<PAGE>
THIS DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON OCTOBER 16, 1997 PURSUANT TO
A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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 August 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
MANOR CARE, INC.
----------------
COMMISSION FILE NUMBER 1-8195
-----------------------------
Incorporated in Delaware E.I.#52-1200376
- ------------------------ ---------------
11555 Darnestown Road, Gaithersburg, Maryland 20878
- ---------------------------------------------------
Telephone: (301) 979-4000
- ---------- --------------
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 twelve months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
63,587,770 Common Shares were outstanding as of October 8, 1997.
This report contains 12 pages.
<PAGE>
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
MANOR CARE, INC. AND SUBSIDIARIES
---------------------------------
The consolidated balance sheet as of August 31, 1997, the consolidated
statements of income and the consolidated statements of cash flows for the three
months ended August 31, 1997 and 1996, 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 August 31, 1997 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, 1997 Form 8-K, previously filed with
the Commission. The results of operations and cash flows for the three month
periods ended August 31, 1997 and 1996 are not necessarily indicative of the
operating results or cash flows for the full year.
2
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
August 31, 1997 May 31, 1997
--------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 30,063 $ 18,396
Receivables (net of allowances
of $28,495 and $24,670) 147,908 126,043
Advances to discontinued lodging segment 115,723 --
Inventories 11,323 11,273
Current deferred income taxes 30,300 32,083
Other current assets 35,081 5,874
----------- -----------
Total current assets 370,398 193,669
----------- -----------
Property and Equipment, at cost
Land 78,712 76,130
Buildings and improvements 835,358 815,851
Capitalized leases 12,747 12,747
Furniture, fixtures and equipment 183,317 175,896
Facilities in progress 58,234 48,154
----------- -----------
1,168,368 1,128,778
Less accumulated depreciation (337,911) (322,985)
----------- -----------
Net property and equipment 830,457 805,793
----------- -----------
Goodwill, net of accumulated amortization 9,427 9,479
----------- -----------
Due from discontinued assisted living, pharmacy,
and home health segments 75,560 75,560
----------- -----------
Advances to discontinued lodging segment -- 115,723
----------- -----------
Net investment in discontinued assisted living,
pharmacy and home health segments 277,235 277,066
----------- -----------
Other assets 75,215 70,288
----------- -----------
Total assets $ 1,638,292 $ 1,547,578
=========== ===========
</TABLE>
3
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
August 31, 1997 May 31, 1997
--------------- ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 11,626 $ 11,649
Accounts payable 57,040 53,462
Accrued expenses 91,491 94,840
Income taxes payable 9,428 --
----------- -----------
Total current liabilities 169,585 159,951
----------- -----------
Mortgages and Other Long-Term Debt 261,943 201,680
----------- -----------
Subordinated Long-Term Debt 289,564 289,510
----------- -----------
Deferred Income Taxes and Other 206,523 206,006
----------- -----------
Shareholders' Equity
Common stock 6,701 6,682
Contributed capital 198,188 194,640
Retained earnings 557,101 538,630
Treasury stock, at cost (51,313) (49,521)
----------- -----------
Total shareholders' equity 710,677 690,431
----------- -----------
$ 1,638,292 $ 1,547,578
=========== ===========
</TABLE>
4
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended August 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues $ 274,054 $ 250,226
Expenses
Operating expenses 208,247 191,539
Depreciation and amortization 15,985 14,586
General corporate and other 11,265 14,163
--------- ---------
Total expenses 235,497 220,288
--------- ---------
Income from operations 38,557 29,938
--------- ---------
Other income and (expenses)
Interest income from advances
to discontinued lodging segment 2,604 5,079
Interest income and other 2,592 1,653
Interest expense (6,829) (5,302)
--------- ---------
Total other income and
(expenses), net (1,633) 1,430
--------- ---------
Income from continuing operations
before income taxes 36,924 31,368
Income taxes 14,100 12,327
--------- ---------
Income from continuing operations 22,824 19,041
Discontinued operations:
Income from discontinued assisted
living, pharmacy and home health
operations (net of income taxes
of $750 and $1,273) (2,964) 1,225
Income from discontinued
lodging operations (net of income
