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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10858
MANOR CARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1687107
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
333 N. SUMMIT STREET, TOLEDO, OHIO 43604-2617
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 252-5500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule12b-2 of the Exchange Act). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on April 24, 2003.
Common stock, $0.01 par value - 90,008,649 shares
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Number
------
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002................................................. 3
Consolidated Statements of Income -
Three months ended March 31, 2003 and 2002........................................... 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and 2002........................................... 5
Notes to Consolidated Financial Statements........................................... 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk........................... 17
Item 4 Controls and Procedures.............................................................. 18
PART II OTHER INFORMATION
Item 1 Legal Proceedings.................................................................... 18
Item 2 Changes in Securities and Use of Proceeds............................................ 18
Item 3 Defaults Upon Senior Securities...................................................... 18
Item 4 Submission of Matters to a Vote of Security Holders.................................. 18
Item 5 Other Information.................................................................... 18
Item 6 Exhibits and Reports on Form 8-K..................................................... 19
SIGNATURES............................................................................................. 20
CERTIFICATIONS......................................................................................... 21
EXHIBIT INDEX.......................................................................................... 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
MANOR CARE, INC.
Consolidated Balance Sheets
March 31, December 31,
2003 2002
---- ----
(Unaudited) (Note 1)
(In thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents $ 16,044 $ 30,554
Receivables, less allowances for doubtful
accounts of $59,754 and $60,093, respectively 381,069 385,960
Prepaid expenses and other assets 23,834 23,974
Deferred income taxes 63,736 70,329
----------- -----------
Total current assets 484,683 510,817
Property and equipment, net of accumulated
depreciation of $733,892 and $704,348, respectively 1,538,005 1,534,339
Goodwill 86,591 85,814
Intangible assets, net of amortization of $3,030 and $9,234, respectively 10,169 10,457
Other assets 167,163 165,505
----------- -----------
Total assets $ 2,286,611 $ 2,306,932
=========== ===========
Liabilities And Shareholders' Equity
Current liabilities:
Accounts payable $ 90,005 $ 95,347
Employee compensation and benefits 125,811 109,628
Accrued insurance liabilities 94,652 109,385
Income tax payable 6,127 11,657
Other accrued liabilities 48,229 48,424
Long-term debt due within one year 2,649 267,423
----------- -----------
Total current liabilities 367,473 641,864
Long-term debt 608,923 373,112
Deferred income taxes 92,188 79,073
Other liabilities 202,645 196,836
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 346,966 349,304
Retained earnings 1,037,088 1,006,295
Accumulated other comprehensive income (loss) 225 (11)
----------- -----------
1,385,389 1,356,698
Less treasury stock, at cost (17.6 and 16.0 million shares, respectively) (370,007) (340,651)
----------- -----------
Total shareholders' equity 1,015,382 1,016,047
----------- -----------
Total liabilities and shareholders' equity $ 2,286,611 $ 2,306,932
=========== ===========
See notes to consolidated financial statements.
3
MANOR CARE, INC.
Consolidated Statements Of Income
(Unaudited)
Three Months Ended March 31
---------------------------
2003 2002
---- ----
(In thousands, except earnings per share)
Revenues $ 730,520 $ 715,987
Expenses:
Operating 611,487 590,330
General and administrative 30,709 29,927
Depreciation and amortization 31,674 31,769
--------- ---------
673,870 652,026
--------- ---------
Income before other income (expenses)
and income taxes 56,650 63,961
Other income (expenses):
Interest expense (8,875) (9,944)
Gain (loss) on sale of assets 189 (944)
Equity in earnings of affiliated companies 1,541 736
Interest income and other 701 609
--------- ---------
Total other expenses, net (6,444) (9,543)
--------- ---------
Income before income taxes 50,206 54,418
Income taxes 19,078 20,679
--------- ---------
Income before cumulative effect 31,128 33,739
Cumulative effect of change in accounting for goodwill (1,314)
--------- ---------
Net income $ 31,128 $ 32,425
========= =========
Earnings per share - basic and diluted:
Income before cumulative effect $ .33 $ .33
Cumulative effect (.01)
--------- ---------
Net income $ .33 $ .32
========= =========
Weighted average shares:
Basic 93,659 101,094
Diluted 94,504 102,146
See notes to consolidated financial statements.
