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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, 1999
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
Registrants former name changed since last report: HCR Manor Care, Inc.
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 29, 1999.
Common stock, $0.01 par value -- 103,043,111 shares
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
------
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income -
Three months and nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
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MANOR CARE, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Note 1)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 91,776 $ 33,718
Receivables, less allowances for
doubtful accounts of $59,492 and $58,125 361,203 314,883
Prepaid expenses and other assets 30,863 33,920
Deferred income taxes 35,235 35,235
----------- -----------
Total current assets 519,077 417,756
Property and equipment, net of accumulated
depreciation of $626,321 and $582,290 1,546,924 1,740,326
Intangible assets, net of amortization 87,671 80,802
Net investment in Genesis preferred stock 293,120 293,120
Other assets 188,394 183,136
----------- -----------
Total assets $ 2,635,186 $ 2,715,140
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,127 $ 107,341
Employee compensation and benefits 57,332 60,976
Accrued insurance liabilities 32,680 26,313
Other accrued liabilities 74,688 72,534
Revolving loans 199,000 230,000
Long-term debt due within one year 6,463 6,547
----------- -----------
Total current liabilities 460,290 503,711
Long-term debt 696,132 693,180
Deferred income taxes 245,564 245,564
Other liabilities 76,061 73,517
Stockholders' equity:
Preferred stock, $.01 par value, 5 million shares authorized
Common stock, $.01 par value, 300 million shares authorized,
111.0 and 110.9 million shares issued 1,110 1,109
Capital in excess of par value 356,547 356,333
Retained earnings 962,804 841,726
----------- -----------
1,320,461 1,199,168
Less treasury stock, at cost (7.7 million shares) (163,322)
----------- -----------
Total stockholders' equity 1,157,139 1,199,168
----------- -----------
Total liabilities and stockholders' equity $ 2,635,186 $ 2,715,140
=========== ===========
See notes to consolidated financial statements.
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MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except earnings per share)
Revenues $ 536,732 $ 557,386 $ 1,599,034 $ 1,653,928
Expenses:
Operating 424,244 428,085 1,252,041 1,281,829
General and administrative 23,210 22,027 67,735 74,297
Depreciation and amortization 29,361 31,270 86,376 89,482
Provision for restructuring charge, merger expenses,
asset impairment and other related charges 4,080 240,655 14,787 254,155
--------- ----------- ----------- -----------
480,895 722,037 1,420,939 1,699,763
--------- ----------- ----------- -----------
Income (loss) from continuing operations before
other income (expenses) and income taxes 55,837 (164,651) 178,095 (45,835)
Other income (expenses):
Interest expense (14,264) (11,942) (40,510) (34,064)
Dividend income 4,951 2,050 14,853 3,250
Equity earnings of affiliated companies 473 1,421 1,829 4,039
Interest income and other 1,376 2,857 2,365 6,108
--------- ----------- ----------- -----------
Total other income (expenses) (7,464) (5,614) (21,463) (20,667)
--------- ----------- ----------- -----------
Income (loss) from continuing operations before income taxes 48,373 (170,265) 156,632 (66,502)
Income taxes 14,876 (27,459) 48,491 7,342
--------- ----------- ----------- -----------
Income (loss) from continuing operations 33,497 (142,806) 108,141 (73,844)
Discontinued operations:
Income from discontinued pharmacy operations
(net of taxes of $136 and $7,256) 153 8,044
Gain on conversion of Vitalink stock (net of taxes of $39,908) 59,861 59,861
--------- ----------- ----------- -----------
Income (loss) before extraordinary items and cumulative effect 33,497 (82,792) 108,141 (5,939)
Extraordinary items - (net of taxes of $3,866, $12,690,
$8,271 and $12,690, respectively) 6,047 (19,036) 12,937 (19,036)
Cumulative effect of change in accounting principle
(net of taxes of $3,759) (5,640)
--------- ----------- ----------- -----------
Net income (loss) $ 39,544 $ (101,828) $ 121,078 $ (30,615)
========= =========== =========== ===========
Earnings per share - basic
Income (loss) from continuing operations $ .32 $ (1.32) $ .99 $ (0.68)
Income from discontinued pharmacy operations (net of taxes) .55 0.63
Extraordinary items (net of taxes) .06 (0.18) .12 (0.18)
Cumulative effect (net of taxes) (.05)
--------- ----------- ----------- -----------
Net income (loss) $ .37* $ (0.94)* $ 1.11 $ (0.28)
========= =========== =========== ===========
Earnings per share - diluted
Income (loss) from continuing operations $ .31 $ (1.32) $ .98 $ (0.68)
Income from discontinued pharmacy operations (net of taxes) .55 0.63
Extraordinary items (net of taxes) .06 (0.18) .12 (0.18)
Cumulative effect (net of taxes) (0.05)
--------- ----------- ----------- -----------
Net income (loss) $ .37 $ (0.94)* $ 1.10 $ (0.28)
========= =========== =========== ===========
Weighted average shares:
Basic 106,212 108,475 109,187 108,317
Diluted 107,253 108,475 110,379 108,317
*Doesn't add due to rounding
See notes to consolidated financial statements.
