<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1994
-----------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ------ to -------
MANOR CARE, INC.
----------------
COMMISSION FILE NUMBER 1-8195
-----------------------------
Incorporated in Delaware E.I.#52-1200376
- ------------------------ ---------------
10750 Columbia Pike, Silver Spring, Maryland 20901
- --------------------------------------------------
Telephone: (301) 681-9400
- ---------
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
62,358,475 Common Shares were outstanding as of April 8, 1994.
This report contains 11 pages.
<PAGE> 2
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
MANOR CARE, INC. AND SUBSIDIARIES
The consolidated balance sheet as of February 28, 1994, the consolidated
statements of income for the three and nine month periods ended February 28,
1994 and 1993, and the consolidated statements of cash flows for the nine
months ended February 28, 1994 and 1993, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows at February 28, 1994 and for all
periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's May 31, 1993 annual
report to shareholders, previously filed with the Commission. The results of
operations for the three and nine month periods ended February 28, 1994 and
1993, and cash flows for the nine months ended February 28, 1994 and 1993, are
not necessarily indicative of the operating results or cash flows for the full
year.
2
<PAGE> 3
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
February 28, 1994 May 31, 1993
----------------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 56,895 $ 80,844
Receivables (net of allowances
of $21,081 and $16,501) 84,889 82,820
Inventories 13,885 13,489
Current deferred income tax benefit 6,381 6,381
Prepaid expenses 16,238 9,374
Other assets 1,592 1,351
--------- ---------
Total current assets 179,880 194,259
--------- ---------
Property and equipment, at cost
Land 91,314 80,944
Building and improvements 780,479 749,261
Capitalized leases 18,991 18,991
Furniture, fixtures and equipment 178,448 168,321
Facilities in progress 18,635 11,762
--------- ---------
1,087,867 1,029,279
Less accumulated depreciation (295,552) (275,533)
--------- ---------
Net property and equipment 792,315 753,746
--------- ---------
Lodging franchise rights 65,176 67,343
Other assets 106,305 91,158
--------- ---------
$1,143,676 $1,106,506
========= =========
</TABLE>
NOTE: The balance sheet at May 31, 1993 has been taken from the
audited financial statements at that date.
3
<PAGE> 4
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
February 28, 1994 May 31, 1993
----------------- ------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 5,753 $ 45,338
Accounts payable 45,152 44,504
Accrued expenses 106,955 85,377
Income taxes payable 6,875 5,254
--------- --------
Total current liabilities 164,735 180,473
--------- --------
Mortgage and other long-term debt 114,824 124,838
--------- --------
Subordinated long-term debt 157,556 255,600
--------- --------
Deferred Income Taxes and Other 194,310 183,601
--------- --------
Stockholders' Equity
Capital stock 6,543 6,047
Contributed capital 167,051 68,471
Retained earnings 381,184 329,532
Cumulative translation adjustment 3 352
Treasury stock, at cost (42,530) (42,408)
--------- ---------
Total stockholders' equity 512,251 361,994
--------- ---------
$1,143,676 $1,106,506
========= =========
</TABLE>
NOTE: The balance sheet at May 31, 1993 has been taken from the audited
financial statements at that date.
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<PAGE> 5
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per-share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
--------------------- --------------------
1994 1993 1994 1993
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Healthcare, net $231,503 $209,732 $676,878 $611,107
Lodging 52,568 35,213 176,446 132,945
-------- -------- -------- --------
Total revenues 284,071 244,945 853,324 744,052
-------- -------- -------- --------
Expenses
Healthcare 175,488 159,030 513,665 464,139
Lodging 40,836 26,952 127,323 93,933
Depreciation & amortization 16,766 15,395 49,196 45,004
General corporate 17,658 15,927 49,202 42,873
-------- -------- -------- --------
Total expenses 250,748 217,304 739,386 645,949
-------- -------- -------- --------
Income from operations 33,323 27,641 113,938 98,103
-------- -------- -------- --------
Other income (expenses)
Interest income and other 440 1,412 1,502 2,846
Gain on sale of property - - 7,978 -
Interest expense (7,312) (9,807) (24,564) (27,669)
-------- -------- -------- --------
Total other (expenses), net (6,872) (8,395) (15,084) (24,823)
-------- -------- -------- --------
Income before income taxes and
extraordinary item 26,451 19,246 98,854 73,280
Income taxes 10,800 7,400 43,200 28,200
-------- -------- -------- --------
Income before extraordinary
item 15,651 11,846 55,654 45,080
Extraordinary item (debt
redemption, net of income
taxes of $1,851) - (3,019) - (3,019)
-------- -------- -------- --------
Net income $ 15,651 $ 8,827 $ 55,654 $ 42,061
======== ======== ======== ========
Average shares outstanding 62,450 57,569 59,854 57,449
======== ======== ======== ========
Income per share of common stock*
Income before extraordinary item $ .25 $ .21 $ .93 $ .79
Extraordinary item (debt
redemption) - (.05) - (.05)
-------- -------- -------- --------
Net income per share of common
stock $ .25 $ .15* $ .93 $ .73*
======== ======== ======== ========
</TABLE>
* Does not add due to rounding.
