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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to Form 10-Q
(Mark One)
| þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2005
OR
| o | 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. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo
Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on August 31, 2005.
Common stock, $0.01 par value – 78,754,187 shares
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Manor Care, Inc.
Form 10-Q/A
Explanatory Note
Explanatory Note
This Amendment No. 1 on Form 10-Q/A is being filed to amend and restate the Company’s Form 10-Q for the quarterly period ended March 31, 2005, which was originally filed on May 10, 2005.
During the first quarter of 2005, and in anticipation of adopting the Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), “Share-Based Payment” (FAS 123R), the Company reviewed its accounting practices for all stock-based compensation, including restricted stock. Historically, the Company amortized its restricted stock compensation to the expected retirement date. As a result of the first quarter review, the Company determined that its restricted stock compensation should have been amortized to the retirement eligible date. The Company recorded a non-cash pretax charge of $10.3 million ($6.6 million after tax, or $.08 per share) to reflect the accelerated expense for the years 2000 through 2004. The effect on the Company’s prior years’ earnings per share was not deemed material at that time. In addition, restricted stock awards were made to retirement eligible employees in March 2005 that resulted in a pretax charge of $8.2 million ($5.2 million after tax or $.06 per share).
Subsequent to the release of the Company’s first quarter earnings, the Company’s independent registered public accounting firm advised the Company that due to the widespread practice of recognizing compensation expense over the explicit service period (up to the date of actual retirement), the SEC staff would accept continuation of that practice under Accounting Principles Board Opinion No. 25 (APB 25) and FASB Statement No. 123 (FAS 123). In addition, for companies that had followed that practice, the Company was advised that the SEC staff would require a continuation of that practice for awards granted prior to the adoption of FAS 123R. For companies that had already made the accounting change in the first quarter, such as Manor Care, the Company was further advised that there would be no objection from the SEC staff because of the immateriality of the change.
In the third quarter of 2005, the Company determined that deferred tax assets, related to restricted stock, previously recorded in the amount of $8.6 million, ($6.9 million of which was recorded in the first quarter of 2005), would not be realized due to the limitations on the tax deductibility of executive compensation and should not have been previously recorded. The Company further determined that the previously discussed first quarter restricted stock adjustments, including any reversal of deferred tax assets, while not material for all years prior to 2005, would be material for 2005 net income.
Consistent with the SEC staff views described above and in consultation with the Company’s independent registered public accounting firm, the Company reverted to its original accounting practice of recognizing compensation cost over the explicit service period and the restatement is included in this Form 10-Q/A. The impact of the restatement for the first quarter reduced general and administrative expenses and increased income before income taxes by $17.7 million, increased income taxes by $8.6 million, increased net income by $9.1 million and increased diluted earnings per share by $.10.
This Form 10-Q/A contains the complete text of Items 1, 2 and 4 of Part I and Item 6 of Part II, as amended, as well as currently dated certifications. Unaffected items have not been repeated in this Amendment No. 1. This Amendment No. 1 does not reflect events occurring after the filing date of the original Form 10-Q on May 10, 2005 or modify or update the disclosures presented in the original Form 10-Q, except to reflect the restatement as described above. Accordingly, Amendment No. 1 should be read in conjunction with our filings made subsequent to the filing of the original Form 10-Q on May 10, 2005, including any amendments to those filings. Additional disclosure regarding the restatement is included in Note 8 to the restated unaudited consolidated financial statements included in Item 1 of Part I of this Amendment No. 1 on Form 10-Q/A.
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Manor Care, Inc.
Form 10-Q/A
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Part I. Financial Information
Item 1.Financial Statements.
Manor Care, Inc.
