<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, 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 (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
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63,409,340 Common Shares were outstanding as of March 21, 1997.
This report contains 13 pages.
<PAGE> 2
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
MANOR CARE, INC. AND SUBSIDIARIES
The consolidated balance sheet as of February 28, 1997, the
consolidated statements of income for the three and nine month periods ended
February 28, 1997 and February 29, 1996, and the consolidated statements of cash
flows for the nine months ended February 28, 1997 and February 29, 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 February 28, 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, 1996 annual report to
shareholders, previously filed with the Commission. The results of operations
for the three and nine month periods ended February 28, 1997 and February 29,
1996, and cash flows for the nine months ended February 28, 1997 and February
29, 1996, 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, 1997 May 31, 1996
----------------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 44,213 $ 62,533
Receivables (net of allowances
of $25,135 and $24,783) 116,796 107,267
Inventories 11,907 18,734
Current deferred income tax benefit 40,667 40,420
Prepaid expenses 12,176 3,885
Other current assets 1,395 2,222
----------- -----------
Total current assets 227,154 235,061
----------- -----------
Property and equipment, at cost
Land 97,194 92,884
Buildings and improvements 944,114 887,184
Capitalized leases 12,747 12,747
Furniture, fixtures and equipment 204,672 209,035
Facilities in progress 48,651 49,067
----------- -----------
1,307,378 1,250,917
Less accumulated depreciation (332,294) (332,710)
----------- -----------
Net property and equipment 975,084 918,207
----------- -----------
Goodwill 29,643 54,646
----------- -----------
Advances to discontinued lodging segment 225,723 225,723
----------- -----------
Net investment in Vitalink 156,611 --
----------- -----------
Net investment in discontinued operations -- 159,537
----------- -----------
Other assets 92,140 88,666
----------- -----------
Total assets $ 1,706,355 $ 1,681,840
=========== ===========
</TABLE>
NOTE: The balance sheet at May 31, 1996 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, 1997 May 31, 1996
----------------- ------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 23,669 $ 23,984
Accounts payable 61,042 85,804
Accrued expenses 123,126 113,426
Income taxes 16,493 8,614
----------- -----------
Total current liabilities 224,330 231,828
----------- -----------
Mortgage and other long-term debt 242,251 334,781
----------- -----------
Senior long-term debt 149,445 --
----------- -----------
Subordinated long-term debt 140,016 155,794
----------- -----------
Deferred income taxes and other 284,405 251,668
----------- -----------
Stockholders' equity
Common stock 6,677 6,581
Contributed capital 194,993 174,364
Retained earnings 512,951 571,925
Cumulative translation adjustments -- (1,362)
Treasury stock, at cost (48,713) (43,739)
----------- -----------
Total stockholders' equity 665,908 707,769
----------- -----------
Total liabilities and stockholders' equity $ 1,706,355 $ 1,681,840
=========== ===========
</TABLE>
NOTE: The balance sheet at May 31, 1996 has been taken from the audited
financial statements at that date.