4
MANOR CARE, INC.
Consolidated Statements Of Cash Flows
(Unaudited)
Three Months Ended March 31
2003 2002
---- ----
(In thousands)
OPERATING ACTIVITIES
Net income $ 31,128 $ 32,425
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 31,674 31,769
Asset impairment and other non-cash charges 1,314
Provision for bad debts 10,025 10,537
Deferred income taxes 19,708
Net (gain) loss on sale of assets (189) 944
Equity in earnings of affiliated companies (1,541) (736)
Changes in assets and liabilities, excluding sold facilities and acquisitions:
Receivables (5,134) (28,472)
Prepaid expenses and other assets (1,951) 17,906
Liabilities (2,979) 30,524
----------- -----------
Total adjustments 49,613 63,786
----------- -----------
Net cash provided by operating activities 80,741 96,211
----------- -----------
INVESTING ACTIVITIES
Investment in property and equipment (23,245) (22,721)
Investment in systems development (1,177) (646)
Acquisitions (10,868) (682)
Adjustment of acquisition of assets from development joint venture 1,158
Proceeds from sale of assets 1,975 2,961
----------- -----------
Net cash used in investing activities (33,315) (19,930)
----------- -----------
FINANCING ACTIVITIES
Net repayments under bank credit agreements (23,400) (50,100)
Principal payments of long-term debt (5,563) (2,532)
Proceeds from exercise of stock options 100 6
Purchase of common stock for treasury (33,073) (29,977)
----------- -----------
Net cash used in financing activities (61,936) (82,603)
----------- -----------
Net decrease in cash and cash equivalents (14,510) (6,322)
Cash and cash equivalents at beginning of period 30,554 26,691
----------- -----------
Cash and cash equivalents at end of period $ 16,044 $ 20,369
=========== ===========
See notes to consolidated financial statements.
5
MANOR CARE, INC.
Notes To Consolidated Financial Statements
(Unaudited)
NOTE 1 - ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management of Manor Care, Inc. (the Company), the interim data includes all
adjustments necessary for a fair statement of the results of the interim periods
and all such adjustments are of a normal recurring nature. Operating results for
the three months ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in Manor Care,
Inc.'s annual report on Form 10-K for the year ended December 31, 2002.
At March 31, 2003, the Company operated 296 skilled nursing facilities, 70
assisted living facilities, 92 outpatient therapy clinics and 88 home health and
hospice offices.
COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income plus other comprehensive
income. Comprehensive income totaled $31.4 million and $32.6 million for the
first quarter of 2003 and 2002, respectively. The other comprehensive income
primarily represents the unrealized gain on investments.
INSURANCE LIABILITIES
At March 31, 2003 and December 31, 2002, the workers' compensation liability
consisted of short-term reserves of $26.4 million and $26.3 million,
respectively, which were included in accrued insurance liabilities, and
long-term reserves of $37.5 million and $32.5 million, respectively, which were
included in other long-term liabilities. The expense for workers' compensation
was $12.3 million and $11.1 million for the first quarters of 2003 and 2002,
respectively. Although management believes that the Company's liability reserves
are adequate, there can be no assurance that these reserves will not require
material adjustment in future periods. See Note 3 for discussion of the
Company's general and professional liability.
6
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.
The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair value recognition provisions of Financial
Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation for options granted since
1995.