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MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30
------------------------------
1999 1998
---- ----
(In thousands)
OPERATING ACTIVITIES
Net income (loss) $ 121,078 $ (30,615)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Income from discontinued pharmacy operations (67,905)
Depreciation and amortization 86,836 89,759
Asset impairment and other non-cash charges 12,240 170,010
Provision for bad debts 18,734 23,407
Deferred income taxes (41,857)
Gain on sale of assets (21,015) (5,515)
Equity in earnings of affiliated companies (1,829) (4,039)
Changes in assets and liabilities, excluding sold facilities and acquisitions:
Receivables (63,268) (51,463)
Prepaid expenses and other assets (15,103) (7,098)
Liabilities (11,104) 79,342
--------- ---------
Total adjustments 5,491 184,641
--------- ---------
Net cash provided by continuing operations 126,569 154,026
Net cash provided by discontinued pharmacy operations 17,836
--------- ---------
Net cash provided by operating activities 126,569 171,862
--------- ---------
INVESTING ACTIVITIES
Investment in property and equipment (132,957) (232,364)
Investment in systems development (22,158)
Acquisition of businesses (8,594) (9,841)
Proceeds from sale of assets 263,603 22,227
Decrease due to deconsolidation of subsidiary (13,948)
Advances to non-consolidated affiliates (2,799)
Other, net 15,273
--------- ---------
Net cash provided by (used in) investing activities of continuing operations 122,052 (243,610)
Net cash used in investing activities of discontinued pharmacy operations (6,810)
--------- ---------
Net cash provided by (used in) investing activities 122,052 (250,420)
--------- ---------
FINANCING ACTIVITIES
Net borrowings (repayments) under bank credit agreements (23,000) 133,339
Principal payments of long-term debt (5,132) (3,425)
Proceeds from exercise of stock options 1,325 1,889
Purchase of common stock for treasury (163,756) (4,838)
Dividends paid by Manor Care (2,805)
--------- ---------
Net cash provided by (used in) financing activities of continuing operations (190,563) 124,160
Net cash used in financing activities of discontinued operations (11,026)
--------- ---------
Net cash provided by (used in) financing activities (190,563) 113,134
--------- ---------
Net increase in cash and cash equivalents 58,058 34,576
Net Manor Care cash flows for December 1997 (3,213)
Cash and cash equivalents at beginning of period 33,718 47,933
--------- ---------
Cash and cash equivalents at end of period $ 91,776 $ 79,296
========= =========
See notes to consolidated financial statements.
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MANOR CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Presentation
- ------------------------------
In accordance with the merger agreement, the Company's name changed from HCR
Manor Care, Inc. to Manor Care, Inc. (the Company) on September 25, 1999. As a
result of the parent company name change, in September 1999 Manor Care, Inc., a
wholly-owned subsidiary of the Company, changed its name to Manor Care of
America, Inc. (Manor Care).
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of the Company, the interim
data includes all adjustments necessary for a fair statement of the results of
the interim periods and, except as discussed in Note 2, all such adjustments are
of a normal recurring nature. Operating results for the three months and nine
months ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
The balance sheet at December 31, 1998 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 HCR Manor Care, Inc.'s
annual report on Form 10-K for the year ended December 31, 1998.
At September 30, 1999, the Company operated 299 skilled and 45 assisted living
facilities, 85 outpatient therapy clinics, 1 acute care hospital, 105 medical
specialty units and 33 home health offices.
