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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, 2002
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, 2002.
Common stock, $0.01 par value -- 100,306,790 shares
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001.......................... 3
Consolidated Statements of Income-
Three months ended March 31, 2002 and 2001.................... 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 2002 and 2001.................... 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................................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 13
Item 2. Changes in Securities......................................... 16
Item 3. Defaults Upon Senior Securities............................... 16
Item 4. Submission of Matters to a Vote of Security Holders........... 17
Item 5. Other Information............................................. 17
Item 6. Exhibits and Reports on Form 8-K.............................. 17
SIGNATURES ....................................................... 18
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
MANOR CARE, INC.
Consolidated Balance Sheets
March 31, December 31,
2002 2001
---- ----
(Unaudited) (Note 1)
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 20,369 $ 26,691
Receivables, less allowances for doubtful
accounts of $68,322 and $68,827, respectively 409,044 391,109
Prepaid expenses and other assets 23,371 31,630
Assets held for sale 56,577 57,735
Deferred income taxes 82,465 82,465
---------- ----------
Total current assets 591,826 589,630
Property and equipment, net of accumulated
depreciation of $705,816 and $680,811, respectively 1,546,880 1,556,910
Goodwill 81,092 80,408
Intangible assets, net of amortization of $9,590 and $9,127, respectively 16,778 17,242
Other assets 169,303 179,881
---------- ----------
Total assets $2,405,879 $2,424,071
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 88,512 $ 88,615
Employee compensation and benefits 111,352 115,533
Accrued insurance liabilities 100,552 76,450
Income tax payable 52,982 34,342
Other accrued liabilities 73,506 71,031
Long-term debt due within one year 8,421 5,388
---------- ----------
Total current liabilities 435,325 391,359
Long-term debt 660,165 715,830
Deferred income taxes 103,095 103,095
Other liabilities 156,610 167,249
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 348,399 348,199
Retained earnings 911,982 878,250
Accumulated other comprehensive income 506 328
---------- ----------
1,261,997 1,227,887
Less treasury stock, at cost (10.2 and 8.7 million shares, respectively) (211,313) (181,349)
---------- ----------
Total shareholders' equity 1,050,684 1,046,538
---------- ----------
Total liabilities and shareholders' equity $2,405,879 $2,424,071
========== ==========
See notes to consolidated financial statements.
3
MANOR CARE, INC.
Consolidated Statements Of Income
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
---- ----
(In thousands, except earnings per share)
Revenues $715,987 $638,193
Expenses:
Operating 590,330 527,197
General and administrative 29,927 26,575
Depreciation and amortization 31,769 30,839
-------- --------
652,026 584,611
-------- --------
Income before other income (expenses) and income taxes 63,961 53,582
Other income (expenses):
Interest expense (9,944) (14,221)
Gain (loss) on sale of assets (944) 798
Equity in earnings (losses) of affiliated companies 736 (297)
Interest income and other 609 303
-------- ---------
Total other expenses, net (9,543) (13,417)
-------- --------
Income before income taxes 54,418 40,165
Income taxes 20,679 15,182
-------- --------
Net income $ 33,739 $ 24,983
======== ========
Earnings per share - basic and diluted $0.33 $0.24
Weighted average shares:
Basic 101,094 102,152
Diluted 102,146 103,760
See notes to consolidated financial statements.
4
MANOR CARE, INC.