Consolidated Balance Sheets
| March 31, | ||||||||
| 2005 | December 31, | |||||||
| Restated | 2004 | |||||||
| (Unaudited) | (Note 1) | |||||||
| (In thousands, except per share data) | ||||||||
Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 43,521 | $ | 32,915 | ||||
| Receivables, less allowances for doubtful accounts of $56,057 and $54,532, respectively | 522,509 | 425,278 | ||||||
| Prepaid expenses and other assets | 24,777 | 24,762 | ||||||
| Deferred income taxes | 59,804 | 57,412 | ||||||
| Total current assets | 650,611 | 540,367 | ||||||
| Property and equipment, net of accumulated depreciation of $792,542 and $768,915, respectively | 1,492,593 | 1,495,152 | ||||||
| Goodwill | 93,007 | 92,672 | ||||||
| Intangible assets, net of amortization of $4,665 and $4,499, respectively | 11,111 | 9,099 | ||||||
| Other assets | 198,094 | 203,408 | ||||||
| Total assets | $ | 2,445,416 | $ | 2,340,698 | ||||
Liabilities And Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 106,735 | $ | 102,178 | ||||
| Employee compensation and benefits | 136,413 | 139,900 | ||||||
| Accrued insurance liabilities | 100,534 | 102,973 | ||||||
| Income tax payable | 15,342 | 4,710 | ||||||
| Other accrued liabilities | 110,892 | 49,992 | ||||||
| Long-term debt due within one year | 2,467 | 2,501 | ||||||
| Total current liabilities | 472,383 | 402,254 | ||||||
| Long-term debt | 552,193 | 555,275 | ||||||
| Deferred income taxes | 136,474 | 134,518 | ||||||
| Other liabilities | 267,382 | 264,492 | ||||||
| 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 | 365,887 | 366,649 | ||||||
| Retained earnings | 1,235,929 | 1,208,493 | ||||||
| Accumulated other comprehensive loss | (1,218 | ) | (1,227 | ) | ||||
| 1,601,708 | 1,575,025 | |||||||
| Less treasury stock, at cost (24.6 and 25.0 million shares, respectively) | (584,724 | ) | (590,866 | ) | ||||
| Total shareholders’ equity | 1,016,984 | 984,159 | ||||||
| Total liabilities and shareholders’ equity | $ | 2,445,416 | $ | 2,340,698 | ||||
See notes to consolidated financial statements.
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Manor Care, Inc.
Consolidated Statements of Income
(Unaudited)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2005 | ||||||||
| Restated | 2004 | |||||||
| (In thousands, except per share amounts) | ||||||||
| Revenues | $ | 879,202 | $ | 797,338 | ||||
| Expenses: | ||||||||
| Operating | 734,150 | 659,358 | ||||||
| General and administrative | 36,266 | 34,791 | ||||||
| Depreciation and amortization | 33,447 | 31,747 | ||||||
| 803,863 | 725,896 | |||||||
| Income before other income (expenses) and income taxes | 75,339 | 71,442 | ||||||
| Other income (expenses): | ||||||||
| Interest expense | (10,116 | ) | (10,719 | ) | ||||
| Gain (loss) on sale of assets | (454 | ) | 2,405 | |||||
| Equity in earnings of affiliated companies | 1,368 | 2,053 | ||||||
| Interest income and other | 359 | 563 | ||||||
| Total other expenses, net | (8,843 | ) | (5,698 | ) | ||||
| Income before income taxes | 66,496 | 65,744 | ||||||
| Income taxes | 26,133 | 24,654 | ||||||
| Net income | $ | 40,363 | $ | 41,090 | ||||
| Earnings per share: | ||||||||
| Basic | $ | .47 | $ | .47 | ||||
| Diluted | $ | .46 | $ | .45 | ||||
| Weighted-average shares: | ||||||||
| Basic | 86,169 | 88,195 | ||||||
| Diluted | 87,720 | 90,533 | ||||||
| Cash dividends declared per common share | $ | .15 | $ | .14 | ||||
See notes to consolidated financial statements.