Three months ended March 31,
2003 2002
---- ----
(In thousands, except earnings per share)
Net income -- as reported $31,128 $32,425
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (1,801) (1,507)
------- -------
Net income -- pro forma $29,327 $30,918
======= =======
Earnings per share -- as reported:
Basic and diluted $ .33 $ .32
Earnings per share -- pro forma:
Basic $ .31 $ .31
Diluted $ .31 $ .30
NEW ACCOUNTING STANDARD
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" (the Interpretation). The Interpretation requires the consolidation of
variable interest entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. Currently, entities are generally consolidated by an
enterprise that has a controlling financial interest through ownership of a
majority voting interest in the entity. The Interpretation provides that an
enterprise with a variable interest in specified assets of a variable interest
entity (VIE) is to treat a portion of the entity as a separate VIE if the
specified assets are essentially the only source of payment for specified
liabilities.
7
A subsidiary of the Company leases the Company's corporate headquarters from an
unconsolidated VIE under an operating lease, which
expires in January 2009. A third party has invested capital at risk exceeding 3
percent of the assets of the VIE with the remainder being financed through a
debt obligation. Under this, and certain other criteria, the proper accounting
was not to consolidate the VIE in the Company's financial statements prior to
adopting the Interpretation. Rather, the Company accounts for the arrangement as
an operating lease. Accordingly, neither the leased corporate headquarters nor
the related debt is reported in the Company's accompanying balance sheets.
The Company expects to begin consolidating the VIE effective July 1, 2003,
because the Company believes it is the VIE's primary beneficiary under the
Interpretation's requirements. The corporate headquarters' lease obligation
includes the annual operating lease payments that reflect interest only payments
on the lessor's $22.8 million of underlying debt, as well as a residual
guarantee of that amount at maturity. On July 1, 2003, the Company expects to
include the residual value guarantee of $22.8 million as an increase to property
and equipment and debt. The Company expects no effect on the results of
operations other than the classification of operating lease payments as interest
expense.
NOTE 2 - REVENUES
Revenues for certain health care services are as follows:
Three months ended March 31,
2003 2002
---- ----
(In thousands)
Skilled nursing and assisted living services $629,969 $608,297
Home health and hospice services 72,888 66,726
Rehabilitation services
(excludes intercompany revenues) 20,924 20,884
Hospital care 15,961
Other services 6,739 4,119
-------- --------
$730,520 $715,987
======== ========
NOTE 3 - CONTINGENCIES
One or more subsidiaries or affiliates of Manor Care of America, Inc. (MCA) have
been identified as potentially responsible parties (PRPs) in a variety of
actions (the Actions) relating to waste disposal sites which allegedly are
subject to remedial action under the Comprehensive Environmental Response
Compensation Liability Act, as amended, 42 U.S.C. Sections 9601 et seq. (CERCLA)
and similar state laws. CERCLA imposes retroactive, strict joint and several
liability on PRPs for the costs of hazardous waste clean-up. The Actions arise
out of the alleged activities of Cenco, Incorporated and its subsidiary and
affiliated companies (Cenco). Cenco was acquired in 1981 by a wholly owned
subsidiary of MCA. The Actions allege that Cenco transported and/or generated
hazardous substances that came to be located at the sites in
8
question. Environmental proceedings such as the Actions may involve owners
and/or operators of the hazardous waste site, multiple waste generators and
multiple waste transportation disposal companies. Such proceedings involve
efforts by governmental entities and/or private parties to allocate or recover
site investigation and clean-up costs, which costs may be substantial. The
potential liability exposure for currently pending environmental claims and
litigation, without regard to insurance coverage, cannot be quantified with
precision because of the inherent uncertainties of litigation in the Actions and
the fact that the ultimate cost of the remedial actions for some of the waste
disposal sites where MCA is alleged to be a potentially responsible party has
not yet been quantified. Based upon its current assessment of the likely outcome
of the Actions, the Company believes that its future environmental liabilities
will be about $4.5 million. The Company has received insurance proceeds that
will offset amounts due as a result of these exposures, depending upon the
ultimate liabilities.