5
<PAGE> 6
MANOR CARE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
February 28, February 28,
1994 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,654 $ 42,061
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization 49,196 45,004
Amortization of debt discount 864 644
Provision for bad debts 9,300 6,408
Increase in deferred taxes 5,877 2,263
Gain on sale of facilities (7,978) -
Changes in assets and liabilities
(excluding sold facilities):
Change in accounts receivable (11,287) (5,637)
Change in inventory and other current assets (6,874) (2,345)
Change in accounts payable and accrued expenses 21,806 (3,593)
Change in income taxes payable 1,621 1,660
Change in other liabilities 2,893 1,951
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 121,072 88,416
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (58,460) (67,932)
Purchase of operating pharmacies (7,250) (29,188)
Purchase of operating hotels (27,250) (12,386)
Investment in a healthcare business (10,000) -
Proceeds from sale of facilities 15,630 -
Other items, net (2,775) 5,574
-------- --------
NET CASH UTILIZED BY INVESTING ACTIVITIES (90,105) (103,932)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of ten year notes - 150,000
Principal payments of debt (52,899) (157,734)
Proceeds from exercise of stock options 1,985 1,088
Issuance/purchase of common stock for treasury - 137
Dividends paid (4,002) (3,783)
-------- --------
NET CASH UTILIZED BY FINANCING ACTIVITIES (54,916) (10,292)
-------- --------
CHANGE IN CASH AND CASH EQUIVALENTS (23,949) (25,808)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 80,844 83,101
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 56,895 $ 57,293
======== ========
</TABLE>
6
<PAGE> 7
MANOR CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1994
(unaudited)
Long-Term Debt
- --------------
During the nine months ended February 28, 1994, the Company repaid
approximately $53 million of debt. Included in this amount was approximately
$3 million related to the Company's redemption of the $99 million of 6-3/8%
Convertible Subordinated Debentures due 2011 on October 25, 1993. The
remaining $96 million were converted, at the election of the bondholders, into
common stock at a conversion price per share of $20.31. Pursuant to these
conversions, 4,743,522 shares of common stock were issued.
On November 20, 1992 the Company issued $150 million of 9-1/2% Senior
Subordinated Notes due 2002. The proceeds of this offering were primarily used
to redeem in January 1993 the $125 million of 11-3/8% Senior Subordinated Notes
due 1998. Also during the nine months ended February 28, 1993, the Company
repaid approximately $33 million of other debt.
Acquisitions, Divestitures and Sales of Property
- ------------------------------------------------
In August 1992 the Company's 82% owned institutional pharmacy subsidiary,
Vitalink Pharmacy Services, Inc., purchased a pharmacy located in Baltimore,
Maryland, servicing 2,600 institutional beds for approximately $3.5 million.
In December 1992 Vitalink also purchased a pharmacy business in New Jersey,
servicing over 9,000 institutional beds, for approximately $25 million. In
August 1993 a pharmacy business in Oregon was purchased for approximately $5.0
million. In December 1993 a pharmacy business in Colorado was purchased for
approximately $2.2 million.
In April 1993 two nursing facilities were sold for $5.2 million. The realized
gain from this sale was immaterial. In July 1993 three nursing facilities were
sold for $15.6 million with a pre-tax gain of approximately $8.0 million.