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Manor Care, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2005 | ||||||||
| Restated | 2004 | |||||||
| (In thousands) | ||||||||
Operating Activities | ||||||||
| Net income | $ | 40,363 | $ | 41,090 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 33,447 | 31,747 | ||||||
| Restricted stock compensation | 745 | 391 | ||||||
| Provision for bad debts | 8,515 | 6,634 | ||||||
| Deferred income taxes | (436 | ) | (1,302 | ) | ||||
| Net (gain) loss on sale of assets | 454 | (2,405 | ) | |||||
| Equity in earnings of affiliated companies | (1,368 | ) | (2,053 | ) | ||||
| Changes in assets and liabilities, excluding sold facilities and acquisitions: | ||||||||
| Receivables | (105,813 | ) | (14,890 | ) | ||||
| Prepaid expenses and other assets | 3,283 | 6,628 | ||||||
| Liabilities | 71,424 | 43,617 | ||||||
| Total adjustments | 10,251 | 68,367 | ||||||
| Net cash provided by operating activities | 50,614 | 109,457 | ||||||
Investing Activities | ||||||||
| Investment in property and equipment | (29,320 | ) | (61,454 | ) | ||||
| Investment in systems development | (748 | ) | (980 | ) | ||||
| Proceeds from sale of assets | 17,107 | |||||||
| Net cash used in investing activities | (30,068 | ) | (45,327 | ) | ||||
Financing Activities | ||||||||
| Principal payments of long-term debt | (487 | ) | (77 | ) | ||||
| Purchase of common stock for treasury | (1,755 | ) | (24,121 | ) | ||||
| Dividends paid | (12,927 | ) | (12,517 | ) | ||||
| Proceeds from exercise of stock options | 5,229 | 12,853 | ||||||
| Net cash used in financing activities | (9,940 | ) | (23,862 | ) | ||||
| Net increase in cash and cash equivalents | 10,606 | 40,268 | ||||||
| Cash and cash equivalents at beginning of period | 32,915 | 86,251 | ||||||
| Cash and cash equivalents at end of period | $ | 43,521 | $ | 126,519 | ||||
See notes to consolidated financial statements.
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Manor Care, Inc.
Notes To Consolidated Financial Statements
(Unaudited and Restated)
(Unaudited and Restated)
Note 1 – Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of Manor Care, Inc. (the Company), all adjustments considered necessary for a fair presentation are included. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. 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, 2004.
At March 31, 2005, the Company operated 279 skilled nursing facilities, 65 assisted living facilities, 97 hospice and home health offices and 88 outpatient therapy clinics.
Comprehensive Income
Comprehensive income represents the sum of net income plus other comprehensive income (loss). Comprehensive income totaled $40.4 million and $40.6 million for the first quarters of 2005 and 2004, respectively. The other comprehensive loss in the first quarter of 2004 represents the reversal of the unrealized gain on investments sold in 2004.
Insurance Liabilities
At March 31, 2005 and December 31, 2004, the workers’ compensation liability consisted of short-term reserves of $24.4 million and $23.7 million, respectively, which were included in accrued insurance liabilities, and long-term reserves of $43.5 million and $41.5 million, respectively, which were included in other long-term liabilities. The expense for workers’ compensation was $10.0 million and $9.3 million for the first quarters of 2005 and 2004, respectively. Although management believes that the Company’s liability reserves are adequate, there can be no assurance that these reserves will not require material adjustment in future periods. See Note 3 for discussion of the Company’s general and professional liability.
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Restricted Stock Accounting
The compensation expense related to time-vested restricted stock awards is amortized up to the employees’ expected retirement date. If an employee retires before the expected retirement date, it would require an acceleration of any remaining unrecognized compensation expense. The Company will be required to change this policy for all awards granted or modified after adoption of the Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), “Share-Based Payment,” on January 1, 2006, as discussed below. Any new or modified awards after December 31, 2005 will be required to be amortized up to the employees’ retirement eligible date. The Company recorded compensation expense for time-vested restricted stock awards of $0.6 million and $0.4 million in the first quarters of 2005 and 2004, respectively. If the Company had recorded the expense up to the employees’ retirement eligible date, the Company would have expensed $8.0 million and $2.6 million in the first quarters of 2005 and 2004, respectively.
Stock-Based Compensation
Stock options are granted for a fixed number of shares to employees with an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for the stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Accordingly, the Company recognizes no compensation expense for the stock options.
