,398 5,479
--------- ---------
Long-term debt $753,643 $644,054
======== ========
NOTE 4 - 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.
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
7
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. If the IRS
were to challenge these deductions, the Company would look at its options
available, including defending vigorously its right to deduct the entire amount
of interest payments.
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 5 - EARNINGS PER SHARE
The calculation of earnings per share (EPS) is as follows:
Three months ended Nine months ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands, except earnings per share)
Numerator:
Net income [income
available to common shareholders] $31,218 $20,373 $86,413 $16,161
======= ======= ======= =======
Denominator:
Denominator for basic EPS -
weighted-average shares 102,250 102,205 102,222 102,266
Effect of dilutive securities:
Stock options 1,552 934 1,460 703
Non-vested restricted stock 308 137 272 46
------- ------- ------- -------
Denominator for diluted EPS -
adjusted for weighted-average
shares and assumed conversions 104,110 103,276 103,954 103,015
======= ======= ======= =======
EPS:
Basic $0.31 $0.20 $0.85 $0.16
Diluted $0.30 $0.20 $0.83 $0.16
Options to purchase shares of the Company's common stock that were not included
in the computation of diluted EPS because the options' exercise prices were
greater than the average market price of the common shares were: 2.0 million
shares with an average exercise price of $35 for the third quarter of 2001, 2.3
million shares with an average exercise price of $34 for nine months of 2001 and
3.2 million shares with an average exercise price of $29 for the third quarter
and nine months of 2000.
8
NOTE 6 - 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. The revenues in the "Other"
category include services for assisted living facilities held for sale,
rehabilitation care, home health care 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 a discussion of unusual expenses
recorded in the first half of 2000.
Long-term Care Other Total
-------------- ----- -----
(In thousands)
Three months ended September 30, 2001
Revenues from external customers $580,412 $107,227 $687,639
Intercompany revenues 10,400 10,400
Depreciation and amortization 29,944 3,153 33,097
Operating margin 112,898 11,114 124,012
Three months ended September 30, 2000
Revenues from external customers 517,050 87,481 604,531
Intercompany revenues 7,138 7,138
Depreciation and amortization 28,017 2,666 30,683
Operating margin 92,605 10,868 103,473
Nine months ended September 30, 2001
Revenues from external customers 1,683,658 305,510 1,989,168
Intercompany revenues 28,792 28,792
Depreciation and amortization 86,969 9,112 96,081
Operating margin 318,326 38,960 357,286
Nine months ended September 30, 2000
Revenues from external customers 1,501,922 253,774 1,755,696
Intercompany revenues 20,538 20,538
Depreciation and amortization 82,380 8,001 90,381
Operating margin 238,571 15,118 253,689
NOTE 7 - COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income plus other comprehensive
income (loss). Comprehensive income was $31.2 million and $86.2 million for the
three months and nine months ended September 30, 2001 and $20.4 million and
$16.2 million for the three months and nine months ended September 30, 2000. The
other comprehensive loss of $0.3 million in the first
9
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 8 - NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) 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. Management will perform the
initial impairment test on recorded goodwill during 2002.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that the Company is required to
adopt beginning January 1, 2002 with transition provisions for certain matters.
The new rules on asset impairment supersede Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(FAS 121), and provide a single accounting model for long-lived assets to be
disposed of. In accordance with the new standard, the Company will continue to
follow the guidance in FAS 121 for the disposal of the 13 assisted living
facilities.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues. Our revenues increased $83.1 million, or 14 percent, from the
third quarter of 2000 to 2001. Revenues from skilled nursing and assisted living
facilities increased $63.4 million, or 12 percent, due to increases in
rates--$55.5 million and capacity/occupancy--$7.9 million. Our revenues from the
home health business increased $13.1 million primarily because of an increase in
home health visits and hospice services.
Our revenues in the first nine months of 2001 increased $233.5 million, or 13
percent, compared with the first nine months of 2000. Revenues from skilled
nursing and assisted living facilities increased $181.7 million, or 12 percent,
due to increases in rates--$163.4 million, capacity--$11.4 million and
occupancy--$6.9 million. Our revenues from the home health business increased
$37.9 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.
10
Our occupancy levels were as follows:
Third Quarter Year-to-date September
------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Total 87% 87% 87% 86%
Excluding start-up facilities 87% 88% 88% 87%
Skilled nursing facilities 88% 88% 88% 87%
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 66 percent and 67 percent for the third quarter and
first nine months of 2000 to 67 percent and 68 percent for the third quarter and
first nine months of 2001. Our bed capacity increased between the first nine
months of 2000 and 2001 primarily because we opened six facilities with 424 beds
and purchased/leased three facilities with 414 beds.
Operating expenses. Our operating expenses increased $62.6 million, or
12 percent, from the third quarter of 2000 to 2001. Operating expenses from
skilled nursing and assisted living facilities increased $43.1 million, or 10
percent from the third quarter of 2000 to 2001. These increases primarily
related to labor costs, including temporary staffing, of $32.0 million;
ancillary costs, excluding internal labor costs, of $5.5 million; and general
and professional liability costs of $3.2 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
$12.5 million from our home health business due to an increase in services and
$1.8 million from our transcription business due to an increase in capacity.
Operating expenses for the first nine months of 2001 increased $129.9 million,
or 9 percent, from the first nine months of 2000. Operating expenses from
skilled nursing and assisted living facilities increased $102.0 million, as
discussed below. Operating expenses increased $29.3 million from our home health
business and $4.8 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. The unusual operating expenses 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 and a development joint venture.