The Company is party to various other legal matters arising in the ordinary
course of business including patient care-related claims and litigation. At
March 31, 2003 and December 31, 2002, the general and professional liability
consisted of short-term reserves of $52.2 million and $50.3 million,
respectively, which were included in accrued insurance liabilities, and
long-term reserves of $117.5 million, which were included in other long-term
liabilities. The expense for general and professional liability claims, premiums
and administrative fees was $20.8 million and $17.6 million for the first
quarter of 2003 and 2002, respectively, which was included in operating
expenses. Although management believes that the Company's liability reserves are
adequate, there can be no assurance that such provision and liability will not
require material adjustment in future periods.
9
NOTE 4 - EARNINGS PER SHARE
The calculation of earnings per share (EPS) is as follows:
Three months ended March 31,
2003 2002
---- ----
(In thousands, except earnings per share)
Numerator:
Income before cumulative effect $31,128 $33,739
======= =======
Denominator:
Denominator for basic EPS -
weighted-average shares 93,659 101,094
Effect of dilutive securities:
Stock options 551 781
Non-vested restricted stock 294 271
------- -------
Denominator for diluted EPS -
adjusted for weighted-average
shares and assumed conversions 94,504 102,146
======= =======
EPS - Income before cumulative effect:
Basic and diluted $ .33 $ .33
Options to purchase shares of the Company's common stock that were not included
in the computation of diluted EPS because the options' exercise prices were
greater than the average market price of the common shares were: 5.3 million
shares with an average exercise price of $24 for the first quarter of 2003 and
2.2 million shares with an average exercise price of $31 for the first quarter
of 2002.
NOTE 5 - SEGMENT INFORMATION
The Company provides a range of health care services. The Company has one
reportable operating segment, long-term care, which includes the operation of
skilled nursing and assisted living facilities. The "Other" category includes
the non-reportable segments and corporate items. The revenues in the "Other"
category include services for rehabilitation, home health and hospice, and
hospital care. The Company's hospital was sold on April 30, 2002. Asset
information, including capital expenditures, is not reported by segment by the
Company. Operating performance represents revenues less operating expenses and
does not include general and administrative expense, depreciation and
amortization, other income and expense items, income taxes and cumulative
effect.
10
Long-Term
Care Other Total
--------- ----- -----
(In thousands)
Three months ended March 31, 2003
Revenues from external customers $ 629,969 $ 100,551 $ 730,520
Intercompany revenues 14,486 14,486
Depreciation and amortization 29,522 2,152 31,674
Operating margin 104,435 14,598 119,033
Three months ended March 31, 2002
Revenues from external customers 608,297 107,690 715,987
Intercompany revenues 13,537 13,537
Depreciation and amortization 28,680 3,089 31,769
Operating margin 115,592 10,065 125,657
NOTE 6 - SUBSEQUENT EVENT RELATED TO DEBT, REFINANCING AND SHARE REPURCHASE
In April 2003, the Company refinanced its five-year, $500 million revolving
credit facility that was scheduled to mature September 24, 2003. As a result of
the refinancing, the Company classified the $235.9 million outstanding under the
five-year credit agreement at March 31, 2003 as long-term debt. The financing
package includes a new three-year $200 million revolving credit facility, $200
million of 6.25% Senior Notes due in 2013 and $100 million of 2.125% Convertible
Senior Notes due in 2023.
Manor Care, Inc.'s three-year $200 million revolving credit facility was
established with a group of banks. As of April 24, 2003, there were no loans
outstanding under this agreement and after consideration of usage for letters of
credit, there was $164.2 million available for future borrowing. Loans under the
three-year credit facility are guaranteed by substantially all of the Company's
subsidiaries. This credit agreement contains 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.
Loans under the three-year credit facility bear interest at variable rates that
reflect, at the election of the Company, the agent bank's base lending rate or
an increment over Eurodollar indices of 1.025 percent to 1.325 percent,
depending on the quarterly performance of a key ratio. The three-year credit
facility also provides for a fee on the total amount of the facility, ranging
from .225 percent to .425 percent, depending on the performance of the same key
ratio. In addition to direct borrowings, the three-year credit facility may be
used to support the issuance of up to $100 million of letters of credit.