The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation for options granted since 1995. Effective March 15, 2005, stock options were awarded to executive officers that vest immediately. In addition, the vesting of the stock options awarded in February 2003 and 2004 with an original three year vesting were accelerated to vest immediately. The Company accelerated the vesting of the prior year awards in order to avoid compensation expense when the new accounting standard for share-based compensation is required to be adopted, as discussed in more detail under New Accounting Standard. Management believes that the executive officers will continue to be employed until the original vesting period; therefore, the Company has not recorded any expense under APB 25. The accelerated vesting of prior year awards resulted in additional pro forma expense, net of related tax effects, of $3.0 million, as included in the table below. All outstanding options are vested at March 31, 2005.
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| Three months ended March 31, | ||||||||
| 2005 | 2004 | |||||||
| (In thousands, except earnings per share) | ||||||||
| Net income – as reported | $ | 40,363 | $ | 41,090 | ||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (8,001 | ) | (1,623 | ) | ||||
| Net income – pro forma | $ | 32,362 | $ | 39,467 | ||||
| Earnings per share – as reported: | ||||||||
| Basic | $ | .47 | $ | .47 | ||||
| Diluted | $ | .46 | $ | .45 | ||||
| Earnings per share – pro forma: | ||||||||
| Basic | $ | .38 | $ | .45 | ||||
| Diluted | $ | .37 | $ | .43 | ||||
New Accounting Standard
In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment,” which is a revision of Statement No. 123. Statement 123R replaces APB Opinion No. 25 and amends Statement No. 95, “Statement of Cash Flows.” Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value. The pro forma footnote disclosure is no longer an alternative to financial statement recognition. In April 2005, the Securities and Exchange Commission postponed the effective date. Statement 123R is effective for the Company beginning January 1, 2006, but early adoption is permitted in periods in which financial statements have not been issued. There are two transition alternatives, modified-prospective and modified-retrospective. Under the modified-prospective method, the Company will be required to recognize compensation cost in the financial statements on the date of adoption. Under the modified-retrospective method, the Company will be required to restate prior periods by recognizing in the financial statements the same amount of compensation cost as previously reported in the pro forma footnote disclosures under Statement 123. The Company will be permitted to apply the modified-retrospective method either to all periods presented or to the start of the fiscal year in which Statement 123R is adopted.
In addition, Statement 123R requires awards classified as liabilities (such as cash-settled stock appreciation rights) to be measured at fair value at each reporting date versus measured at intrinsic value under Statement 123. The time value of the liability will be recognized as compensation cost but then be reversed as the settlement date approaches. At expiration, total
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compensation cost will not differ from that which would result under the intrinsic-value method. Management expects to adopt this Statement on January 1, 2006 under the modified-prospective-transition method. As discussed previously, all of the Company’s options are vested so it will not have expense related to prior year awards. Management has not determined the impact of adoption of cash-settled stock appreciation rights.
Note 2 – Revenues
Revenues for certain health care services are as follows:
| Three months ended March 31, | ||||||||
| 2005 | 2004 | |||||||
| (In thousands) | ||||||||
| Skilled nursing and assisted living services | $ | 749,468 | $ | 676,562 | ||||
| Hospice and home health services | 95,331 | 92,093 | ||||||
| Rehabilitation services (excludes intercompany revenues) | 24,796 | 21,824 | ||||||
| Other services | 9,607 | 6,859 | ||||||
| $ | 879,202 | $ | 797,338 | |||||
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. At March 31, 2005, the Company had $4.5 million accrued in other long-term liabilities based on its current assessment of the likely outcome of the Actions which
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was reviewed with its outside advisors. At March 31, 2005, there were no receivables related to insurance recoveries.
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, 2005 and December 31, 2004, the general and professional liability consisted of short-term reserves of $60.1 million and $65.9 million, respectively, which were included in accrued insurance liabilities, and long-term reserves of $119.5 million and $122.5 million, respectively, which were included in other long-term liabilities. The expense for general and professional liability claims, premiums and administrative fees was $18.2 million and $20.5 million for the first quarters of 2005 and 2004, respectively, which was included in operating expenses. Although management believes that the Company’s liability reserves are adequate, there can be no assurance that such provision and liability will not require material adjustment in future periods.