In December 1993 the Company made a $10 million investment for a minority
interest in a physician practice management business.
During fiscal year 1993, the Company purchased seven operating hotels
containing a total of 1,306 rooms for approximately $25 million. In the first
nine months of fiscal 1994, eight operating hotels were purchased containing a
total of 1,214 rooms for approximately $27 million. An additional two hotels
were purchased in fiscal 1994 which are in the process of being converted to
assisted living facilities.
7
<PAGE> 8
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
Available cash balances of $57 million as of February 28, 1994 and unused lines
of credit of $162 million are considered adequate to ensure sufficient
liquidity and capital resources for the foreseeable future.
Results of Operations
- ---------------------
Income before extraordinary item for the three months ended February 28, 1994
was $15.7 million or $.25 per share as compared to $11.8 million or $.21 per
share reported in the prior year quarter. For the nine months ended February
28, 1994, income before extraordinary item amounted to $55.7 million or $.93
per share as compared to the prior year's $45.1 million or $.79 per share. The
prior year results include a one-time, extraordinary after tax charge of $3.0
million relating to the early redemption of $125 million of 11-3/8% Senior
Subordinated Notes due 1998. Net income after extraordinary loss from early
debt redemption for the three months and nine months ended February 28, 1993
amounted to $8.8 million or $.15 per share and $42.1 million or $.73,
respectively.
Income from operations for the three and nine month periods ended February 28,
1994 was $33.3 million and $113.9 million, respectively. This compares to
income from operations in the same periods last year of $27.6 million and $98.1
million, respectively.
Gross profit for the healthcare division for the three and nine months ended
February 28, 1994, increased $5.3 million and $16.2 million, respectively, when
compared with the same periods last year. For the three and nine months ended
February 28, 1994, healthcare revenues and operating expenses rose 10% and 11%,
respectively. The improvement in gross profit was primarily due to the
maturing of the new facilities opened as part of the Company's internal
development program as well as the expansion of value added services.
8
<PAGE> 9
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
- ---------------------------------
Gross profit for the lodging division for the three and nine month periods
ended February 28, 1994 increased $3.5 million and $10.1 million, respectively,
when compared to the same periods last year. Lodging revenues increased 49%
and 33% and lodging expenses increased 52% and 36% for the three and nine month
periods, respectively. Significant increases in revenues and expenses are due
to the recent purchases of hotels. Furthermore, operating profits have
increased due to the economy's gradual recovery which has stimulated demand for
the Company's economy and mid-market lodging brands.
Depreciation and amortization increased $1.4 and $4.2 million for the three and
nine month periods ended February 28, 1994, respectively, due to the lodging
acquisitions and increases in property and equipment resulting from additions
and renovations to existing facilities during the past twelve months.
General Corporate expenses for the three and nine months ended February 28,
1994 increased $1.7 million and $6.3 million, respectively, when compared to
the same periods last year. These increases were primarily due to general
inflation and increased payroll and benefits costs relating to various
programs.
Interest expense for the three and nine months ended February 28, 1994
decreased $2.5 million and $3.1 million, respectively, when compared to the
same periods last year. The net decrease is primarily due to the early
redemption and conversion of the $99 million of 6-3/8% debentures on October
25, 1993. Interest capitalized, in conjunction with construction programs,
amounted to $.4 million and $2.2 million in the nine months ended February 28,
1994 and 1993, respectively.
9
<PAGE> 10
MANOR CARE, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 - Agreement dated as of February 11, 1994 between Choice
Hotels International, Inc. and Frederick W. Mosser.
(b) There were no reports filed on Form 8-K for the three
months ended February 28, 1994.
10
<PAGE> 11
MANOR CARE, INC. AND SUBSIDIARIES
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)
<TABLE>
<S> <C> <C>
Date: April 8, 1994 By: James A. MacCutcheon
------------- Senior Vice President
and Chief Financial Officer
Date: April 8, 1994 By: James H. Rempe
------------- Senior Vice President
General Counsel and Secretary
Date: April 8, 1994 By: Margarita Schoendorfer
------------- Vice President and
Corporate Controller
</TABLE>
11
<PAGE> 12
EXHIBIT INDEX
10-1 - Agreement dated as of February 11, 1994 between Choice
Hotels International, Inc. and Frederick W. Mosser.