NOTE 2 - Restructuring Charge, Merger Expenses, Asset Impairment and Other
- --------------------------------------------------------------------------
Related Charges
- ---------------
The components of the charge consist of the following (in thousands):
Cash/ Liability at Liability at
Non-cash 12/31/98 Charge Activity 9/30/99
-------- -------- ------ -------- -------
Manor Care planned spin-off:
Employee benefits cash $617 $219 $(731) $105
HCR and Manor Care merger:
Employee benefits cash 28,294 (23,074) 5,220
Other exit costs cash 4,234 (1,005) 3,229
Other costs:
Amortization non-cash 12,240 (12,240)
Duplicate costs cash 2,328 (2,328)
Other cash 1,000 (850) 150
------- ---------- ---------- -------
Total $34,145 $14,787 $(40,228) $8,704
======= ======= ======== ======
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In Manor Care's planned spin-off, the employees did not receive lump-sum
severance payments upon termination but receive their severance as biweekly
payments through 1999. In the HCR and Manor Care merger, 531 employees received
termination notices and at September 30, 1999 all but 2 employees have left the
Company. A number of employees who left the Company continue to be paid
severance payments on a biweekly basis through 1999. The non-cash charge for
amortization primarily related to certain Manor Care software applications which
are being used until the transition to HCR applications. The carrying value of
the software was amortized over its remaining estimated useful life. Certain
general and administrative costs of $2.3 million represented salaries and
benefits for employees performing duplicate services in Toledo or Gaithersburg
in the first quarter.
NOTE 3 - Earnings Per Share
- ---------------------------
The calculation of earnings per share (EPS) is as follows:
Three months ended Nine months ended
September 30 September 30
------------------------ -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except earnings per share)
Numerator:
Income (loss) from continuing
operations (income available to
common stockholders) $33,497 $(142,806) $108,141 $(73,844)
======= ========= ======== ========
Denominator:
Denominator for basic EPS -
weighted-average shares 106,212 108,475 109,187 108,317
Effect of dilutive securities:
Stock options 1,041 1,192
-------- -------- -------- -------
Denominator for diluted EPS -
adjusted for weighted-average
shares and assumed conversions 107,253 108,475 110,379 108,317
======= ======= ======= =======
EPS - income (loss) from continuing
operations
Basic $.32 $(1.32) $.99 $(.68)
Diluted $.31 $(1.32) $.98 $(.68)
NOTE 4 - Divestitures
- ---------------------
During the second quarter, the Company exercised a purchase option on Manor
Care's corporate headquarters in Gaithersburg, Maryland and sold the property
realizing net proceeds of $25 million and a $10.3 million gain ($6.3 million
after tax). In conjunction with selling the Manor Care corporate headquarters,
three interest rate swaps with a notional amount of $30.3 million that hedged
the operating lease payments for the property were terminated for a gain of $.5
million.
The Company formed a strategic alliance with Alterra Healthcare Corporation
(Alterra) in 1998. Two of the key provisions of the alliance include the sale of
twenty-six centers and the lease of two centers to Alterra in 1999 and the
creation of a joint venture to develop and construct up to $500
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million of specialized assisted living residences in the Company's core markets
over the next three to five years. During the second quarter the Company closed
on three of the twenty-six assisted living facilities for $13 million realizing
a $.6 million gain ($.3 million after tax). During the third quarter, the
Company closed on the sale of twenty-three additional facilities for $146
million realizing an $8.0 million gain ($4.9 million after tax). As part of the
development joint venture, the Company contributed fourteen properties (six of
which were open) on June 30, 1999 and six properties on September 30, 1999 with
a net book value of $74 million and recognizing no gain or loss.
The gains on asset sales have all been recorded as extraordinary items as
required after a business combination accounted for as a pooling of interests.
NOTE 5 - Debt
- -------------
The Company's $300 million credit agreement (364 Day Agreement) which matured
September 24, 1999 was amended and now provides for a $200 million credit
agreement. Loans under the amended 364 Day Agreement which mature September 22,
2000, bear interest at variable rates that reflect, at the election of the
Company, either the agent bank's base lending rate or an increment over
Eurodollar indices of .50% to 1.275%, depending on the quarterly performance of
a key ratio. In addition, the 364 Day Agreement provides for a fee on the total
amount of the facility, ranging from .125% to .225%, depending on the
performance of the same ratio. Whenever the aggregate utilization of the 364 Day
Agreement and the 5 Year Agreement exceeds $350 million, an additional fee of
.05% is charged on loans under the 5 Year Agreement and an additional fee
ranging from .10% to .125% is charged on loans under the 364 Day Agreement,
based on the performance of a key ratio.
The Company and Alterra have jointly and severally guaranteed a $200 million
revolving credit agreement of the development joint ventures in which each
company has a 50% interest. At September 30, 1999 there was $48 million of
guaranteed debt outstanding under the revolving credit agreement.
NOTE 6 - Stock Purchase
- -----------------------
On May 4, 1999 the Board of Directors authorized the Company to purchase up to
$200 million of its common stock through December 31, 2000. The shares may be
used for internal stock option and 401(k) match programs and for other uses,
such as possible future acquisitions. During the second and third quarter, the
Company purchased 7,601,100 shares for $164 million.