Note 4 – Earnings Per Share
The calculation of earnings per share (EPS) is as follows:
| Three months ended March 31, | ||||||||
| 2005 | 2004 | |||||||
| (In thousands, except earnings per share) | ||||||||
| Numerator: | ||||||||
| Numerator for basic EPS – net income | $ | 40,363 | $ | 41,090 | ||||
| After-tax amount of interest expense on Convertible Senior Notes (Old Notes) | 26 | 27 | ||||||
| Numerator for diluted EPS | $ | 40,389 | $ | 41,117 | ||||
| Denominator: | ||||||||
| Denominator for basic EPS – weighted-average shares | 86,169 | 88,195 | ||||||
| Effect of dilutive securities: | ||||||||
| Stock options | 1,045 | 1,337 | ||||||
| Non-vested restricted stock | 459 | |||||||
| Convertible Senior Notes | 506 | 542 | ||||||
| Denominator for diluted EPS – adjusted for weighted-average shares and assumed conversions | 87,720 | 90,533 | ||||||
| EPS: | ||||||||
| Basic | $ | .47 | $ | .47 | ||||
| Diluted | $ | .46 | $ | .45 | ||||
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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: 0.6 million shares with an average exercise price of $38 for the first quarter of 2005 and 0.4 million shares with an average exercise price of $39 for the first quarter of 2004.
Note 5 – Employee Benefit Plans
The Company has two qualified and two non-qualified defined benefit pension plans included in the table below. Two of the plans’ future benefits are frozen. The components of net pension cost are as follows:
| Three months ended March 31, | ||||||||||
| 2005 | 2004 | |||||||||
| (In thousands) | ||||||||||
| Service cost | $ | 429 | $ | 413 | ||||||
| Interest cost | 990 | 1,039 | ||||||||
| Expected return on plan assets | (1,183 | ) | (1,226 | ) | ||||||
| Amortization of unrecognized transition asset | (12 | ) | (12 | ) | ||||||
| Amortization of prior service cost | 490 | 490 | ||||||||
| Amortization of net loss | 235 | 211 | ||||||||
| Net pension cost | $ | 949 | $ | 915 | ||||||
Note 6 – Shareholder Rights Plan
The Company’s shareholder rights plan expired on May 2, 2005.
Note 7 – Segment Information
The Company provides a range of health care services. The Company has two reportable operating segments, long-term care, which includes the operation of skilled nursing and assisted living facilities, and hospice and home health. The Other category includes the non-reportable segments and corporate items. The revenues in the Other category include services for rehabilitation and other services. Asset information, including capital expenditures, is not reported by segment by the Company. Operating performance represents revenues less operating expenses and does not include general and administrative expenses, depreciation and amortization, other income and expense items, and income taxes.
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| Long-Term | Hospice and | |||||||||||||||
| Care | Home Health | Other | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Three months ended March 31, 2005 | ||||||||||||||||
| Revenues from external customers | $ | 749,468 | $ | 95,331 | $ | 34,403 | $ | 879,202 | ||||||||
| Intercompany revenues | 19,649 | 19,649 | ||||||||||||||
| Depreciation and amortization | 31,709 | 773 | 965 | 33,447 | ||||||||||||
| Operating margin | 129,513 | 12,451 | 3,088 | 145,052 | ||||||||||||
| Three months ended March 31, 2004 | ||||||||||||||||
| Revenues from external customers | $ | 676,562 | $ | 92,093 | $ | 28,683 | $ | 797,338 | ||||||||
| Intercompany revenues | 16,996 | 16,996 | ||||||||||||||
| Depreciation and amortization | 30,039 | 771 | 937 | 31,747 | ||||||||||||
| Operating margin | 117,443 | 16,040 | 4,497 | 137,980 | ||||||||||||
Note 8 – Restatement of Previously Issued Financial Statements
To correct the items discussed in our Explanatory Note on page 2, the Company restated its consolidated balance sheet at March 31, 2005, its consolidated statement of income for the quarter ended March 31, 2005 and its consolidated statement of cash flows for the quarter ended March 31, 2005. The accompanying notes to the consolidated financial statements have been restated as necessary to reflect the adjustments.