<PAGE> 1
EXHIBIT 10.1
SETTLEMENT AGREEMENT
Frederick W. Mosser and Choice Hotels International, Inc. have reached
the following Agreement as of February 11, 1994. In this Agreement, "Employee"
refers to Frederick W. Mosser. "Company" refers to Choice Hotels
International, Inc.
1. Termination of Employment. Employee's employment agreement
dated as of July 31, 1991 and employment will terminate on March 11, 1994.
Employee's job duties will terminate on February 11, 1994. Employee hereby
resigns as an officer and director of the Company and its affiliated
corporations effective February 11, 1994. Upon termination of employment,
Employee will return to Company any property owned by Company, including credit
cards, keys to buildings and non-public materials, except that pursuant to the
terms set forth in paragraph 2(J) below Employee may continue to use his
company car until his final departure from Germany to the United States (not
later than July 1, 1994).
2. Benefits. Company will pay Employee the following benefits:
A) Salary through March 11, 1994, with usual deductions taken
(i.e., health insurance premium, FICA and income tax withholding, as
applicable).
B) Earned vacation pay, with usual deductions taken.
C) Approved business expenses incurred through March 11, 1994,
according to Company's policies.
<PAGE> 2
D) An additional amount equal to US $500,000, payable on or
before February 28, 1994 with usual deductions taken.
E) Company will pay for Employee's US, Maryland and German income
tax preparation for 1993 and 1994.
F) Company will indemnify Employee against Maryland income taxes
assessed for all years or partial years that Employee
has been employed by Company in Germany. Furthermore, Employee's liability to
the Company, if any, for taxes due for 1993 and 1994 pursuant to his employment
agreement dated as of July 31, 1991 and letter of understanding dated June 19,
1991 is hereby waived by the Company.
G) Company will pay the reasonable costs of moving Employee, his
family and household goods back to the US and will also pay the reasonable
costs of delivery of household goods stored while Employee has been employed by
Company in Germany.
H) Company will pay the reasonable costs of restoring Employee's
home in Bethesda, Maryland to the condition at the beginning of the present
tenant's tenancy (reasonable wear and tear excepted) upon the present tenant's
vacating the premises in or about September 1994.
I) Company will pay the reasonable costs of restoring Employee's
rental house in Germany to the condition at the beginning of the Employee's
tenancy (reasonable wear and tear excepted) upon his vacating it in about June
1994.
J) Employee will be allowed the continued use, with all operating
expenses to be borne by Employee, of his company car
2
<PAGE> 3
until July 1, 1994 or until his departure from Germany to the US, whichever
first occurs.
Employee understands that these benefits are all Employee is entitled
to receive from Company except for rights under stock option agreements
presently vested or which vest prior to termination of employment and further
except for retirement or profit- sharing benefits to which Employee may be
entitled under Company's standard program, if any. Employee will receive no
further wages, vacation or other similar payments from Company. Employee
agrees that the payments and benefits set forth herein are more than Company is
required to pay under its normal policies and procedures.
3. Complete Release. Employee agrees to release Company, its
parent, and any related companies, subsidiaries and affiliates, and the
officers, directors, employees and agents of all of them, from all claims or
demands Employee may have based on Employee's employment with Company or the
termination of that employment except for claims for benefits under this
Agreement. This includes a release of any rights or claims Employee may have
under the Age Discrimination in Employment Act, which prohibits age
discrimination in employment; Title VII of the Civil Rights Act of 1964, which
prohibits discrimination in employment based on race, color, national origin,
religion or sex; the Equal Pay Act, which prohibits paying men and women
unequal pay for equal work; and any
3
<PAGE> 4
other federal, state or local laws or regulations prohibiting employment
discrimination. This also includes a release by Employee of any claims for
personal injuries, wrongful discharge, compensation and benefits, expenses,
bonuses, or any other employee rights or benefits. This release does not
include a release of Employee's right, if any, to retirement or profit-sharing
benefits under Company's standard programs, if any.
This Agreement covers both claims Employee knows about and those he or
she may not know about. Employee assumes the risk of any and all unknown
claims which may exist at the time he or she signs this Agreement, and agrees
that this Agreement shall apply to any and all known and unknown claims.