taxes of $2,934) -- 3,419
--------- ---------
Net income $ 19,860 $ 23,685
========= =========
Weighted average shares of common stock 63,708 63,002
========= =========
Income per share of common stock:
Income from continuing
operations $ 0.36 $ 0.30
Income from discontinued
assisted living, pharmacy and
home health operations (0.05) 0.02
Income from discontinued
lodging operations -- 0.06
--------- ---------
Net income per share of
common stock $ 0.31 $ 0.38
========= =========
Dividends per share of common stock $ .022 $ .022
========= =========
</TABLE>
5
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended August 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,860 $ 23,685
Reconciliation of net income to net cash
provided by operating activities:
Income from discontinued assisted living,
pharmacy and home health operations 2,964 (1,225)
Income from discontinued lodging segment -- (3,419)
Depreciation and amortization 15,985 14,586
Amortization of debt discount 71 103
Provision for bad debts 5,891 3,490
Increase (decrease) in deferred taxes 4,355 (2,686)
Minority interest in discontinued segment 11 26
Changes in assets and liabilities
Change in receivables (27,756) (8,495)
Change in inventories and other current assets (29,257) (30,050)
Change in current liabilities 229 (7,931)
Change in income taxes payable 9,428 17,667
Change in other liabilities (2,067) (9,681)
--------- ---------
NET CASH UTILIZED BY CONTINUING OPERATIONS (286) (3,930)
NET CASH (UTILIZED) PROVIDED BY DISCONTINUED
ASSISTED LIVING, PHARMACY AND HOME HEALTH
OPERATIONS (20,160) 11,420
NET CASH PROVIDED BY DISCONTINUED
LODGING OPERATIONS -- 13,929
--------- ---------
NET CASH (UTILIZED) PROVIDED BY OPERATING
ACTIVITIES (20,446) 21,419
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (45,463) (28,920)
Advances to discontinued assisted living, pharmacy
and home health operations (3,133) (9,146)
Other items, net (173) (7,285)
--------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES
OF CONTINUING OPERATIONS (48,769) (45,351)
NET CASH PROVIDED (UTILIZED) BY INVESTING
ACTIVITIES OF DISCONTINUED ASSISTED LIVING,
PHARMACY AND HOME HEALTH OPERATIONS 6,938 (10,937)
NET CASH UTILIZED BY INVESTING ACTIVITIES
OF DISCONTINUED LODGING OPERATIONS -- (16,577)
--------- ---------
NET CASH (UTILIZED) BY INVESTING
ACTIVITIES (41,831) (72,865)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 60,800 149,400
Principal payments of debt (578) (116,275)
Proceeds from exercise of stock options 3,691 9,964
Treasury Stock acquired (1,792) --
Retirement of bonds -- (9,900)
Dividends paid (1,399) (1,381)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES OF CONTINUING OPERATIONS 60,722 31,808
NET CASH PROVIDED (UTILIZED) BY FINANCING
ACTIVITIES OF DISCONTINUED ASSISTED LIVING,
PHARMACY AND HOME HEALTH OPERATIONS 13,222 (483)
NET CASH PROVIDED BY FINANCING ACTIVITIES
OF DISCONTINUED LODGING OPERATIONS -- 260
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 73,944 31,585
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 11,667 (19,861)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,396 38,943
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,063 $ 19,082
========= =========
</TABLE>
6
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following review of operating results includes the historical results of
operations of the Company for the three months ended August 31, 1997 and August
31, 1996 reflecting the Company's assisted living, pharmacy and home health
segments as discontinued operations. The results of operations for the three
months ended August 31, 1996 previously reported have been restated to reflect
the assisted living, pharmacy and home health segments as discontinued
operations.
Net income for the three months ended August 31, 1997 was $19.9 million or $0.31
per share as compared to $23.7 million or $0.38 per share reported in the prior
year quarter.
Income from operations for the three months ended August 31, 1997 was $38.6
million. This compares to income from operations in the same period last year of
$29.9 million.
Gross profit for the three months ended August 31, 1997 increased $7.1 million,
when compared with the same period last year. For the three months ended August
31, 1997, revenues and operating expenses rose 9.5% and 8.7% respectively.
Increased capacity and rates of 5.0% and 5.8%, respectively, in the Company's
skilled nursing facilities accounted for the improvement in first quarter gross
profit.
Depreciation and amortization increased $1.4 million for the three month period
ended August 31, 1997 from the same period last year as a result of
acquisitions, new construction and increases in property and equipment resulting
from additions and renovations to existing facilities during the past twelve
months.