11
The Company issued $200 million principal amount of 6.25% Senior Notes due in
2013, priced at 99.686 percent to yield 6.29 percent. Interest is payable each
May 1 and November 1, beginning November 1, 2003. The Company also issued $100
million principal amount of 2.125% Convertible Senior Notes due in 2023, priced
at 100 percent. Interest is payable each April 15 and October 15, beginning
October 15, 2003. The Company may not redeem the Convertible Senior Notes before
April 15, 2010. Starting with the six-month period beginning April 15, 2010, the
Company may be obligated to pay contingent interest to the holders of the
Convertible Senior Notes under certain circumstances. The initial conversion
price is $31.12 per share of common stock, equivalent to 32.1337 shares of the
Company's common stock per $1,000 principal amount of notes. The conversion
price is subject to adjustment in certain events. The holders of the Convertible
Senior Notes may convert their notes into shares of the Company's common stock
prior to the stated maturity at their option only under the following
circumstances: (1) if the average of the last reported sales price of the
Company's common stock for the 20 trading days immediately prior to the
conversion date is greater than or equal to 120% of the conversion price per
share of common stock on such conversion date; (2) if the notes have been called
for redemption; (3) upon the occurrence of specified corporate transactions; and
(4) if the credit ratings assigned to the notes decline to certain levels. The
holders of the Convertible Senior Notes may require the Company to purchase all
or a portion of their notes at any of five specified dates during the life of
the notes, with the first such date being April 15, 2005. Except for the initial
repurchase date, the Company may elect to satisfy the repurchase in whole or in
part with common stock rather than cash.
The initial net proceeds of approximately $293.2 million from the closing of the
three-year credit facility, Senior Notes and Convertible Senior Notes were used
to repay borrowings outstanding under the Company's five-year revolving credit
facility and to purchase $25.0 million of the Company's common stock concurrent
with the refinancing transactions. The Company is in the process of registering
the Senior Notes and Convertible Senior Notes with the Securities and Exchange
Commission. The Senior Notes and Convertible Senior Notes are guaranteed by
substantially all of the Company's subsidiaries.
In April 2003, the Company's board of directors authorized management to spend
an additional $100 million to purchase common stock through December 31, 2004.
The Company purchased 1,775,400 shares in the first quarter of 2003 for $33.1
million and an additional 3,449,047 shares through April 24, 2003 for $68.9
million, including the $25 million repurchased concurrently with the Convertible
Senior Notes offering. At April 24, 2003, the Company had remaining unused
repurchase authority of $135.9 million.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CRITICAL ACCOUNTING POLICIES
General and Professional Liability. Our general and professional
reserves include amounts for patient care-related claims and incurred but not
reported claims. The amount of our reserves is determined based on an estimation
process that uses information obtained from both company-specific and industry
data. The estimation process requires us to continuously monitor and evaluate
the life cycle of the claims. Using data obtained from this monitoring and our
assumptions about emerging trends, we along with our independent actuary develop
information about the size of ultimate claims. The most significant assumptions
used in the estimation process include determining the trend in costs, the
expected cost of claims incurred but not reported and the expected costs to
settle unpaid claims. Our assumptions take into consideration our internal
efforts to contain our costs by reviewing our risk management programs, our
operational and clinical initiatives, and other industry changes affecting the
long-term care market. In comparing the first quarter of 2003 with the first
quarter of 2002, the number of new claims is flat and our average settlement
costs per claim have decreased slightly. Although we believe our reserves are
adequate, we can give you no assurance that this liability will not require
material adjustment in future periods.
RESULTS OF OPERATIONS -
QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2002
Revenues. Our revenues increased $14.5 million, or 2 percent, from the
first quarter of 2002 to 2003. Excluding the results of our hospital that we
sold in April 2002, our revenues increased $30.5 million, or 4 percent. Revenues
from our long-term care segment (skilled nursing and assisted living facilities)
increased $21.7 million, or 4 percent, due to increases in rates/patient
mix--$18.0 million and occupancy--$5.7 million that were partially offset by a
decrease in capacity--$2.0 million. Our revenues from the home health and
hospice business increased $6.2 million, or 9 percent, primarily because of an
increase in hospice services.