NOTE 7 - New Accounting Pronouncements
- --------------------------------------
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which was postponed in Statement
No. 137 and is now effective January 1, 2001. This Statement permits early
adoption as of the beginning of any fiscal quarter after its issuance. This
Statement requires the Company to recognize all derivatives on the balance sheet
at fair value. Management has not determined when it will adopt this Statement
nor has it determined the impact of adoption.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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OVERVIEW
The Company is a provider of a range of health care services, including skilled
nursing care, assisted living, subacute medical care, rehabilitation therapy,
home health care and management services for subacute care, rehabilitation
therapy, vision care and eye surgery. The most significant portion of the
Company's business relates to skilled nursing care and assisted living
facilities. At September 30, 1999, the Company operated 299 skilled and 45
assisted living facilities. During the first nine months of 1999, the Company
opened two skilled nursing and 12 assisted living facilities, and divested 31
assisted living facilities as explained below.
The Company formed a strategic alliance with Alterra Healthcare Corporation
(Alterra) in 1998. Two of the key provisions of the alliance include the sale of
twenty-six centers and lease of two centers to Alterra in 1999 and the creation
of a joint venture to develop and construct up to $500 million of specialized
assisted living residences in the Company's core markets over the next three to
five years. During the second and third quarter of 1999, the Company sold
twenty-six assisted living facilities to Alterra, leased one facility to Alterra
and contributed twenty properties to development joint ventures. Thirty-one of
these assisted living facilities were open prior to being sold or leased.
Under the Balanced Budget Act of 1997, a new Medicare prospective payment system
(PPS) commenced on July 1, 1998. The new payment system becomes effective for
different segments of the health care continuum (hospitals, skilled nursing,
home health, etc.) at different times and even commences at different dates for
different nursing facilities. The former HCR long-term care facilities
transitioned onto PPS in January 1999 and the former Manor Care facilities in
June 1999.
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 1999 decreased $20.7 million
or 4% to $536.7 million as compared to the same period in 1998. Revenues from
skilled nursing and assisted living facilities decreased $24.1 million or 5% due
to decreases in rates ($20.3 million) and occupancy ($16.2 million) partially
offset by an increase in capacity ($12.4 million).
Revenues for the nine months ended September 30, 1999 decreased $54.9 million or
3% to $1.6 billion as compared to the same period in 1998. Revenues from skilled
nursing and assisted living facilities decreased $57.3 million or 4% due to
decreases in rates ($56.8 million), with the decrease in occupancy ($64.8
million) offsetting the increase in capacity ($64.3 million). The decrease in
revenues for the ancillary businesses due to the impact of PPS was offset by the
revenues recorded in association with the development activities and strategic
alliance with Alterra.
The decline in rates was primarily attributable to transitioning onto the
Medicare PPS in 1999. The occupancy levels for all facilities including
start-ups were 89% for the three months and nine months ended September 30, 1998
compared to 86% for the same periods in 1999, respectively. The occupancy for
the Company's skilled nursing facilities declined from 89% in the three months
and nine months ended September 30, 1998 to 88% and 87% in the same periods in
1999, respectively, reflecting the impact of transitioning onto the Medicare PPS
and a decline in private pay mix over the last year. The growth in bed capacity
between the first nine months of 1999 and the last three months of 1998 was due
to the timing of opening 19 assisted living and 2 skilled
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facilities partially offset by the divestiture of 31 assisted living facilities
in the second and third quarters of 1999.
The quality mix of revenue from Medicare, private pay and insured patients
related to skilled nursing and assisted living facilities and rehabilitation
operations decreased from 70% and 71% for the three months and nine months ended
September 30, 1998 to 66% and 67% for the same periods in 1999, respectively.
This decline was a result of the decrease in Medicare rates and census due to
the Medicare PPS, decline in private pay mix, and decrease in insurance rates
and census.
Operating expenses for the three months ended September 30, 1999 decreased $3.8
million or 1% to $424.2 million from the comparable period in 1998. Operating
expenses from skilled nursing and assisted living facilities decreased $8.9
million or 2% which was primarily attributable to the decline in ancillary costs
as the Company found alternate methods of service which resulted in lower costs.
Operating expenses for the nine months ended September 30, 1999 decreased $29.8
million or 2% to $1.3 billion from the comparable period in 1998. Operating
expenses from skilled nursing and assisted living facilities decreased $35.0
million or 3%. By excluding the effect of start-up facilities in the first nine
months of 1999 and 1998, operating expenses decreased $41.4 million which was
primarily attributable to the decline in ancillary costs as the Company found
alternate methods of service which resulted in lower costs.