Consolidated Statements Of Cash Flows
(Unaudited)
THREE MONTHS ENDED MARCH 31
---------------------------
2002 2001
---- ----
(In thousands)
OPERATING ACTIVITIES
Net income $ 33,739 $ 24,983
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 31,769 30,839
Provision for bad debts 10,537 10,552
Net (gain) loss on sale of assets 944 (798)
Equity in (earnings) losses of affiliated companies (736) 297
Changes in assets and liabilities, excluding sold facilities and acquisitions:
Receivables (28,472) (7,076)
Prepaid expenses and other assets 17,906 (11,700)
Liabilities 30,524 24,167
-------- ---------
Total adjustments 62,472 46,281
-------- ---------
Net cash provided by operating activities 96,211 71,264
-------- ---------
INVESTING ACTIVITIES
Investment in property and equipment (22,721) (18,184)
Investment in systems development (646) (2,089)
Acquisitions (682) (3,472)
Proceeds from sale of assets 2,961 3,005
Adjustment of acquisition of assets from development joint venture 1,158
--------- ---------
Net cash used in investing activities (19,930) (20,740)
-------- ---------
FINANCING ACTIVITIES
Net repayments under bank credit agreements (50,100) (244,200)
Principal payments of long-term debt (2,532) (2,585)
Proceeds from issuance of senior notes 200,000
Payment of deferred financing costs (2,712)
Proceeds from exercise of stock options 6 1,002
Purchase of common stock for treasury (29,977) (3,519)
-------- ---------
Net cash used in financing activities (82,603) (52,014)
-------- ---------
Net decrease in cash and cash equivalents (6,322) (1,490)
Cash and cash equivalents at beginning of period 26,691 24,943
-------- ---------
Cash and cash equivalents at end of period $ 20,369 $ 23,453
======== =========
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 three months ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in Manor Care, Inc.'s annual
report on Form 10-K for the year ended December 31, 2001.
At March 31, 2002, the Company operated 298 skilled nursing and 57 assisted
living facilities, 94 outpatient therapy clinics, one acute care hospital and 88
home health offices.
NOTE 2 - GOODWILL AND INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
No. 142, "Goodwill and Other Intangible Assets," that the Company adopted
January 1, 2002. Under this Statement, goodwill and indefinite-lived intangible
assets are no longer amortized but are reviewed annually for impairment, or more
frequently if impairment indicators arise. Manor Care has no indefinite-lived
intangible assets. At January 1, 2002, the Company has goodwill of $80.4 million
on its balance sheet. Management has not determined the effect of the initial
impairment test on its consolidated financial position or results of operations.
The Company is in its final stages of completing the initial impairment test and
will finish this analysis by June 30.
6
The effect of not amortizing goodwill for the first quarter of 2001 and
year-to-date 2001 is as follows:
First First
Quarter Quarter Year
2002 2001 2001
---- ---- ----
(In thousands, except earnings per share)
Reported net income $33,739 $24,983 $68,490
Add back: goodwill amortization,
net of tax of $204 and $812, respectively 653 2,591
------- ------- --------
Adjusted net income $33,739 $25,636 $71,081
======= ======= =======
Diluted earnings per share:
Reported net income $.33 $.24 $.66
Goodwill amortization, net of tax .01 .03
---- ---- ----
Adjusted net income $.33 $.25 $.69
==== ==== ====
NOTE 3 - REVENUES
Revenues for certain health care services are as follows for the three months
ended March 31:
2002 2001
---- ----
(In thousands)
Skilled nursing and assisted living services $604,190 $540,205
Home health and hospice services 66,726 55,988
Rehabilitation services (excludes intercompany revenues) 20,884 24,113
Hospital care 15,961 14,528
Other services (includes assets held for sale) 8,226 3,359
-------- --------
$715,987 $638,193
======== ========
NOTE 4 - EARNINGS PER SHARE
The calculation of earnings per share (EPS) is as follows for the three months
ended March 31:
2002 2001
---- ----
(In thousands, except earnings per share)
Numerator:
Net income [income available to common shareholders] $ 33,739 $ 24,983
======== ========
Denominator:
Denominator for basic EPS - weighted-average shares 101,094 102,152
Effect of dilutive securities:
Stock options 781 1,368
Non-vested restricted stock 271 240
-------- --------
Denominator for diluted EPS - adjusted for weighted-
average shares and assumed conversions 102,146 103,760
======== ========
EPS - basic and diluted $0.33 $0.24
7
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: 2.2 million
shares with an average exercise price of $31 for the first quarter of 2002 and
2.5 million shares with an average exercise price of $32 for the first quarter
of 2001.
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. The revenues in the "Other"
category include services for assisted living facilities held for sale,
rehabilitation, home health and hospice, 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.