General corporate and other expense for the three months ended August 31, 1997
decreased $2.9 million when compared to the same period last year. This decrease
was primarily because of downsizing due to reengineering efforts in both
organizational and financial systems. General corporate and other expense
represented 4.1% of revenues during the three months ended August 31, 1997
compared to 5.7% for the same period last year. General corporate and other
expense includes risk management, information systems, treasury, accounting,
legal, human resources and other administrative support functions.
Interest expense increased $1.5 million for the three months ended August 31,
1997 compared to the same period last year. The increase was attributable to the
increase in the average outstanding balance of the $250 million competitive
advance and multi-currency revolving credit facility (the "Credit Facility")
during the current period when compared to the same period last year. Interest
capitalized in conjunction with construction programs amounted to $0.8 million
and $1.1 million in the three months ended August 31, 1997 and 1996,
respectively.
7
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONT.)
Long-Term Debt
- --------------
Long-term debt was $551.5 million at August 31, 1997 compared to $491.2 million
at May 31, 1997. The amounts related to assisted living mortgages totaled $45.6
million at August 31, 1997 and are included in long-term debt as well as in due
from discontinued assisted living, pharmacy and home health segments, as these
mortgages will be transferred to the discontinued assisted living, pharmacy and
home health segments on the date of the distribution.
The Company's Credit Facility is provided by a group of sixteen banks.
Borrowings under the Facility are, at the option of the Company, at one of
several rates including LIBOR plus 20 basis points. In addition, the Company has
the option to request participating banks to bid on loan participation at lower
rates than those contractually provided by the Facility. The Facility presently
requires the Company to pay fees of 10 basis points on the entire loan
commitment. The Facility will terminate on September 6, 2001. Outstanding
borrowings at August 31, 1997 totaled $175.0 million.
In June 1996, the Company issued $150.0 million of 7.5% Senior Notes due 2006.
These notes are redeemable at the option of the Company at any time at a price
equal to the greater of (a) the principal 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 redemption. The proceeds of this offering were used to repay
borrowings under the Company's Credit Facility. In July 1996, the Company
repurchased 9.5% Senior Subordinated Notes with a face amount of $9.9 million
for $10.5 million. On October 1, 1997, a notice was mailed to bondholders
indicating the Company's intention to redeem the 9.5% Senior Subordinated Notes
on November 17, 1997 at a price of 103.56% of the principal amount plus accrued
interest.
Acquisitions, Openings, Divestitures and Sales of Property
- ----------------------------------------------------------
During the first three months of fiscal year 1998, the Company opened one
newly constructed skilled nursing center located in California.
During fiscal year 1997, the Company acquired two skilled nursing centers for
$17.8 million. Additionally, the Company opened four newly constructed skilled
nursing centers. The Company also sold four skilled nursing centers for $17.3
million.
8
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONT.)
Discontinued Operations
- -----------------------
On September 15, 1997, the Company announced its intention to proceed with a
separation of its assisted living, pharmacy and home health businesses
(collectively, the "Health Services Business") from its skilled nursing, real
estate and healthcare facility development business via a spin-off of the Health
Services Business (the "Distribution"). The spin-off of the Health Services
Business will be effected by a distribution to the Company's shareholders of all
the common stock of New ManorCare Health Services, Inc., a wholly owned
subsidiary of the Company, which as of the date of the spin-off, will own and
operate all the Company's assisted living operations as well as manage the
skilled nursing assets owned by the Company. Following the Distribution, New
ManorCare Health Services, Inc. will change its name to ManorCare Health
Services, Inc. and the Company will change its name to Manor Care Realty, Inc.
The Board of Directors voted to approve in principle the transaction subject to
receipt of other approvals and consents and satisfactory implementation of the
arrangements for the Distribution. The Company anticipates that the transaction
will be completed by the end of calendar year 1997. The Distribution is
conditional upon certain matters, including receipt of a satisfactory
solvency opinion, necessary regulatory approvals and relicensing arrangements as
well as the declaration of the special dividend by the Company's Board of
Directors. On October 9, 1997, the Company received a ruling from the Internal
Revenue Service which provides, among other things, that the Distribution will
qualify as a tax-free transaction to the Company and its shareholders. As of
August 31, 1997, the Company had cash advances totaling $277.2 million
outstanding from the Health Services Business. These advances will be forgiven
at the date of the spin-off.
Liquidity and Capital Resources
- -------------------------------
The Company has available cash balances of $30.1 million as of August 31, 1997.