4. Future Lawsuits. Employee promises never to file a lawsuit
asserting any claims that are released in Paragraph 3 of this Agreement.
Employee further agrees not to assist any other person in bringing any action,
claim or demand against Company and agrees not to make derogatory remarks about
Company. Employee agrees to assist Company at Company's expense in any lawsuit
or claim arising from circumstances that took place during Employee's
employment, to the extent reasonably necessary to protect Company's interests,
and Company will reimburse Employee's reasonable expenses in connection
therewith.
5. Business Information of Company. Employee agrees that for a
period of twenty-four (24) months from the date of termination of employment,
he or she shall not directly or
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<PAGE> 5
indirectly, or cause others to: (1) make use of or disclose to others any
non-public information relating to the business of Company and its affiliates,
including but not limited to present or prospective clients, franchises,
management contracts, development plans, acquisitions, operating data or
Company policies; (2) without Company's prior written consent, offer employment
to or employ on behalf of any other person or entity, any person who is an
employee of Company or its affiliates on the date hereof, or induce such
person, directly or indirectly, to leave his or her employment; or (3) solicit
franchisees, customers or clients of Company or its affiliates, or otherwise
induce such persons, directly or indirectly, to terminate or reduce their
business with Company.
6. Non-Admission of Liability. Company makes this Agreement to
avoid the cost of defending against any possible lawsuit. By making this
Agreement, Company does not admit that it has done anything wrong.
7. Non-Release of Future Claims. This Agreement does not waive
or release any rights or claims that Employee may have under the Age
Discrimination in Employment Act which arise after the termination of
Employee's employment.
8. Consequences of Employee Violation of Promises. If Employee
breaks Employee's promise in Paragraph 4 of this Agreement and files a lawsuit
based on claims that Employee has released,
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Employee will pay for all costs incurred by Company, any related companies, or
the officers, directors, employees or agents of any of them, including
reasonable attorneys' fees, in defending against Employee's claim.
9. Period for Review and Consideration of Agreement. Employee
understands that Employee has been given a period of twenty-one (21) days to
review and consider this Agreement before signing it. Employee further
understands that Employee may use as much of this twenty-one (21) day period as
Employee wishes prior to signing this Agreement.
10. Encouragement to Consult with Attorney. Employee is strongly
encouraged to consult with an attorney before signing this Agreement. Employee
understands that whether or not to do so is Employee's decision.
11. Employee's Right to Revoke Agreement. Employee may revoke
this Agreement within seven (7) days of Employee's signing it. Revocation can
be made by delivering a written notice of revocation to Gerald W. Petitt,
President, Choice Hotels International, Inc., at 10750 Columbia Pike, Silver
Spring, Maryland 20901. For this revocation to be effective, written notice
must be received by Gerald W. Petitt no later than the close of business on the
seventh (7th) day after Employee signs this Agreement. If Employee does not
sign this Agreement within the
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<PAGE> 7
time period set forth in Paragraph 9, or revokes this Agreement, it shall not
be effective or enforceable and Employee will not receive the benefits
described in Paragraphs 2(D), (I) and (J).
12. Termination of Employment. Employee acknowledges that, if
this Agreement becomes effective, Employee's employment with Company will end
irrevocably and forever and will not be resumed.
13. Entire Agreement. This is the entire Agreement between
Employee and Company. Company has made no promises to Employee other than
those in this Agreement.
EMPLOYEE ACKNOWLEDGES THAT HE OR SHE HAS READ THIS AGREEMENT,
UNDERSTANDS IT AND IS VOLUNTARILY ENTERING INTO IT.
PLEASE READ THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL
KNOWN AND UNKNOWN CLAIMS.
<TABLE>
<CAPTION>
EMPLOYEE CHOICE HOTELS INTERNATIONAL, INC.
<S> <C>
/s/ Frederick W. Mosser By: /s/ Gerald W. Petitt
- ------------------------------- ----------------------------------
Frederick W. Mosser Gerald W. Petitt, President
Date: February 11, 1994 Date: February 11, 1994
/s/ Everett F. Casey /s/ Everett F. Casey
- ------------------------------- -------------------------------------
Witness Attest Asst. Secy.
</TABLE>
7