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 $135.7 million, or 11 percent,
from the first nine months of 2000 to 2001. We attribute the largest portion of
this operating expense increase to labor costs and temporary staffing of $84.4
million. Ancillary costs, excluding internal labor costs, increased $16.8
million and general and professional liability expense increased $12.0 million
in the first nine months of 2001 compared with the first nine months of 2000.
11
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 some assistance with the passage of a
measure of tort reform in Florida in May 2001 that became fully effective on
October 5. The industry was not included in previously passed tort reform in
Florida as were other health care providers. We believe 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 in reducing the long-term care industry's current litigation
burden. Consistent with our end-of-year practices, we have initiated a review,
along with our advisors, of the adequacy of our current and prior-year liability
accruals. We expect to complete this review by year-end 2001.
General and administrative expenses. Our general and administrative
expenses, which approximated 4 percent of revenues, increased $2.5 million and
$8.6 million from the third quarter and first nine months of 2000 to 2001,
respectively, because of stock appreciation rights, legal expenses, other
professional services and general cost increases.
Depreciation and amortization. Depreciation increased $2.1 million and
$3.1 million from the third quarter and first nine months of 2000 compared to
2001. Amortization increased $0.3 million and $2.6 million from the third
quarter and first nine months of 2000 compared to 2001 primarily due to computer
software amortization.
Interest expense. When excluding capitalized interest, our interest
expense in the third quarter and first nine months of 2001 decreased $4.1
million and $8.8 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 of affiliated companies. On July 2, 2001, we paid in
full a $57 million revolving line of credit, which we guaranteed, of a
development joint venture. 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 consolidated the results of
these facilities in the third quarter of 2001 and classified them as held for
sale. See Note 2 to the consolidated financial statements for further
discussion. During the first half of 2001 (prior to our consolidation), we
recorded equity losses of $3.1 million related to a development joint venture.
We recorded equity losses of $0.2 million and $0.5 million for the third quarter
and first nine months of 2000, respectively.
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
12
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.
Minority interest income. The minority interest income for the third
quarter and first nine months 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 nine months of 2001, we satisfied our cash requirements from
cash generated from operating activities. Cash flows from operating activities
were $225.2 million for the first nine months of 2001, an increase of $41.5
million from the first nine months of 2000. Our operating cash flows increased
primarily because of an increase in net income. We used the cash principally for
capital expenditures, to acquire businesses, to repay debt, to pay guaranteed
debt of a development joint venture and to purchase our common stock.
Expenditures for property and equipment of $65.5 million in the first nine
months of 2001 included $18.3 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 $196.6 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 September 30,
2001, outstanding borrowings totaled $369.7 million under the five year
agreement.
As discussed in Note 2 to the consolidated financial statements, on July 2, 2001
we paid in full a development joint venture's revolving line of credit balance
including accrued interest for a total of $57.7 million. After consideration of
usage for letters of credit, we had $100.1 million remaining credit available
under the five year agreement on September 30, 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
1,211,000 shares for $32.9 million in the first nine months 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.
13
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.
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 at issuance.
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. On or about September 20, 2001, Genesis'
bankruptcy court confirmed its plan of reorganization, or the Genesis Bankruptcy
Plan, and the Genesis Bankruptcy Plan became effective on or about October 3,
2001. The status of the various Genesis/NeighborCare lawsuits is as follows:
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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.
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.
Pursuant to the Genesis Bankruptcy Plan, virtually all affirmative claims
against Genesis and/or its affiliated debtors that arose prior to September 20,
2001 were discharged. MCA's set-off and recoupment rights, however, were
specifically preserved by the Genesis
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Bankruptcy Plan. Accordingly, on October 22, 2001, MCA filed a motion for
reconsideration or clarification of the Court's September 29, 2000 order for the
limited purpose of obtaining reconsideration or clarification of the September
29, 2000 order insofar as it might affect MCA's set-off and recoupment rights
against Genesis.
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 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,
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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.
The matter was heard by the Arbitrator in July and August of 2001. The parties
are in the process of filing post-trial briefs and the Arbitrator is expected to
take the matter under submission for decision in November 2001. 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, 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. Following the bankruptcy filing, the case was closed subject to being
reopened on motion by any party after entry of an injunction imposed by Section
524 of the Bankruptcy Code. Such an injunction was issued by the bankruptcy
court on September 20, 2001, as part of the order confirming the Genesis
Bankruptcy Plan. Pursuant to the Genesis Bankruptcy Plan, virtually all
affirmative claims against Genesis and its affiliated debtors that arose prior
to September 20, 2001 were discharged. MCA's setoff and recoupment rights,
however, were specifically preserved by the Genesis Bankruptcy Plan. MCA is
currently evaluating whether any further action is appropriate or necessary
with respect to this matter.
See Note 4 - Contingencies in the notes to the consolidated financial statements
for a discussion of litigation related to environmental matters and patient-care
related claims.
17
Item 2. CHANGES IN SECURITIES.
None
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
Item 5. OTHER INFORMATION.
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Manor Care, Inc.
(Registrant)
Date November 2, 2001 By /s/ Geoffrey G. Meyers
------------------ --------------------------------------------
Geoffrey G. Meyers, Executive Vice President
and Chief Financial Officer
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