Long-Term Care Other Total
-------------- ----- -----
(In thousands)
Three months ended March 31, 2002
Revenues from external customers $604,190 $111,797 $715,987
Intercompany revenues 13,537 13,537
Depreciation and amortization 28,680 3,089 31,769
Operating margin 115,210 10,447 125,657
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
NOTE 6 - 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
8
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 $24.0 to $28.5 million. The Company has received or
expects to receive between $20.3 million and $24.5 million of insurance
proceeds, depending upon the ultimate liabilities, which will offset some
amounts due as a result of these exposures.
The Company is party to various other legal matters arising in the ordinary
course of business including patient care-related claims and litigation. At
March 31, 2002 and December 31, 2001, the general and professional liability
consisted of short-term reserves of $48.1 million and $48.0 million,
respectively, which were included in accrued insurance liabilities, and
long-term reserves of $93.5 million and $88.5 million, respectively, which were
included in other long-term liabilities. The expense for general and
professional liability claims and premiums was $17.6 million and $13.0 million
for the first quarter of 2002 and 2001, respectively, which was included in
operating expenses. There can be no assurance that such provision and liability
will not require material adjustment in future periods.
NOTE 7 - COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income plus other comprehensive
income (loss). Comprehensive income totaled $33.9 million and $24.7 million for
the first quarter of 2002 and 2001, respectively. The other comprehensive income
of $0.2 million in the first quarter of 2002 primarily relates to unrealized
gain on investments. The other comprehensive loss of $0.3 million 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 senior notes in March 2001.
NOTE 8 - SUBSEQUENT EVENT
On April 30, 2002, the Company completed the sale of its hospital to Health
Management Associates, Inc. (HMA) for approximately $80 million in cash.
Separately, the Company invested $16 million to acquire 20 percent of the HMA
entity owning the hospital. The total gain on the sale of the hospital was
approximately $39 million. The Company recorded a pre-tax gain of approximately
$31 million and deferred approximately $8 million, or 20 percent, of the gain.
Simultaneously, the Company acquired for $16 million a 20 percent interest in
another HMA entity that recently acquired a hospital.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -
QUARTER ENDED MARCH 31, 2002 COMPARED TO QUARTER ENDED MARCH 31, 2001
Revenues. Our revenues increased $77.8 million, or 12 percent, from the
first quarter of 2001 to 2002. Revenues from our long-term care segment (skilled
nursing and assisted living facilities excluding assets held for sale) increased
$64.0 million, or 12 percent, due to increases in rates--$58.5 million,
capacity--$3.7 million and occupancy--$1.8 million. Our revenues from the home
health business increased $10.7 million primarily because of an increase in
hospice services.
Our rate increases for the long-term care segment related to Medicare, Medicaid
and private pay. Our average Medicare rate increased 12 percent from $296 per
day in the first quarter of 2001 to $333 in the first quarter of 2002 related to
the positive effect of the Medicare, Medicaid and SCHIP Benefits Improvement and
Protection Act of 2000 with many of the provisions beginning April 1, 2001, as
well as our higher acuity patients. Our average Medicaid rate increased 8
percent from $112 per day in the first quarter of 2001 to $121 per day in the
first quarter of 2002. Private and other rates for our skilled nursing
facilities increased 5 percent from $171 per day in the first quarter of 2001 to
$180 per day in the first quarter of 2002. The increase in rates was also a
result of a shift in the mix of our patients to a higher percentage of Medicare
patients.
Our bed capacity grew between the first quarter of 2001 and 2002 primarily
because we opened two facilities with 184 beds and purchased/leased two
facilities with 355 beds, which was partially offset by the closing/sale of two
facilities with 223 beds. Our occupancy levels were 87 percent for the first
quarter of 2001 compared with 88 percent for the first quarter of 2002. When
excluding start-up facilities, our occupancy levels were 88 percent for the
first quarters of 2001 and 2002. Our occupancy levels for skilled nursing
facilities remained at 88 percent for the first quarter of 2001 and 2002. The
quality mix of revenues from Medicare, private pay and insured patients that
related to skilled nursing and assisted living facilities and rehabilitation
operations remained constant at 68 percent for the first quarter of 2001 and
2002.
Operating Expenses. Our operating expenses in the first quarter of 2002
increased $63.1 million, or 12 percent, compared with the first quarter of 2001.
Operating expenses from our long-term care segment increased $45.1 million, or
10 percent. Our operating expenses from our home health business increased $11.4
million because of an increase in services.
