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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ X ]
(Cover page 1 of 2 pages)
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Based on the closing price of $19.25 per share on January 31, 2001, the
aggregate market value of the registrant's voting stock held by non-affiliates
was $1,868,803,725. Solely for purposes of this computation, the registrant's
directors and executive officers have been deemed to be affiliates. Such
treatment is not intended to be, and should not be construed to be, an admission
by the registrant or such directors and officers that all of such persons are
"affiliates," as that term is defined under the Securities Act of 1934.
The number of shares of Common Stock, $.01 par value, of
Manor Care, Inc. outstanding as of January 31, 2001 was 102,650,514.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated herein by reference in the Part
indicated:
Specific portions of the registrant's Proxy Statement for the Annual
Shareholders' Meeting to be held May 8, 2001 are incorporated by reference
in Part III.
(Cover page 2 of 2 pages)
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TABLE OF CONTENTS
PART I
Item 1. Business .............................................................2
Item 2. Properties ..........................................................12
Item 3. Legal Proceedings ...................................................13
Item 4. Submission of Matters to a Vote of Security Holders .................16
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters .................................................16
Item 6. Selected Financial Data .............................................17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................18
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...........31
Item 8. Financial Statements and Supplementary Data .........................31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................................58
PART III
Item 10. Directors and Executive Officers of the Registrant ..................58
Item 11. Executive Compensation ..............................................60
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................................60
Item 13. Certain Relationships and Related Transactions ......................60
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .........................................................61
SIGNATURES .....................................................................67
EXHIBITS ....................................................................E-1
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PART I
ITEM 1. BUSINESS
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GENERAL DEVELOPMENT OF BUSINESS
Manor Care, Inc. (the Company) is a provider of a range of health care services,
including skilled nursing care, assisted living, subacute medical and
rehabilitation care, rehabilitation therapy, home health care, hospice care, and
management services for subacute care and rehabilitation therapy. The most
significant portion of the Company's business relates to long-term care,
including skilled nursing care and assisted living, which is the Company's only
reportable operating segment. See Notes 5 and 16 to the consolidated financial
statements for revenues for certain health care services and segment
information, respectively. At December 31, 2000, the Company operated 298
skilled nursing facilities and 56 assisted living facilities in 32 states with
more than 60 percent located in Ohio, Michigan, Illinois, Pennsylvania and
Florida. Within some of the Company's centers, there are medical specialty units
which provide subacute medical and rehabilitation care, and/or Alzheimer's care
programs. At December 31, 2000, the Company operated 87 outpatient
rehabilitation clinics, an acute care hospital and 78 home health care offices
that include the offices of In Home Health, Inc. (IHHI).
The Company owned 41 percent of IHHI at December 31, 1999 and acquired
additional shares in June 2000 to increase its ownership to 61 percent. On
December 28, 2000, pursuant to a merger agreement approved by IHHI stockholders,
the Company purchased the remaining shares of IHHI to increase its ownership to
100 percent. The Company paid approximately $14.0 million for its additional
ownership during 2000.
The Company formed a strategic alliance with Alterra Healthcare Corporation
(Alterra) in 1998 to develop a broad-based network primarily dedicated to the
care of patients suffering from Alzheimer's disease. Key provisions of the
alliance that were implemented in 1999 included the sale of 26 assisted living
centers and the lease of two centers to Alterra; creation of a joint venture to
develop and construct up to $500 million of Alzheimer's dementia care assisted
living facilities in the Company's core markets over the next three to five
years; and the formation of a new company to provide a variety of ancillary
services, including rehabilitation therapy and home and hospice care, to
residents in Alterra centers. In 1999, the Company sold 26 centers to Alterra
for $154.5 million and, as part of the development joint venture, contributed 20
facilities valued at $77.8 million. The Company and Alterra jointly and
severally guaranteed a line of credit related to the joint venture that was to
mature September 30, 2002. In 2000 the following occurred with respect to the
joint venture: the Company and Alterra curtailed current and ceased future
development activities, reduced the joint venture's revolving line of credit
from $200 million to $60 million, and the Company purchased seven facilities
that were originally contributed by the Company to the joint venture in 1999. In
January 2001, the line of credit was further reduced to $57 million and the
maturity date was adjusted to June 29, 2001.
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The executive offices of the Company are located at 333 N. Summit Street,
Toledo, Ohio 43604-2617. The Company's telephone number is (419) 252-5500.
NARRATIVE DESCRIPTION OF BUSINESS
Long-Term Care Services
The Company is a leading owner and operator of long-term care centers in the
United States, with the majority of its facilities operating under the respected
Heartland, ManorCare and Arden Courts names.
Skilled Nursing Centers. The Company's facilities have interdisciplinary
teams of experienced medical professionals providing services prescribed by
physicians. These teams include registered nurses, licensed practical nurses and
certified nursing assistants, who provide individualized comprehensive nursing
care around the clock. Quality of Life programs are designed to give the highest
possible level of functional independence to residents. Licensed therapists
provide physical, speech, respiratory and occupational therapy for patients
recovering from strokes, heart attacks, orthopedic conditions, or other
illnesses, injuries or disabilities. In addition, the centers provide
first-class dietary services, social services, therapeutic recreational
activities, housekeeping and laundry services. Many of the Company's centers are
accredited by the Joint Commission on Accreditation of Healthcare Organizations
(JCAHO).
Assisted Living Services. The Company has a number of stand-alone assisted
living centers as well as units within its skilled nursing centers dedicated to
providing personal care services and assistance with general activities of daily
living such as dressing, bathing, meal preparation and medication management. A
comprehensive resident assessment helps determine the appropriate package of
services desired or required by each resident. The assisted living staff
encourages residents to socialize and participate in a broad spectrum of
activities.
Specialty Services
Subacute Medical and Rehabilitation Care. The Company's commitment to
reducing the cost of quality health care is exemplified by its leadership in
subacute programs designed to shorten or eliminate hospital stays. Working
closely with patients, families and insurers, interdisciplinary teams of
experienced medical professionals develop comprehensive, individualized patient
care plans that target the essential medical, functional and discharge planning
objectives. The Company provides medical and rehabilitation programs for
patients recovering from major surgery; severe injury; or serious
cardiovascular, respiratory, infectious, endocrine or neurological illnesses.
Alzheimer's Care. As an industry leader in Alzheimer's care, the Company
provides innovative services and facilities for the care of Alzheimer's patients
in early, middle and advanced stages of the disease. Specialized care and
programming are provided by trained staff for persons with Alzheimer's or
related disorders in freestanding Arden Courts facilities and in dedicated units
within many of the Company's skilled nursing centers.
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Health Care Services
The Company provides rehabilitation therapy in long-term care centers of the
Company, other skilled centers, hospitals and the Company's 87 outpatient
therapy clinics serving the Midwestern and Mid-Atlantic states, Texas and
Florida. The Company's home health care business specializes in all levels of
home health, hospice care and rehabilitation therapy from 78 offices in 18
states. The Company provides program management services for subacute care and
acute rehabilitation programs in hospitals and skilled nursing centers. The
Company owns and operates a general medical/surgical acute care hospital with
172 licensed beds in Texas. The Company entered into long-term management
contracts with physician practices in the Midwestern states, specializing in
vision care and refractive eye surgery.
Other Services
The Company owns approximately 96 percent of a start-up medical transcription
company which converts medical dictation into electronically formatted patient
records. Health care providers use the records in connection with patient care
and other administrative purposes.
Labor
Labor costs, including temporary staffing, account for approximately 64 percent
of the Company's operating expenses, and the Company competes with other health
care providers with respect to attracting and retaining qualified or skilled
personnel. The Company also competes with various industries related to the
available labor pool of lower-wage employees. A shortage of nurses or other
trained personnel and general inflationary pressures have required the Company
to enhance its wage and benefits packages in order to compete for qualified
personnel. Although the Company does not currently have a staffing shortage in
all markets where the Company operates, there are certain markets with shortages
of health care workers where high priced temporary help has been used to
supplement staffing levels. If a shortage of nurses or other health care workers
occurred in all geographic areas in which the Company operates it could
adversely affect the ability of the Company to attract and retain qualified
personnel and could further increase its operating costs.
Customers
There are no individual customers or related groups of customers which account
for a significant portion of the Company's revenue. The Company does not expect
that the loss of a single customer or group of related customers would have a
material adverse effect.
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Certain classes of patients rely on a common source of funds for payment of the
cost of their care. The following table reflects the allocation of such revenue
sources among Medicare, Medicaid, and private pay and other sources for the last
three years for services related to skilled nursing, assisted living and
rehabilitation operations.
2000 1999 1998
---- ---- ----
Medicaid 33% 33% 29%
Medicare 24% 20% 22%
Private pay & other 43% 47% 49%
---- ---- ----
100% 100% 100%
==== ==== ====
Private pay and other sources include commercial insurance, individual patients'
own funds, managed care plans and the Veterans Administration. Although payment
rates vary among these sources, such rates are largely determined by market
forces and costs.
The government reimbursement programs such as Medicare and Medicaid prescribe,
by regulation, the billing methods and amounts which may be charged and
reimbursed for the care of patients covered by such programs. On August 5, 1997,
Congress enacted the Balanced Budget Act of 1997 (Budget Act), which sought to
achieve a balanced federal budget by, among other things, reducing federal
spending on the Medicare and Medicaid programs. The law contained numerous
changes affecting Medicare payments to skilled nursing facilities, home health
agencies, hospices and therapy providers, among others. For cost reporting
periods beginning prior to July 1, 1998, Medicare reimbursement for skilled
nursing facilities operated on a retrospective payment system in which each
facility received an interim payment during the year, which was later adjusted
to reflect actual allowable direct and indirect costs of services based on the
submission of a cost report at the end of each year. The Budget Act resulted in
a shift to a prospective Medicare payment system (PPS) in which skilled nursing
facilities are reimbursed at a per diem rate for specific covered services
regardless of their actual cost. Specifically, the Budget Act provided that,
over three cost reporting periods beginning on or after July 1, 1998, the
Medicare program phased in this prospective payment system. The Budget Act also
required a prospective payment system to be established for home health services
that began October 1, 2000. The Budget Act also reduced payments to many
providers and suppliers, including therapy providers and hospices, and gave
states greater flexibility in the administration of their Medicaid programs by
repealing the federal requirement that payment be reasonable and adequate to
cover the costs of "efficiently and economically operated" nursing facilities.
In November 1999, Congress passed the Medicare Balanced Budget Refinement Act
(BBRA 99). In addition, in December 2000 Congress passed the Medicare, Medicaid,
and State Child Health Insurance Program (SCHIP) Benefits Improvement and
Protection Act of 2000 (BIPA 2000). Both the BBRA 99 and the BIPA 2000 redress
certain reductions in Medicare reimbursement resulting from the Budget Act.
There are several provisions of the BBRA 99 that positively affected the Company
beginning primarily in the latter half of 2000 and that will continue through
2001. First, there was a temporary increase in the payment for certain high cost
nursing home patients, for services provided beginning April 1, 2000. This
provision was amended by BIPA 2000 to redistribute the amounts applicable to
rehabilitation patients from three specific categories to all categories. This
temporary increase will continue until such time as the Secretary of the
Department of Health and Human Services implements a refined case mix system to
better account for medically complex patients. Second, the federal
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per diem rates will be increased under the BBRA 99 by an additional 4 percent
per year for the 12 months ended September 30, 2001 and 2002. Third, for cost
reporting periods beginning on or after January 1, 2000, skilled nursing
facilities may waive the PPS transition period and elect to receive 100 percent
of the federal per diem rate. Fourth, certain specific services or items
(ambulance services in conjunction with renal dialysis, chemotherapy items and
prosthetic devices) furnished on or after April 1, 2000 may be reimbursed in
addition to the PPS per diem rate. Fifth, there is a two-year moratorium on the
annual $1,500 therapy caps each for physical/speech therapy and occupational
therapy beginning with services provided on or after January 1, 2000. This
provision was amended by the BIPA 2000, extending the moratorium through
September 30, 2002. Sixth, there is a delay in the 15 percent reduction in the
base payment level for the Company's home health business until October 2001.
This provision was also amended by BIPA 2000, extending the delay through
September 30, 2002. In addition, BIPA 2000 requires that the Government
Accounting Office (GAO) submit a report to the Congress by April 1, 2002
analyzing the need for the 15 percent reduction on payment limits for home
health services.
In addition to the changes noted above, there are several other BIPA 2000
provisions that will positively affect the Company beginning in the second
quarter of 2001. First, the inflation index used to trend the skilled nursing
facility prospective rates forward for fiscal 2001 was revised upward. Second,
effective April 1, 2001 and continuing through September 30, 2002, the nursing
component of the case mix adjusted portion of federal prospective rate will be
increased by 16.66 percent. Third, BIPA 2000 provides a 5 percent increase in
rates for hospice services furnished on or after April 1, 2001 through September
30, 2002.
There can be no assurances that payments from governmental or private payors
will remain at levels comparable to levels described above or will, in the
future, be sufficient to cover the costs allocable to patients eligible for
reimbursement from such programs. The Company cannot now predict whether any
changes in reimbursement will be adopted in the future or what effect any such
changes, if adopted, would have on the Company.
Regulation and Licenses
General. Health care is an area of extensive and frequent regulatory
change. Various aspects of the Company's business are subject to regulation by
the federal government and the states in which the Company operates. Skilled
nursing facilities, assisted living facilities (in some states) and other health
care businesses, including home health agencies and hospices, are subject to
annual licensure and other regulatory requirements. In particular, the operation
of nursing facilities and the provision of health care services are subject to
federal, state and local laws relating to the delivery and adequacy of medical
care, distribution of pharmaceuticals, equipment, personnel, operating policies,
fire prevention, rate-setting, and compliance with building codes and
environmental laws. Skilled nursing facilities are subject to periodic
inspection by governmental and other authorities to assure continued compliance
with various standards, their continued licensing under state law, certification
under the Medicare and Medicaid programs and continued participation in the
Veterans Administration program, and the ability to participate in other
third-party programs. The Company is also subject to inspection regarding record
keeping and inventory control. From time to time, the Company, like others in
the health care industry, may receive
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notices from federal and state regulatory agencies relating to alleged
deficiencies for failure to comply with applicable standards. Such notices may
require the Company to take corrective action, and may impose civil money
penalties and/or other operating restrictions on the Company. Failure of the
skilled nursing facilities to comply with such directives or otherwise to be in
substantial compliance with licensure and certification laws, rules and
regulations could result in loss of certification as a Medicare and Medicaid
provider and/or a loss of licensure. The Company's assisted living facilities
are subject to varying degrees of regulation and licensing by local and state
health and social service agencies and other regulatory authorities specific to
their location. While regulations and licensing requirements often vary
significantly from state to state, they typically address, among other things:
personnel education, training and records; facility services, including
administration of medication, assistance with supervision of medication
management and limited nursing services; physical plant specifications;
furnishing of resident units; food and housekeeping services; emergency
evacuation plans; and resident rights and responsibilities. Failure of the
assisted living facilities to be in compliance with licensing requirements could
result in loss of licensure. In most states, assisted living facilities also are
subject to state or local building codes, fire codes and food service licensure
or certification requirements. In addition, since the assisted living industry
is relatively new, the manner and extent to which it is regulated at the federal
and state levels are evolving. Changes in the laws or new interpretations of
existing laws as applied to the skilled nursing facilities, the assisted living
facilities or other components of the Company's health care businesses may have
a significant impact on the Company's methods and costs of doing business.
Licensing and Certification. The Company's success depends in part upon its
ability to satisfy applicable regulations and requirements and to procure and
maintain required licenses and Medicare and Medicaid certifications in rapidly
changing regulatory environments. Any failure to satisfy applicable regulations
or to procure or maintain a required license or certification could have a
material adverse effect on the Company. In addition, certain regulatory
developments, such as revisions in the building code requirements for assisted
living and skilled nursing facilities, mandatory increases in scope and quality
of care to be offered to residents, and revisions in licensing and certification
standards, could have a material adverse effect on the Company.
Health Care Reforms. In recent years, there have been numerous initiatives
on the federal and state levels for comprehensive reforms affecting the payment
for and availability of health care services. Aspects of certain of these health
care initiatives (such as reductions in funding of the Medicare and Medicaid
programs; potential changes in reimbursement regulations by the Health Care
Financing Administration; enhanced pressure to contain health care costs by
Medicare, Medicaid and other payors; and greater state flexibility in the
administration of Medicaid) could adversely affect the Company.
Certificate of Need Laws. Many states have adopted Certificate of Need
(CON) or similar laws which generally require that the appropriate state agency
approves certain acquisitions and determines that a need exists for certain bed
additions, new services and capital expenditures or other changes prior to beds
and/or new services being added or capital expenditures being undertaken. To the
extent that CON or other similar approvals are required for the expansion of
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the Company's operations, either through facility acquisitions or expansion or
provision of new services or other changes, such expansion could be adversely
affected by the failure or inability to obtain the necessary approvals, changes
in the standards applicable to such approvals, and possible delays and expenses
associated with obtaining such approvals. There can be no assurance that the
Company will be able to obtain CON approval for all future projects requiring
such approval.
Anti-Remuneration Laws. The Company is also subject to federal and state
laws which govern financial and other arrangements involving health care
providers. These laws prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation or
arrangement of, a particular provider for medical products and services. These
laws include the federal "Stark Legislation" which prohibits, with limited
exceptions, the referral of patients for certain designated health services,
including home health services, physical therapy and occupational therapy, by a
physician to an entity in which the physician has a financial interest. The
January 2001 final rule (Phase I) to implement the Stark Legislation makes clear
that the restrictions apply to referrals for designated health services provided
in skilled nursing facilities. Certain statutory exceptions are available for
employment agreements, leases, in-office ancillary services and other physician
arrangements. Phase I of the final rule also sets forth additional exceptions.
Most of this rule will become effective January 4, 2002, except for provisions
governing referrals for home health care services which become effective April
6, 2001. Phase II of the final rule, which will cover the remaining portions of
the statute, including those pertaining to Medicaid, is expected to be released
in 2001. Phase I of the final rule eases certain of the restrictions in the
proposed rule, including the criteria for qualifying as a group practice. The
final rule also, among other things: recognizes an exception for referrals for
residents covered under a Part A skilled nursing facility stay; conforms the
supervision requirements to Medicare coverage and payment policies for the
specific services; clarifies the definitions of designated health services and
indirect financial relationships; and creates various new exceptions, including
for indirect compensation arrangements. Although the Company has sought to
comply in all respects with all applicable provisions of the Stark Legislation,
there can be no assurance that its physician arrangements will be found to be in
compliance with the Stark Legislation, as such law ultimately may be
interpreted. In addition, the Company is subject to the federal "anti-kickback
law" which prohibits, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of patients, or
the purchasing, leasing, ordering, or arranging for any goods, services or items
for which payment can be made under Medicare, Medicaid or other federal health
care programs. Possible sanctions for violation of the anti-kickback law include
criminal penalties, civil money penalties and/or exclusion from participation in
Medicare, Medicaid or other federal health care programs.