4
<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
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
----------------------- -------------------------
1997 1996 1997 1996
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 354,176 $ 334,404 $ 1,042,240 $ 908,118
--------- --------- ----------- ---------
Expenses
Operating expenses 276,068 261,124 817,550 699,271
Depreciation & amortization 19,002 18,086 55,879 49,685
General corporate & other 16,402 18,350 48,275 53,756
--------- --------- ----------- ---------
Total expenses 311,472 297,560 921,704 802,712
--------- --------- ----------- ---------
Income from operations 42,704 36,844 120,536 105,406
--------- --------- ----------- ---------
Other income (expenses)
Interest income from advances
to discontinued lodging segment 5,079 5,079 15,236 14,595
Interest income and other 1,276 1,162 5,909 3,371
Gain on issuance of Vitalink stock 61,878 -- 61,878 --
Income from net investment in
Vitalink 1,612 -- 1,612 --
Minority interest 96 (244) 342 (1,243)
Interest expense (10,260) (7,617) (29,428) (22,015)
--------- --------- ----------- ---------
Total other income
(expenses), net 59,681 (1,620) 55,549 (5,292)
--------- --------- ----------- ---------
Income from continuing operations 102,385 35,224 176,085 100,114
Income taxes 40,993 14,313 70,393 41,034
--------- --------- ----------- ---------
Net income from continuing
operations 61,392 20,911 105,692 59,080
Discontinued operations:
Income from discontinued lodging
segment (net of income taxes
of $0, $1,487, $16,300, $14,966) -- 1,391 11,829 20,436
--------- --------- ----------- ---------
Net income $ 61,392 $ 22,302 $ 117,521 $ 79,516
--------- --------- ----------- ---------
Average shares outstanding 63,332 62,644 63,137 62,592
--------- --------- ----------- ---------
Earnings per share:
Earnings from continuing
operations $ 0.97 $ 0.34 $ 1.67 $ 0.94
Earnings from discontinued
lodging segment -- 0.02 0.19 0.33
--------- --------- ----------- ---------
Total earnings per share $ 0.97 $ 0.36 $ 1.86 $ 1.27
========= ========= =========== =========
Dividends per share of common stock $ 0.022 $ 0.022 $ 0.066 $ 0.066
========= ========= =========== =========
</TABLE>
5
<PAGE> 6
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
Feb. 28, 1997 Feb. 29, 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 117,521 $ 79,516
Reconciliation of net income to net cash
provided by operating activities:
Gain on issuance of Vitalink stock (61,878) --
Income from net investment in Vitalink (1,612) --
Income from discontinued lodging segment (11,829) (20,436)
Depreciation and amortization 55,879 49,685
Amortization of debt discount 446 484
Provision for bad debts 12,917 12,594
Increase in deferred taxes 40,370 24,538
Gain on sale of properties (7,321) --
Changes in assets and liabilities
Change in accounts receivable (46,796) (21,818)
Change in inventory and other current assets (11,892) (1,089)
Change in current liabilities (8,372) 15,342
Change in income taxes payable 8,047 18,063
Change in other liabilities (17,628) (29,523)
--------- ---------
NET CASH PROVIDED BY CONTINUING OPERATIONS 67,852 127,356
NET CASH PROVIDED BY DISCONTINUED
LODGING SEGMENT 40,599 36,820
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 108,451 164,176
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (114,852) (81,454)
Acquisition of assisted living facilities -- (19,050)
Investment in systems development (7,203) (8,684)
Acquisition of operating pharmacies (5,291) (6,270)
Acquisition of healthcare facilities (17,793) (29,454)
Purchase of home health business -- (22,950)
Purchase of previously leased healthcare facility -- (2,915)
Sale of healthcare facilities 17,283 --
Other items, net (12,810) (5,249)
--------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES
OF CONTINUING OPERATIONS (140,666) (176,026)
NET CASH UTILIZED BY INVESTING ACTIVITIES
OF DISCONTINUED LODGING SEGMENT (29,424) (104,257)
--------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES (170,090) (280,283)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 149,400 94,300
Principal payments of debt (99,269) (20,866)
Advances to discontinued lodging segment -- (27,201)
Proceeds from exercise of stock options 6,867 1,410
Dividends paid (4,433) (4,124)
Retirement of debentures (9,900) --
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES OF CONTINUING OPERATIONS 42,665 43,519
NET CASH PROVIDED BY FINANCING
ACTIVITIES OF DISCONTINUED LODGING SEGMENT 654 25,216
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 43,319 68,735
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS (18,320) (47,372)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 62,533 72,972
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,213 $ 25,600
========= =========
</TABLE>
6
<PAGE> 7
MANOR CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED February 28, 1997
(unaudited)
Long-Term Debt
Long-term debt was $531.7 million at February 28, 1997 compared to $490.6
million at May 31, 1996. The Company has a $250.0 million competitive advance
and multi-currency revolving credit facility provided by a group of sixteen
banks. This facility provides that up to $75 million is available for borrowings
in foreign currencies. 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 requires the Company to pay fees of 1/10 of 1% on the
entire loan commitment. The facility will terminate on September 6, 2001.
Outstanding borrowings at February 28, 1997 totalled $150.0 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
at 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 competitive advance and multi-currency revolving
credit facility. In July 1996, the Company repurchased 9.5% senior notes with a
face amount of $9.9 million for $10.5 million.