Our rate increases for the long-term care segment related to Medicaid and
private pay. Our average Medicaid rate increased 6 percent from $121 per day in
the first quarter of 2002 to $128 per day in the first quarter of 2003. Private
and other rates for our skilled nursing facilities increased 5 percent from $180
per day in the first quarter of 2002 to $189 per day in the first quarter of
2003. The increase in overall rates was also a result of a shift in the mix of
our patients to a higher percentage of Medicare patients, even though the
Medicare rate decreased because certain of the increases in Medicare
reimbursement for skilled nursing facilities provided for under the Medicare,
Medicaid and SCHIP Balanced Budget Refinement Act of 1999, or BBRA 99, and the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000,
or BIPA 2000, expired on September 30, 2002, the so-called Medicare
13
Cliff. Our average Medicare rate was $333 per day in the first quarter of 2002
compared with $310 in the first quarter of 2003.
Our occupancy levels were 87 percent for the first quarter of 2002 compared with
88 percent for the first quarter of 2003. Excluding start-up facilities, our
occupancy levels were 88 percent for the first quarters of 2002 and 2003. Our
occupancy levels for skilled nursing facilities were 88 percent for the first
quarter of 2002 compared with 89 percent for the first quarter of 2003. The
quality mix of revenues from Medicare, private pay and insured patients that
related to skilled nursing and assisted living facilities and rehabilitation
operations remained constant at 68 percent for the first quarters of 2002 and
2003.
Our bed capacity declined between the first quarter of 2002 and 2003 primarily
because we closed or sold three skilled nursing facilities with 498 beds, which
was partially offset by opening three assisted living facilities with 188 beds.
Operating Expenses. Our operating expenses in the first quarter of 2003
increased $21.2 million, or 4 percent, compared with the first quarter of 2002.
Excluding the results of our hospital that was sold on April 30, 2002, operating
expenses increased $35.3 million, or 6 percent. Operating expenses from our
long-term care segment increased $32.8 million, or 7 percent. Our operating
expenses from our home health and hospice business increased $5.1 million, or 9
percent, because of an increase in services.
We attribute the largest portion ($20.3 million) of the long-term care operating
expense increase between the first quarter of 2002 and 2003 to wages, temporary
staffing and payroll overhead. Our other operating expense increases for this
segment included ancillary costs, excluding internal labor, of $2.2 million and
general and professional liability expense of $3.6 million. Ancillary costs,
which include various types of therapies, medical supplies and prescription
drugs, increased as a result of our more medically complex patients. Our general
and professional liability expense increased primarily because of our increase
in the monthly claims accrual from $5.0 million in the first quarter of 2002 to
$6.0 million in the first quarter of 2003.
Depreciation and Amortization. Our depreciation increased $0.6 million
from the first quarter of 2002 to 2003. The increase in depreciation related to
our capital expenditures in the past year and 11 facilities that were held for
sale in 2002, which was partially offset by a decline in depreciation of $1.0
million from the sale of our hospital and writedown of asset values due to
impairment in 2002. Amortization decreased $0.7 million primarily due to a
decrease in software amortization.
14
Interest Expense. Interest expense decreased $1.1 million related to a
decline in debt levels. With the refinancing of our five-year credit facility in
April 2003, we expect our interest expense to increase by approximately $1.0
million per month. See Note 6 to the consolidated financial statements for
discussion of our debt refinancing.
Gain (Loss) on Sale of Assets. Our loss on sale of assets in 2002
related to sales of land that we decided not to develop.
Equity in Earnings of Affiliated Companies. Our equity earnings
increased in the first quarter of 2003 compared with 2002 primarily because of
our ownership interests in two hospitals acquired on April 30, 2002.