General and administrative expenses decreased $6.6 million for the nine months
ended September 30, 1999 as compared to the same periods in 1998. By excluding
the net gains from sale of assets in 1998, general and administrative expenses
decreased $11.2 million for the same period primarily as a result of synergies
obtained from combining HCR and Manor Care and reclassifying $2.3 million of
duplicate costs in the first quarter to the provision for the restructuring
charge and other related charges, as explained below. Depreciation and
amortization decreased $1.9 million and $3.1 million for the three months and
nine months ended September 30, 1999 compared to the same periods in 1998 due to
a decline in the amortization of Manor Care's computer software and the
Company's goodwill related to the write down of assets in 1998.
In the first nine months of 1999, the Company recorded a charge of $14.8
million. The components of the charge and the remaining liability at September
30, 1999 consist of the following (in thousands):
Cash/ Liability at Liability at
Non-cash 12/31/98 Charge Activity 9/30/99
-------- -------- ------ -------- -------
Manor Care planned spin-off:
Employee benefits cash $617 $219 $(731) $105
HCR and Manor Care merger:
Employee benefits cash 28,294 (23,074) 5,220
Other exit costs cash 4,234 (1,005) 3,229
Other costs:
Amortization non-cash 12,240 (12,240)
Duplicate costs cash 2,328 (2,328)
Other cash 1,000 (850) 150
------- --------- --------- ------
Total $34,145 $14,787 $(40,228) $8,704
======= ======= ======== ======
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In Manor Care's planned spin-off, the employees did not receive lump-sum
severance payments upon termination but receive their severance as biweekly
payments through 1999. In the HCR and Manor Care merger, 531 employees received
termination notices and at September 30, 1999 all but 2 employees have left the
Company. A number of employees who left the Company continue to be paid
severance payments on a biweekly basis through 1999. The non-cash charge for
amortization primarily related to certain Manor Care software applications which
are being used until the transition to HCR applications. The carrying value of
the software was amortized over its remaining estimated useful life. Certain
general and administrative costs of $2.3 million represented salaries and
benefits for employees performing duplicate services in Toledo or Gaithersburg
in the first quarter.
In the first nine months of 1998, the Company recorded a $254.2 million charge
related to restructuring, merger expenses, asset impairment and other related
charges. In the second quarter of 1998, Manor Care recorded a charge of $13.5
million in connection with its plan to separate its business which did not occur
as a result of the merger with HCR. In the third quarter of 1998, charges
related to the merger of HCR and Manor Care totaled $240.7 million.
Interest expense increased in 1999 compared to the prior year periods due to an
increase in average debt outstanding under bank credit facilities. Dividend
income increased during 1999 due to the $4.4 million quarterly dividend related
to the Company's ownership of Series G Cumulative Convertible Preferred Stock of
Genesis Health Ventures, Inc (Genesis) that was initially recorded in September
1998. The decrease in equity earnings of affiliated companies was attributable
to a decline in earnings of the pharmacy partnership due to a reduction in
prices as a result of the Medicare PPS. Interest income and other decreased
between 1999 and 1998 primarily due to a decline in rental income from Manor
Care's corporate office buildings that were sold during 1998.
The effective tax rate for the nine months ended September 30, 1999 was 31.0%
compared to 36.1% for the year ended December 31, 1998 after excluding the tax
effects of the provision for restructuring charge, merger expenses, asset
impairment and other related charges, as some of these items are not deductible
for income tax purposes. The decrease was attributable to an increase in the
exclusion on dividends received as a result of the Genesis dividend and an
adjustment of the Company's prior years' tax accruals.
In the third quarter of 1998, the Company recorded a gain of $99.8 million
($59.9 million after tax) from the conversion of Vitalink Pharmacy Services,
Inc. (Vitalink) common stock to Genesis preferred stock on August 28, 1998. The
financial results of Vitalink were recorded as income from discontinued
operations.
In the first nine months of 1999, the Company recorded the gains on sale of
assets as extraordinary items as required after a business combination accounted
for as a pooling of interests. In the second quarter, the Company exercised a
purchase option on Manor Care's corporate headquarters in Gaithersburg, Maryland
and sold the property realizing net proceeds of $25 million and a $10.3 million
gain ($6.3 million after tax). In conjunction with selling the Manor Care
corporate headquarters, three interest rate swaps with a notional amount of
$30.3 million that hedged the operating lease payments for the property were
terminated for a gain of $.5 million. In the second quarter, the Company closed
on three of the twenty-six assisted living facilities sold to Alterra for $13
million realizing a $.6 million gain ($.3 million after tax) and in the third
quarter closed on the remaining twenty-three facilities for $146 million
realizing an $8.0 million gain ($4.9 million after
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tax).