We attribute the largest portion ($28.2 million) of the long-term care operating
expense increase between the first quarter of 2001 and 2002 to labor costs and
temporary staffing. Our other operating expense increases for this segment
included ancillary costs, excluding internal labor, of $6.3 million and general
and professional liability expense of $3.9 million. Ancillary costs, which
include various types of therapies, medical supplies and prescription drugs,
increased
10
as a result of our more medically complex patients.
General and Administrative Expenses. Our general and administrative
expenses, which approximated 4 percent of revenues, increased $3.4 million from
the first quarter of 2001 to 2002 because of deferred compensation plans and
general cost increases.
Depreciation and Amortization. Our depreciation increased $1.5 million
from the first quarter of 2001 to 2002 as a result of additional depreciation
for our new construction projects and renovations of existing facilities
completed in the past year. Amortization decreased $0.6 million because we are
no longer amortizing goodwill that was $0.9 million in the first quarter of
2001. This decrease was partially offset by an increase in software
amortization. See Note 2 to the consolidated financial statements for additional
discussion of the change in accounting for goodwill.
Interest Expense. Interest expense decreased $4.3 million related to a
decline in both average interest rates and debt levels.
Gain (Loss) on Sale of Assets. Our loss on sale of assets in 2002
related to sales of land that we decided not to develop. Our gain on sale of
assets in 2001 primarily related to the sale of a skilled nursing facility.
Equity in Earnings (Losses) of Affiliated Companies. We recorded equity
losses related to our development joint venture with Alterra Healthcare
Corporation on this line item during the first half of 2001 and then
consolidated the results of 13 assisted living facilities in the second half of
2001. During the first quarter of 2001, we recorded equity losses of $1.2
million related to this development joint venture.
FINANCIAL CONDITION -- MARCH 31, 2002 AND DECEMBER 31, 2001
Assets held for sale decreased $1.2 million because of the receipt of cash from
the settlement that we reached with Alterra Healthcare Corporation and the
third-party equity investors in 2001.
Accrued insurance liabilities increased $24.1 million primarily due to the
reclassification of an $18.8 million environmental liability from other
long-term liabilities. The payment is due in January 2003. Some of this payment
will be offset by insurance proceeds that are due in January 2003. As a result,
we also reclassified $9.5 million from other long-term assets to receivables.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. During the first quarter of 2002, we satisfied our cash
requirements from cash generated from operating activities. Cash flows from
operating activities were $96.2 million for the first quarter of 2002, an
increase of $24.9 million from the first quarter of 2001. Our operating cash
flows increased because of the increase in net income and positive changes in
working capital. We used the cash principally for capital expenditures, to repay
debt and to purchase our common stock. Expenditures for property and equipment
of $22.7 million in the first quarter of 2002
11
included $5.9 million to construct new facilities and expand existing
facilities.
Debt Agreement. At March 31, 2002, outstanding borrowings totaled
$283.9 million under the five-year agreement. After consideration of usage for
letters of credit, the remaining credit availability under the five-year
agreement totaled $183.0 million at March 31, 2002.
Stock Purchase. On December 4, 2001, our board of directors authorized
us to spend up to $100 million to purchase our common stock from January 1, 2002
through December 31, 2003. We purchased 1,450,000 shares for $30.0 million in
the first quarter of 2002 and an additional 535,000 shares for $13.0 million in
April 2002. We may use the shares for internal stock option and 401(k) match
programs and for other uses, such as possible future acquisitions.
Sale of Hospital. On April 30, 2002, we completed the sale of our
hospital. Separately, we acquired a 20 percent interest in two entities, one
that owns our former hospital. The net cash provided by these transactions was
approximately $48 million.
Second Quarter Unusual Cash Outflows. We paid NeighborCare Pharmacy
Services approximately $22.0 million in April 2002 related to the undisputed
amount of the arbitration decision and paid the Internal Revenue Service (IRS)
approximately $35.3 million in April and May 2002 related to the settlement
agreement for COLI for the years 1993 through 1997. Our remaining COLI
obligation with the IRS is $2.7 million.
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
12
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 for the year ended
December 31, 2001. There have been no significant changes in our market risks
since December 31, 2001.