The federal government, private insurers and various state enforcement agencies
have increased their scrutiny of providers' business practices and claims in an
effort to identify and prosecute fraudulent and abusive practices. The federal
government has issued fraud alerts concerning home health services, the
provision of medical services and supplies to skilled nursing facilities, and
arrangements between hospices and nursing facilities; accordingly, these areas
may come under closer scrutiny by the government. In addition, the Department of
Health and Human Services Office of Inspector General and the Department of
Justice have from time to time established enforcement initiatives focusing on
specific billing practices or other suspected areas of abuse. Current
initiatives include the appropriateness of therapy services provided to Medicare
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beneficiaries residing in skilled nursing facilities, appropriate cost
allocation between the Medicare-certified and non-certified portions of the
facility, billing for ancillary supplies, resident assessments and quality of
care. The Health Insurance Portability and Accountability Act of 1996 (HIPPA),
which became effective January 1, 1997, expands the scope of certain fraud and
abuse laws to include all health care services, whether or not they are
reimbursed under a federal health care program, and creates new enforcement
mechanisms to combat fraud and abuse. The Budget Act also expands numerous
health care fraud provisions. Furthermore, many states restrict certain business
relationships between physicians and other providers of health care services,
and some have enacted laws similar to the federal Stark Legislation and the
anti-kickback law. In addition, some states prohibit business corporations from
providing, or holding themselves out as a provider of, medical care. Possible
sanctions for violation of any of these restrictions or prohibitions include
loss of licensure or eligibility to participate in reimbursement programs and
civil and criminal penalties. These laws vary from state to state and have
seldom been interpreted by the courts or regulatory agencies. Although the
Company has sought to structure its business relationships and transactions in
compliance with these federal and state anti-remuneration laws, there can be no
assurance that such laws will ultimately be interpreted in a manner consistent
with the practices of, and business transactions by, the Company. Failure to
comply with such laws can result in civil money penalties, exclusion from the
Medicare, Medicaid and other federal health care programs, and criminal
convictions.
Related Party Rule. Prior to the implementation of the prospective payment
system for skilled nursing facilities (i.e., for cost reporting periods
beginning prior to July 1, 1998), the Medicare program limited certain allowable
costs for items and services provided by companies that are associated or
affiliated with, have control of, or are controlled by, a Medicare provider.
Many state Medicaid programs have adopted the same rule in determining costs
that will be included in the payment rates. Unless a provider qualifies for the
exception to the related party rule, the Medicare program will only reimburse
the provider for the cost incurred by the related party in providing products or
services, rather than the related party's charge. An organization can qualify
for the exception to the related party rule by meeting the following criteria:
1) the entities are bona fide separate organizations; 2) a substantial part of
the supplying organization's business activity is conducted with non-related
organizations and there is an open, competitive market for such services or
products; 3) the services or products are commonly obtained by a provider from
other organizations and are not a basic element of patient care ordinarily
furnished directly to patients by the providers; and 4) the charge to the
provider is in line with the charge for such services and products in the open
market and no more than the charge made under comparable circumstances to
others. The Medicare program has taken the position that a subsidiary of the
Company providing rehabilitation management services is a related party and that
certain fees paid to this entity should be adjusted based upon the related party
rule. The Company is in the process of appealing the Medicare program's decision
to adjust these fees. The Company believes that, to the extent this subsidiary
or any other subsidiary of the Company is considered to be a related party for
purposes of this rule, the operations of each such subsidiary would qualify for
the exception to the related party rule. However, there can be no assurance that
the interpretation and application of the related party rule and the exception
thereto by governmental authorities will result in the Company qualifying for
the exception. The application of the Medicare related party rule could
adversely affect allowable payments to the Company's skilled nursing facilities
for pre-July 1, 1998 cost reports.
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False Claim Regulation. False claims are prohibited pursuant to criminal
and civil statutes. Criminal provisions at 42 U.S.C. Section 1320a-7b prohibit
filing false claims or making false statements to receive payment or
certification under Medicare and Medicaid, or failing to refund overpayments or
improper payments. Offenses for violation are felonies punishable by up to five
years imprisonment and/or $25,000 fines. Criminal penalties may also be imposed
pursuant to the Federal False Claim Act, 18 U.S.C. Section 287. In addition,
under HIPPA, Congress enacted a criminal health care fraud statute for fraud
involving a health care benefit program, which is defined to include both public
and private payors. Civil provisions at 31 U.S.C. Section 3729 prohibit the
knowing filing of a false claim or the knowing use of false statements to obtain
payment. Penalties for violations are fines of not less than $5,500 nor more
than $11,000, plus treble damages, for each claim filed. Also, the statute
allows any individual to bring a suit, known as a qui tam action, alleging false
or fraudulent Medicare or Medicaid claims or other violations of the statute and
to potentially share in any amounts paid by the entity to the government in
fines or settlement. Although the Company has sought to comply with such
statutes, there can be no assurance that such laws will ultimately be
interpreted in a manner consistent with the practices of, and business
transactions by, the Company.
Health Information Practices. HIPAA also mandates, among other things, the
adoption of standards for the exchange of electronic health information in an
effort to encourage overall administrative simplification and enhance the
effectiveness and efficiency of the health care industry. Among the standards
that the Department of Health and Human Services adopt pursuant to HIPAA are
standards for the following: electronic transactions and code sets; unique
identifiers for providers, employers, health plans and individuals; security and
electronic signatures; privacy; and enforcement.
Although HIPAA was intended ultimately to reduce administrative expenses and
burdens faced within the health care industry, we believe the law will initially
bring about significant and, in some cases, costly changes. The Department of
Health and Human Services has released two rules to date mandating the use of
new standards with respect to certain health care transactions and health
information. The first rule requires the use of uniform standards for common
health care transactions, including health care claims information, plan
eligibility, referral certification and authorization, claims status, plan
enrollment and disenrollment, payment and remittance advice, plan premium
payments and coordination of benefits, and it establishes standards for the use
of electronic signatures.
Second, the Department of Health and Human Services has released new standards
relating to the privacy of individually identifiable health information. These
standards not only require our compliance with rules governing the use and
disclosure of protected health information, but they also require us to impose
those rules, by contract, on any business associate to whom such information is
disclosed. Rules governing the security of health information have been proposed
but have not yet been issued in final form.
The Department of Health and Human Services finalized the new transaction
standards on August 17, 2000, and we will be required to comply with them by
October 16, 2002. The privacy standards were issued on December 28, 2000, to
become effective in mid-April,
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2001, with a compliance date of February 26, 2003. The Bush Administration and
Congress are taking a careful look at the existing regulations, but it is
uncertain whether there will be changes to the privacy standards or their
compliance date. With respect to the security regulations, once they are issued
in final form, affected parties will have approximately two years to be fully
compliant. Sanctions for failing to comply with the HIPAA health information
practices provisions include criminal penalties and civil sanctions.
Management is in the process of evaluating the effect of HIPAA on the Company.
At this time, management anticipates that the Company will be able to fully
comply with those HIPAA requirements that have been adopted. However, management
cannot at this time estimate the cost of such compliance, nor can management
estimate the cost of compliance with standards that have not yet been finalized
by the Department of Health and Human Services. Although the new and proposed
health information standards are likely to have a significant effect on the
manner in which the Company handles health data and communicates with payors,
based on its current knowledge, the Company believes that the cost of its
compliance will not have a material adverse effect on its business, financial
condition or results of operations.
Competitive Conditions
The Company's nursing facilities compete primarily on a local and regional basis
with many long-term care providers, some of whom may own as few as a single
nursing center. The ability of the Company to compete successfully varies from
location to location depending on a number of factors, including the number of
competing centers in the local market, the types of services available, quality
of care, reputation, age and appearance of each center and the cost of care in
each locality. In general, the Company seeks to compete in each market by
establishing a reputation within the local community for quality and caring
health services, attractive and comfortable facilities, and the provision of
specialized health care.
The Company also competes with a variety of other companies in providing
assisted living services, rehabilitation therapy services and home health care
services. Given the relatively low barriers to entry and continuing health care
cost containment pressures in the assisted living industry, the Company expects
that the assisted living industry will become increasingly competitive in the
future. Increased competition in the future could limit the Company's ability to
attract and retain residents, to maintain or increase resident service fees, or
to expand its business.
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Employees
As of December 31, 2000, the Company had approximately 54,000 full-and part-time
employees. Approximately 6,000 of the employees are salaried and the remainder
are paid on an hourly basis. Approximately 2,000 of the employees are members of
labor unions.
ITEM 2. PROPERTIES
-------------------
The principal properties of the Company and its subsidiaries, which are of
material importance to the conduct of their business, consist of 354 long-term
care centers located in 32 states. The centers are predominately single-story
structures with brick or stucco facades, dry wall partitions and attractive
interior finishes. Common areas of the skilled nursing facilities include
dining, therapy, personal care and activity rooms, and resident and visitor
lounges, as well as administrative offices and employee lounges. The Company
believes that all of its centers have been well maintained and are suitable for
the conduct of its business. For the year ended December 31, 2000, approximately
86 percent of the beds were utilized.
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The following table shows the number and location of centers and beds operated
by the Company as of December 31, 2000.
Number of Centers
-----------------
Assisted
Skilled Living Number of Beds
------- --------- --------------
Pennsylvania 46 10 8,146
Florida 36 11 6,005
Ohio 43 6 5,996
Illinois 29 6 4,194
Michigan 26 1 3,490
Texas 19 2 3,122
Maryland 13 8 2,570
California 9 1 1,388
Wisconsin 10 1,154
Indiana 5 1 1,061
Virginia 6 1 978
West Virginia 7 940
South Carolina 7 853
New Jersey 4 4 736
Oklahoma 6 714
Washington 4 483
Kansas 3 466
New Mexico 3 455
Missouri 3 430
Iowa 4 406
Delaware 2 1 347
Colorado 2 300
Kentucky 1 1 264
Georgia 2 257
North Dakota 2 215
Tennessee 1 211
Connecticut 3 180
Nevada 1 180
Utah 1 140
Arizona 1 120
North Carolina 1 120
South Dakota 1 99
---- ---- --------
298 56 46,020
==== ==== ========
The Company owns 332 of these centers, leases 19, and has partnerships in three
centers. There are 56 assisted living facilities with a total of 4,699 beds.
There are 16 properties subject to liens which encumber the properties in an
aggregate amount of $41,382,000.
The Company leases space for its corporate headquarters in Toledo, Ohio. The
Company also leases space for its outpatient therapy clinics and home health
care offices. In addition, the Company owns one hospital in Texas.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
Since May of 1999, the Company and certain related persons and entities have
been parties to several actions by or against Genesis Health Ventures, Inc.
("Genesis") and its subsidiary, NeighborCare Pharmacy Services, Inc.
("NeighborCare"). On or about June 22, 2000,
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16
Genesis and NeighborCare filed voluntary petitions for bankruptcy (the
"Bankruptcy") under Chapter 11 of the Bankruptcy Code, which effectively stayed
the actions to the extent they had not been stayed already. The status of the
various Genesis/NeighborCare lawsuits is discussed below.
On May 7, 1999, Genesis filed suit in federal district court in Delaware against
the Company, its wholly owned subsidiary, Manor Care of America, Inc. (formerly
known as Manor Care, Inc. ("MCA")), its Chief Executive Officer, Paul A. Ormond,
and its Chairman, Stewart Bainum, Jr. The complaint alleges that the defendants
fraudulently induced Genesis to acquire, in August 1998, all of the outstanding
stock of Vitalink Pharmacy Services, Inc. ("Vitalink"), an approximately 50
percent-owned subsidiary of MCA, and that such alleged conduct constituted
violations of Section 10(b) of the Securities Exchange Act of 1934, common law
fraudulent misrepresentation and negligent misrepresentation. The suit also
alleges that the Company's ownership in a partnership known as Heartland
Healthcare Services violates a non-compete provision signed by MCA. The suit
seeks compensatory and punitive damages in excess of $100 million and
preliminary and permanent injunctive relief enforcing the covenant not to
compete. On June 29, 1999, the defendants moved to dismiss or, in the
alternative, to stay the lawsuit in its entirety. On March 22, 2000, the court
granted the defendants' motion to stay the action in its entirety pending the
arbitration discussed below, but denied the motion with respect to the
alternative request to dismiss the action. 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, MCA filed a separate action in federal district court in
Delaware against Genesis concerning its 1998 acquisition of Vitalink. MCA'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 Genesis' issuance of approximately $293 million of
Genesis Preferred Stock as consideration to MCA for its approximately 50 percent
interest in Vitalink. MCA seeks, among other things, compensatory damages and
recission voiding MCA's purchase of the Genesis Preferred Stock and requiring
Genesis to return to MCA the consideration that it paid at the time of the
Vitalink sale. On November 23, 1999, Genesis moved to dismiss the lawsuit in its
entirety. On or about January 18, 2000, Genesis moved to consolidate MCA's
lawsuit with the suit that Genesis had filed in Delaware district court on May
7, 1999. On or about September 29, 2000, the Court granted in part and denied in
part Genesis' motion to dismiss and also denied Genesis' motion to consolidate
the lawsuits. On October 6, 2000, MCA advised the court by letter that the
automatic stay in the Bankruptcy had stayed MCA's lawsuit, but that pursuant to
11 U.S.C. ss. 108(c), MCA reserved any and all rights it may have concerning the
September 29, 2000 order and the MCA litigation, including the right to seek
clarification and reconsideration of the order, following termination or
expiration of the automatic stay. The Company intends to vigorously prosecute
this lawsuit following relief from the Bankruptcy stay.
Additionally, on May 7, 1999, NeighborCare instituted a lawsuit in the Circuit
Court for Baltimore City, Maryland (the "Maryland Action") against the Company,
MCA and ManorCare Health Services, Inc. ("MHS") seeking damages, preliminary and
permanent injunctive relief, and a declaratory judgment related to allegations
that the defendants had improperly sought to terminate certain Master Service
Agreements ("MSAs") between Vitalink
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(n/k/a NeighborCare) and MHS. NeighborCare also instituted arbitration
proceedings (the "Arbitration") against the same defendants, 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 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; and (iii) to stay
termination of the agreements at issue until a decision can be reached in the
Arbitration. NeighborCare has since dismissed the Maryland Action and
consolidated certain of those claims into the Arbitration by filing an Amended
Demand for Arbitration. On June 15, 1999, the defendants filed an answer and
counterclaim, denying the material allegations in the Amended Demand, and they
subsequently moved to dismiss three of the six claims alleged in the Amended
Demand. On or about May 17, 2000, the Arbitrator granted in part the defendants'
motion to dismiss, thereby dismissing two of NeighborCare's six claims. On or
about May 23, 2000, based upon NeighborCare's representation that it would
likely file for bankruptcy before it could complete the Arbitration hearing set
for the weeks of June 12 and July 3, 2000, the Arbitrator vacated the hearing
dates. The matter was then effectively stayed by NeighborCare's June 22, 2000
Bankruptcy. Thereafter, the defendants moved the Bankruptcy Court to enforce the
arbitration clause and for relief from the automatic stay to the extent
necessary so that the Arbitration could be completed. NeighborCare, in turn,
opposed this motion and filed its own motion seeking to assume the MSAs in the
Bankruptcy. On or about February 6, 2001, the Bankruptcy Court granted the
defendants' motion to enforce the arbitration clause and for relief from the
automatic stay, thereby returning the matter to Arbitration for hearing. The
Bankruptcy Court deferred consideration of NeighborCare's motion to assume until
following the completion of the Arbitration. The parties are in the process of
scheduling a new hearing date. The Company intends to vigorously defend the
Arbitration demand and to vigorously prosecute their counterclaim following
relief from the automatic stay. 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 in the Circuit
Court for Baltimore County, Maryland against Omnicare, Inc. and Heartland
Healthcare Services, Inc. (a partnership between subsidiaries of Omnicare, Inc.
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. On
November 12, 1999, the court stayed the matter pending the Arbitration. 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 December 22, 1999, MCA filed suit in federal court in Toledo, Ohio against
Genesis; Cypress Group, L.L.C.; TPG Partners II, L.P.; and Nazem, Inc. The
complaint alleges that the issuance by Genesis of its Series H and Series I
Preferred Stock violated the terms of the Series G Preferred Stock and the terms
of a rights agreement entered into between Genesis and MCA in connection with
the Vitalink transaction. On February 29, 2000, the defendants moved to dismiss
the case. That motion was pending before the court as of the time the matter was
automatically stayed by Genesis' June 22, 2000 bankruptcy filing.
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See the "Commitments and Contingencies" section on pages 28-30 under Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations for discussion of litigation related to environmental matters and
patient-care related claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
-----------------------------------------------------------------------------
The Company's common stock is listed under the symbol "HCR" on the New York
Stock Exchange which is the principal market on which the stock is traded.
The range of market prices by quarter in trading on the New York Stock Exchange
for 1999 and 2000 is shown below.
Low High
--- ----
1999
First Quarter $21.9375 $33.5000
Second Quarter $22.0000 $30.2500
Third Quarter $15.6875 $24.7500
Fourth Quarter $12.7500 $21.2500
2000
First Quarter $8.2500 $17.3750
Second Quarter $6.5000 $13.7500
Third Quarter $6.8750 $16.1875
Fourth Quarter $13.4375 $21.1875
No cash dividends have been declared or paid on the common stock.
The number of shareholders of record on January 31, 2001 was 3,777.
Approximately 93% of the outstanding shares were registered in the name of
Depository Trust Company, or CEDE, which held these shares on behalf of several
hundred brokerage firms, banks and other financial institutions. The Company
estimates that the shares attributed to these financial institutions represent
the interests of nearly 20,000 beneficial owners.
