<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998
-----------------
( ) 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.
X
Yes_____ No_____
63,672,143 Common Shares were outstanding as of April 13, 1998.
This reports contains 14 pages
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1.
- -------
FINANCIAL STATEMENTS
MANOR CARE, INC. AND SUBSIDIARIES
---------------------------------
The consolidated balance sheet as of February 28, 1998, the consolidated
statements of income for the three and nine month periods ended February 28,
1998 and 1997, and the consolidated statements of cash flows for the nine months
ended February 28, 1998 and 1997, 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, 1998 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 annual report to shareholders,
previously filed with the Commission. The results of operations for the three
and nine month periods ended February 28, 1998 and 1997, and cash flows for the
nine months ended February 28, 1998 and 1997, are not necessarily indicative of
the operating results or cash flows for the full year.
1
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
February 28, 1998 May 31, 1997
----------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 51,839 $ 32,882
Receivables (net of allowances of $45,446
and $41,493) 257,156 215,191
Inventories 39,912 37,724
Current deferred income tax benefit 41,104 41,856
Other current assets 22,318 9,817
----------- ----------
Total current assets 412,329 337,470
----------- ----------
Property and equipment, at cost
Land 101,252 97,569
Buildings and improvements 1,012,728 971,850
Capitalized leases 12,747 12,747
Furniture, fixtures and equipment 256,666 242,143
Facilities in progress 116,533 58,200
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1,499,926 1,382,509
----------- ----------
Less accumulated depreciation (385,591) (354,938)
----------- ----------
Net property and equipment 1,114,335 1,027,571
----------- ----------
Goodwill 375,216 356,460
----------- ----------
Advances to discontinued lodging segment - 115,723
----------- ----------
Other assets 125,126 142,480
----------- ----------
Total assets $ 2,027,006 $1,979,704
=========== ==========
</TABLE>
2
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
February 28, 1998 May 31, 1997
------------------ -------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,925 $ 14,845
Accounts payable 78,412 82,457
Accrued expenses 132,587 130,519
Income taxes 28,054 -
---------- ----------
Total current liabilities 246,978 227,821
---------- ----------
Mortgages and other long-term debt 406,208 306,963
---------- ----------
Senior and Subordinated long-term debt 149,505 289,510
---------- ----------
Minority interest 191,026 185,965
---------- ----------
Deferred income taxes ($200,161 and $202,937) and other 277,134 279,014
---------- ----------
Stockholders' equity:
Common stock 6,715 6,682
Contributed capital 199,321 194,640
Retained earnings 601,650 538,630
Treasury stock, at cost (51,531) (49,521)
---------- ----------
Total stockholders' equity 756,155 690,431
---------- ----------
Total liabilities and stockholders' equity $2,027,006 $1,979,704
========== ==========
</TABLE>
3
<PAGE>
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,
------------------ ------------------------
1998 1997 1998 1997
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $468,142 $388,747 $1,353,765 $1,076,811
-------- -------- ---------- ----------
Expenses:
Operating expenses 371,423 304,781 1,094,667 846,263
Depreciation and amortization 24,955 19,991 72,773 56,868
General corporate and other 15,342 16,455 43,550 48,328
-------- -------- ---------- ---------
Total expenses 411,720 341,227 1,210,990 951,459
-------- -------- ---------- ---------
Income from operations 56,422 47,520 142,775 125,352
-------- -------- ---------- ---------
Other income and (expenses):
Interest income from advances to
discontinued lodging segment (901) 5,079 4,093 15,236
Interest income and other 1,507 750 6,197 5,383
Gain on issuance of Vitalink stock - 61,878 - 61,878
Minority interest (3,618) (1,162) 3,676 (916)
Interest expense (7,610) (10,508) (29,683) (29,676)
-------- -------- ---------- ---------
Total other income and
(expenses), net (10,622) 56,037 (15,717) 51,905
-------- -------- --------- ----------
Income from continuing operations before
income taxes 45,800 103,557 127,058 177,257