The effects of the restatement on the consolidated balance sheet as of March 31, 2005 are summarized as follows:
| March 31, 2005 | ||||||||
| Previously | ||||||||
| Reported | Restated | |||||||
| (In thousands) | ||||||||
| Current liabilities: | ||||||||
| Income tax payable | $ | 15,405 | $ | 15,342 | ||||
| Long-term liabilities: | ||||||||
| Deferred income taxes | 127,840 | 136,474 | ||||||
| Shareholders’ Equity: | ||||||||
| Capital in excess of par value | 383,600 | 365,887 | ||||||
| Retained earnings | 1,226,787 | 1,235,929 | ||||||
| Total shareholders’ equity | 1,025,555 | 1,016,984 | ||||||
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The consolidated statement of income was adjusted by a decrease to general and administrative expenses by $17.7 million and an increase to income taxes by $8.6 million. The effects of the restatement on the consolidated statement of income for the first quarter of 2005 are as follows:
| Three months ended | ||||||||
| March 31, 2005 | ||||||||
| Previously | ||||||||
| Reported | Restated | |||||||
| (In thousands, except per share amounts) | ||||||||
| Expenses: | ||||||||
| General and administrative | $ | 53,979 | $ | 36,266 | ||||
| Income before other income (expenses) and income taxes | 57,626 | 75,339 | ||||||
| Income before income taxes | 48,783 | 66,496 | ||||||
| Income taxes | 17,562 | 26,133 | ||||||
| Net income | 31,221 | 40,363 | ||||||
| Earnings per share: | ||||||||
| Basic | $ | .36 | $ | .47 | ||||
| Diluted | $ | .36 | $ | .46 | ||||
There was no change to the cash provided by operations as the adjustments were all non-cash items. The effects of the restatement on the consolidated statement of cash flows for the first quarter of 2005 are summarized as follows:
| Three months ended | ||||||||
| March 31, 2005 | ||||||||
| Previously | ||||||||
| Reported | Restated | |||||||
| (In thousands) | ||||||||
| Operating activities: | ||||||||
| Net income | $ | 31,221 | $ | 40,363 | ||||
| Restricted stock compensation | 18,458 | 745 | ||||||
| Deferred income taxes | (9,070 | ) | (436 | ) | ||||
| Liabilities | 71,487 | 71,424 | ||||||
| Total adjustments | 19,393 | 10,251 | ||||||
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
General and Professional Liability.Our general and professional reserves include amounts for patient care-related claims and incurred but not reported claims. The amount of our reserves is determined based on an estimation process that uses information obtained from both company-specific and industry data. The estimation process requires us to continuously monitor and evaluate the life cycle of the claims. Using data obtained from this monitoring and our assumptions about emerging trends, we along with our independent actuary develop information about the size of ultimate claims based on our historical experience and other available industry information. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle unpaid claims. Our assumptions take into consideration our internal efforts to contain our costs by reviewing our risk management programs, our operational and clinical initiatives, and other industry changes affecting the long-term care market. In comparing the first quarter of 2005 with the first quarter of 2004, the number of new claims is similar and our average settlement cost per claim is down. Our accrual rate for current claims is $5.1 million per month. Although we believe our liability reserves are adequate and appropriate, we can give no assurance that these reserves will not require material adjustment in future periods.
Workers’ Compensation Liability.Our workers’ compensation reserves are determined based on an estimation process that uses company-specific data. We continuously monitor the claims and develop information about the ultimate cost of the claims based on our historical experience. During 2003 and continuing into 2004, we expanded and increased attention to our safety, training and claims management programs. As a result, the number of new claims in the first quarter of 2005 decreased in comparison to the prior year period. Our workers’ compensation expense increased $0.7 million for the first quarter of 2005 in comparison to the prior year period primarily because of inflation. Although we believe our liability reserves are adequate and appropriate, we can give no assurance that these reserves will not require material adjustment in future periods.