In connection with the Distribution, Manor Care is offering $350.0 million
Senior Notes due 2007. Concurrently with the sale of the Notes, the Company
anticipates entering into new credit facilities (the "Credit Facilities") to be
provided by a group of banks consisting of a $300.0 million revolving credit
facility and a $150.0 million term loan facility. The gross proceeds from the
issuance of the Notes, together with borrowings under the Credit Facilities will
be used to effect the Distribution, including financing the cash portion of the
capital contribution to New ManorCare Health Services, refinancing certain debt
of Manor Care and paying related fees and expenses. Additionally, ManorCare
Health Services plans to offer to exchange $1,000 principal amount of its 7 1/2%
Senior Notes due 2006 (the "New MCHS Senior Notes") for each $1,000 principal
amount of 7 1/2% Senior Notes due 2006 of Manor Care (the "Old Senior Notes")
properly tendered (the "Exchange Offer"). In addition, consents to certain
amendments of the covenants governing the Old Senior Notes will be sought in
connection with the Exchange Offer. Consummation of the Exchange Offer is
conditioned upon, among other things, acceptance of the Exchange Offer by
holders of at least a majority in principal amount of the Old Senior Notes (the
"Minimum Tender Condition") and consummation of the Distribution. As a result of
the Exchange Offer, ManorCare Health Services, not Manor Care Realty, will be
the obligor on the New MCHS Senior Notes; and Manor Care Realty, not ManorCare
Health Services, will remain the obligor on the Old Senior Notes. On October 8,
1997, the Company received notification from its discontinued lodging segment
that it will prepay the balance of the advances from the Company on October 15,
1997. The available cash balances and additional debt being offered are
considered adequate to ensure sufficient liquidity and capital resources for
both the upcoming year and the foreseeable future.
9
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
PART II-OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
- -------
At the annual shareholders meeting on September 15, 1997, the shareholders
elected the directors who had been nominated by the Company. The number of votes
cast was as follows:
<TABLE>
<CAPTION>
For Against/Withheld
--- ----------------
<S> <C> <C>
Stewart Bainum, Jr 56,083,780 172,511
Stewart Bainum 56,085,789 170,502
Regina E. Herzlinger 56,085,903 170,788
William H. Longfield 56,089,981 166,310
Frederic V. Malek 56,055,582 200,709
Jerry E. Robertson 56,067,818 188,473
Kennett L. Simmons 56,085,398 170,893
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
- -------
(a) Exhibits
27 - Financial Data Schedule
(b) There was a Form 8-K filed on September 15, 1997.
10
<PAGE>
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)
/s/ Leigh C. Comas
---------------------------------
Date: October 13, 1997 By: Leigh C. Comas
---------------- Vice President, Finance
and Treasurer
/s/ James H. Rempe
---------------------------------
Date: October 13, 1997 By: James H. Rempe
---------------- Senior Vice President,
General Counsel and Secretary
/s/ Margarita Schoendorfer
---------------------------------
Date: October 13, 1997 By: Margarita Schoendorfer
---------------- Vice President and
Corporate Controller
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF INCOME AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> AUG-31-1997
<CASH> 30,063
<SECURITIES> 0
<RECEIVABLES> 176,403
<ALLOWANCES> 28,495
<INVENTORY> 11,323
<CURRENT-ASSETS> 370,398
<PP&E> 1,168,368
<DEPRECIATION> 337,911
<TOTAL-ASSETS> 1,638,292
<CURRENT-LIABILITIES> 169,585
<BONDS> 551,507
0
0
<COMMON> 6,701
<OTHER-SE> 703,976
<TOTAL-LIABILITY-AND-EQUITY> 1,638,292
<SALES> 0
<TOTAL-REVENUES> 274,054
<CGS> 0
<TOTAL-COSTS> 213,621
<OTHER-EXPENSES> 15,985
<LOSS-PROVISION> 5,891
<INTEREST-EXPENSE> 6,829
<INCOME-PRETAX> 36,924
<INCOME-TAX> 14,100
<INCOME-CONTINUING> 22,824
<DISCONTINUED> (2,964)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,860
<EPS-PRIMARY> 0.312<F1>
<EPS-DILUTED> 0.312<F1>
<FN>
<F1>THE COMPANY PRESENTS SIMPLE EARNINGS PER SHARE (EPS) ON THE FACE OF ITS
INCOME STATEMENT, AS FULLY DILUTIVE EPS IS WITHIN 97% OF SIMPLE EPS. THE FIGURES
PRESENTED ABOVE ARE SIMPLE EPS.
</FN>
</TABLE>