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ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
FIVE-YEAR FINANCIAL HISTORY
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share and other data)
RESULTS OF OPERATIONS
Revenues $ 2,380,578 $ 2,135,345 $ 2,209,087 $ 2,228,534 $ 2,022,710
Expenses:
Operating 2,016,258 1,697,459 1,715,575 1,760,923 1,598,826
General and administrative 104,027 89,743 96,017 99,881 100,971
Depreciation and amortization 121,208 114,601 119,223 112,723 99,165
Provision for restructuring charge, merger
expenses, asset impairment and other
related charges 14,787 278,261 26,300
----------- ----------- ----------- ----------- -----------
2,241,493 1,916,590 2,209,076 1,973,527 1,825,262
----------- ----------- ----------- ----------- -----------
Income from continuing operations before other income
(expenses), income taxes, and minority interest 139,085 218,755 11 255,007 197,448
Other income (expenses):
Interest expense (60,733) (54,082) (46,587) (56,805) (47,799)
Impairment of investments (20,000) (274,120)
Equity in earnings of affiliated companies 812 1,729 5,376 2,806 1,500
Other income 2,505 5,322 16,635 23,289 11,353
Interest income from advances to discontinued
lodging segment 16,058 20,314
----------- ----------- ----------- ----------- -----------
Total other expenses, net (77,416) (321,151) (24,576) (14,652) (14,632)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and minority interest 61,669 (102,396) (24,565) 240,355 182,816
Income taxes (benefit) 21,489 (47,238) 21,597 85,064 64,177
Minority interest income 1,125
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations $ 39,055 $ (55,158) $ (46,162) $ 155,291 $ 118,639
=========== =========== =========== =========== ===========
Earnings per share -
Income (loss) from continuing operations:
Basic $ 0.38 $ (0.51) $ (.42) $ 1.44 $ 1.10
Diluted $ 0.38 $ (0.51) $ (.42) $ 1.40 $ 1.06
Manor Care of America, Inc. dividends per share $ .04 $ .09 $ .09
FINANCIAL POSITION
Total assets $ 2,358,468 $ 2,289,777 $ 2,722,727 $ 2,568,368 $ 2,382,038
Long-term debt 644,054 687,502 693,180 751,281 731,346
Shareholders' equity 1,012,729 980,037 1,199,168 1,163,029 994,690
OTHER DATA (UNAUDITED)
Number of skilled nursing and assisted living
facilities 354 346 360 335 323
The financial results represent the combined results of Health Care and
Retirement Corporation (HCR) and MCA for all periods presented. For 1998 and
forward, the financial information was based on a year ended December 31. For
1997 and 1996, HCR's financial information for the years ended December 31, 1997
and 1996 were combined with MCA's financial information for the 12 months ended
November 30, 1997 and 1996, respectively, due to different fiscal year ends.
The Company changed its method of accounting for its investment in In Home
Health, Inc. (IHHI) over the past five years due to changes in ownership or
control. See Note 1 to the consolidated financial statements for further
discussion. IHHI's financial results were consolidated in 2000, 1997 and 1996,
and recorded under the equity method in 1999 and 1998. IHHI's results are not
included on the individual line items above when recorded on the equity method,
although there is no effect on income (loss) from continuing operations. IHHI's
revenues were $84.3 million for 1999 and $87.7 million for 1998, and operating
expenses were $72.2 million for 1999 and $83.7 million for 1998.
On November 1, 1996, MCA completed the spin-off of its lodging segment and the
financial results above reflect this segment as a discontinued operation in
1996. MCA recorded interest income related to cash advances provided to the
discontinued lodging segment for the acquisition and renovation of lodging
assets.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS - OVERVIEW
On September 24, 1998, the shareholders of Health Care and Retirement
Corporation (HCR) and the shareholders of the former Manor Care, Inc., now known
as Manor Care of America, Inc. (MCA), separately approved the merger of MCA into
a subsidiary of HCR, effective September 25, 1998. As a result of the
transaction, MCA became a wholly owned subsidiary of HCR and HCR changed its
name to HCR Manor Care, Inc. and then to Manor Care, Inc. (the Company) in 1999.
The merger has been accounted for by the pooling-of-interests method.
Accordingly, the consolidated financial statements give retroactive effect to
the merger and include the combined operations for all periods presented.
The Company is a provider of a range of health care services, including skilled
nursing care, assisted living, subacute medical and rehabilitation care,
rehabilitation therapy, home health care, hospice care, and management services
for subacute care and rehabilitation therapy. The most significant portion of
the Company's business relates to skilled nursing care and assisted living. At
December 31, 2000, the Company operated 298 skilled nursing facilities and 56
assisted living facilities in 32 states with more than 60 percent located in
Ohio, Michigan, Illinois, Pennsylvania and Florida. Within some of the Company's
centers, there are medical specialty units which provide subacute medical and
rehabilitation care, and/or Alzheimer's care programs. Some of the Company's
assisted living facilities operate under the brand names "Arden Courts" and
"Springhouse." The Arden Courts facilities are specifically focused on providing
care to persons suffering from early to middle-stage Alzheimer's disease and
related memory impairment, while the Springhouse facilities serve the general
assisted living population of frail elderly. These assisted living facilities
provide housing, personalized support and health care services in a
non-institutional setting designed to address the needs of the elderly or
Alzheimer's afflicted.
The Company formed a strategic alliance with Alterra Healthcare Corporation
(Alterra) in 1998 to develop a broad-based network primarily dedicated to the
care of patients suffering from Alzheimer's disease. Key provisions of the
alliance that were implemented in 1999 included the sale of 26 assisted living
centers and the lease of two centers to Alterra; creation of a joint venture to
develop and construct up to $500 million of Alzheimer's dementia care assisted
living facilities in the Company's core markets over the next three to five
years; and the formation of a new company to provide a variety of ancillary
services, including rehabilitation therapy and home and hospice care, to
residents in Alterra centers. In 1999, the Company sold 26 centers to Alterra
for $154.5 million and, as part of the development joint venture, contributed 20
facilities valued at $77.8 million. The Company and Alterra jointly and
severally guaranteed a line of credit related to the joint venture that was to
mature September 30, 2002. In 2000 the following occurred with respect to the
joint venture: the Company and Alterra curtailed current and ceased future
development activities, reduced the joint venture's revolving line of credit
from $200 million to $60 million, and the Company purchased seven facilities
that were originally contributed by the Company to the joint venture in 1999. In
January 2001, the line of credit was further reduced to $57 million and the
maturity date was adjusted to June 29, 2001.
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21
Growth in the skilled nursing and assisted living centers continued with the
construction of new facilities. The table below details the number of skilled
nursing and assisted living facilities and beds built or sold during the past
three years. Sixteen facilities were sold to Alterra or the joint venture but
were not open at the time of sale and are not included in the table below, as
well as activity related to managed facilities.
2000 1999 1998
Facilities Beds Facilities Beds Facilities Beds
---------- ---- ---------- ---- ---------- ----
Skilled nursing facilities
Built/Acquired 3 414 2 240
Closed/Lease expired 2 349
Assisted living facilities
Built/Acquired 12 728 12 752 26 1,680
Sold/Leased to others 31 2,602 2 185
The home health care business specializes in all levels of home health, hospice
care and rehabilitation therapy from 78 offices located in 18 states that
includes the acquisition of In Home Health, Inc. (IHHI) in 2000. In 1998 and
1999, the Company accounted for its investment in IHHI under the equity method
and changed to consolidation due to an increase in ownership from 41 percent to
61 percent in June 2000. Retroactive to January 1, 2000, the Company began
consolidating the results of IHHI and deducting the minority interest share on
an after-tax basis. On December 28, 2000, pursuant to a merger agreement
approved by IHHI stockholders, the Company purchased the remaining shares of
IHHI to increase its ownership to 100 percent.
The Company provides rehabilitation therapy in long-term care centers of the
Company, other skilled centers, hospitals and the Company's 87 outpatient
therapy clinics serving the Midwestern and Mid-Atlantic states, Texas and
Florida. The Company provides program management services for subacute care and
acute rehabilitation programs in hospitals and skilled nursing centers. The
Company owns and operates a general medical/surgical acute care hospital with
172 licensed beds in Texas. The Company entered into long-term management
contracts with physician practices in the Midwestern states, specializing in
vision care and refractive eye surgery. The Company owns approximately 96
percent of a start-up medical transcription business, which converts medical
dictation into electronically formatted patient records. Health care providers
use the records in connection with patient care and other administrative
purposes.
In the last three years the health care industry has had to deal with major
changes in Medicare legislation which affected the Company's results during 1998
through 2000. Under the Balanced Budget Act of 1997 (Budget Act), a new Medicare
prospective payment system (PPS) commenced on July 1, 1998. The new payment
system became effective for different segments of the health care continuum
(hospitals, skilled nursing, home health, etc.) at different times and even
commenced at different dates for different nursing facilities. Although
management believed that PPS would ultimately be a net positive for its skilled
nursing business, the same was not believed to be true for other businesses and
customers of the Company. MileStone Healthcare, Inc. (MileStone), a wholly-owned
subsidiary of the Company, provides management services to skilled nursing,
subacute care and acute rehabilitation programs, primarily in hospitals.
MileStone lost certain contracts during the second and third quarters of 1998
that have not been replaced due to the
19
22
impact of PPS on its customers. In addition, the Budget Act also had an
unfavorable impact on the reimbursement for home health care companies due to an
interim payment system (IPS) that was effective October 1997 for IHHI and
January 1998 for the Company's home health subsidiary. Under IPS, reimbursement
rates were reduced as a result of revised rate ceilings combined with
establishing an annual payment limitation per individual. As a result of IPS,
the Company has been focusing on reducing its costs to offset the revenue
reductions. PPS replaced IPS for home health reimbursement in October 2000.
However, a reduction in the base payment rate has been delayed by BBRA 99, as
discussed below. The Company does not believe that the impact of PPS on its home
health business will have a significant effect on the results of the Company.
The Company's rehabilitation business also was affected due to reduced
reimbursement from the April 1998 implementation of Medicare reimbursement
ceilings for speech and occupational therapy salaries. See discussion below of
impairment charges in 1998 on these businesses.
In November 1999, Congress passed the Medicare Balanced Budget Refinement Act
(BBRA 99). In addition, in December 2000 Congress passed the Medicare, Medicaid,
and State Child Health Insurance Program (SCHIP) Benefits Improvement and
Protection Act of 2000 (BIPA 2000). Both the BBRA 99 and the BIPA 2000 redress
certain reductions in Medicare reimbursement resulting from the Budget Act.
There are several provisions of the BBRA 99 that positively affected the Company
beginning primarily in the latter half of 2000 and that will continue through
2001. First, there was a temporary increase in the payment for certain high cost
nursing home patients, for services provided beginning April 1, 2000. This
provision was amended by BIPA 2000 to redistribute the amounts applicable to
rehabilitation patients from three specific categories to all categories. This
temporary increase will continue until such time as the Secretary of the
Department of Health and Human Services implements a refined case mix system to
better account for medically complex patients. Second, the federal per diem
rates will be increased under the BBRA 99 by an additional 4 percent per year
for the 12 months ended September 30, 2001 and 2002. Third, for cost reporting
periods beginning on or after January 1, 2000, skilled nursing facilities may
waive the PPS transition period and elect to receive 100 percent of the federal
per diem rate. Fourth, certain specific services or items (ambulance services in
conjunction with renal dialysis, chemotherapy items and prosthetic devices)
furnished on or after April 1, 2000 may be reimbursed in addition to the PPS per
diem rate. Fifth, there is a two-year moratorium on the annual $1,500 therapy
caps each for physical/speech therapy and occupational therapy beginning with
services provided on or after January 1, 2000. This provision was amended by the
BIPA 2000, extending the moratorium through September 30, 2002. Sixth, there is
a delay in the 15 percent reduction in the base payment level for the Company's
home health business until October 2001. This provision was also amended by BIPA
2000, extending the delay through September 30, 2002. In addition, BIPA 2000
requires that the Government Accounting Office (GAO) submit a report to the
Congress by April 1, 2002 analyzing the need for the 15 percent reduction on
payment limits for home health services.
In addition to the changes noted above, there are several other BIPA 2000
provisions that will positively affect the Company beginning in the second
quarter of 2001. First, the inflation index used to trend the skilled nursing
facility prospective rates forward for fiscal 2001 was revised upward. Second,
effective April 1, 2001 and continuing through September 30, 2002, the nursing
component of the case mix adjusted portion of federal prospective rate will be
increased by 16.66 percent. Third, BIPA 2000 provides a 5 percent increase in
rates for hospice services furnished on or after April 1, 2001 through September
30, 2002.
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23
There can be no assurances that payments from governmental or private payors
will remain at levels comparable to levels described above or will, in the
future, be sufficient to cover the costs allocable to patients eligible for
reimbursement from such programs. The Company cannot now predict whether any
changes in reimbursement will be adopted in the future or what effect any such
changes, if adopted, would have on the Company.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
As explained in the overview, the Company changed the accounting for its
investment in IHHI retroactive to January 1, 2000. In the table below, IHHI's
actual financial results have been included in 1999 to be comparative with 2000.
The narrative that follows includes IHHI in 1999 only for the line items
presented in the table.
Percent
2000 1999 Change
---- ---- -------
Revenues $2,380,578 $2,219,651 7%
Expenses:
Operating 2,016,258 1,769,706 14%
General and administrative 104,027 96,749 8%
Depreciation and amortization 121,208 116,079 4%
Revenues increased $160.9 million or 7 percent as compared with the same period
in 1999. By excluding the facilities sold or leased in 1999, revenues increased
$181.9 million or 8 percent. Revenues from skilled nursing and assisted living
facilities that are included in operations in 2000 increased $147.2 million or 8
percent due to increases in rates ($123.0 million) and capacity ($33.1 million)
partially offset by a decrease in occupancy ($8.9 million). Revenues from the
combined home health businesses increased $41.1 million primarily as a result of
an increase in hospice services and home health visits.
The increase in rates for the skilled nursing and assisted living facilities was
attributable to private, Medicaid and Medicare. The Medicare rate increase
related to provisions in the BBRA 99. The growth in bed capacity between 1999
and 2000 was primarily due to opening eleven assisted living facilities in 2000,
as well as other skilled nursing bed additions. The occupancy levels for
facilities in operation in 2000 were 87 percent for 1999 compared to 86 percent
for 2000. After excluding start-up facilities, the occupancy levels were 87
percent for both years. The occupancy levels for skilled nursing facilities were
87 percent for both years. In addition, the skilled nursing occupancy increased
to 88 percent in the fourth quarter of 2000. The quality mix of revenue from
Medicare, private pay and insured patients related to skilled nursing and
assisted living facilities and rehabilitation operations remained constant at 67
percent for 1999 and 2000.
Operating expenses increased $246.6 million or 14 percent compared with 1999. By
excluding facilities sold or leased in 1999, operating expenses increased $265.4
million or 15 percent. Operating expenses from skilled nursing and assisted
living facilities that are included in operations in 2000 increased $208.4
million, as discussed below. Operating expenses from the Company's home health
businesses increased $36.5 million in relation to the increase in revenues.
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24
The largest portion of the skilled nursing and assisted living operating expense
increase was attributable to labor costs and temporary staffing in the amount of
$88.8 million.
The skilled nursing and assisted living operating expense increase was also
affected by recording an additional $57.0 million of general and professional
liability expense in 2000 compared to 1999 related to a change in estimate
incorporating industry experience. The additional expense was determined as a
result of independent evaluations of the Company's growing potential liability
for patient-related litigation despite a continuing good quality record and
generally low historical claims experience. The evaluations were prepared in
response to the dramatic increases in the average cost per claim and volume of
lawsuits filed against the Company and in the long-term care industry in
general. The adjustment reflects the additional litigation and settlement costs
the Company could incur if there is no change in the current environment,
particularly in the state of Florida.
General and professional liability claims for the long-term care industry,
especially in the state of Florida, have become increasingly expensive. The
average cost of a claim in Florida in 1999 was two and one-half times higher
than the rest of the country that increased to three times in 2000. Industry
providers in the state are experiencing three times the number of claims in 1999
and four times in 2000 compared to the national average. The Company and other
affected providers are actively pursuing legislative and regulatory changes that
include tort reform. However, there can be no assurances that legislative
changes will be made, or that any such change will have a positive impact on the
current trend.
General and administrative expense, which approximated 4 percent of revenues,
increased $7.3 million compared with 1999 primarily as a result of legal
expenses, other professional services and general cost increases. Depreciation
and amortization increased $5.1 million primarily due to computer software
amortization. Although the average debt outstanding has declined, interest
expense increased $6.7 million compared with the prior year due to an increase
in interest rates.
On April 26, 1998, Vitalink Pharmacy Services, Inc. (Vitalink) entered into an
Agreement and Plan of Merger (Vitalink Merger Agreement) with Genesis Health
Ventures, Inc. (Genesis). Pursuant to the Vitalink Merger Agreement that was
consummated on August 28, 1998, MCA and one of its subsidiaries received 586,240
shares of Genesis Series G Cumulative Convertible Preferred Stock (Series G
Preferred Stock) valued at $293.1 million as consideration for all of its common
stock of Vitalink. Upon a third-party valuation, the Company reduced the basis
of its Series G Preferred Stock investment by $274.1 million in 1999 based on
Genesis' inability to pay dividends and its operating performance. As a result
of Genesis' bankruptcy filing on June 22, 2000, the Company reduced the basis of
its investment by $19.0 million to zero and wrote off another Genesis-related
investment of $1.0 million in 2000.
The Series G Preferred Stock bears cash dividends at the initial rate of 5.9375
percent. In 1999, the Company recorded $4.4 million of dividend income each
quarter and then fully reserved the dividends at the end of the year due to
non-payment. As a result of the non-payment of the cumulative dividends for four
consecutive quarters, all future dividends beginning in 2000 are payable in
additional shares of Series G Preferred Stock. Based on Genesis' inability to
pay cash dividends and its bankruptcy filing, the Company fully reserved the
dividends of $17.4 million in 2000.
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The Company owns 100 percent of the preferred stock of IHHI that has a 12
percent annual dividend. As a result of changing the accounting for the
Company's investment in IHHI in 2000, the preferred stock dividend of $2.4
million was eliminated in consolidation, although in 1999, the dividend was
fully reported on the line item, "Other income."
The minority interest income for 2000 represented the minority owners' share of
IHHI's net income. In 1999, IHHI's financial results were not consolidated.
Instead, the Company's share of IHHI's earnings was recorded on the line item,
"Equity in earnings of affiliated companies."
During 1999, the Company sold assets for a net gain of $11.5 million after tax.
The net gain was recorded as an extraordinary item as required after a business
combination accounted for as a pooling of interests. The Company sold 26
facilities to Alterra for $154.5 million, realizing a gain of $6.1 million ($3.7
million after tax). The Company also exercised a purchase option on MCA's
corporate headquarters in Gaithersburg, Maryland and sold the property,
realizing net proceeds of $24.5 million and a $10.1 million gain ($6.1 million
after tax).
The Company believes that inflation has had no material impact on its results of
operations.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues decreased $73.7 million or 3 percent from the prior year. Revenues from
skilled nursing and assisted living facilities decreased $76.1 million or 4
percent due to decreases in rates ($64.9 million) and occupancy ($65.2 million)
which were partially offset by an increase in capacity ($54.0 million).