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:
First Action. On May 7, 1999, NeighborCare instituted a lawsuit in the
Circuit Court for Baltimore City, Maryland against us; our wholly owned
subsidiary, Manor Care of America, Inc. formerly known as Manor Care, Inc., or
MCA; and MCA's wholly owned subsidiary, ManorCare Health Services, Inc., or
MCHS, seeking damages, preliminary and permanent injunctive relief, and a
declaratory judgment related to allegations that the defendants had improperly
sought to terminate certain long-term Master Service Agreements between
Vitalink, now known as NeighborCare, and MCHS. MCHS had sought to terminate the
Master Service Agreements effective June 1, 1999, although they did not expire
by their terms until September 30, 2004. NeighborCare also instituted
arbitration proceedings against the same defendants. The arbitration proceedings
sought 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:
13
- 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 subsequently dismissed the Maryland action and consolidated certain
of those claims into the arbitration by filing an amended demand for
arbitration.
Following a hearing held in the summer of 2001, the arbitrator rendered a
decision and award on February 14, 2002. The decision and award denied
defendants' right to terminate the Master Service Agreements, thus requiring
MCHS to continue performing under the agreements until they expire September 30,
2004. The decision also ordered defendants to pay damages and certain related
amounts to NeighborCare as a result of NeighborCare being precluded from
supplying certain facilities owned by affiliates of MCHS. We estimated a total
charge of $24.6 million arising from the decision and award and booked this
amount in the fourth-quarter of 2001. Both parties have filed motions to clarify
certain matters relating to the decision and award, and those motions are
pending.
Second Action. On May 7, 1999, Genesis filed suit in federal district
court in Delaware against us; MCA; our Chief Executive Officer, Paul A. Ormond;
and our Chairman at that time, 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, without advising Genesis of the defendants'
alleged intent to terminate the Master Service Agreements that are the subject
of the arbitration described above or their alleged intent not to renew them
beyond their current term of September 30, 2004. 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 above, but denied the motion with respect to the alternative request
to dismiss the action. Following completion of the arbitration proceeding and
receipt of the arbitration decision and award described above, the court
returned the
14
lawsuit to its active calendar. On April 30, 2001, the defendants: (i) moved to
strike the allegations in the First Amended Complaint that were disposed of by
the arbitration decision and award, and (ii) filed their answer and affirmative
defenses to the remaining allegations. The defendants' motion to strike is
presently pending.
The parties are currently engaged in discovery, and the court has scheduled the
matter for trial beginning March 10, 2003. 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.
Third Action. On August 27, 1999, MCA filed a separate action in
federal district court in Delaware against Genesis concerning Genesis' 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. The
lawsuit sought, among other things, compensatory damages and rescission, 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.
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 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. On or about December 5, 2001,
Genesis filed its cross-motion to dismiss the lawsuit in its entirety, including
the claims sustained by the September 29, 2000 Order. Genesis based its
cross-motion on the discharge provision of its Bankruptcy Plan. MCA's motion and
Genesis' cross-motion are pending before the Court. On April 30, 2002, the
defendants in the lawsuit filed by Genesis on May 7,
15
1999 (including MCA) filed their affirmative defenses to that action. Among
their affirmative defenses, the defendants included defenses based upon the
set-off and recoupment rights arising from Genesis' misrepresentations and/or
omissions of material fact that formed the basis of this lawsuit.
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 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 set-off 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 6 - 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
16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 7, 2002 the
stockholders approved the following items: a) elect Joseph H. Lemieux as a
director, b) elect John T. Schwieters as a director, c) elect Gail R. Wilensky
as a director and d) ratify the selection of Ernst & Young LLP as independent
public accountants for the year ending December 31, 2002. The items were
approved by a vote as follows:
ITEM FOR AGAINST WITHHELD ABSTAIN
---- --- ------- -------- -------
a 85,868,566 5,209,916
b 89,489,292 1,589,190
c 89,503,734 1,574,748
d 87,831,357 2,903,083 344,042
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
17
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 13, 2002 By /s/ Geoffrey G. Meyers
---------------- ----------------------------------------
Geoffrey G. Meyers, Executive Vice President
and Chief Financial Officer
18