Cumulative Effect of Change in Accounting Principle. In July 2001, the
Financial Accounting Standards Board issued Statement No. 142, "Goodwill and
Other Intangible Assets," that we adopted January 1, 2002. Under this Statement,
goodwill and indefinite-lived intangible assets are no longer amortized but are
reviewed annually for impairment, or more frequently if impairment indicators
arise. We completed our initial impairment test in the second quarter of 2002
and determined that $1.3 million of our goodwill related to our vision business
was impaired. The impairment loss, with no tax effect, was recorded retroactive
to January 1, 2002 as a cumulative effect of a change in accounting principle.
FINANCIAL CONDITION - MARCH 31, 2003 AND DECEMBER 31, 2002
Property and equipment increased $3.7 million primarily because of $23.2 million
in new construction and renovations to existing facilities and a $10.1 million
cash payment to exercise a purchase option on a leased facility. These increases
were partially offset by depreciation of $29.5 million and disposal of assets of
$1.9 million.
Accrued insurance liabilities decreased $14.7 million primarily due to an $18.6
million payment of an environmental liability in January 2003. We also received
insurance proceeds of $9.5 million in January 2003 to offset half of this
payment.
Long-term debt due within one year decreased $264.8 million primarily due to the
reclassification of our credit agreement debt of $235.9 million from short-term
debt to long-term debt at March 31, 2003 because we refinanced our debt in April
2003, as further discussed in Note 6 to the consolidated financial statements.
15
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. During the first quarter of 2003, we satisfied our cash
requirements from cash generated from operating activities. Cash flows from
operating activities were $80.7 million for the first quarter of 2003. Our
operating cash flows decreased $15.5 million from the first quarter of 2002
primarily because of our environmental liability payment of $18.6 million in the
first quarter of 2003. We used the cash principally for capital expenditures,
acquisitions, to repay debt and to purchase our common stock.
Investing Activities. Our expenditures for property and equipment of
$23.2 million in the first quarter of 2003 included $3.0 million to construct
new facilities and expand existing facilities. In the first quarter of 2003, we
exercised a purchase option for $10.1 million on a facility that was previously
leased.
Debt Agreement. At March 31, 2003, outstanding borrowings totaled
$235.9 million under our five-year, $500 million revolving credit agreement that
was scheduled to mature September 24, 2003 but was refinanced in April 2003. The
financing package includes a new three-year $200 million revolving credit
facility, $200 million of 6.25% Senior Notes due in 2013 and $100 million of
2.125% Convertible Senior Notes due in 2023. The initial net proceeds of
approximately $293.2 million from the closing of these transactions were used to
repay borrowings outstanding under the Company's five-year revolving credit
facility and to purchase $25.0 million of the Company's common stock concurrent
with the refinancing transactions. As of April 24, 2003, there were no loans
outstanding under the new three-year revolving credit facility and after
consideration of usage for letters of credit, there was $164.2 million available
for future borrowing.
Stock Purchase. During 2001 and 2002, our board of directors authorized
us to spend up to $300 million to purchase our common stock with $200 million of
the authorization expiring on December 31, 2003 and the remaining $100 million
on December 31, 2004. In April 2003, our board authorized an additional $100
million through December 31, 2004. With these authorizations, we purchased
1,775,400 shares in the first quarter of 2003 for $33.1 million and an
additional 3,449,047 shares through April 24, 2003 for $68.9 million, which
includes the $25.0 million repurchased concurrently with the Convertible Senior
Notes offering. We have $135.9 million remaining authority to repurchase our
shares as of April 24. We may use the shares for internal stock option and
401(k) match programs and for other uses, such as possible future acquisitions.
We believe that a certain amount of debt has an appropriate place in our overall
capital structure and it is not our strategy to eliminate all debt financing.