In the third quarter of 1998, the Company recorded an extraordinary loss from
the early extinguishment of debt totaling $31.7 million ($19.0 million after
tax). On September 25, 1998 the Company repaid the outstanding debt under HCR's
and Manor Care's prior credit arrangements. In conjunction with the
extinguishment of debt, the Company terminated three interest rate swaps with a
total notional amount of $350 million that were designated as a hedge of Manor
Care's debt. The extraordinary loss primarily related to the termination of the
swaps but also included the unamoritized debt issue costs.
In the first quarter of 1998, the Company recorded the cumulative effect of
expensing start-up costs capitalized as of January 1, 1998 totaling $9.4 million
($5.6 million after tax).
FINANCIAL CONDITION
The increase in cash at September 30, 1999 resulted from the sale of facilities
at the end of the month. The increase in receivables of $46.3 million between
December 31, 1998 and September 30, 1999 was primarily related to a $36.5
million receivable for facilities sold to Alterra and contributed to a
development joint venture in the third quarter. The funds are expected to be
received in the fourth quarter.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which was postponed in Statement
No. 137 and is effective January 1, 2001. This Statement permits early adoption
as of the beginning of any fiscal quarter after its issuance. This Statement
requires the Company to recognize all derivatives on the balance sheet at fair
value. Management has not determined when it will adopt this Statement nor has
it determined the impact of adoption.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1999, the Company satisfied its cash
requirements from a combination of cash generated from operating activities and
proceeds from sale of assets. The Company used the cash principally for capital
expenditures and the purchase of the Company's common stock. At September 30,
1999, the Company maintained $91.8 million in cash and cash equivalents.
Expenditures for property and equipment during the first nine months of 1999
consisted of $67.1 million for construction of new facilities and $65.8 million
for renovation and maintenance of existing facilities. The proceeds from the
sale of assets of $263.6 million included the sale of the former Manor Care
corporate headquarters ($25 million), twenty-six assisted living facilities to
Alterra ($159 million) and twenty properties to development joint ventures ($74
million).
On May 4, 1999 the Board of Directors authorized the Company to purchase up to
$200 million of its common stock through December 31, 2000. The shares may be
used for internal stock option and 401(k) match programs and for other uses,
such as possible future acquisitions. The Company purchased 7,601,100 shares for
$163.8 million in the second and third quarter and an additional 325,000 shares
for $5.5 million in October 1999.
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The Company's $300 million credit agreement (364 Day Agreement) which matured
September 24, 1999 was amended and now provides for a $200 million credit
agreement. Loans under the amended 364 Day Agreement mature September 22, 2000.
See Note 5 to the consolidated financial statements for discussion of the
interest rate. At September 30, 1999, outstanding borrowings aggregated $683
million under the bank credit agreements. After consideration of usage for
letters of credit, the remaining credit availability under the agreements
totaled $3.8 million. At October 31, 1999, the remaining credit availability
increased to $70.7 million after utilizing excess cash to pay down debt.
The Company has cash flow commitments related to the HCR and Manor Care merger
restructuring plan that will require approximately $6 million in the remainder
of 1999, primarily for employee benefits.
The Company believes that its cash flow from operations will be sufficient to
cover debt payments, future capital expenditures and operating needs. It is
likely that the Company will pursue growth from acquisitions, partnerships and
other ventures which 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.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the year. Any of the Company's computer
software and hardware that are date sensitive and all of our embedded chip
devices could recognize a two digit date of `00' as `1900' rather than `2000'.
This could result in system failures and miscalculations causing disruptions to
our operations.
In 1995, HCR began an evaluation and upgrade to all of its technical
infrastructure including hardware, operating systems and business applications.
With the completion of that upgrade process, the Company will have in place, a
complete package of technical solutions that properly utilize dates beyond
December 31, 1999. The estimated costs of this package are expected to be $35
million. Most of these costs will be capitalized and amortized over a five to
twelve year period. Since inception of the project, the Company has incurred
approximately $32.2 million ($3.4 million expensed and $28.7 million
capitalized) as of September 30, 1999. The Company has completed the technical
solution definition and is 95% complete with the implementation. All computer
hardware, software and operating system upgrades are expected to be in place by
the end of fourth quarter of 1999. It has not been necessary to accelerate our
original implementation plan due to the Year 2000 issue.
To insure that our embedded chip devices, vendor and supplier interfaces are
also Year 2000 compliant, the Company has put into place an assessment,
remediation, testing, implementation and contingency plan for all products,
services and relationships that do not meet our Year 2000 compliance standards.