Income taxes 17,771 42,165 53,463 71,565
-------- -------- ---------- ----------
Income from continuing operations 28,029 61,392 73,595 105,692
Discontinued operations:
Income from discontinued lodging
operations (net of income taxes of $0,
$ 0, $0, $8,734) - - - 11,829
Extraordinary item, net of taxes - - (3,216) -
Cumulative change in accounting principle, net of taxes - - (3,173) -
-------- -------- ---------- ----------
Net income $ 28,029 $ 61,392 $ 67,206 $ 117,521
======== ======== ========== ==========
Average shares outstanding 63,834 63,332 63,776 63,137
-------- -------- ---------- ----------
Basic earnings per share:
Earnings from continuing operations $ 0.44 $ 0.38 $ 1.15 $ 1.08
Gain on issuance of Vitalink stock - 0.59 - 0.59
Earnings from discontinued lodging
operations - - - 0.19
Extraordinary item - - (0.05) -
Cumulative change in accounting
principle - - (0.05) -
-------- -------- ---------- ----------
Total basic earnings per share $ 0.44 $ 0.97 $ 1.05 $ 1.86
======== ======== ========== ==========
Average shares outstanding-assuming dilution 64,859 64,147 64,627 64,155
-------- -------- ---------- ----------
Diluted earnings per share:
Earnings from continuing operations $ 0.43 $ 0.38 $ 1.14 $ 1.07
Gain on issuance of Vitalink stock - 0.58 - 0.58
Earnings from discontinued lodging
operations - - - 0.18
- - (0.05) -
Extraordinary item
Cumulative change in accounting - - (0.05) -
principle -------- -------- ---------- ----------
Total diluted earnings per share $ 0.43 $ 0.96 $ 1.04 $ 1.83
======== ======== ========== ==========
Dividends per share of common stock $ 0.022 $ 0.022 $ 0.066 $ 0.066
======== ======== ========== ==========
</TABLE>
4
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FEBRUARY 28,
-----------------------
1998 1997
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 67,206 $ 117,521
Reconciliation of net income to net cash provided by operating activities:
Income from discontinued lodging operations - (11,829)
Gain on issuance of Vitalink stock - (61,878)
Depreciation and amortization 72,773 56,868
Cumulative change in accounting principle 5,288 -
Amortization of debt discount 195 446
Write-off of In Home Health Medicare receivables 15,451 -
Provision for bad debts 28,167 13,215
Increase in deferred taxes (970) 32,832
Gain on sale of properties (2,057) (6,891)
Minority interest (3,676) 916
Changes in assets and liabilities:
Change in receivables (63,414) (48,193)
Change in inventories and other current assets (14,090) (10,135)
Change in current liabilities (7,912) (2,427)
Change in income taxes payable 27,211 15,963
Change in other liabilities (470) (8,215)
--------- ---------
NET CASH PROVIDED BY CONTINUING OPERATIONS 123,702 88,193
--------- ---------
NET CASH PROVIDED BY DISCONTINUED LODGING SEGMENT - 40,599
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 123,702 128,792
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (150,713) (115,499)
Investment in systems development (29,340) (7,259)
Acquisition of pharmacy business - (97,400)
Acquisition of skilled nursing facilities - (17,793)
Sale of skilled nursing facilities - 17,283
Acquisition of operating pharmacies (5,550) (7,147)
GranCare Settlement 19,000 -
Payments received from discontinued lodging segment 115,723 -
HomeCare Acquisition (82) -
Other items, net (7,669) (18,625)
--------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES
OF CONTINUING OPERATIONS (58,631) (246,440)
--------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES OF
DISCONTINUED LODGING SEGMENT - (29,424)
--------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES (58,631) (275,864)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 152,000 246,800
Principal payments of debt (53,700) (100,606)
Proceeds from exercise of stock options 7,897 6,867
Treasury stock acquired (2,010) -
Retirement of debentures (146,100) (9,900)
Dividends paid (4,201) (4,433)
--------- ---------
NET CASH (UTILIZED) PROVIDED BY FINANCING ACTIVITIES
OF CONTINUING OPERATIONS (46,114) 138,728
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF
DISCONTINUED LODGING SEGMENT - 654
--------- ---------
NET CASH UTILIZED PROVIDED BY FINANCING ACTIVITIES (46,114) 139,382
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 18,957 (7,690)
--------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32,882 62,533
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51,839 $ 54,843
========= =========
</TABLE>
5
<PAGE>
Item 2.