The decline in rates was primarily attributable to transitioning onto the
Medicare PPS in 1999. The occupancy level for all facilities including start-up
facilities was 89 percent in 1998 compared to 86 percent in 1999. The occupancy
for the Company's skilled nursing facilities declined from 89 percent in 1998 to
87 percent in 1999, reflecting a decline in Medicare patients and private pay
patients over the last year. The growth in bed capacity was due to the timing of
opening three skilled nursing and 12 assisted living facilities in 1999, and two
skilled nursing and 26 assisted living facilities in 1998, partially offset by
the divestiture of 31 assisted living facilities in 1999.
The quality mix of revenue from Medicare, private pay and insured patients
related to skilled nursing and assisted living facilities and rehabilitation
operations declined from 71 percent in 1998 to 67 percent in 1999. This decline
was primarily a result of the decrease in Medicare rates and census due to the
Medicare PPS, as well as a decline in private pay patients.
Operating expenses decreased $18.1 million or 1 percent compared to 1998.
Operating expenses from skilled nursing and assisted living facilities decreased
$31.2 million or 2 percent. By excluding the effect of start-up facilities in
1999 and 1998, operating expenses for the facilities decreased $28.1 million.
The decrease was attributable to a decline in ancillary costs as the Company
found alternate methods of service which resulted in lower costs. The decrease
was partially offset by an increase in labor costs, primarily as a result of
temporary staffing in certain markets. Operating expenses increased $12.4
million in 1999 from start-up losses related to the Company's medical
transcription business.
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26
General and administrative expenses decreased $6.3 million from the prior year.
By excluding the net gains from the sale of assets in 1998, general and
administrative expenses decreased $11.7 million for the same period as a result
of synergies obtained from combining HCR and MCA. In 1998, a gain of $7.4
million from the sale of three former MCA corporate office buildings and a loss
of $2.0 million from the sale of two Springhouse facilities were included in
general and administrative expenses.
Depreciation decreased $2.2 million from the prior year due to the decline in
depreciation from the sale of assets. Amortization decreased $2.4 million as a
result of the write-down of assets in 1998.
The components of the restructuring charge, merger expenses, asset impairment
and other charges for 1998 and 1999 are disclosed in the table and narrative
below. The liability outstanding at December 31, 1999 related to these charges
was paid in 2000.
Cash 1998 1998 Liability 1999 1999 Liability
Non-cash Charge Activity at 12/31/98 Charge Activity at 12/31/99
-------- ------ -------- ----------- ------ -------- -----------
(In thousands)
MCA planned spin-off:
Employee benefits cash $5,917 $(5,300) $617 $219 $(836)
Transaction costs cash 6,805 (6,805)
Write-down of assets non-cash 778 (778)
-------- --------- ------- ------- -------- ------
13,500 (12,883) 617 219 (836)
-------- --------- ------- ------- -------- ------
HCR and MCA transaction:
Employee benefits cash 41,028 (12,734) 28,294 (27,184) $1,110
Deferred compensation non-cash 11,867 (11,867)
Other exit costs cash 4,234 4,234 (3,314) 920
Merger transaction costs cash 21,122 (21,122)
Write-down of assets non-cash 56,468 (56,468)
-------- --------- ------- ------- -------- ------
134,719 (102,191) 32,528 (30,498) 2,030
-------- --------- ------- ------- -------- ------
Other costs:
Amortization non-cash 7,863 (7,863) 10,554 (10,554)
Duplicate costs cash 5,725 (5,725) 2,328 (2,328)
Other cash 1,685 (685) 1,000 (1,000)
Asset impairment unrelated to merger non-cash 114,769 (114,769) 1,686 (1,686)
-------- --------- ------- ------- -------- ------
130,042 (129,042) 1,000 14,568 (15,568)
-------- --------- ------- ------- -------- ------
Total $278,261 $(244,116) $34,145 $14,787 $(46,902) $2,030
======== ========= ======= ======= ======== ======
In 1998, the Company recorded a $278.3 million charge related to restructuring,
merger expenses, asset impairment and other related charges. A component
pertains to MCA's $13.5 million charge recorded in the second quarter in
connection with its plan to separate its skilled nursing facility management,
assisted living and home health businesses from its skilled nursing facility
ownership, real estate and health care facility development business. As a
result of the transaction with HCR, the separation of MCA's businesses did not
occur.
Charges related to the transaction totaled $134.7 million. In connection with
the merger, the Company developed a plan to integrate the businesses of both
companies that included closing MCA's corporate office in Gaithersburg, Maryland
and realigning the operating divisions from eight to six. The remaining $130.0
million of the charge related to other unusual costs as a result of the merger
and asset impairment unrelated to the restructuring.
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27
In 1999, the Company recorded a $14.8 million charge with the major portion
relating to the amortization of MCA's software applications until the transition
to HCR's applications. The liability outstanding relating to all restructuring
and other charges is recorded in other accrued liabilities.
In MCA's planned spin-off of its non-health care businesses, a total of 208
employees were terminated. The employees did not receive a lump-sum severance
payment upon termination, but rather received their severance as biweekly
payments through 1999. The transaction costs primarily included financial
advisory, legal, and accounting fees and expenses, and printing and mailing
costs.
In the transaction between HCR and MCA, the employee benefit costs related to
severance payments and retention bonuses for 505 corporate employees and 26
field employees of MCA who received termination notices. A total of 364
employees left the Company as of December 31, 1998, but 269 employees continued
to be paid their severance payments on a biweekly basis. The majority of the MCA
employees remaining with the Company at December 31, 1998 had termination dates
in the first quarter of 1999. At December 31, 1999, all but three employees who
received termination notices had left the Company. The cash severance payments
continued through 2000. The deferred compensation expense of $11.9 million was
attributable to the lapsing of restrictions on HCR's restricted stock due to the
merger. The other exit costs pertain to various lease agreements and hardware
and software contracts that will be or have been terminated. The merger
transaction costs primarily included financial advisory, legal, and accounting
fees and expenses, and printing and mailing costs.
The Company identified two groups of assets that were impaired as a result of
the merger. The Company has integrated the information systems of the companies,
which resulted in the write-off of the net book value ($45.2 million) of MCA's
computer hardware and software that was no longer being utilized by the Company
as of December 31, 1998. Certain construction development project costs ($11.3
million), excluding the land value, have been abandoned due to a change in
strategy.
The Company recorded other unusual costs as a result of the merger. The non-cash
charge primarily related to the amortization of certain MCA software
applications which were being used until the transition to HCR applications. The
carrying value of the software was amortized over its estimated useful life
ranging from six to nine months. Certain general and administrative costs of
$5.7 million in 1998 and $2.3 million in 1999 represented salaries and benefits
for employees performing duplicate services in Toledo or Gaithersburg.
In 1998, the Company also recorded a charge for impairment of certain assets
based on its quarterly review of long-lived and intangible assets. Management
determined that MileStone's intangible assets with a net book value of $52.5
million were impaired based on the effects of changes in the Medicare
reimbursement system discussed above and reduced the book value by $44.6 million
to the assets' estimated fair value. The fair value was determined based on a
multiple of projected annual earnings. The remaining useful life has been
adjusted from 38 years to 18 years.
The asset impairment of the Company's home health businesses was also related
largely to the Medicare reimbursement changes discussed above. Based on the
impact of IPS in 1998 and the anticipated effects of PPS after October 2000,
management determined that the expected future
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earnings does not support the carrying value of these assets. Therefore, the
book value of the related goodwill was reduced by $22.0 million to zero in 1998.
Its estimated fair value was determined based on a multiple of projected annual
earnings.
Management determined that the fixed assets for five skilled nursing facilities
and two assisted living facilities were impaired based on the carrying value
exceeding the undiscounted cash flows. The skilled nursing facilities were
generating negative cash flows, and the fixed assets were written off except for
the land. The estimated fair value of the assisted living facilities was
determined based on a multiple of projected annual earnings. The fixed assets of
the skilled nursing and assisted living facilities had a carrying value of $26.8
million and were written down by $19.9 million in 1998.
The Company determined that three of its vision management businesses had
impaired assets. The first business was a start-up business in 1995 which had
$4.6 million in advances and $1.0 million in fixed assets. Since the business
had not been able to generate cash flows to cover its expenses, the assets were
written off in 1998. With the second business, the Company had advances of $1.5
million which were written down by $1.1 million in 1998. The third business had
a 40-year management contract with a carrying value of $11.8 million. Based on a
multiple of projected annual earnings, the estimated fair value was $3.4
million, and the remaining estimated useful life was reduced from 36 years to 16
years. The primary reason for the decrease in projected annual earnings was
declining reimbursement.
Management determined that the intangible assets for six rehabilitation
businesses were impaired based on the carrying value exceeding the undiscounted
cash flows. The businesses were generating negative cash flows, and the Company
had exhausted all measures to return the operations to a level of profitability.
The book value of the related intangible assets was reduced by $8.4 million to
zero carrying value in 1998.
Interest expense increased $7.5 million compared with the prior year due to an
increase in average debt outstanding under the bank credit facilities and a
decrease in the amount of interest capitalized for construction projects.
The Genesis Series G Preferred Stock bears cash dividends at the initial rate of
5.9375 percent. The Company accrued $5.8 million of dividend income in 1998 for
four months, which was recorded on the line item, "Other income," and was paid
in 1999. The Company continued to accrue dividend income of $4.4 million each
quarter in 1999. At December 31, 1999, Genesis had failed to pay dividends on
the Series G Preferred Stock for four consecutive quarters. Upon a third-party
valuation, the Company recorded a reserve of $17.4 million for accrued 1999
dividends and reduced the basis of its Series G Preferred Stock investment by
$274.1 million based on Genesis' inability to pay dividends and its current
operating performance.
The income taxes recorded in 1999 included the tax effects of the impairment of
the Genesis investment and an adjustment of the Company's prior years' estimated
tax liabilities. The income taxes recorded in 1998 included the tax effects of
the provision for restructuring charge, merger expenses, asset impairment and
other related charges, some of which were not deductible for income tax
purposes. The effective tax rate, excluding these items, was 39.5 percent in
1999 compared with 36.1 percent in 1998. The increase in the effective tax rate
was due to a decline in the deductions for corporate-owned life insurance and
the dividend received deduction as well as an
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increase in state and local income taxes.
During 1998, the Company recorded a gain of $99.8 million ($59.9 million after
tax) from the conversion of Vitalink common stock to Genesis Series G Preferred
Stock. The financial results of Vitalink were recorded as income from
discontinued pharmacy operations for all periods presented.
During 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 MCA'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 MCA's debt. The extraordinary
loss primarily related to the termination of the swaps but also included the
unamortized debt issue costs.
During 1998, the Company elected to adopt Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities" (SOP 98-5), which requires start-up costs
to be expensed as incurred. The cumulative effect of expensing start-up costs
capitalized as of January 1, 1998 was $9.4 million ($5.6 million after tax).
The Company believes that inflation has had no material impact on its results of
operations.
FINANCIAL CONDITION - DECEMBER 31, 2000 AND 1999
The December 31, 2000 balance sheet included the balances of IHHI due to
consolidation as of January 1, 2000. The most significant IHHI line items were
current assets of $34.5 million, which included receivables of $29.3 million,
and current liabilities of $27.6 million.
Property and equipment increased $26.9 million in 2000 primarily as a result of
additions to property and equipment of $116.9 million and transfer from
receivables of $19.2 million for facilities purchased from the development joint
venture with Alterra, which was partially offset by depreciation of $111.2
million.
Net intangible assets of $102.7 million at December 31, 2000 include $80.6
million of goodwill related to numerous acquisitions over the past nine years.
With the acquisition of IHHI in 2000, the Company recorded $13.0 million of
goodwill.
Accrued insurance liabilities increased $64.9 million to $107.8 million at
December 31, 2000 with $42.6 million classified as other long-term liabilities.
The increase was primarily a result of the accrual for general and professional
liabilities, as discussed previously.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board 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 requires the Company to recognize all derivatives on the balance sheet
at fair value. Because the Company currently does not use derivatives,
management believes that the adoption of this Statement will have no effect on
earnings or the financial position of the Company.
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CAPITAL RESOURCES AND LIQUIDITY
During 2000, the Company satisfied its cash requirements from cash generated
from operating activities. Cash flows from operating activities were $210.1
million for 2000, an increase of $73.0 million from 1999. The increase in
liabilities was due to the additional accrual for general and professional
liability claims discussed previously. The Company used the cash principally for
capital expenditures, acquisition of businesses and repayment of debt.
Expenditures for property and equipment during 2000 were $116.9 million that
included $51.8 million for the construction of new facilities. Planned capital
expenditures in 2001 (excluding acquisitions) are expected to approximate $125
million, of which 50 percent relates to renovations and capital improvements to
the long-term care facilities. As part of diversification into other health care
services, the Company acquired IHHI for $14.0 million and acquired various
businesses and paid contingent consideration for prior years' acquisitions for a
total of $8.3 million. Payment of long-term debt of $18.6 million included a
prepayment of $12.5 million.
The Company has a five-year, $500 million credit agreement (Five Year Agreement)
and a 364-day, $200 million credit agreement (364 Day Agreement) with a group of
banks. At December 31, 2000, outstanding borrowings aggregated $452 million
under the Five Year Agreement and $155 million under the 364 Day Agreement - a
total of $607 million. The Company plans to annually refinance the 364 Day
Agreement unless longer term financing becomes available. After consideration of
usage for letters of credit, the remaining credit availability under the
combined agreements totaled $66.7 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, and on February 8,
2000, the Board authorized an additional $100 million through December 31, 2001.
The Company purchased 440,000 shares in 2000 for $6.2 million and a total of 9.1
million shares for $186.5 million since May 1999. 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 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.
COMMITMENTS AND CONTINGENCIES
As of December 31, 2000, the Company had contractual commitments of $8.4 million
relating to its internal construction program. The Company had total letters of
credit of $32.9 million at December 31, 2000 that benefit certain third-party
insurers and bondholders of certain industrial revenue bonds, and 89 percent of
such letters of credit relate to recorded liabilities. The Company had
obligations under non-cancelable operating leases totaling $80.4 million at
December 31, 2000.
In 1999, the Company, Alterra and the development joint venture jointly and
severally guaranteed a $200 million revolving credit agreement, which was to
mature September 30, 2002. The line of credit was reduced to $60 million in
March 2000. In January 2001, the line
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of credit was further reduced to $57 million and the maturity date was adjusted
to June 29, 2001. The Company and Alterra each have a 50 percent interest in the
development joint venture which is the 10 percent owner and managing owner or
partner in the various project companies and partnerships which are entitled to
borrow under the credit agreement. There was $57 million of guaranteed debt
outstanding under the revolving credit agreement at December 31, 2000. Funds
were used to construct and support start-up working capital for assisted living
residences. The Company and Alterra are undertaking efforts to sell the
facilities. The debt will be repaid upon the sale of each facility. Although it
is impossible to determine the ultimate results of the sale of these facilities,
the Company does not presently anticipate any loss associated with the guarantee
of the debt related to these properties. Beginning January 1, 2001, the Company
will record 50 percent of the joint venture's expected losses as compared to
approximately 10 percent in 2000 due to the elimination of third-party equity.
The Company anticipates its share of net losses to be approximately $1.0 million
per quarter through June 2001.
Certain acquisition agreements contain a provision for additional consideration
to be paid contingent upon the future financial results of the businesses. The
maximum contingent consideration aggregates $14.9 million and will, if earned,
be paid over the next five years and treated as additions to the purchase price
of the businesses.
One or more subsidiaries or affiliates of MCA have been identified as
potentially responsible parties (PRPs) in a variety of actions (the Actions)
relating to waste disposal sites which allegedly are subject to remedial action
under the Comprehensive Environmental Response Compensation Liability Act, as
amended, 42 U.S.C. Sections 9601 et seq. (CERCLA) and similar state laws. CERCLA
imposes retroactive, strict joint and several liability on PRPs for the costs of
hazardous waste clean-up. The Actions arise out of the alleged activities of
Cenco, Incorporated and its subsidiary and affiliated companies (Cenco). Cenco
was acquired in 1981 by a wholly owned subsidiary of MCA. The Actions allege
that Cenco transported and/or generated hazardous substances that came to be
located at the sites in question. Environmental proceedings such as the Actions
may involve owners and/or operators of the hazardous waste site, multiple waste
generators and multiple waste transportation disposal companies. Such
proceedings involve efforts by governmental entities and/or private parties to
allocate or recover site investigation and clean-up costs, which costs may be
substantial. The potential liability exposure for currently pending
environmental claims and litigation, without regard to insurance coverage,
cannot be quantified with precision because of the inherent uncertainties of
litigation in the Actions and the fact that the ultimate cost of the remedial
actions for some of the waste disposal sites where MCA is alleged to be a
potentially responsible party has not yet been quantified. Based upon its
current assessment of the likely outcome of the Actions, the Company believes
that its future environmental liabilities will be approximately $22.5 to $28
million. The Company has received or expects to receive between $18.0 million
and $23.5 million of insurance proceeds, depending upon the ultimate
liabilities, which will offset amounts due as a result of these exposures.
Legislation phased out interest deductions on certain policy loans related to
corporate-owned life insurance (COLI) as of January 1, 1999. The Company has
recorded a cumulative reduction to income tax expense of approximately $34
million resulting from interest deductions for tax periods prior to 1999. While
the Internal Revenue Service (IRS) has not asserted any claim challenging the
Company's COLI interest expense deductions, the IRS has challenged other
taxpayers' COLI
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interest deductions and has prevailed in certain lower court decisions. Although
the Company intends to defend vigorously its right to deduct the entire amount
of such interest payments, were the IRS to challenge these deductions, there can
be no assurance that the Company would ultimately be able to deduct such
amounts, and if additional taxes were to be owed, the Company could have to pay
additional interest and possibly penalties.
The Company is party to various other legal matters arising in the ordinary
course of business including patient care-related claims and litigation. The
Company believes that the resolution of such matters will not result in
liability materially in excess of accounting accruals established with respect
to such matters.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Statements contained in this report that 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: our existing and future
indebtedness; integration of acquired businesses; changes in Medicare, Medicaid
and certain private payors' reimbursement levels; existing government
regulations and changes in, or the failure to comply with, governmental
regulations; changes in, or the failure to comply with, regulations governing
the transmission and privacy of health information; state regulation of the
construction or expansion of health care providers; legislative proposals for
health care reform; competition; the ability to attract and retain qualified
personnel; the failure to comply with occupational health and safety
regulations; changes in the treatment of interest deductions on certain policy
loans related to corporate-owned life insurance; changes in current trends in
the cost and volume of general and professional liability claims; the ability to
enter into managed care provider arrangements on acceptable terms; and
litigation.
