<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 November 30, 1996
( ) 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
----- -----
62,810,084 Common Shares were outstanding as of January 10, 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 November 30, 1996, the consolidated
statements of income for the three and six month periods ended November 30, 1996
and 1995, and the consolidated statements of cash flows for the six months ended
November 30, 1996 and 1995, 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 November 30, 1996 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 six month periods ended November 30, 1996 and 1995, and cash flows for the
six months ended November 30, 1996 and 1995, 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>
November 30, 1996 May 31, 1996
----------------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 51,564 $ 62,533
Receivables (net of allowances
of $29,000 and $24,311) 125,740 107,267
Inventories 21,344 18,734
Current deferred income tax benefit 40,791 40,420
Prepaid expenses 23,155 3,885
Other current assets 2,758 2,222
--------- ----------
Total current assets 265,352 235,061
--------- ----------
Property and equipment, at cost
Land 94,421 92,884
Buildings and improvements 920,602 887,184
Capitalized leases 12,747 12,747
Furniture, fixtures and equipment 227,654 209,035
Facilities in progress 55,583 49,067
--------- ----------
1,311,007 1,250,917
Less accumulated depreciation (356,341) (332,710)
--------- ----------
Net property and equipment 954,666 918,207
--------- ----------
Goodwill 62,202 54,646
--------- ----------
Advances to discontinued lodging segment 225,723 225,723
--------- ----------
Net investment in discontinued lodging segment - 159,537
--------- ----------
Other assets 97,310 88,666
--------- ----------
Total assets $1,605,253 $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>
November 30, 1996 May 31, 1996
----------------- --------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 17,433 $ 23,984
Accounts payable 67,223 85,804
Accrued expenses 124,273 113,426
Income taxes 17,477 8,614
---------- ----------
Total current liabilities 226,406 231,828
---------- ----------
Mortgage and other long-term debt 231,180 334,781
---------- ----------
Subordinated long-term debt 297,945 155,794
---------- ----------
Deferred income taxes and other 248,066 251,668
---------- ----------
Stockholders' equity
Common stock 6,597 6,581
Contributed capital 182,864 174,364
Retained earnings 453,913 571,925
Cumulative translation adjustments - (1,362)
Treasury stock, at cost (41,718) (43,739)
---------- ----------
Total stockholders' equity 601,656 707,769
Total liabilities and ---------- ----------
stockholders' equity $1,605,253 $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 Six Months Ended
November 30, November 30,
-------------------- --------------------
1996 1995 1996 1995
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Revenues $351,585 $299,722 $688,064 $573,714
-------- -------- -------- --------
Expenses
Operating expenses 275,410 228,657 541,482 438,147
Depreciation & amortization 18,573 16,050 36,877 31,599
General corporate & other 15,896 16,965 31,873 35,406
-------- -------- -------- --------
Total expenses 309,879 261,672 610,232 505,152
-------- -------- -------- --------
Income from operations 41,706 38,050 77,832 68,562
-------- -------- -------- --------
Other income (expenses)
Interest income from advances
to discontinued lodging segment 5,078 4,904 10,157 9,516
Interest income and other 2,560 1,390 4,633 2,209
Minority interest 516 (417) 246 (999)
Interest expense (10,026) (8,791) (19,168) (14,398)
-------- -------- -------- --------
Total other expenses, net (1,872) (2,914) (4,132) (3,672)
-------- -------- -------- --------
Income from continuing operations 39,834 35,136 73,700 64,890
Income taxes 15,800 14,479 29,400 26,721
-------- -------- -------- --------
Net Income from continuing
operations 24,034 20,657 44,300 38,169
Discontinued operations:
Income from discontinued lodging
segment (net of income taxes
of $5,800, $5,821, $16,300,
$13,479) 8,410 8,131 11,829 19,045
-------- -------- -------- --------
Net income $ 32,444 $ 28,788 $ 56,129 $ 57,214
-------- -------- -------- --------
Average shares outstanding 63,079 62,587 63,040 62,566
-------- -------- -------- --------
Earnings per share:
Earnings from continuing
operations $0.38 $0.33 $0.70 $0.61
Earnings from discontinued
lodging segment 0.13 0.13 0.19 0.30
-------- -------- -------- --------
Total earnings per share 0.51 0.46 $ 0.89 $ 0.91
======== ======== ======== ========
Dividends per share of common stock $ 0.022 $ 0.022 $ 0.044 $ 0.044
======== ======== ======== ========
</TABLE>
5
<PAGE> 6
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended November 30,
-----------------------------
1996 1995
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $56,129 $57,214