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
On September 15, 1997, the Company announced its intention to proceed with a
separation of its skilled nursing facility management, assisted living, pharmacy
and home health businesses (collectively, the "Health Services Business") from
its skilled nursing facility, 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 would 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, would own and operate all of the Company's assisted living
operations as well as manage and lease 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
Distribution is conditional upon certain matters, including receipt of a
satisfactory solvency opinion, and the declaration of the special dividend by
the Company's Board of Directors.
Due to the fact that the majority of the current Manor Care operations would
be transferred to ManorCare Health Services in connection with the Distribution,
the Distribution would be reported for accounting purposes as a "reverse spin-
off." Accordingly, Manor Care, Inc. will continue to present consolidated
results (with no discontinued operations treatment) up to the date of the
Distribution. After the Distribution, ManorCare Health Services will present
Manor Care, Inc.'s historical consolidated results for periods prior to the
Distribution and Manor Care Realty will present the historical results of
Community Hospital of Mesquite Hospital, Inc., Manor Care Realty's accounting
predecessor, for periods prior to the Distribution.
The following discussion is based on the operations of the Company before the
Distribution and related transactions. The operations of the skilled nursing
facilities should continue to have a material impact on ManorCare Health
Services after the Distribution because of certain skilled nursing lease
agreements which will be in place between ManorCare Health Services and Manor
Care Realty. The information contained herein does not indicate the results of
operations or financial condition of ManorCare Health Services that would have
been reported for the periods indicated had the Distribution occurred on the
first day of the periods discussed.
Following the Distribution, ManorCare Health Services' principal sources of
revenue are expected to be the management and operation of the skilled nursing
facilities, assisted living revenues, pharmacy revenues and home health
revenues. ManorCare Health Services' principal operating expenses are expected
to consist of operating and payroll expenses related to skilled nursing and
assisted living facilities, lease payments to Manor Care Realty and all of the
costs of pharmacy and home health operations. The following review of operating
results includes the historical results of the skilled nursing facilities,
assisted living, pharmacy and home health segments' operations.
Certain matters discussed in this Form 10-Q constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. All of these forward-looking statements are based on estimates and
assumptions made by management of the Company which, although believed by
management of the Company to be reasonable, are inherently subject to risks and
uncertainties. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
6
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (cont.)
- ---------------------
materially from those anticipated, estimated, projected or expected.
Therefore, investors should not place undue reliance upon such estimates and
forward-looking statements.
Risk factors that could cause the Company's actual results, performance or
achievements to be different from any future results, performance or
achievements expressed or implied by such forward-looking statements include,
without limitation: (i) the Company's success in implementing its business
strategy, including its success in completing the spin-off of its Health
Services Business, and, thereafter, Manor Care Realty's and ManorCare Health
Services' success in implementing their respective business strategies, (ii)
the Company's success in arranging financing where required, (iii) the nature
and extent of future competition, (iv) the extent of future health care reform
and regulation, including cost containment measures, (v) the loss or retirement
of key members of management or significant changes in the Company's shareholder
base, (vi) increases in the Company's cost of borrowing, (vii) costs associated
with the planned transition of ManorCare Health Services and Manor Care Realty
to separate public companies, (viii) changes in the mix of payment sources for
patient services, including any decrease in the amount and percentage of
revenues derived from private payors, (ix) the ability of the Company to
continue to deliver high quality care and to attract private pay residents, and
(x) changes in general economic conditions (including the labor market) and/or
in the markets in which the Company may from time to time compete. Many of such
risk factors are beyond the control of the Company and its management.
Other risk factors that could cause the actual results, performance or
achievements of the Company, Manor Care Realty and ManorCare Health Services to
be different from any future results, performance or achievements expressed or
implied by any forward-looking statements are set forth in the Company's and
ManorCare Health Services' Registration Statement on Form S-1 and Form S-3
(Registration No. 333-37599) and are also detailed from time to time in the
Company's, Manor Care Realty's and ManorCare Health Services' public statements
and/or filings with the Securities and Exchange Commission.