Acquisitions, Openings, Divestitures and Sales of Property
During the first nine months of fiscal 1997, the Company transferred an assisted
living facility to the discontinued lodging segment with an approximate net book
value of $4.9 million. The Company's pharmacy subsidiary, Vitalink Pharmacy
Services, Inc., purchased a pharmacy business in California for approximately
$5.3 million. In addition, the Company acquired a nursing center in California
for $4.4 million and a nursing center in Michigan for $13.4 million. Through new
construction, the Company opened four skilled nursing centers and five assisted
living facilities. The Company sold four nursing centers in Indiana, Iowa,
Illinois and Texas for $17.3 million.
During fiscal year 1996, the Company acquired four nursing centers and an
operating lease for approximately $45.4 million, of which $32.4 million was cash
and the remainder was assumed liabilities. Additionally, six assisted living
facilities, with five attached skilled nursing units, were purchased for $74.3
million, of which $19.0 million was cash and the remainder was assumed
liabilities. The Company's pharmacy subsidiary, Vitalink Pharmacy Services,
Inc., purchased two pharmacies for $6.3 million. In October 1995, the Company
purchased 41% of the
7
<PAGE> 8
MANOR CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED February 28, 1997
(unaudited)
Acquisitions, Openings, Divestitures and Sales of Property(Cont.)
common stock of In Home Health, Inc. (IHHI), a provider of home health services,
for $22.9 million. The Company paid an additional $20.0 million to IHHI for 100%
of its outstanding voting convertible preferred stock and for warrants to
purchase an additional 6.0 million shares of common stock. As a result of this
transaction, the Company currently has effective control of approximately 63% of
the voting stock of IHHI.
Pharmacy Subsidiary Merger
On February 12, 1997, Vitalink Pharmacy Services, Inc. completed a merger with
TeamCare, the pharmacy subsidiary of GranCare, Inc. Vitalink issued 11.6 million
shares in exchange for all of the outstanding shares and stock options of
GranCare. In addition, Vitalink funded the redemption of $98 million of
GranCare's 9 3/8% senior subordinated notes and assumed approximately $10
million of additional GranCare indebtedness. The stock issuance resulted in a
pretax gain of $61.9 million.
As a result of the merger, the Company's interest in Vitalink was reduced from
82% to 45%. Consequently, Vitalink was deconsolidated effective February 1, 1997
and the Company's investment in Vitalink is now accounted for under the equity
method.
Liquidity and Capital Resources
Available cash balances of $44.2 million as of February 28, 1997 and unused
lines of credit of $108.8 million are considered adequate to ensure sufficient
liquidity and capital resources for both the upcoming year and the foreseeable
future.
8
<PAGE> 9
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
On November 1, 1996, Manor Care, Inc. completed the spin-off of its lodging
segment by contributing its net investment in discontinued operations totaling
$165.7 million to Choice Hotels International, Inc. (The amount of the
contribution was adjusted in the third quarter for cash payments made by Manor
Care on behalf of Choice totalling $1.0 million.) Manor Care shareholders of
record on October 10, 1996, received one share of Choice Hotels International,
Inc. common stock for each outstanding share of Manor Care common stock.
Accordingly, lodging results are reported as discontinued operations for all
periods presented. Because the spin-off was completed two months into the second
quarter, results for the nine month period ended February 28, 1997 include less
than nine months of income and earnings per share from the discontinued lodging
segment. As a consequence, discontinued lodging results for current year periods
are not directly comparable to results for prior year periods.
Net income for the three months ended February 28, 1997 was $61.4 million or
$0.97 per share, compared to $22.3 million or $0.36 per share reported in the
prior year quarter. Net income for the nine months ended February 28, 1997 was
$117.5 million or $1.86 per share, compared to $79.5 million or $1.27 per share,
last year. Excluding the gain on issuance of Vitalink stock after tax, net
income for the three and nine month periods ended February 28, 1997 was $24.3
million or $0.38 per share and $80.4 million or $1.28 per share, respectively.
Income from operations for the three and nine month periods ended February 28,
1997, was $42.7 million and $120.5 million, respectively. This compares to
income from operations in the same periods last year of $36.8 million and $105.4
million.