Results of Operations –
Quarter Ended March 31, 2005 Compared with Quarter Ended March 31, 2004
Revenues.Our revenues increased $81.9 million, or 10 percent, from the first quarter of 2004 to 2005, primarily related to the increased revenues of $63.2 million associated with provider assessments for several states, including Pennsylvania. The first quarter Pennsylvania effect was $7.4 million. Revenues from our long-term care segment, excluding the revenues associated with provider assessments, increased $9.7 million, or 1 percent, due to increases in rates/patient mix of $49.0 million and occupancy of $8.9 million that were partially offset by a decrease in capacity of
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$48.2 million. Our revenues from the hospice and home health segment increased $3.2 million, or 4 percent, primarily from an increase in the number of patients utilizing our hospice services.
Our average rates per day for the long-term care segment were as follows:
| First Quarter | ||||||||||||
| 2005 | 2004 | Increase | ||||||||||
| Medicare | $ | 352.50 | $ | 333.37 | 6 | % | ||||||
| Medicaid | $ | 146.10 | $ | 133.22 | 10 | % | ||||||
| Private and other (skilled only) | $ | 211.59 | $ | 197.07 | 7 | % | ||||||
Our average Medicare rates increased as a result of an inflation update of 2.8 percent effective October 1, 2004, as well as higher acuity Medicare patients. Our average Medicaid rate excluded the prior year Pennsylvania revenues associated with provider assessments but included the first quarter effect. For comparison purposes, our average Medicaid rate was $141 when excluding the first quarter Pennsylvania effect.
Our occupancy levels were 88 percent for the first quarter of 2004 and 89 percent for the first quarter of 2005. Excluding start-up facilities, our occupancy levels were 89 percent for the first quarters of 2004 and 2005. Excluding start-up facilities, our occupancy levels for skilled nursing facilities were 89 percent for the first quarter of 2004 and 90 percent for the first quarter of 2005. The quality mix of revenues from Medicare, private pay and insured patients that related to our long-term care segment and rehabilitation operations increased from 69 percent for the first quarter of 2004 to 71 percent for the first quarter of 2005.
Our bed capacity declined between the first quarters of 2004 and 2005 primarily because of the divestiture of 21 facilities in 2004.
Operating Expenses.Our operating expenses in the first quarter of 2005 increased $74.8 million, or 11 percent, compared with the first quarter of 2004, primarily related to the increase in provider assessments of $57.5 million for several states, including Pennsylvania. The first quarter Pennsylvania provider assessment effect was $7.3 million.
Excluding the increase in provider assessments, operating expenses from our long-term care segment increased $3.3 million, or 1 percent, between the first quarters of 2004 and 2005. The largest portion of the operating expense increase related to ancillary costs, excluding internal labor, of $13.0 million. Ancillary costs, which include various types of therapies, medical supplies and prescription drugs, increased as a result of our more medically complex patients. Partially offsetting this increase were decreases in labor costs of $9.7 million and general and professional liability expense of $2.2 million. Our labor costs have decreased due to the divestiture of facilities in 2004. Our wage rates increased 4 percent compared with the first quarter of 2004.
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During the quarter, our hospice and home health segment was reorganized in preparation for future growth. We appointed a new general manager and new divisional and regional management. Margins declined this quarter as our operating expenses increased $6.8 million or 9 percent, primarily due to a $4.2 million increase in labor costs.
Depreciation and Amortization.Our depreciation expense increased $1.6 million from the first quarters of 2004 to 2005. Excluding our divested facilities in 2004, depreciation expense increased $2.4 million because of the completion of new construction projects and renovations to existing facilities.
Interest Expense.Interest expense decreased $0.6 million from the first quarter of 2004 to 2005 because of lower debt levels partially offset by higher interest rates.
Gain on Sale of Assets.Our gain on sale of assets in 2004 primarily resulted from the sale of four skilled nursing facilities in January 2004 and certain other assets.