Reconciliation of net income to net cash
provided by operating activities:
Income from discontinued lodging segment (11,829) (19,045)
Depreciation and amortization 36,877 31,599
Amortization of debt discount 397 230
Provision for bad debts 7,987 7,815
Increase in deferred taxes 5,014 7,774
Gain on sale of properties (7,321) 0
Changes in assets and liabilities
Change in accounts receivable (26,109) (4,942)
Change in inventory and other current assets (20,918) (9,964)
Change in current liabilities (8,955) 1,996
Change in income taxes payable 8,863 6,210
Change in other liabilities (11,210) 12,091
--------- ---------
NET CASH PROVIDED BY CONTINUING OPERATIONS 28,925 90,978
NET CASH PROVIDED BY DISCONTINUED
LODGING SEGMENT 40,599 25,792
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 69,524 116,770
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (78,165) (53,348)
Acquisition of assisted living facilities 0 (19,050)
Investment in systems development (5,548) (2,757)
Acquisition of operating pharmacies (5,291) (5,533)
Acquisition of healthcare facilities (4,440) (14,607)
Purchase of home health business 0 (22,950)
Sale of healthcare facilities 17,283 0
Other items, net (13,899) (10,735)
--------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES
OF CONTINUING OPERATIONS (90,060) (128,980)
NET CASH UTILIZED BY INVESTING ACTIVITIES
OF DISCONTINUED LODGING SEGMENT (29,424) (76,860)
--------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES (119,484) (205,840)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 149,400 56,000
Principal payments of debt (108,547) (2,863)
Advances to discontinued lodging segment 0 (27,201)
Proceeds from exercise of stock options 10,149 598
Dividends paid (2,765) (2,748)
Retirement of debentures (9,900) 0
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES OF CONTINUING OPERATIONS 38,337 23,786
NET CASH PROVIDED BY FINANCING
ACTIVITIES OF DISCONTINUED LODGING SEGMENT 654 25,848
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 38,991 49,634
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS (10,969) (39,436)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 62,533 72,972
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51,564 $ 33,536
========= =========
</TABLE>
6
<PAGE> 7
MANOR CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996
(unaudited)
Long-Term Debt
Long-term debt was $529.1 million at November 30, 1996 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 November 30, 1996 totalled $135.0 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, Divestitures and Sales of Property
During the first six 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 sold four nursing centers in
Indiana, Iowa, Illinois and Texas for $17.3 million, of which $12.9 million
was held in escrow at November 30, 1996.
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 common stock of In Home Health, Inc. (IHHI), a provider of
home health services, for $22.9 million. The Company paid an
7
<PAGE> 8
MANOR CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996
(unaudited)
Acquisitions, Divestitures and Sales of Property (Continued)
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.
8
<PAGE> 9
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 $51.6 million as of November 30, 1996 and unused
lines of credit of $131.6 million are considered adequate to ensure sufficient
liquidity and capital resources for both the upcoming year and the foreseeable
future.
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 is preliminary and may be subject to further adjustment in future
periods. 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 three and six
month periods ended November 30, 1996 include less than three and six months,
respectively, 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 November 30, 1996 was $32.4 million or
$0.51 per share, compared to $28.8 million or $0.46 per share reported in the
prior year quarter. Net income for the six months ended November 30, 1996 was
$56.1 million or $0.89 per share, compared to $57.2 million or $0.91 per share,
last year.
Income from operations for the three and six month periods ended November 30,
1996, was $41.7 million and $77.8 million, respectively. This compares to
income from operations in the same periods last year of $38.1 million and $68.6
million.
Gross profit for the three and six month periods ended November 30, 1996
increased $5.1 million and $11.0 million, respectively, when compared to the
same periods last year. For the three and six months ended November 30, 1996,
revenues rose 17.3% and 19.9% compared to the same periods in the prior year,
while operating expenses rose 20.4% and 23.6%, respectively. Increased
capacity of 6.3% in the Company's skilled nursing facilities and increased
capacity and occupancies at the Company's assisted living facilities accounted
for the improvement in year-to-date gross profit.