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.
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ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------
The Company's market risks inherent in derivatives and other financial
instruments result primarily from changes in U.S. interest rates. The Company is
not a party to any material derivative financial instruments. The Company's
interest expense is most sensitive to changes in the general level of U.S.
interest rates applicable to its U.S. dollar indebtedness. To mitigate the
impact of fluctuations in variable interest rates, the Company could, at its
option, convert to fixed interest rates by either refinancing variable rate debt
with fixed rate debt or entering into interest rate swaps.
The following table provides information about the Company's significant
interest rate risk at December 31:
2000 1999
---- ----
Fair Fair
Outstanding Value Outstanding Value
----------- ----- ----------- -----
(In thousands)
Variable rate debt:
364 Day Credit Agreement, matures
September 2001 and 2000, interest at a
Eurodollar based rate plus 1.625% and
1.00%, respectively $155,000 $155,000 $179,000 $179,000
Five Year Credit Agreement, matures
September 2003, interest at a
Eurodollar based rate plus .80% and
.50%, respectively 452,000 452,000 476,500 476,500
Fixed rate debt:
Senior Notes, due June 2006,
interest rate at 7.5% 150,000 141,003 150,000 143,020
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
Page
----
Report of Ernst & Young LLP, Independent Auditors 32
Consolidated Balance Sheets 33
Consolidated Statements of Operations 34
Consolidated Statements of Cash Flows 35
Consolidated Statements of Shareholders' Equity 36
Notes to Consolidated Financial Statements 37
Supplementary Data (Unaudited) - Summary of Quarterly Results 57
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Manor Care, Inc.
We have audited the accompanying consolidated balance sheets of Manor Care, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also include the
financial statement schedule listed in the Index at Item 14. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Manor Care, Inc.
and subsidiaries at December 31, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Toledo, Ohio
January 25, 2001
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MANOR CARE, INC.
Consolidated Balance Sheets
December 31, December 31,
2000 1999
---- ----
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 24,943 $ 12,287
Receivables, less allowances for
doubtful accounts of $61,137 and $58,975, respectively 389,943 294,449
Receivable from sale of assets 3,107 44,467
Prepaid expenses and other assets 24,867 28,409
Deferred income taxes 62,019 51,539
---------- ----------
Total current assets 504,879 431,151
Net property and equipment 1,577,378 1,550,507
Intangible assets, net of amortization of $20,921 and $13,513, respectively 102,711 88,286
Investment in Genesis preferred stock 19,000
Other assets 173,500 200,833
---------- ----------
Total assets $2,358,468 $2,289,777
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,390 $ 86,614
Employee compensation and benefits 81,065 52,376
Accrued insurance liabilities 65,165 35,870
Income tax payable 27,274 14,906
Other accrued liabilities 48,172 33,266
Revolving loans 155,000 179,000
Long-term debt due within one year 5,479 6,617
---------- ----------
Total current liabilities 472,545 408,649
Long-term debt 644,054 687,502
Deferred income taxes 108,916 126,754
Other liabilities 120,224 86,835
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 335,609 358,958
Retained earnings 837,123 798,068
---------- ----------
1,173,842 1,158,136
Less treasury stock, at cost (8.4 and 8.7 million shares, respectively) (161,113) (178,099)
---------- ----------
Total shareholders' equity 1,012,729 980,037
---------- ----------
Total liabilities and shareholders' equity $2,358,468 $2,289,777
========== ==========
See accompanying notes.
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MANOR CARE, INC.
Consolidated Statements of Operations
Year Ended December 31
----------------------
2000 1999 1998
---- ---- ----
(In thousands, except per share data)
Revenues $2,380,578 $2,135,345 $2,209,087
Expenses:
Operating 2,016,258 1,697,459 1,715,575
General and administrative 104,027 89,743 96,017
Depreciation and amortization 121,208 114,601 119,223
Provision for restructuring charge, merger expenses,
asset impairment and other related charges 14,787 278,261
---------- ---------- ----------
2,241,493 1,916,590 2,209,076
---------- ---------- ----------
Income from continuing operations before other
income (expenses), income taxes and minority interest 139,085 218,755 11
Other income (expenses):
Interest expense (60,733) (54,082) (46,587)
Impairment of investments (20,000) (274,120)
Equity in earnings of affiliated companies 812 1,729 5,376
Other income 2,505 5,322 16,635
---------- ---------- ----------
Total other expenses, net (77,416) (321,151) (24,576)
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes and minority interest 61,669 (102,396) (24,565)
Income taxes (benefit) 21,489 (47,238) 21,597
Minority interest income 1,125
---------- ---------- ----------
Income (loss) from continuing operations 39,055 (55,158) (46,162)
Discontinued operations:
Income from discontinued pharmacy operations
(net of taxes of $7,256) 8,044
Gain on conversion of Vitalink stock (net of taxes of $39,908) 59,861
---------- ---------- ----------
Income (loss) before extraordinary item and cumulative effect 39,055 (55,158) 21,743
Extraordinary item (net of taxes of $7,508 and $12,690, respectively) 11,500 (19,036)
Cumulative effect of change in accounting principle
(net of taxes of $3,759) (5,640)
---------- ---------- ----------
Net income (loss) $ 39,055 $ (43,658) $ (2,933)
========== ========== ==========
Earnings per share - basic and diluted
Income (loss) from continuing operations $.38 $(.51) $(.42)
Income from discontinued operations (net of taxes) .62
Extraordinary item (net of taxes) .11 (.17)
Cumulative effect (net of taxes) (.05)
---------- ---------- ----------
Net income (loss) $.38 $(.41)* $(.03)*
========== ========== ==========
Weighted-average shares:
Basic 102,203 107,627 108,958
Diluted 103,126 107,627 108,958
*Doesn't add due to rounding
See accompanying notes.
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MANOR CARE, INC.
Consolidated Statements of Cash Flows
Year Ended December 31
----------------------
2000 1999 1998
---- ---- ----
(In thousands)
OPERATING ACTIVITIES
Net income (loss) $ 39,055 $ (43,658) $ (2,933)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Income from discontinued operations (67,905)
Depreciation and amortization 121,208 115,910 119,329
Asset impairment and other non-cash charges 12,240 191,745
Impairment of investments 20,000 274,120
Provision for bad debts 32,911 29,005 39,485
Deferred income taxes (26,518) (112,984) (46,537)
Net gain on sale of assets (506) (18,963) (6,545)
Equity in earnings of affiliated companies (812) (1,729) (5,376)
Minority interest income 1,125
Changes in assets and liabilities, excluding sold facilities
and acquisitions:
Receivables (91,649) (69,974) (83,798)
Prepaid expenses and other assets 10,371 (6,355) 23,956
Liabilities 104,964 (40,502) (26,018)
--------- --------- ---------
Total adjustments 171,094 180,768 138,336
--------- --------- ---------
Net cash provided by operating activities 210,149 137,110 135,403
--------- --------- ---------
INVESTING ACTIVITIES
Investment in property and equipment (116,941) (166,503) (295,578)
Investment in systems development (10,067) (11,122) (22,158)
Acquisitions (22,263) (9,229) (9,841)
Proceeds from sale of assets 8,893 263,941 24,137
Consolidation (deconsolidation) of subsidiary 15,701 (13,948)
Other, net (9,646)
--------- --------- ---------
Net cash provided by (used in) investing activities (124,677) 77,087 (327,034)
--------- --------- ---------
FINANCING ACTIVITIES
Net borrowings (repayments) under bank credit agreements (48,500) (50,500) 191,940
Principal payments of long-term debt (18,630) (6,712) (6,788)
Proceeds from stock options and common stock 474 1,954 3,120
Purchase of common stock for treasury (6,160) (180,370) (4,838)
Dividends paid by Manor Care of America, Inc. (2,805)
--------- --------- ---------
Net cash provided by (used in) financing activities (72,816) (235,628) 180,629
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 12,656 (21,431) (11,002)
Net Manor Care of America, Inc. cash flows for December 1997 (3,213)
Cash and cash equivalents at beginning of period 12,287 33,718 47,933
--------- --------- ---------
Cash and cash equivalents at end of period $ 24,943 $ 12,287 $ 33,718
========= ========= =========
See accompanying notes
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MANOR CARE, INC.
Consolidated Statements of Shareholders' Equity
Capital Total
Common Stock in Excess Treasury Stock Share-
------------ of Par Retained -------------- holders'
Shares Amount Value Earnings Shares Amount Equity
------ ------ ----- -------- ------ ------ ------
(In thousands, except per share data)
Balance at January 1, 1998 115,868 $7,199 $471,930 $850,539 (7,845) $(166,639) $1,163,029
Adjustment to conform Manor
Care of America, Inc.'s fiscal year 9 121 4,627 4,748
Issue and vesting of restricted stock 339 3 13,110 13,113
Purchase of treasury stock (369) (16,056) (16,056)
Exercise of stock options 218 6 2,138 (6,993) 577 10,742 5,893
Tax benefit from restricted stock
and exercise of stock options 34,997 34,997
Net loss (2,933) (2,933)
Manor Care of America, Inc.
cash dividends ($.044 per share) (2,805) (2,805)
Exchange of Manor Care of
America, Inc. common
stock and stock options for the
Company's common stock (5,488) (6,099) (165,854) 7,637 171,953
Other (109) (709) (818)
------- ------ -------- -------- ------- --------- -----------
Balance at December 31, 1998 110,946 1,109 356,333 841,726 1,199,168
Purchase of treasury stock (8,793) (181,268) (181,268)
Exercise of stock options 87 1 (1,165) 125 3,169 2,005
Tax benefit from restricted stock
and exercise of stock options 3,790 3,790
Net loss (43,658) (43,658)
------- ------ -------- -------- ------- --------- -----------
Balance at December 31, 1999 111,033 1,110 358,958 798,068 (8,668) (178,099) 980,037
Issue and vesting of restricted stock (14,451) 550 14,656 205
Purchase of treasury stock (777) (11,409) (11,409)
Exercise of stock options (10,840) 507 13,739 2,899
Tax benefit from restricted stock
and exercise of stock options 1,942 1,942
Net income 39,055 39,055
------- ------ -------- -------- ------- --------- -----------
Balance at December 31, 2000 111,033 $1,110 $335,609 $837,123 (8,388) $(161,113) $1,012,729
======= ====== ======== ======== ======= ========== ==========
See accompanying notes.
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MANOR CARE, INC.
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES
NATURE OF OPERATIONS
Manor Care, Inc. (the Company) is a provider of a range of health care services,
including skilled nursing care, assisted living, subacute medical and
rehabilitation care, rehabilitation therapy, home health care, hospice care, and
management services for subacute care and rehabilitation therapy. The most
significant portion of the Company's business relates to skilled nursing care
and assisted living, operating 354 centers in 32 states with more than 60
percent located in Ohio, Michigan, Illinois, Pennsylvania and Florida. The
Company provides rehabilitation therapy in nursing centers of its own and
others, and in the Company's 87 outpatient therapy clinics serving the
Midwestern and Mid-Atlantic states, Texas and Florida. The home health care
business specializes in all levels of home health, hospice care and
rehabilitation therapy from 78 offices located in 18 states. The Company
operates one hospital in Texas. In addition, the Company owns a majority of a
start-up medical transcription business, which converts medical dictation into
electronically formatted patient records.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. As a result of the merger of Vitalink Pharmacy
Services, Inc. (Vitalink) with and into Genesis Health Ventures, Inc. (Genesis)
in 1998, the accompanying consolidated financial statements reflect the pharmacy
segment as discontinued operations. Significant intercompany accounts and
transactions have been eliminated in consolidation.
On September 24, 1998, the shareholders of Health Care and Retirement
Corporation (HCR) and the shareholders of the former Manor Care, Inc., now known
as Manor Care of America, Inc. (MCA), separately approved the merger of MCA into
a subsidiary of HCR, effective September 25, 1998. In accordance with the merger
agreement, each share of MCA common stock was converted into one share of HCR
common stock for a total of approximately 63.9 million shares, and MCA stock
options outstanding were converted into approximately 2.1 million shares of HCR
common stock. As a result of the transaction, MCA became a wholly owned
subsidiary of HCR and HCR changed its name to HCR Manor Care, Inc and then to
Manor Care, Inc. in 1999. The merger has been accounted for by the
pooling-of-interests method. Accordingly, the accompanying consolidated
financial statements give retroactive effect to the merger and include the
combined operations for all periods presented.
The Company uses the equity method to account for investments in entities in
which it has less than a majority interest but can exercise significant
influence. These investments are classified on the accompanying balance sheets
as other long-term assets. Under the equity method, the investment, originally
recorded at cost, is adjusted to recognize the Company's share of the net
earnings or losses of the affiliate as it occurs. Losses are limited to the
extent of the Company's investments in, advances to and guarantees for the
investee.
The Company has controlling investments in certain entities which are not wholly
owned. Amounts reflected as minority interest represent the minority owners'
share of income in these
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entities. Minority interest liability represents the cumulative minority owners'
share of income in these entities and is classified as other long-term
liabilities.
In June 2000, the Company changed the accounting method for its investment in In
Home Health, Inc. (IHHI) from the equity method to consolidation due to an
increase in ownership from 41 percent to 61 percent. Retroactive to January 1,
2000, the Company began consolidating the results of IHHI and deducting the
minority interest share on an after-tax basis. On December 28, 2000, pursuant to
a merger agreement approved by IHHI stockholders, the Company purchased the
remaining shares of IHHI to increase its ownership to 100 percent. In 1998, the
Company changed the accounting for its investment in IHHI from consolidation to
the equity method, retroactive to January 1, 1998, as a result of modifications
to the preferred stock agreement that changed the Company's voting rights
related to its preferred stock ownership.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH EQUIVALENTS
Investments with a maturity of three months or less when purchased are
considered cash equivalents for purposes of the statements of cash flows.
RECEIVABLES AND REVENUES
Revenues are recognized when the related patient services are provided.
Receivables and revenues are stated at amounts estimated by management to be the
net realizable value. See Note 5 for further discussion.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided by the
straight-line method over the estimated useful lives of the assets, generally
three to 20 years for equipment and furnishings and 10 to 40 years for buildings
and improvements.
Direct incremental costs are capitalized for major development projects and are
amortized over the lives of the related assets. The Company capitalizes interest
on borrowings applicable to facilities in progress.
INTANGIBLE ASSETS
Goodwill and other intangible assets of businesses acquired are amortized by the
straight-line method over periods ranging from five to 15 years for non-compete
agreements, 20 to 40 years for management contracts and 20 to 40 years for
goodwill. Deferred financing costs are amortized to interest expense over the
life of the related borrowings, using the interest method.
INVESTMENT
The Company's investment in Genesis preferred stock is recorded at the lower of
cost or net realizable value. Unrealized losses that are other than temporary
are recognized in net income. See Note 4 for further discussion.
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41
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying value of long-lived and intangible assets is reviewed quarterly to
determine if facts and circumstances suggest that the assets may be impaired or
that the amortization period may need to be changed. The Company considers
external factors relating to each asset, including contract changes, local
market developments, national health care trends and other publicly available
information. If these external factors and the projected undiscounted cash flows
of the company over the remaining amortization period indicate that the asset
will not be recoverable, the carrying value will be adjusted to the estimated
fair value. See Note 2 for further discussion of impairment charges in 1998.
SYSTEMS DEVELOPMENT COSTS
Costs incurred for systems development include direct payroll and consulting
costs. These costs are capitalized and are amortized over the estimated useful
lives of the related systems.
START-UP COSTS
Prior to 1998, the Company capitalized start-up costs and amortized the costs
over two years. In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" (SOP 98-5), which requires start-up costs to be expensed as
incurred. In the fourth quarter of 1998, the Company elected to adopt SOP 98-5
as of January 1, 1998. The cumulative effect of expensing all capitalized
start-up costs as of January 1 was $9.4 million, or $5.6 million after tax.
INVESTMENT IN LIFE INSURANCE
Investment in corporate-owned life insurance policies is recorded net of policy
loans in other assets. The net life insurance expense, which includes premiums
and interest on cash surrender borrowings, net of all increases in cash
surrender values, is included in operating expenses.
INTEREST RATE SWAPS
Gains and losses on terminations of interest rate swap agreements are deferred
as an adjustment to the carrying amount of the outstanding debt and amortized as
an adjustment to interest expense related to the debt over the remaining term of
the original contract life of the terminated swap agreement. In the event of the
early extinguishment of a designated debt obligation and its associated interest
rate swap, any realized or unrealized gain or loss from the swap is recognized
in income coincident with the extinguishment gain or loss.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred $9.9
million, $9.5 million and $20.3 million in advertising costs for the years ended
December 31, 2000, 1999 and 1998, respectively.
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TREASURY STOCK
The Company records the purchase of its common stock for treasury at cost. The
treasury stock is reissued on a first-in, first-out method. If the proceeds from
reissuance of treasury stock exceed the cost of the treasury stock, the excess
is recorded in capital in excess of par value. If the cost of the treasury stock
exceeds the proceeds from reissuance of the treasury stock, the difference is
first charged against any excess previously recorded in capital in excess of par
value and any remainder is charged to retained earnings.
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 APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, the Company recognizes no compensation expense for
the stock options.
EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income (income
available to common shareholders) by the weighted-average number of common
shares outstanding during the period. The computation of diluted EPS is similar
to basic EPS except that the number of shares is increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. Dilutive potential common shares for
the Company include shares issuable upon exercise of the Company's non-qualified
stock options and restricted stock that has not vested.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board 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 requires the Company to recognize all derivatives on the balance sheet
at fair value. Because the Company currently does not use derivatives,
management believes that the adoption of this statement will have no effect on
earnings or the financial position of the Company.
RECLASSIFICATIONS
Certain reclassifications affecting other assets, other liabilities and
operating expenses have been made in the 1999 financial statements to conform
with the 2000 presentation.
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2. RESTRUCTURING CHARGE, MERGER EXPENSES, ASSET IMPAIRMENT AND OTHER CHARGES
The components of the restructuring charge, merger expenses, asset impairment
and other charges in 1998 of $278.3 million and in 1999 of $14.8 million are
disclosed in the table below. The liability outstanding at December 31, 1999
related to these charges was included in other accrued liabilities and paid in
2000.