Because of our significant annual cash flow, we believe that we will be able to
refinance the major pieces of our debt as they mature. Based on our ability to
refinance significant portions of our debt as it matures, we believe that our
cash flow from operations will be sufficient to cover operating needs, future
capital
16
expenditure requirements and scheduled debt payments of miscellaneous small
borrowing arrangements and capitalized leases. It is likely that we will pursue
growth from acquisitions, partnerships and other ventures that we would fund
from excess cash from operations, credit available under a refinanced bank
credit agreement and other financing arrangements that are normally available in
the marketplace.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report may include forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. We identify forward-looking statements in this report by using
words or phrases such as "anticipate," "believe," "estimate," "expect,"
"intend," "may be," "objective," "plan," "predict," "project," and "will be" and
similar words or phrases, or the negative thereof.
These forward-looking statements are subject to numerous assumptions, risks and
uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by us in those statements include, among
others: changes in the health care industry because of political and economic
influences; changes in Medicare, Medicaid and certain private payors'
reimbursement levels; existing government regulations, including applicable
health care, tax and health and safety regulations, and changes in, or the
failure to comply with, governmental regulations or the interpretations thereof;
legislative proposals for health care reform; competition and general economic
and business conditions; the ability to attract and retain qualified personnel;
changes in current trends in the cost and volume of patient-care related claims
and workers' compensation claims and in insurance costs related to such claims;
and other litigation.
Although we believe the expectations reflected in our forward-looking statements
are based upon reasonable assumptions, we can give no assurance that we will
attain these expectations or that any deviations will not be material. Except as
otherwise required by the federal securities laws, we disclaim any obligations
or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this report to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See the discussion of our market risk in our Form 10-K for the year ended
December 31, 2002. The fair value of our 7 1/2% and 8% Senior Notes at March 31,
2003 has not changed significantly since year end.
17
Item 4. Controls and Procedures
Within 90 days of filing this quarterly report, an evaluation was performed
under the supervision and with the participation of our management, including
the chief executive officer, or CEO, and chief financial officer, or CFO, of the
effectiveness of the design and operation of our disclosure procedures. Based on
that evaluation, our management, including the CEO and CFO, concluded that our
disclosure controls and procedures were effective as of March 31, 2003 and the
evaluation date. There have been no significant changes in our internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 - Contingencies in the notes to the consolidated financial statements
for a discussion of litigation related to environmental matters and patient-care
related claims.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
18
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
S-K Item
601 No.
--------
4.1 $200,000,000 Credit Agreement dated as of April 21, 2003 among
Manor Care, Inc., as the Borrower, Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer, and
The Other Lenders Party Hereto
99.1 Chief Executive Officer Certification Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002
99.2 Chief Financial Officer Certification Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002
(b) Reports on Form 8-K
None in the first quarter of 2003.
On April 10, 2003, Manor Care, Inc. filed a Form 8-K and under Item 9
included the April 9, 2003 press release announcing the Company's intention
to refinance its existing credit facility and to issue $200 million of
Senior Notes and $90 million of Senior Convertible Notes. The risk factors
that were included in the preliminary Offering Memorandum in connection with
the Senior Convertible Notes were included in the Form 8-K.
On April 25, 2003, Manor Care, Inc. filed a Form 8-K and under Item 9 (the
information was provided under Item 12 - Results of Operations and Financial
Condition) furnished the April 25, 2003 press release reporting the
Company's financial results for the first quarter of 2003.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Manor Care, Inc.
(Registrant)
Date April 28, 2003 By /s/ Geoffrey G. Meyers
---------------- --------------------------------------------
Geoffrey G. Meyers, Executive Vice President
and Chief Financial Officer
20
CERTIFICATIONS
I, Paul A. Ormond, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Manor Care, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 28, 2003
/s/ Paul A. Ormond
Chairman, President and Chief Executive Officer
21
I, Geoffrey G. Meyers, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Manor Care, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 28, 2003
/s/ Geoffrey G. Meyers
Executive Vice President and Chief Financial Officer
22
EXHIBIT INDEX
Exhibit
-------
4.1 $200,000,000 Credit Agreement dated as of April 21, 2003 among
Manor Care, Inc., as the Borrower, Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer, and
The Other Lenders Party Hereto
99.1 Chief Executive Officer Certification Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002
99.2 Chief Financial Officer Certification Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002
23