Depreciation and amortization increased $2.5 million and $5.3 million for the
three and six month periods ended November 30, 1996, respectively due to
acquisitions and increases in property and equipment resulting from additions
and renovations to existing facilities.
9
<PAGE> 10
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Results of Operations (Continued)
General corporate & other expense for the three and six month periods ended
November 30, 1996, decreased $1.1 million and $3.5 million, respectively, when
compared to the same periods last year. This decrease was partially due to a
reduction in employees related to the discontinued lodging segment 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 three and six month
periods ended November 30, 1996. The Company also recorded charitable
contributions expense of $5.0 million which is included in general corporate
& other expense for the three and six month periods ended November 30, 1996.
General corporate & other expense represented 4.5% and 4.6% of revenues during
the three and six month periods ended November 30, 1996 compared to 5.7%
and 6.2% 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 six month periods ended November 30, 1996,
increased $1.2 million and $4.8 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
$2.6 million and $1.4 million for the six months ended November 30, 1996
and 1995, respectively.
Pharmacy Subsidiary Merger Agreement
In September 1996, the Company's 82%-owned pharmacy subsidiary Vitalink
Pharmacy Services, Inc. and GranCare, Inc. announced that they have entered
into a definitive merger agreement. The first step in the transaction calls
for GranCare to spin-off its skilled nursing operations in a tax-free
distribution to shareholders.
On January 9, 1997, Vitalink announced that the SEC has declared effective the
registration statements relating to the merger. The transaction is expected to
be completed on or about February 10, 1997.
10
<PAGE> 11
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 30, 1996, 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. 55,157,627 125,550
Stewart Bainum 54,671,291 611,886
Regina E. Herzlinger 55,174,731 108,446
William H. Longfield 55,172,844 110,333
Frederic V. Malek 55,139,530 143,647
Jerry E. Robertson 55,153,659 129,518
Kenneth L. Simmons 55,165,409 117,768
</TABLE>
The shareholders approved the Manor Care, Inc. 1996 Non-employee Director Stock
Compensation Plan, which authorizes the awarding of a maximum of 40,000 shares
of Company common stock to non-employee directors. There were 54,543,905
shares voted in favor of the proposal, 416,032 shares voted against and 323,240
shares abstaining.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 - Financial Data Schedule
(b) The following reports on Form 8-K were filed during the three months
ended November 30, 1996:
1) Form 8-K dated November 5, 1996 reporting under Item 2 the spin-off
of the Company's lodging business.
2) Form 8-K dated November 22, 1996 reporting under Item 5 certain
agreements entered into by the Company in connection with the
registration of debt securities and the commencement of the
Company's Medium-Term Note Program.
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)
Date: January 10, 1997 By: /s/ Leigh C. Comas
--------------------------
Leigh C. Comas
Vice President, Finance and
Treasurer
By: /s/ James H. Rempe
-----------------------------
Date: January 10, 1997 James H. Rempe
Senior Vice President,
General Counsel and Secretary
By: /s/ Margarita Schoendorfer
-----------------------------
Date: January 10, 1997 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> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 51,564
<SECURITIES> 0
<RECEIVABLES> 160,397
<ALLOWANCES> 29,000
<INVENTORY> 21,344
<CURRENT-ASSETS> 265,352
<PP&E> 1,311,007
<DEPRECIATION> 356,341
<TOTAL-ASSETS> 1,605,253
<CURRENT-LIABILITIES> 226,406
<BONDS> 529,125
0
0
<COMMON> 6,597
<OTHER-SE> 595,059
<TOTAL-LIABILITY-AND-EQUITY> 1,605,253
<SALES> 0
<TOTAL-REVENUES> 688,064
<CGS> 0
<TOTAL-COSTS> 570,372
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,987
<INTEREST-EXPENSE> 19,168
<INCOME-PRETAX> 73,700
<INCOME-TAX> 29,400
<INCOME-CONTINUING> 44,300
<DISCONTINUED> 11,829
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,129
<EPS-PRIMARY> 0.890<F2>
<EPS-DILUTED> 0.890<F2>
<FN>
<F1>This schedule contains summary financial information extracted from the
Consolidated Balance Sheets, the Consolidated Statements of Income and the Con-
solidated 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>