Cash 1998 1998 Liability 1999 1999 Liability
Non-cash Charge Activity at 12/31/98 Charge Activity at 12/31/99
-------- ------ -------- ----------- ------ -------- -----------
(In thousands)
MCA planned spin-off:
Employee benefits cash $5,917 $(5,300) $617 $219 $(836)
Transaction costs cash 6,805 (6,805)
Write-down of assets non-cash 778 (778)
-------- --------- ------- ------- -------- ------
13,500 (12,883) 617 219 (836)
-------- --------- ------- ------- -------- ------
HCR and MCA transaction:
Employee benefits cash 41,028 (12,734) 28,294 (27,184) $1,110
Deferred compensation non-cash 11,867 (11,867)
Other exit costs cash 4,234 4,234 (3,314) 920
Merger transaction costs cash 21,122 (21,122)
Write-down of assets non-cash 56,468 (56,468)
-------- --------- ------- ------- -------- ------
134,719 (102,191) 32,528 (30,498) 2,030
-------- --------- ------- ------- -------- ------
Other costs:
Amortization non-cash 7,863 (7,863) 10,554 (10,554)
Duplicate costs cash 5,725 (5,725) 2,328 (2,328)
Other cash 1,685 (685) 1,000 (1,000)
Asset impairment unrelated to merger non-cash 114,769 (114,769) 1,686 (1,686)
-------- --------- ------- ------- -------- ------
130,042 (129,042) 1,000 14,568 (15,568)
-------- --------- ------- ------- -------- ------
Total $278,261 $(244,116) $34,145 $14,787 $(46,902) $2,030
======== ========= ======= ======= ======== ======
One component of the 1998 charge pertains to MCA's $13.5 million charge in
connection with its plan to separate its skilled nursing facility management,
assisted living and home health businesses from its skilled nursing facility
ownership, real estate and health care facility development business. As a
result of the transaction with HCR, the separation of MCA's businesses did not
occur. Under the planned spin-off, 208 employees were terminated and received
their severance as biweekly payments.
Charges related to the HCR-MCA transaction totaled $134.7 million in 1998. In
connection with the merger, the Company developed a plan to integrate the
businesses of both companies that included closing MCA's corporate office in
Gaithersburg, Maryland and realigning the operating divisions from eight to six.
The employee benefit costs related to severance payments and retention bonuses
for 505 corporate employees and 26 field employees of MCA who received
termination notices. The terminated employees received their severance as
biweekly payments. The deferred compensation expense of $11.9 million was
attributable to the lapsing of restrictions on HCR's restricted stock due to the
merger. The other exit costs pertained to various lease agreements and hardware
and software contracts that have been terminated. The merger transaction costs
primarily included financial advisory, legal, and accounting fees and expenses,
and printing and mailing costs. The write-down of assets as a result of the
merger included MCA's computer hardware and software that was no longer being
utilized by the Company and certain abandoned construction development projects.
Of the charges, $130.0 million in 1998 and $14.6 million in 1999 related to
other unusual costs as a
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result of the merger and asset impairment unrelated to the restructuring. The
non-cash charge primarily related to the amortization of certain MCA software
applications until the transition to HCR's applications. Certain general and
administrative costs represented salaries and benefits for employees performing
duplicate services in Toledo or Gaithersburg.
In 1998, the Company also recorded a charge for impairment of certain assets
based on its quarterly review of long-lived and intangible assets. The charge of
$114.8 million consisted of a majority of the goodwill related to the Company's
program management service business, all of the goodwill related to the
Company's home health businesses, the intangible assets related to six of the
Company's rehabilitation businesses, a majority of the fixed assets related to
seven facilities and certain assets relating to the Company's vision management
businesses. A significant feature of the Company's evaluation was the evolving
impact of the Balanced Budget Act of 1997 (Budget Act) under which a new
Medicare prospective payment system (PPS) commenced on July 1, 1998 and an
interim payment system (IPS) for home health businesses that commenced on
October 1, 1997 for the Company. These new reimbursement systems had an
unfavorable impact on the program management service, home health and vision
management businesses, resulting in an impairment loss. The write-off of the
facility fixed assets and the rehabilitation company intangible assets resulted
from specific entities, which were not generating cash flow despite efforts by
the Company to return the operations to a level of profitability. The estimated
fair value of the impaired assets was based on a multiple of projected annual
earnings.
3. ACQUISITIONS/DIVESTITURES
The Company owned 41 percent of In Home Health, Inc (IHHI) at December 31, 1999
and acquired the remaining interest in 2000 for $14.0 million. The acquisition
was recorded under the purchase method of accounting, and the Company recorded
$13.0 million of goodwill which will be amortized over 20 years. The pro forma
unaudited results of operations for the years ended December 31, 2000 and 1999,
assuming the purchase of IHHI had been consummated as of January 1, 1999,
follows:
2000 1999
---- ----
(In thousands, except per share data)
Revenues $2,380,578 $2,219,651
Operating expenses 2,016,258 1,769,706
Income (loss) before extraordinary
item and cumulative effect 39,305 (53,332)
Net income (loss) 39,305 (41,832)
Net income (loss) per share -
basic and diluted $.38 $(.39)
The Company also paid $8.3 million, $9.2 million and $9.8 million in 2000, 1999
and 1998, respectively, for the acquisition of rehabilitation therapy
businesses, home health businesses and additional consideration for prior
acquisitions. The acquisitions were accounted for under the purchase method of
accounting. Certain acquisition agreements contain a provision for additional
consideration contingent upon the future financial results of the businesses.
The maximum contingent consideration aggregates $14.9 million and will, if
earned, be paid over the next five years and treated as additions to the
purchase price of the businesses. The results
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45
of operations of the acquired businesses are included in the consolidated
statements of income from the date of acquisition. The pro forma consolidated
results of operations would not be materially different from the amounts
reported in prior years.
The Company formed a strategic alliance with Alterra Healthcare Corporation
(Alterra) in 1998. Two of the key provisions of the alliance included the sale
of 26 centers and the lease of two centers to Alterra in 1999 and the creation
of a joint venture in 1999 to develop and construct specialized assisted living
residences in the Company's core markets. In 1999, the Company completed the
sale of 26 facilities for $154.5 million, realizing a gain of $6.1 million ($3.7
million after tax). As part of the development joint venture, the Company
contributed 20 facilities to various project companies or partnerships of which
the joint venture has a 10 percent equity interest. The facilities had a net
book value of $77.8 million, and the Company recognized no gain or loss on the
sale. Due to a change in development intentions of the partners, the Company
purchased seven facilities in 2000 that were originally contributed by the
Company in 1999. The Company reclassified its receivable of $26.4 million
related to developing these assets to property and equipment. Of this amount,
$19.2 was a receivable at December 31, 1999.
During 1999, the Company exercised a purchase option on MCA's corporate
headquarters in Gaithersburg, Maryland and sold the property, realizing net
proceeds of $24.5 million and a $10.1 million gain ($6.1 million after tax). The
gains on asset sales in 1999 have all been recorded as extraordinary items as
required after a business combination accounted for as a pooling of interests.
4. DISCONTINUED PHARMACY OPERATIONS
MCA and one of its subsidiaries owned approximately 50 percent of Vitalink
Pharmacy Services, Inc. (Vitalink) common stock. On April 26, 1998, Vitalink
entered into an Agreement and Plan of Merger (Vitalink Merger Agreement) with
Genesis Health Ventures, Inc. (Genesis). Pursuant to the Vitalink Merger
Agreement, on August 28, 1998, MCA received .045 shares of Series G Cumulative
Convertible Preferred Stock of Genesis (Series G Preferred Stock) for each share
of Vitalink common stock. MCA received 586,240 preferred shares valued at $293.1
million as consideration for all of its common stock of Vitalink. As a result of
the conversion of stock, MCA recorded a gain of $99.8 million ($59.9 million
after tax). Accordingly, the Vitalink results are reported as discontinued
operations for all periods presented.
The Series G Preferred Stock bears cash dividends at an initial annual rate of
5.9375 percent. The Company accrued $5.8 million of dividend income in 1998
which was paid in 1999. The Company continued to accrue dividend income of $4.4
million each quarter in 1999. At December 31, 1999, Genesis had failed to pay
dividends on the Series G Preferred Stock for four consecutive quarters. Based
on Genesis' inability to pay dividends and its operating performance in 1999,
the Company recorded a reserve of $17.4 million for accrued 1999 dividends and
reduced the basis of its $293.1 million investment by $274.1 million.
As a result of the non-payment of the cumulative dividends for four consecutive
quarters, all future dividends are payable in additional shares of Series G
Preferred Stock valued at $500 per share, and the holders of Series G Preferred
Stock elected two additional directors to the
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46
Genesis board until such time as all accrued and unpaid dividends are paid in
full in cash. Subsequent to their election, the additional directors resigned
and replacement directors have not been named as of December 31, 2000. In 2000,
the Company recorded a reserve of $17.4 million for the dividends paid in
additional shares of Series G Preferred Stock and due to Genesis' bankruptcy
filing on June 22, 2000, reduced the basis of its investment by $19.0 million to
zero.
Series G Preferred Stock holders are initially entitled to 13.441 votes per
share of Series G Preferred Stock, and will vote together with the holders of
Genesis common stock and as a separate class on matters as to which the
Pennsylvania Business Corporation Law requires a separate class vote.
At the option of MCA, each share of Series G Preferred Stock is convertible at
any time into Genesis common stock at a conversion price of $37.20 per share,
subject to adjustment under certain circumstances. Beginning April 26, 2001,
Genesis may, under certain circumstances, force conversion of the Series G
Preferred Stock, at conversion prices ranging from $37.20 to $38.87 per share of
Genesis common stock. Dividends will cease to accrue in respect to the Series G
Preferred Stock as of the date of the conversion.
The financial results for the discontinued pharmacy operations for the year
ended December 31, 1998 are as follows: revenues of $381.1 million that includes
sales to MCA's skilled nursing and assisted living facilities of $31.8 million,
income before income taxes of $15.3 million and net income of $8.0 million.
5. REVENUES
The Company receives reimbursement under the federal Medicare program and
various state Medicaid programs. Revenues under these programs totaled $1.4
billion, $1.1 billion and $1.1 billion for the years ended December 31, 2000,
1999 and 1998, respectively. Medicare and certain Medicaid program revenues are
subject to audit and retroactive adjustment by government representatives. In
the opinion of management, any differences between the net revenue recorded and
final determination will not materially affect the consolidated financial
statements. Net third-party settlements amounted to a $4.2 million receivable
and $9.6 million payable at December 31, 2000 and 1999, respectively. There were
no non-governmental receivables which represented amounts in excess of 10
percent of total receivables at December 31, 2000 and 1999.
Revenues for certain health care services are as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Skilled nursing and assisted living services $2,037,959 $1,911,720 $1,987,815
Rehabilitation services 71,111 63,767 70,522
Home health services 186,475 61,062 48,416
Other services 85,033 98,796 102,334
---------- ---------- ----------
$2,380,578 $2,135,345 $2,209,087
========== ========== ==========
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6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2000 1999
---- ----
(In thousands)
Land and improvements $ 234,719 $ 217,457
Buildings and improvements 1,579,336 1,473,425
Equipment and furnishings 341,412 347,455
Capitalized leases 29,974 31,329
Construction in progress 38,415 77,232
----------- -----------
2,223,856 2,146,898
Less accumulated depreciation 646,478 596,391
----------- -----------
Net property and equipment $ 1,577,378 $ 1,550,507
=========== ===========
Depreciation expense, including amortization of capitalized leases, amounted to
$111.2 million, $108.5 million and $110.8 million for the years ended December
31, 2000, 1999 and 1998, respectively. Accumulated depreciation includes $11.9
million and $10.8 million at December 31, 2000 and 1999, respectively, relating
to capitalized leases.
7. DEBT
Debt consists of the following at December 31:
2000 1999
---- ----
(In thousands)
Five Year Agreement $452,000 $476,500
364 Day Agreement (revolving loans) 155,000 179,000
Senior Notes, net of discount 149,675 149,615
Mortgages and other notes 42,456 61,135
Capital lease obligations (see Note 8) 5,402 6,869
-------- --------
804,533 873,119
Less:
364 Day Agreement 155,000 179,000
Amounts due within one year 5,479 6,617
-------- ---------
Long-term debt $644,054 $687,502
======== ========
Concurrent with the merger, a five-year, $500 million credit agreement (Five
Year Agreement) and a 364-day, $300 million credit agreement (364 Day Agreement)
were established with a group of banks, under which both the Company and MCA are
borrowers. The credit agreements were established to repay borrowings of HCR and
MCA under prior credit arrangements, as discussed below, to provide additional
credit capacity for future developments and to provide credit back-up for the
issuance of commercial paper. The credit agreements contain various covenants,
restrictions and events of default. Among other things, these provisions require
the Company to maintain certain financial ratios and impose certain limits on
its ability to incur indebtedness, create liens, pay dividends, repurchase
stock, dispose of assets and make acquisitions.
45
48
The Company's $300 million credit agreement was amended in 1999 and now provides
for a $200 million credit agreement (364 Day Agreement). Loans under the amended
364 Day Agreement, which mature September 21, 2001, 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 percent to 1.275
percent, 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 percent to .225 percent, depending on the performance of the
same ratio.
Loans under the Five Year Agreement, which mature September 24, 2003, bear
interest at variable rates that reflect, at the election of the Company, the
agent bank's base lending rate, rates offered by any of the participating banks
under bid procedures or an increment over Eurodollar indices of .15 percent to
.50 percent, depending on the quarterly performance of a key ratio. In addition
to direct borrowings, the Five Year Agreement may be used to support the
issuance of up to $100 million of letters of credit. The Five Year Agreement
also provides for a fee on the total amount of the facility, ranging from .125
percent to .25 percent, depending on the performance of the same key ratio.
Whenever the aggregate utilization of both credit facilities exceeds $350
million, an additional fee of .05 percent is charged on loans due under the Five
Year Agreement and an additional fee ranging from .10 percent to .125 percent is
charged on loans under the 364 Day Agreement, based on the performance of a key
ratio. The average interest rate on loans under the Five Year and 364 Day Credit
Agreements was 7.48 percent at December 31, 2000, excluding the fee on the total
facility. After consideration of usage for letters of credit, the remaining
credit availability under the combined agreements totaled $66.7 million.
In 1999, the Company, Alterra and the development joint venture jointly and
severally guaranteed a $200 million revolving credit agreement, which was to
mature September 30, 2002. The line of credit was reduced to $60 million in
March 2000. In January 2001, the line of credit was further reduced to $57
million and the maturity date was adjusted to June 29, 2001. The Company and
Alterra each have a 50 percent interest in the development joint venture which
is the 10 percent owner and managing owner or partner in the various project
companies and partnerships which are entitled to borrow under the credit
agreement. There was $57 million and $48 million of guaranteed debt outstanding
under the revolving credit agreement at December 31, 2000 and 1999,
respectively. Funds were used to construct and support start-up working capital
for assisted living residences. The Company and Alterra are undertaking efforts
to sell the facilities. The debt will be repaid upon the sale of each facility.
On September 25, 1998, the Company repaid $264 million outstanding under HCR's
prior credit agreement and $325 million on MCA's prior credit arrangements. The
repayment of the prior credit facilities was accounted for as an early
extinguishment of debt. 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 MCA's debt. The loss on
terminating the swaps of $31.3 million along with the unamortized debt issue
costs was recorded as an extraordinary item that totaled $31.7 million ($19.0
million after tax).
In June 1996, MCA issued $150 million of 7.5% Senior Notes due 2006. These notes
are redeemable at the option of MCA at any time at a price equal to the greater
of (a) the principal
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49
amount or (b) the sum of the present values of the remaining scheduled payments
of principal and interest, discounted with an applicable treasury rate plus 15
basis points, plus accrued interest to the date of the redemption. The proceeds
of the offering were used to repay borrowings under MCA's prior credit facility.
Interest rates on mortgages and other long-term debt ranged from 5.40 percent to
10.75 percent. Maturities ranged from 2001 to 2018. Owned property with a net
book value of $93.0 million was pledged or mortgaged. Interest paid on all debt
amounted to $63.7 million, $56.4 million and $47.1 million for the years ended
December 31, 2000, 1999 and 1998, respectively. Capitalized interest costs
amounted to $4.5 million, $3.2 million and $8.6 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
Debt maturities for the five years subsequent to December 31, 2000 are as
follows: 2001 - $160.5 million; 2002 - $5.6 million; 2003 - $460.7 million; 2004
- $3.5 million; and 2005 - $3.7 million.
8. LEASES
The Company leases certain property and equipment under both operating and
capital leases, which expire at various dates to 2036. Certain of the facility
leases contain purchase options, and the Company's headquarters lease includes a
residual guarantee of $22.8 million. Payments under non-cancelable operating
leases, minimum lease payments and the present value of net minimum lease
payments under capital leases as of December 31, 2000 are as follows:
Operating Capital
Leases Leases
--------- ------
(In thousands)
2001 $ 15,610 $ 645
2002 12,962 659
2003 10,810 654
2004 4,268 615
2005 2,416 620
Later years 34,301 11,716
-------- -------
Total minimum lease payments $ 80,367 14,909
========
Less amount representing interest 9,507
-------
Present value of net minimum
lease payments (included in
long-term debt - see Note 7) $ 5,402
=======
Rental expense was $22.4 million, $17.8 million and $18.0 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
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9. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
2000 1999 1998
---- ---- ----
(In thousands)
Current:
Federal $ 41,353 $ 51,865 $ 58,885
State and local 8,453 15,641 9,249
--------- --------- ---------
49,806 67,506 68,134
Deferred:
Federal (22,947) (93,983) (39,782)
State and local (5,370) (20,761) (6,755)
--------- --------- ---------
(28,317) (114,744) (46,537)
--------- --------- ---------
Provision (benefit) for income taxes from
continuing operations 21,489 (47,238) 21,597
Provision for income taxes from
discontinued operations 47,164
Provision (benefit) for income taxes from
extraordinary items 7,508 (12,690)
Benefit for income taxes from cumulative
effect of change in accounting principle (3,759)
--------- --------- ---------
Total provision (benefit) for income taxes $ 21,489 $ (39,730) $ 52,312
========= ========= =========
The reconciliation of the amount computed by applying the statutory federal
income tax rate to income (loss) from continuing operations before income taxes
to the provision (benefit) for income taxes from continuing operations is as
follows:
2000 1999 1998
---- ---- ----
(In thousands)
Income taxes (benefit) computed at statutory rate $21,584 $(35,839) $(8,598)
Differences resulting from:
Write-off of non-deductible goodwill 22,028
Non-deductible transaction costs 7,217
State and local income taxes 2,004 (3,328) 1,621
Non-deductible compensation 911 1,870 2,028
Exclusion of dividends received (588) (2,093)
Jobs tax credits (1,770) (1,520) (1,484)
Corporate-owned life
insurance (163) (1,079)
Unrealized losses of subsidiary 4,340
Reversal of valuation allowance (3,931)
Adjustment to prior years' estimated tax liabilities (11,653)
Other 2,691 (357) 1,957
--------- --------- ---------
Provision (benefit) for income taxes from
continuing operations $21,489 $(47,238) $21,597
======= ======== =======
The Internal Revenue Service has examined the Company's federal income tax
returns for all years through May 31, 1995 for MCA and through December 31, 1996
for HCR. The years have been closed through May 31, 1995 for MCA and through
December 31, 1992 for HCR. The Company believes that it has made adequate
provision for income taxes that may become payable with respect to open tax
years.