The Company expects all phases along with the contingency plan to be completed
by the end of the fourth quarter of 1999 with internal resources. The Company
has queried our significant suppliers and at this point, based on their
representations, the Company does not believe that Year 2000 presents a material
exposure as it relates to our embedded chip devices, system interfaces,
significant suppliers or vendors. The Company believes today that the most
likely worst case scenario, if it occurred, would involve temporary disruptions
in delivery of medical and other supplies and temporary
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disruptions in payments, especially payments from Medicare and other government
programs. If the federal and state healthcare reimbursement agencies or their
intermediaries were to fail to implement Year 2000 compliant technologies before
December 31, 1999, a temporary cash flow disruption could result. Those agencies
and intermediaries have Year 2000 plans in place and the Company continues to
monitor the status of those projects. However, all of the governmental agencies
have stated that interim payment procedures would be implemented if their Year
2000 solutions are not in place by January 1, 2000.
The foregoing assessment is based on information currently available to the
Company. The Company will revise its assessment as it implements its Year 2000
strategy. The Company's Year 2000 compliance program is an ongoing process and
the risk assessments and estimates of costs and completion dates for various
phases of the program are subject to change. The cost of the Year 2000 program
and the dates on which the Company believes the phases of the program will be
completed are based on management's best estimates, which were derived using
numerous assumptions of future events. Factors that could cause such changes
include availability of qualified personnel and consultants, the actions of
third parties and material changes in governmental regulations. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-Q which are not historical facts may be
forward-looking statements within the meaning of federal law. Such
forward-looking statements reflect management's beliefs and assumptions and are
based on information currently available to management. Forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both nationally and in the regions in which the Company operates;
industry capacity; demographic changes; existing government regulations and
changes in, or the failure to comply with, governmental regulations; legislative
proposals for health care reform; the ability to enter into managed care
provider arrangements on acceptable terms; changes in Medicare and Medicaid
reimbursement levels; liability and other claims asserted against the Company;
competition; changes in business strategy or development plans; and the ability
to attract and retain qualified personnel. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the cautionary statements
set forth or referred to above in this paragraph. The Company disclaims any
obligation to update such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There have been no significant changes in the Company's long-term debt since
December 31, 1998. During the second quarter of 1999, the Company exercised a
purchase option on Manor Care's corporate headquarters in Gaithersburg, Maryland
and sold the property. In conjunction with selling the Manor Care corporate
headquarters, three interest rate swaps with a notional amount of $30.3 million
that hedged the operating lease payments for the property were terminated for a
gain of $.5 million.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
On May 7, 1999 Genesis Health Ventures ("Genesis") filed suit
in federal district court in Delaware against the Company,
Manor Care, Paul A. Ormond and Stewart Bainum, Jr.
(collectively, the "Delaware Defendants"). Manor Care has been
a wholly-owned subsidiary of the Company since September 25,
1998. Mr. Ormond is President and Chief Executive Officer of
the Company and Mr. Bainum is Chairman of the Board of
Directors of the Company and formerly was Chairman of the
Board, President and Chief Executive Officer of Manor Care.
The complaint alleges that the Delaware Defendants
fraudulently induced Genesis to acquire, in August, 1998, all
of the outstanding stock of Vitalink Pharmacy Services, Inc.
("Vitalink") and that such alleged conduct constituted
violations of Section 10(b) of the Securities Exchange Act of
1934, common law fraudulent misrepresentation, negligent
misrepresentation and breach of contract. The suit seeks
compensatory and punitive damages in excess of $100 million
and preliminary and permanent injunctive relief enforcing a
covenant not to compete allegedly applicable to the Company.
On June 10, 1999, Genesis filed an amended complaint that was
substantively identical to the original complaint. The Company
believes that the material allegations of the amended
complaint are untrue and that it has substantial defenses to
the factual and legal assertions therein. On June 29, 1999,
the Delaware Defendants moved to dismiss or, in the
alternative, to stay the lawsuit in its entirety. That motion
is presently pending before the court. The Company intends 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 the financial
condition of the Company.
On August 27, 1999, Manor Care filed as a related lawsuit in
federal district court in Delaware a separate action against
Genesis concerning its 1998 acquisition of Vitalink. Manor
Care's lawsuit charges Genesis with violations of Section 11
and Section 12 of the Securities Act of 1933, based upon
Genesis' misrepresentations and/or misleading omissions in
connection with the Genesis' issuance of approximately $293
million of Genesis Preferred Stock as consideration to Manor
Care for its approximately fifty percent interest in Vitalink.