Income Taxes.Our effective tax rate was 39.3 percent in the first quarter of 2005 compared with 37.5 percent in the first quarter of 2004. We expected our 2005 effective tax rate to be 37.0 percent, as disclosed in our 2004 Form 10-K, but due to additional non-deductible restricted stock expense we now expect our rate to be approximately 37.5 percent in 2005 before unusual items. In the first quarter of 2005, we reversed $1.7 million of deferred tax assets related to prior years’ restricted stock expense that was partially offset by an adjustment to prior years’ state tax liability.
Financial Condition – March 31, 2005 and December 31, 2004
Receivables and other accrued liabilities have both increased primarily as a result of the Pennsylvania revenues and associated provider assessment. The receipts and payments related to Pennsylvania are scheduled for the second quarter.
Liquidity and Capital Resources
Cash Flows.During the first quarter of 2005, we satisfied our cash requirements with cash generated from operating activities. We used the cash principally for capital expenditures and the payment of dividends. Cash flows from operating activities were $50.6 million for the first quarter of 2005, a decrease of $58.8 million from the first quarter of 2004. Our operating cash flows in 2005 decreased primarily because of federal income tax payments of $14.1 million and Medicare settlement payments of $31.9 million related to the former Manor Care home office cost reports for 1997 through 1999, which are under appeal and recorded as receivables.
Investing Activities.Our expenditures for property and equipment of $29.3 million in the first quarter of 2005 included $9.3 million to construct new facilities and expand existing facilities.
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Debt Agreement.As of March 31, 2005, there were no loans outstanding under our three-year $200 million revolving credit facility. After consideration of usage for letters of credit, there was $151.4 million available for future borrowings. The holders of our $100 million Convertible Senior Notes had the right to require us to purchase the Notes on April 15, 2005 but only $15,000 was requested for redemption. The next put date is April 15, 2008.
Stock Purchase.In July 2004, our Board of Directors authorized us to spend up to $100 million to purchase our common stock through December 31, 2005. With this authorization, we purchased 50,000 shares in the first quarter of 2005 for $1.8 million. We had $55.5 million remaining authority to repurchase our shares as of March 31, 2005. We may use the shares for internal stock option and 401(k) match programs and for other uses, such as possible acquisitions.
Cash Dividends.On April 22, 2005, we announced that the Company will pay a quarterly cash dividend of 15 cents per share to shareholders of record on May 9, 2005. This dividend will approximate $13.0 million and is payable May 23, 2005. We intend to declare and pay regular quarterly cash dividends; however, there can be no assurance that any dividends will be declared, paid or increased in the future.
We believe that our cash flow from operations will be sufficient to cover operating needs, future capital expenditure requirements, scheduled debt payments of miscellaneous small borrowing arrangements and capitalized leases, cash dividends and some share repurchase. Because of our significant annual cash flow, we believe that we will be able to refinance the major pieces of our debt as they mature. It is likely that we will pursue growth from acquisitions, partnerships and other ventures that we would fund from excess cash from operations, credit available under our revolving credit facility 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 the health care industry because of political and economic influences; changes in Medicare, Medicaid and certain private payors’
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reimbursement levels or coverage requirements; 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 patient care-related claims and workers’ compensation claims and in insurance costs related to such 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 4.Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including the chief executive officer, or CEO, and chief financial officer, or CFO, of the effectiveness of the design and operation of our disclosure procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2005. There were no significant changes in our internal control over financial reporting in the first quarter of 2005 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 6.Exhibits.
| S-K Item | ||
| 601 No. | ||
| 31.1 | Chief Executive Officer Certification | |
| 31.2 | Chief Financial Officer Certification | |
| 32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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) | ||||
DateSeptember 27, 2005 | By | /s/ Geoffrey G. Meyers | ||
| Geoffrey G. Meyers, Executive Vice President and Chief Financial Officer | ||||
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Exhibit Index
| Exhibit | ||
| 31.1 | Chief Executive Officer Certification | |
| 31.2 | Chief Financial Officer Certification | |
| 32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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