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51
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
the Company's federal and state deferred tax assets and liabilities are as
follows:
2000 1999
---- ----
(In thousands)
Deferred tax assets:
Accrued insurance reserves $ 44,305 $ 16,890
Net loss on Genesis investment 43,526 35,499
Allowances for receivables and settlements 33,433 31,565
Employee compensation and benefits 27,610 27,998
Net operating loss carryover 11,622 11,553
Other 3,932 4,471
--------- ---------
$164,428 $127,976
========= =========
Deferred tax liabilities:
Fixed asset and intangible asset
bases differences $155,784 $150,588
Leveraged leases 35,978 36,646
Pension receivable 8,984 7,832
Other 10,579 8,125
--------- ---------
$211,325 $203,191
========= =========
Net deferred tax liabilities $(46,897) $ (75,215)
========= =========
At December 31, 2000, the Company had approximately $45.4 million of net
operating loss carryforwards for tax purposes which expire in 2017-2019, and the
maximum amount to be used in any year is $6.8 million. Net income taxes paid
amounted to $33.7 million, $50.0 million and $9.0 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
10. COMMITMENTS/CONTINGENCIES
One or more subsidiaries or affiliates of 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
49
52
actions for some of the waste disposal sites where MCA is alleged to be a
potentially responsible party has not yet been quantified. Based upon its
current assessment of the likely outcome of the Actions, the Company believes
that its future environmental liabilities will be approximately $22.5 to $28
million. The Company has received or expects to receive between $18.0 million
and $23.5 million of insurance proceeds, depending upon the ultimate
liabilities, which will offset amounts due as a result of these exposures.
Legislation phased out interest deductions on certain policy loans related to
corporate-owned life insurance (COLI) as of January 1, 1999. The Company has
recorded a cumulative reduction to income tax expense of approximately $34
million resulting from interest deductions for tax periods prior to 1999. While
the Internal Revenue Service (IRS) has not asserted any claim challenging the
Company's COLI interest expense deductions, the IRS has challenged other
taxpayers' COLI interest deductions and has prevailed in certain lower court
decisions. Management understands that these decisions and the IRS's position
are being subjected to extensive challenges in court. The Company intends to
defend vigorously its right to deduct the entire amount of such interest
payments, were the IRS to challenge these deductions.
The Company is party to various other legal matters arising in the ordinary
course of business including patient care-related claims and litigation. The
Company believes that the resolution of such matters will not result in
liability materially in excess of accounting accruals established with respect
to such matters.
As of December 31, 2000, the Company had contractual commitments of $8.4 million
relating to its internal construction program. As of December 31, 2000, the
Company has total letters of credit of $32.9 million that benefit certain
third-party insurers and bondholders of certain industrial revenue bonds, and 89
percent of such letters of credit relate to recorded liabilities.
11. EARNINGS PER SHARE
The calculation of earnings per share (EPS) is as follows:
2000 1999 1998
---- ---- ----
(In thousands, except EPS)
Numerator:
Income (loss) from continuing operations
(income available to common shareholders) $ 39,055 $(55,158) $(46,162)
Denominator:
Denominator for basic EPS - weighted-
average shares 102,203 107,627 108,958
Effect of dilutive securities:
Stock options 839
Non-vested restricted stock 84
-------- -------- --------
Denominator for diluted EPS -
adjusted for weighted-average
shares and assumed conversions 103,126 107,627 108,958
======== ======== ========
EPS- income (loss) from continuing operations
Basic and diluted $.38 $(.51) $(.42)
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53
Options to purchase 2,950,000 shares of the Company's common stock at an average
price of $30.47 were not included in the computation of diluted EPS for 2000
because the options' exercise prices were greater than the average market price
of the common shares. In 1999 and 1998, the dilutive effect of stock options
would have been 1,121,000 and 2,349,000 shares, respectively. These shares were
not included in the calculation because the effect would be anti-dilutive with a
loss from continuing operations.
12. STOCK PLANS
The Company has stock option plans for key employees and for outside directors
which authorize the grant of options for up to 11,199,000 and 800,000 shares,
respectively. There were 2,486,684 and 3,962,016 shares available for future
grant at December 31, 2000 and 1999, respectively. Generally, the exercise price
of each option equals the market price of the Company's stock on the date of
grant, and an option's maximum term is 10 years. The options for key employees
vest between three and five years, and the options for outside directors vest
immediately.
The Company has elected to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans, and, accordingly, did not recognize compensation
expense for options granted in 1995 through 2000. If the Company had accounted
for its 1995 through 2000 options under the fair value method, net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
2000 1999 1998
---- ---- ----
(In thousands, except earnings per share)
Net income (loss) - as reported $39,055 $(43,658) $(2,933)
Net income (loss) - pro forma $36,039 $(46,346) $(17,581)
Earnings per share - as reported:
Basic and diluted $.38 $(.41) $(.03)
Earnings per share - pro forma:
Basic and diluted $.35 $(.43) $(.16)
The pro forma effect on net income for 2000, 1999 and 1998 is not representative
of the pro forma effect on net income in future years because a limited number
of options were granted in 1999 and the vesting of options were accelerated in
1998. In 1998, all outstanding MCA options were converted, under their original
terms, into the right to receive shares of the Company's common stock.
Therefore, the remaining fair value of 1995 through 1998 grants was expensed in
1998 on a pro forma basis. Also, the vesting was accelerated for stock options
granted in 1996 and 1997 for certain HCR executive officers, which required the
remaining fair value to be expensed in 1998 on a pro forma basis.
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998, respectively: dividend yield
of 0 percent for the Company in 2000 and 1999 and HCR in 1998; dividend yield
based on historical dividends of $.088 per share annually for MCA in 1998;
expected volatility of 46 percent, 35 percent and 28 percent; risk-
51
54
free interest rates of 6.18 percent, 5.35 percent and 4.72 percent; and expected
lives of 4.2, 4.8 and 4.5 years. The weighted-average fair value of options
granted is $3.36, $10.25 and $10.53 per share in 2000, 1999 and 1998,
respectively. The option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Since the
Company's stock options have characteristics significantly different from those
of traded options, and since variations in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
Information regarding these option plans for 1998, 1999 and 2000 is as follows:
Weighted-
Average
Exercise
Shares Price
------ ---------
Options outstanding at
January 1, 1998 8,373,945 $15.53
Options granted 1,808,370 $34.22
Options forfeited (256,838) $29.01
Options exercised (804,489) $7.47
Converted to stock (see Note 1) (3,313,467)
----------
Options outstanding at
December 31, 1998 5,807,521 $20.04
Options granted 38,001 $26.31
Options forfeited (227,226) $31.59
Options exercised (211,679) $9.33
----------
Options outstanding at
December 31, 1999 5,406,617 $20.02
Options granted 1,635,444 $9.11
Options forfeited (160,112) $30.76
Options exercised (506,800) $5.41
----------
Options outstanding at
December 31, 2000 6,375,149 $18.11
==========
Options exercisable at
December 31, 1998 3,984,996 $14.24
December 31, 1999 3,952,392 $15.14
December 31, 2000 3,936,324 $17.56
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The following tables summarize information about options outstanding and options
exercisable at December 31, 2000:
Options Outstanding
-------------------
Weighted-
Weighted- Average
Range of Average Remaining
Exercise Number Exercise Contractual
Prices Outstanding Price Life
------ ----------- --------- -----------
$ 5 - $10 2,899,334 $ 6.46 4.8
$10 - $20 967,185 $15.78 3.1
$20 - $30 673,498 $24.67 5.5
$30 - $45 1,835,132 $35.34 6.6
---------
6,375,149 $18.11 5.1
=========
Options Exercisable
-------------------
Weighted-
Range of Average
Exercise Number Exercise
Prices Exercisable Price
------ ----------- -----
$ 5 - $10 1,619,334 $ 6.04
$10 - $20 967,185 $15.78
$20 - $30 673,498 $24.67
$30 - $45 676,307 $40.64
---------
3,936,324 $17.56
=========
The Company has a restricted stock plan for corporate officers and certain key
senior management employees which authorizes up to 1,892,866 restricted shares
to be issued. There were 112,250 restricted shares available for future grant at
December 31, 2000. During 2000, certain executive officers were issued 550,000
restricted shares with a fair value of $7.00 that vest at retirement. During
1998, certain executive officers and key senior management employees were issued
339,500 restricted shares with a fair value of $38.63. The restrictions
associated with the 1998 restricted stock lapsed as a result of the merger, and
the total deferred compensation expense of $11.9 million was recorded in the
provision for restructuring charge. Compensation expense related to restricted
stock was $0.2 million and $12.7 million for the years ended December 31, 2000
and 1998, respectively.
13. EMPLOYEE BENEFIT PLANS
The Company has two qualified defined benefit pension plans which were amended
in 1994 and 1996 to freeze all future benefits.
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The funded status of these plans is as follows:
2000 1999
---- ----
(In thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $35,512 $39,298
Interest cost 2,341 2,575
Actuarial gains (2,486) (1,957)
Benefits paid (4,058) (4,404)
------- ------
Benefit obligation at end of year 31,309 35,512
------- ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 65,132 61,965
Actual return on plan assets 1,228 7,571
Benefits paid (4,058) (4,404)
------- ------
Fair value of plan assets at end of year 62,302 65,132
------- ------
Excess funded status of the plans 30,993 29,620
Unrecognized net actuarial gains (8,410) (10,103)
------- -------
Prepaid benefit cost $22,583 $19,517
======= =======
Both plans have prepaid benefit costs at December 31, 2000. The prepaid benefit
under one plan was $19.7 million at December 31, 1999. The accrued pension cost
under the other plan was $0.2 million at December 31, 1999. At December 31, 2000
and 1999, the fair value of one plan's assets was $15.0 million and $16.4
million, respectively, with an associated accumulated benefit obligation of
$15.5 million and $17.7 million, respectively.
The components of the net pension income for these plans are as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Interest cost $ 2,341 $ 2,575 $ 2,528
Expected return on plan assets (5,408) (5,395) (4,691)
------- ------- -------
Net pension income $(3,067) $(2,820) $(2,163)
======= ======= =======
The actuarial present value of benefit obligations is based on an average
discount rate of 7.75 percent at December 31, 2000 and 1999. The freezing of
future pension benefits eliminated any future salary increases from the
computation. The average expected long-term rate of return on assets is 10
percent for 2000 and 1999.
The Company has two senior executive retirement plans which are non-qualified
plans designed to provide pension benefits and life insurance for certain
officers. Pension benefits are based on compensation and length of service. The
benefits under one of the plans are provided from a combination of the benefits
to which the corporate officers are entitled under a defined benefit pension
plan and from life insurance policies that are owned by certain officers who
have assigned the corporate interest (the Company's share of premiums paid) in
the policies to the Company. The Company's share of the cash surrender value of
the policies was $36.2 million and $30.1 million at December 31, 2000 and 1999,
respectively, and was included in other assets. The other plan is unfunded.
During 2000, the unfunded plan
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57
recognized a curtailment gain of $1.8 million due to the resignation of
employees which reduced accrued benefits. The accrued liability for both plans
was $8.1 million and $9.4 million at December 31, 2000 and 1999, respectively,
and was included in other long-term liabilities.
The Company maintains three savings programs qualified under Section 401(k) of
the Internal Revenue Code (401(k)) and two non-qualified, deferred compensation
programs. The Company contributes up to a maximum matching contribution ranging
from 2 percent to 6 percent of the participant's compensation, as defined in
each plan. The Company's expense for these plans amounted to $6.5 million, $11.1
million and $8.8 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The decrease in expense for 2000 and 1998 was primarily due to a
decline in earnings on the non-qualified, deferred compensation programs.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and fair value of the financial instruments are as follows:
2000 1999
----------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(In thousands)
Cash and cash equivalents $ 24,943 $ 24,943 $ 12,287 $ 12,287
Debt, excluding capitalized leases 799,131 790,086 866,250 861,255
The carrying amount of cash and cash equivalents is equal to its fair value due
to the short maturity of the investments.
The carrying amount of debt, excluding capitalized lease obligations,
approximates its fair value due to the significant amount of variable rate debt.
The fair value is estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates.
15. SHAREHOLDER RIGHTS PLAN
Each outstanding share of the Company's common stock includes an exercisable
Right which, under certain circumstances, will entitle the holder to purchase
from the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock for an exercise price of $150, subject to adjustment. The Rights
expire on May 2, 2005. Such rights will not be exercisable nor transferable
apart from the common stock until 10 days after a person or group acquires 15
percent, except as noted below, of the Company's common stock or initiates a
tender offer or exchange offer that would result in ownership of 15 percent of
the Company's common stock. In the event that the Company is merged, and its
common stock is exchanged or converted, the Rights will entitle the holders to
buy shares of the acquirer's common stock at a 50 percent discount. Under
certain other circumstances, the Rights can become rights to purchase the
Company's common stock at a 50 percent discount. The Rights may be redeemed by
the Company for one cent per Right at any time prior to the first date that a
55
58
person or group acquires a beneficial ownership of 15 percent of the Company's
common stock.
The description and terms of the Rights are set forth in a Rights Agreement,
dated as of May 2, 1995, and amended on June 10, 1998 (Rights Agreement),
between the Company and Harris Trust and Savings Bank, as Rights Agent. Pursuant
to the Rights Agreement, the trigger percentage is raised to 20 percent in the
case of a Bainum Family Member or Bainum Family Entity, as defined in the Rights
Agreement.
16. SEGMENT INFORMATION
The Company provides a range of health care services. The Company has one
reportable operating segment, long-term care, which includes the operation of
skilled nursing and assisted living facilities. The "Other" category includes
the non-reportable segments and corporate items not considered to be an
operating segment. The revenues in the "Other" category include services for
rehabilitation, home health and hospital care. Asset information by segment,
including capital expenditures, is not provided to the Company's chief operating
decision maker.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (see Note 1). The
Company evaluates performance and allocates resources based on operating margin
which represents revenues less operating expenses. The operating margin does not
include general and administrative expense, depreciation and amortization, the
provision for restructuring and other charges, other income and expense items,
and income taxes. The "Other" category is not comparative as IHHI is included on
a consolidated basis in 2000 and on the equity method in 1999 and 1998. The
Company recorded an additional $57 million of general and professional liability
expense in 2000 in comparison to 1999. The change in estimate incorporates
industry experience and relates to the long-term care segment.
Long-term Care Other Total
-------------- ----- -----
(In thousands)
Year ended December 31, 2000
Revenues from external customers $2,037,959 $342,619 $2,380,578
Intercompany revenues 27,825 27,825
Depreciation and amortization 109,213 11,995 121,208
Operating margin 335,291 29,029 364,320
Year ended December 31, 1999
Revenues from external customers $1,911,720 $223,625 $2,135,345
Intercompany revenues 20,993 20,993
Depreciation and amortization 107,185 7,416 114,601
Operating margin 398,668 39,218 437,886
Year ended December 31, 1998
Revenues from external customers $1,987,815 $221,272 $2,209,087
Intercompany revenues 38,319 38,319
Depreciation and amortization 94,506 24,717 119,223
Operating margin 443,609 49,903 493,512
56
59
MANOR CARE, INC.
Supplementary Data (Unaudited)
Summary Of Quarterly Results
Year Ended December 31, 2000
----------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(In thousands, except per share amounts)
Revenues $569,918 $581,247 $604,531 $624,882 $2,380,578
Income from continuing operations before other
income (expenses), income taxes and minority interest 11,948 28,810 45,869 52,458 139,085
Net income (loss) (783) (3,429) 20,373 22,894 39,055
Earnings per share - net income (loss):
Basic and diluted $(.01) $(.03) $.20 $.22 $.38
Year Ended December 31, 1999
----------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(In thousands, except per share amounts)
Revenues $531,848 $530,454 $536,732 $536,311 $2,135,345
Income from continuing operations before other
income (expenses), income taxes, and minority interest 66,571 55,687 55,837 40,660 218,755
Income (loss) before extraordinary item and cumulative effect 41,028 33,616 33,497 (163,299) (55,158)
Net income (loss) 41,028 40,506 39,544 (164,736) (43,658)
Earnings per share - Income (loss) before
extraordinary item and cumulative effect:
Basic $.37 $.30 $.32 $(1.59) $(.51)
Diluted $.37 $.30 $.31 $(1.59) $(.51)
The results for the first quarter of 2000 differ from the amounts in the
respective 10-Q due to the change in the accounting for the Company's investment
in In Home Health, Inc. (IHHI) from the equity method to consolidation,
retroactive to January 1, 2000. The Company increased its ownership in IHHI in
June 2000. See Note 1 to the consolidated financial statements for additional
discussion.
In the first quarter of 2000, the Company recorded general and professional
liability expense of $33.6 million ($21.5 million after tax) that related to a
change in estimate incorporating industry experience. In the second quarter of
2000, the Company reduced the basis of its investment in Genesis preferred stock
and another Genesis investment by $20.0 million ($12.8 million after tax). See
the Management's Discussion and Analysis for further discussion of these items.
In the fourth quarter of 1999, the Company reduced the basis of its investment
in Genesis preferred stock by $274.1 million ($165.8 million after tax) and
recorded a reserve of $17.4 million ($16.2 million after tax) related to accrued
1999 dividend income. See Note 4 to the consolidated financial statements for
further discussion. In the fourth quarter of 1999, the Company also recorded
losses of $12.4 million related to a start-up business. In the first, second and
third quarters of 1999, the Company recorded a provision for restructuring
charge, merger expenses, asset impairment and other related charges of $6.9
million ($4.6 million after tax), $3.8 million ($2.5 million after tax) and $4.1
million ($2.7 million after tax), respectively.
57
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
Information on directors of the Registrant is incorporated herein by reference
under the heading "Election of Directors" in the Registrant's Proxy Statement
which will be filed pursuant to Regulation 14A with the Commission prior to
April 30, 2001. The names, ages, offices and positions held during the last five
years of each of the Company's executive officers is set forth below.