Gross profit for the three and nine month periods ended February 28, 1997
increased $4.8 million and $15.8 million, respectively, when compared to the
same periods last year. For the three and nine months ended February 28, 1997,
revenues rose 6% and 15% compared to the same periods in the prior year, while
operating expenses rose 6% and 17%, respectively. Increased capacity and rates
of 6.1% and 5.6%, respectively, in the Company's skilled nursing facilities and
increased capacity in the Company's assisted living facilities accounted for the
improvement in year-to-date gross profit. Due to the Vitalink merger two months
into the third quarter, results for the three and nine month periods ended
February 28, 1997 include less than three and nine months, respectively, of
revenues and expenses for pharmacy operations; therefore, results for current
year periods are not directly comparable to results for prior year periods.
9
<PAGE> 10
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Depreciation and amortization increased $.9 million and $6.2 million for the
three and nine month periods ended February 28, 1997, respectively, when
compared to the same periods last year. The increase was due to acquisitions,
openings of newly constructed facilities and increases in property and equipment
resulting from additions and renovations to existing facilities.
General corporate & other expense for the three and nine month periods ended
February 28, 1997, decreased $1.9 million and $5.5 million, respectively, when
compared to the same periods last year. This decrease was partially due to a
reduction in employees related to the discontinued operations and reengineering
efforts in both organizational and financial systems. Additionally, a gain of
$7.3 million from the sale of four nursing centers is included in general
corporate & other expense for the nine month period ended February 28, 1997. The
Company also recorded charitable contributions expense of $5.0 million which is
included in general corporate & other expense for the nine month period ended
February 28, 1997. General corporate & other expense represented 4.6% of
revenues during both the three and nine month periods ended February 28, 1997
compared to 5.5% and 6.0% for the same periods last year. General corporate &
other expense includes risk management, information systems, treasury,
accounting, legal, human resources and other administrative support functions.
Interest expense for the three and nine month periods ended February 28, 1997,
increased $2.6 million and $7.4 million, respectively, when compared to the same
periods last year. The increase in interest expense resulted primarily from the
issuance of $150.0 million of 7.5% senior notes in June 1996. Interest
capitalized in conjunction with construction programs amounted to $3.6 million
and $2.6 million for the nine months ended February 28, 1997 and February 29,
1996, respectively.
10
<PAGE> 11
MANOR CARE, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
No matters where submitted to a vote of security holders during the three months
ended February 28, 1997.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 - Financial Data Schedule
(b) There were no reports filed on Form 8-K for the three months ended
February 28, 1997.
11
<PAGE> 12
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: April 7, 1997 By: Leigh C. Comas
------------- Vice President, Finance and
Treasurer
/S/ JAMES H. REMPE
-----------------------------------
Date: April 7, 1997 By: James H. Rempe
------------- Senior Vice President,
General Counsel and Secretary
/S/ MARGARITA SCHOENDORFER
-----------------------------------
Date: April 7, 1997 By: Margarita Schoendorfer
------------- Vice President and
Corporate Controller
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
MANOR CARE, INC. AND SUBSIDIARIES
Financial Data Schedule For
Commercial and Industrial Companies <F1>
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 44,213
<SECURITIES> 0
<RECEIVABLES> 147,487
<ALLOWANCES> 25,135
<INVENTORY> 11,907
<CURRENT-ASSETS> 227,154
<PP&E> 1,307,378
<DEPRECIATION> 332,294
<TOTAL-ASSETS> 1,706,355
<CURRENT-LIABILITIES> 224,330
<BONDS> 531,712
0
0
<COMMON> 6,677
<OTHER-SE> 659,231
<TOTAL-LIABILITY-AND-EQUITY> 1,706,355
<SALES> 0
<TOTAL-REVENUES> 1,042,240
<CGS> 0
<TOTAL-COSTS> 860,512
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,917
<INTEREST-EXPENSE> 29,428
<INCOME-PRETAX> 176,085
<INCOME-TAX> 70,393
<INCOME-CONTINUING> 105,692
<DISCONTINUED> 11,829
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,521
<EPS-PRIMARY> 1.861<F2>
<EPS-DILUTED> 1.861<F2>
<FN>
<F1>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.
<F2>The Company presents simple earnings per share (EPS) on the face of its income
statement as fully dilutive EPS is at least 97% of simple EPS. The figures
presented above are simple EPS.
</FN>
</TABLE>