The complaint alleges that Genesis unlawfully failed to
disclose or made misrepresentations related to the effects of
the conversion to the prospective payment system, the
restructuring of the Multicare joint venture, the impact of
the acquisition of Multicare, the status of Genesis labor
relations, Genesis' ability to declare dividends on the
Preferred Stock and information relating to the ratio of
combined fixed charges and preference dividends to earnings.
Manor Care seeks, among other things, compensatory damages and
recission voiding Manor Care's purchase of the Genesis
Preferred Stock and requiring Genesis to return to Manor Care
the consideration that it paid at the time of the Vitalink
sale.
Additionally, on May 7, 1999 Vitalink, now known as
Neighborcare Pharmacy Services, Inc. ("Neighborcare"),
instituted a lawsuit in the Circuit Court for
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Baltimore City, Maryland (the "Maryland Action") against the
Company, Manor Care and ManorCare Health Services, Inc.(MHS)
(collectively, the "Maryland Defendants") seeking damages,
preliminary and permanent injunctive relief and a declaratory
judgment related to allegations that the Maryland Defendants
have improperly sought to terminate certain Master Service
Agreements ("MSAs") between Vitalink and MHS. Neighborcare has
also purported to institute arbitration proceedings (the
"Arbitration") against the Maryland Defendants with the
American Arbitration Association, seeking substantially the
same relief as sought in the Maryland Action with respect to
one of the MSAs at issue in the Maryland Action and also
certain additional permanent relief with respect to that
contract. On May 13, 1999, Neighborcare and the Maryland
Defendants agreed: (i) to consolidate the Maryland Action into
the Arbitration; (ii) to dismiss the Maryland Action with
prejudice as to jurisdiction and without prejudice as to the
merits; (iii) to stay termination of the agreements at issue
until a decision can be reached in the Arbitration; and (iv)
that Neighborcare shall not proceed on its claims for
preliminary relief in the Maryland Action or the Arbitration
in view of the May 13, 1999 agreement. Neighborcare has since
dismissed the Maryland Action and consolidated certain of
those claims into the Arbitration by filing an Amended Demand
for Arbitration. The Company believes that the material
allegations in the Amended Demand for Arbitration are untrue
and that it has substantial factual and legal defenses
thereto. The Company intends to vigorously defend the
Arbitration. Although the ultimate outcome of the Arbitration
is uncertain, management believes that it is not likely to
have a material adverse effect on the financial condition of
the Company.
On July 26, 1999, Neighborcare filed an additional complaint
against Omnicare, Inc. and Heartland Healthcare Services,
Inc.(a joint venture between subsidiaries of Omnicare and the
Company) seeking injunctive relief and compensatory and
punitive damages. The complaint includes counts for tortious
interference with Vitalink's purported contractual rights
under the MSAs. On October 4, 1999, the defendants moved to
dismiss or, in the alternative, to stay the lawsuit in its
entirety. That motion is presently pending before the court.
Although the ultimate outcome of the case is uncertain,
management believes that it is not likely to have a material
adverse effect on the financial condition of the Company.
One or more subsidiaries or affiliates of Manor Care 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 Manor Care. The Actions allege that Cenco
transported and/or generated hazardous substances that came to
be located at the sites in question. The Company believes the
waste disposal activities at issue occurred prior to the Manor
Care subsidiary's acquisition of Cenco.
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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 Manor Care
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 the
potential environmental liability exposure, after
consideration of insurance coverage, is approximately $4.5
million.
The Company is party to various other legal proceedings
arising in the ordinary course of business. The Company does
not believe the results of such proceedings, even if
unfavorable to the Company, would have a material adverse
effect on its financial position.
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
S-K Item
601 No.
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3 Form of Amended and Restated By-laws of the
Registrant
4 364 Day Credit Agreement dated as of
September 25, 1998, as amended as of
September 24, 1999, among HCR Manor Care,
Inc., Manor Care, Inc., Bank of America,
National Association, the Chase Manhattan
Bank, Deutsche Bank and the Other Financial
Institutions Party Hereto.
27 Financial Data Schedule for the nine months
ended September 30, 1999
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Manor Care, Inc.
(Registrant)
Date November 15, 1999 By /s/ Geoffrey G. Meyers
-------------------- -------------------------------------
Geoffrey G. Meyers, Executive Vice
President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit
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3 Form of Amended and Restated By-laws of the Registrant
4 364 Day Credit Agreement dated as of September 25, 1998, as
amended as of September 24, 1999, among HCR Manor Care, Inc.,
Manor Care, Inc., Bank of America, National Association, the
Chase Manhattan Bank, Deutsche Bank and the Other Financial
Institutions Party Hereto.
27 Financial Data Schedule for the nine months ended September 30,
1999
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