EXECUTIVE OFFICERS
------------------
NAME AGE OFFICE AND EXPERIENCE
---- --- ---------------------
PAUL A. ORMOND 51 President and Chief Executive Officer of the
Company since August 1991 and Chairman of
the Board of the Company from August 1991 to
September 1998. Member of Class I of the
Board of Directors of the Company, with a
term expiring in 2001.
M. KEITH WEIKEL 62 Senior Executive Vice President and Chief
Operating Officer of the Company since
August 1991. Member of Class III of the
Board of Directors of the Company, with a
term expiring in 2003.
GEOFFREY G. MEYERS 56 Executive Vice President and Chief Financial
Officer of the Company since August 1991 and
Treasurer of the Company from August 1991 to
August 1998.
R. JEFFREY BIXLER 55 Vice President and General Counsel of the
Company since November 1991 and Secretary of
the Company since December 1991.
NANCY A. EDWARDS 50 Vice President and General Manager of
Central Division of the Company since
December 1993.
58
61
JOHN K. GRAHAM 40 Vice President and Director of
Rehabilitation Services of the Company since
September 1998, Assistant Vice President and
General Manager of Vision Management and
Ancillary Businesses of Health Care and
Retirement Corporation of America (HCRA), a
subsidiary of the Company, from January 1997
to August 1998, and Assistant Vice President
and Director of Planning and Marketing of
HCRA from January 1996 to December 1996.
JEFFREY A. GRILLO 42 Vice President and General Manager of
Mid-Atlantic Division of the Company since
February 1999, Regional Director of
Operations in Mid-Atlantic District of
ManorCare Health Services, Inc. (MCHS), a
subsidiary of the Company, from 1996 to
January 1999, and Regional Director of
Operations in Southeast District of MCHS
from 1994 to 1996.
LARRY C. LESTER 58 Vice President and General Manager of
Midwest Division of the Company since
January 2000, Regional Director of
Operations in Midwest Region of HCRA, from
January 1998 to December 1999, and Vice
President of Oakwood Healthcare System from
January 1993 to December 1997.
SPENCER C. MOLER 53 Vice President and Controller of the Company
since August 1991.
O. WILLIAM MORRISON 62 Vice President and General Manager of
Eastern Division of the Company since March
1999, Assistant Vice President and General
Manager of Texas of the Company from October
1998 to February 1999, and Regional Manager
in the Central Division of HCRA from
September 1995 to September 1998.
RICHARD W. PARADES 44 Vice President and General Manager of
Mid-States Division of the Company since
January 1999, District Vice President and
General Manager of Mid-States of MCHS from
February 1997 to December 1998, and Regional
Director of Operations in Mid-States
District of MCHS from 1994 to January 1997.
F. JOSEPH SCHMITT 52 Vice President and General Manager of
Southern Division of the Company since
December 1993.
59
62
JO ANN YOUNG 51 Vice President and General Manager of
Assisted Living Division of the Company
since June 2000, Vice President and Director
of Assisted Living of the Company from
September 1998 to May 2000, Vice President
and Director of Assisted Living of MCHS from
February 1997 to August 1998, and Vice
President of Operations of Caretenders
HealthCorp from 1996 to January 1997.
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
Information on executive compensation is incorporated herein by reference under
the heading "Executive Compensation" in the Registrant's Proxy Statement which
will be filed with the Commission prior to April 30, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
Information on security ownership of certain beneficial owners is incorporated
herein by reference under the heading "Security Ownership of Certain Management
and Beneficial Owners" in the Registrant's Proxy Statement which will be filed
with the Commission prior to April 30, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
---------------------------------------------------------
Information on certain relationships and related transactions is incorporated
herein by reference under the heading "Election of Directors" in the
Registrant's Proxy Statement which will be filed with the Commission prior to
April 30, 2001.
60
63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Manor Care, Inc. and
subsidiaries are filed as part of this Form 10-K in Item 8 on the pages
indicated:
Page
----
Report of Ernst & Young LLP, Independent Auditors 32
Consolidated Balance Sheets - December 31, 2000 and 1999 33
Consolidated Statements of Operations -
Years ended December 31, 2000, 1999 and 1998 34
Consolidated Statements of Cash Flows -
Years ended December 31, 2000, 1999 and 1998 35
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 2000, 1999 and 1998 36
Notes to Consolidated Financial Statements - December 31, 2000 37
The following consolidated financial statement schedule of Manor Care, Inc. and
subsidiaries is included in this Form 10-K on page 62:
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
61
64
MANOR CARE, INC.
Schedule II - Valuation and Qualifying Accounts
Charged Additions
Balance at to Costs Deduc- From Balance
Beginning Other and tions Acquisi- at End of
of Period (Note 1) Expenses (Note 2) Tions Period
---------- -------- -------- -------- --------- ---------
(In thousands)
Year ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $58,975 $32,911 $(31,868) $1,119 $61,137
======= ======= ======== ====== =======
Reserve of Genesis dividend $17,404 $17,404 $34,808
======= ======= =======
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $58,125 $29,005 $(28,230) $75 $58,975
======= ======= ======== === =======
Reserve of Genesis dividend $ $17,404 $17,404
======= ======= =======
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $52,590 $(469) $39,485 $(33,481) $58,125
======= ===== ======= ======== =======
(1) Amount includes $1,725,000 for MCA's December 1997 net activity offset by
the removal of In Home Health, Inc.'s (IHHI) allowance for doubtful accounts of
$2,194,000 as of January 1, 1998 due to the deconsolidation of IHHI.
(2) Uncollectible accounts written off, net of recoveries.
62
65
EXHIBITS
S-K Item 601
No. Document
-------------
2.1 -- Amended and Restated Agreement and Plan of Merger, dated as
of June 10, 1998, by and among Manor Care, Inc., Catera
Acquisition Corp. and the Registrant (filed as Annex A to
Health Care and Retirement Corporation's (HCR) Registration
Statement on Form S-4, File No. 333-61677 and incorporated
herein by reference).
3.1 -- Certificate of Incorporation of Health Care and Retirement
Corporation (filed as Exhibit 4.1 to HCR's Registration
Statement on Form S-1, File No. 33-42535 and incorporated
herein by reference).
3.2 -- Form of Certificate of Amendment of Certificate of
Incorporation of the Registrant (filed as Annex D to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
3.3 -- Form of Amended and Restated By-laws of the Registrant
(filed as Exhibit 3 to Manor Care, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999 and
incorporated herein by reference).
4.1 -- Rights Agreement, dated as of May 2, 1995, between Health
Care and Retirement Corporation and Harris Trust and Savings
Bank (filed as Exhibit 1 to HCR's Registration Statement on
Form 8-A and incorporated herein by reference).
4.2 -- Second Amendment to Rights Agreement dated as of June 10,
1998 between Health Care and Retirement Corporation and
Harris Trust and Savings Bank (filed as Exhibit 4.1 to HCR
Manor Care Inc.'s Form 8-K filed on October 1, 1998 and
incorporated herein by reference).
4.3 -- Third Amendment to Rights Agreement dated as of March 11,
2000 between Manor Care, Inc., as successor to Health Care
and Retirement Corporation, and Harris Trust and Savings
Bank (filed as Exhibit 4.1 to Manor Care Inc.'s Form 8-K
filed on March 14, 2000 and incorporated herein by
reference).
4.4 -- Registration Rights Amendment dated as of September 25,
1998 between HCR Manor Care, Inc. and Stewart Bainum,
Stewart Bainum, Jr., Bainum Associates Limited Partnership,
MC Investment Limited Partnership, Realty Investment
Company, Inc., Mid Pines Associates Limited Partnership,
The Stewart Bainum Declaration of rust and The Jane L.
Bainum Declaration of Trust (filed as Exhibit 4.2 to HCR
Manor Care, Inc.'s Form 8-K filed on October 1, 1998 and
incorporated herein by reference).
4.5 -- Credit Agreement dated as of September 25, 1998 among HCR
Manor Care, Inc., Manor Care, Inc., Bank of America
National Trust and Savings Association, The Chase Manhattan
Bank, TD Securities (USA) Inc., and the Other Financial
Institutions Party Hereto (filed as Exhibit 4 to HCR Manor
Care, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 and incorporated herein by
reference).
4.6 -- First Amendment to Five Year Credit Agreement dated as of
February 9, 2000 among Manor Care, Inc. (formerly known as
HCR Manor Care, Inc.), Manor Care of America, Inc.
(formerly known as Manor Care, Inc.), various financial
institutions, and Bank of America, N.A., as Administrative
Agent (filed as Exhibit 4.6 to Manor Care, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1999
and incorporated herein by reference).
63
66
4.7 -- Second Amendment to Five Year Credit Agreement dated as of
September 22, 2000 among Manor Care, Inc. (formerly known
as HCR Manor Care, Inc.), Manor Care of America, Inc.
(formerly known as Manor Care, Inc.), various financial
institutions, and Bank of America, N.A., as Administrative
Agent (filed as Exhibit 4 to Manor Care, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2000 and incorporated herein by reference).
4.8 -- 364 Day Credit Agreement dated as of September 25, 1998
among HCR Manor Care, Inc., Manor Care, Inc., Bank of
America National Trust and Savings Association, The Chase
Manhattan Bank, TD Securities (USA) Inc., and the Other
Financial Institutions Party Hereto (filed as Exhibit 4.1
to HCR Manor Care, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 and incorporated
herein by reference).
4.9 -- 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 (filed as
Exhibit 4 to Manor Care, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 and
incorporated herein by reference).
4.10 -- The Second Amendment to the 364 Day Credit Agreement dated
as of February 9, 2000 among Manor Care, Inc. (formerly HCR
Manor Care, Inc.), Manor Care of America, Inc. (formerly
Manor Care, Inc.), various financial institutions, and Bank
of America, N.A., as Administrative Agent (filed as Exhibit
4.9 to Manor Care, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by
reference).
4.11 -- The Third Amendment to the 364 Day Credit Agreement dated
as of September 22, 2000 among Manor Care, Inc. (formerly
HCR Manor Care, Inc.), Manor Care of America, Inc.
(formerly Manor Care, Inc.), various financial
institutions, and Bank of America, N.A., as Administrative
Agent (filed as Exhibit 4.1 to Manor Care, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2000 and incorporated herein by reference).
4.12 -- Indenture dated as of June 4, 1996 between Manor Care,
Inc. and Wilmington Trust Company, Trustee (filed as Exhibit
4.1 to Manor Care of America, Inc.'s (MCA), formerly known as
Manor Care, Inc., Form 8-K dated June 4, 1996 and
incorporated herein by reference).
4.13 -- Supplemental Indentures dated as of June 4, 1996 between
Manor Care, Inc. and Wilmington Trust Company, Trustee (filed
as Exhibit 4.2 to MCA's Form 8-K dated June 4, 1996 and
incorporated herein by reference).
10.1 -- Stock Purchase Agreement and amendment among HCR, HCRC
Inc., O-I Health Care Holding Corp. and Owens-Illinois,
Inc. dated as of August 30, 1991 (filed as Exhibit 10.1 and
10.1(a) to HCR's Registration Statement on Form S-1, File
No. 33-42535 and incorporated herein by reference).
10.2 -- Form of Annual Incentive Award Plan (filed as Exhibit 10.2
to HCR's Registration Statement on Form S-1, File No.
33-42535 and incorporated herein by reference).
10.3 -- Performance Award Plan (filed on pages A1 to A3 of Manor
Care, Inc.'s Proxy Statement dated March 30, 2000 in
connection with its Annual Meeting held on May 2, 2000 and
incorporated herein by reference).
10.4 -- Amended Stock Option Plan for Key Employees (filed as
Exhibit 4 to HCR's Registration Statement on Form S-8, File
No. 33-83324 and incorporated herein by reference).
64
67
10.5 -- First Amendment, Second Amendment and Third Amendment to
the Amended Stock Option Plan for Key Employees (filed as
Exhibits 4.1, 4.2 and 4.3, respectively, to HCR's
Registration Statement on Form S-8, File No. 333-64181 and
incorporated herein by reference).
10.6 -- Revised form of Non-Qualified Stock Option Agreement
between HCR and various Key Employees participating in the
Stock Option Plan for Key Employees (filed as Exhibit 4.7
to HCR's Registration Statement on Form S-8, File
No.33-48885 and incorporated herein by reference).
10.7 -- Amended Restricted Stock Plan (filed on pages A1 to A9 of
HCR's Proxy Statement dated March 25, 1997 in connection
with its Annual Meeting held on May 6, 1997 and
incorporated herein by reference).
10.8 -- First Amendment to Amended Restricted Stock Plan (filed as
Exhibit 4.2 to HCR's Registration Statement on Form S-8,
File No. 333-64235 and incorporated herein by reference).
*10.9 -- Revised form of Restricted Stock Plan Agreement between
Manor Care, Inc. and officers participating in the Amended
Restricted Stock Plan.
10.10 -- Executive Officer Deferred Compensation Plan dated December
18, 1991 (filed as Exhibit 10.12 to HCR's Annual Report on
Form 10-K for the period ended December 31, 1991 and
incorporated herein by reference).
10.11 -- Form of Indemnification Agreement between HCR and various
officers and directors (filed as Exhibit 10.9 to HCR's
Registration Statement on Form S-1, File No. 33-42535 and
incorporated herein by reference).
*10.12 -- Amended and Restated Health Care and Retirement
Corporation Senior Executive Retirement Plan, effective
October 1, 1992, restated January 1, 1998.
*10.13 -- First Amendment to Amended and Restated Health Care and
Retirement Corporation Senior Executive Retirement Plan,
effective January 1, 1998.
10.14 -- Senior Management Savings Plan dated December 17, 1992
(filed as Exhibit 10.16 to HCR's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated
herein by reference).
10.15 -- Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA, and Paul A. Ormond (filed as Exhibit 10.14 to Manor
Care, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference).
10.16 -- Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA and M. Keith Weikel (filed as Exhibit 10.15 to Manor
Care, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference).
10.17 -- Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA and Geoffrey G. Meyers (filed as Exhibit 10.16 to
Manor Care, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by
reference).
10.18 -- Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA and R. Jeffrey Bixler (filed as Exhibit 10.17 to Manor
Care, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference).
10.19 -- Form of Executive Retention Agreement among the Registrant,
HCRA and Paul A. Ormond (filed as Exhibit 10.1 to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
10.20 -- Form of Executive Retention Agreement among the Registrant,
HCRA and M. Keith Weikel (filed as Exhibit 10.2 to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
65
68
10.21 -- Form of Executive Retention Agreement among the Registrant,
HCRA and Geoffrey G. Meyers (filed as Exhibit 10.3 to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
10.22 -- Form of Executive Retention Agreement among the Registrant,
HCRA and R. Jeffrey Bixler (filed as Exhibit 10.4 to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
10.23 -- Form of Retention Agreement among the Registrant, Manor
Care, Inc. and Stewart Bainum, Jr. (filed as Exhibit 10.13
to MCA's Annual Report on Form 10-K for the year ended May
31, 1998 and incorporated herein by reference).
10.24 -- Form of Noncompetition Agreement among the Registrant,
Manor Care, Inc. and Stewart Bainum, Jr.(filed as Exhibit
10.12 to MCA's Annual Report on Form 10-K for the year
ended May 31, 1998 and incorporated herein by reference).
10.25 -- Form of Chairman's Service Agreement between the Registrant
and Stewart Bainum, Jr. (filed as Exhibit 10.7 to HCR's
Registration Statement on Form S-4, File No. 333-61677 and
incorporated herein by reference).
10.26 -- Stock Option Plan for Outside Directors (filed as Exhibit
4.4 to HCR's Registration Statement on Form S-8, File No.
33-48885 and incorporated herein by reference).
10.27 -- First Amendment, Second Amendment and Third Amendment to
the Stock Option Plan for Outside Directors (filed as
Exhibits 4.4, 4.5 and 4.6, respectively, to HCR's
Registration Statement on Form S-8, File No. 333-64181 and
incorporated herein by reference).
10.28 -- Form of Non-Qualified Stock Option Agreement between HCR
and various outside directors participating in Stock Option
Plan for Outside Directors (filed as Exhibit 4.6 to HCR's
Registration Statement on Form S-8, File No. 33-48885 and
incorporated herein by reference).
10.29 -- Manor Care, Inc.'s Non-Employee Director Stock Compensation
Plan (filed as Exhibit A to MCA's Proxy Statement dated
August 28, 1996 which is Exhibit 99 to the Annual Report on
Form 10-K for the year ended May 31, 1997 and incorporated
herein by reference).
*21 -- Subsidiaries of the Registrant
*23 -- Consent of Independent Auditors
REPORTS ON FORM 8-K
The Company filed a Form 8-K on December 28, 2000 regarding the completion of
the merger of In Home Health, Inc. with a subsidiary of Manor Care, Inc.
--------------
* Filed herewith.
66
69
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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)
by /s/ R. Jeffrey Bixler
------------------------------------
R. Jeffrey Bixler
Vice President, General Counsel
and Secretary
DATE: February 13, 2001
67
70
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Manor Care, Inc. and
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stewart Bainum, Jr.
--------------------------------
Stewart Bainum, Jr. Chairman of the Board, Director February 13, 2001
/s/ Joseph H. Lemieux
--------------------------------
Joseph H. Lemieux Director February 13, 2001
/s/ William H. Longfield
--------------------------------
William H. Longfield Director February 13, 2001
/s/ Frederic V. Malek
--------------------------------
Frederic V. Malek Director February 13, 2001
/s/ Geoffrey G. Meyers
--------------------------------
Geoffrey G. Meyers Executive Vice President and Chief
Financial Officer
(Principal Financial Officer) February 13, 2001
/s/ Spencer C. Moler
--------------------------------
Spencer C. Moler Vice President and Controller (Principal
Accounting Officer) February 13, 2001
/s/ Paul A. Ormond
--------------------------------
Paul A. Ormond President and Chief Executive Officer
(Principal Executive Officer); Director February 13, 2001
/s/ John T. Schwieters
--------------------------------
John T. Schwieters Director February 13, 2001
/s/ Robert G. Siefers
--------------------------------
Robert G. Siefers Director February 13, 2001
/S/ M. Keith Weikel
--------------------------------
M. Keith Weikel Senior Executive Vice President and
Chief Operating Officer; Director February 13, 2001
/S/ Gail R. Wilensky
--------------------------------
Gail R. Wilensky Director February 13, 2001
/s/ Thomas L. Young
--------------------------------
Thomas L. Young Director February 13, 2001
68
71
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.9 Restricted Stock Form Agreement
10.12 Amended and Restated Health Care and Retirement
Corporation Senior Executive Retirement Plan
10.13 First Amendment to Amended and Restated Health Care
and Retirement Corporation Senior Executive
Retirement Plan
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
69