Nine Months Ended February 28, 1998 compared to Nine Months Ended February 28,
1997
Revenues increased $79.4 million (20.4%) and $277.0 million (25.7%) to
$468.1 million and $1,353.8 million for the three and nine months ended February
28, 1998 as compared to the same periods in the prior year. The increase in
revenues is principally attributable to increases in rates and capacity. The
growth in bed capacity is attributable to the expansion of three skilled nursing
facilities (34 beds), and the opening of two newly constructed Arden Court
facilities (112 beds). The increase in rates includes the incremental impact of
settlements with government agencies related to prior period cost reports of
$3.6 million and $6.8 million for the three and nine months ended February 28,
1998 as compared to the same periods in the prior year.
SKILLED NURSING FACILITIES. Skilled nursing revenues increased $58.1
million (7.7%) to $809.0 million for the nine months ended February 28, 1998 as
compared to the same period in the prior year. The increase in revenues is
principally attributable to increases in rates (4.0%) and capacity. The growth
in bed capacity (34 beds) is attributable to the expansion of three skilled
nursing facilities. The increase in rates includes the incremental impact of
settlements with government agencies related to prior period cost reports as
discussed above.
7
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (cont.)
- ---------------------
Operating expenses increased $50.7 million (9.0%) to $612.4 million for the
nine months ended February 28, 1998 as compared to the same period in the prior
year. The increase in operating expenses is attributable to additional capacity
and increased staffing necessitated by higher patient acuity and more complex
product and service offerings. As a result, the operating profit associated
with the operation of the skilled nursing facilities for the nine months ended
February 28, 1998 increased to $196.6 million from $189.2 million in the
previous period.
PHARMACY. Pharmacy revenues for the nine month period ended February 28,
1998, increased over the comparable period of fiscal year 1997 by $218.7 million
or 143.4%, primarily due to the inclusion of TeamCare revenues of $49.4 million
and $184.0 million for the two and eight month periods ended January 31, 1998
that were not included in prior period results. TeamCare was acquired in
February, 1997.
Pharmacy operating expenses increased $228.2 million or 243.4% for the nine
month period ended February 28, 1998 over the comparable period last year.
Included in operating expenses for the nine months ended February 28, 1998 is an
unusual item representing a non-recurring charge of $3.1 million relating to
costs associated with the August 1997 resignation of Vitalink's Chief Executive
Officer and the consolidation of all corporate functions in Naperville,
Illinois. Excluding the unusual item, operating expenses increased $225.1
million to $318.9 million or 85.9% of net revenues as compared to $93.8 million
or 61.5% of net revenues in the same prior year period. The increase is
primarily attributable to the inclusion of TeamCare results effective February
1,1997. The increase in operating costs as a percentage of net revenues is
mainly attributable to TeamCare's higher payroll costs as a percentage of
revenues, TeamCare's higher selling, general and administration costs and the
amortization of goodwill and pharmacy contracts arising from the TeamCare merger
($5.4 million). Operating margin decreases also resulted from a variety of
pricing related factors, including certain third party reimbursement reductions
and changes in customer base.
ASSISTED LIVING BUSINESS. Assisted living revenues increased by $14.2
million or 26.4% for the nine month period ended February 28, 1998 from $53.8
million for the same period last year due primarily to capacity ($4.7 million),
rate ($5.9 million) and occupancy ($3.7 million) increases. The increases in
capacity are partially attributable to the openings of two 56-unit Arden Courts
facilities in Georgia and Maryland.
Operating expenses increased by $9.3 million or 23.1% for the nine month
period ended February 28, 1998 compared to the nine-month period ended February
28, 1997, as a result of increases in capacity and inflation.
8
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (cont.)
- ---------------------
HOME HEALTH. Home health revenues decreased $19.0 million for the nine
months ended February 28, 1998 over the same prior year period, primarily due to
adjustments to Medicare receivables in connection with Medicare reimbursement
decisions related to the allowability of community liaison costs and required
documentation to support allowable costs. Revenues recorded under the Medicare
program are subject to adjustment upon audit by government intermediaries. As a
result of this decision, In Home Health increased recorded reserves for other
unresolved cost disputes by approximately $15.5 million.
Operating expenses decreased $4.4 million or 4.7% for the nine month period
ended February 28, 1998 as compared to the same prior year period. The decrease
was a result of a plan to restructure In Home Health's field operations and
reduce its cost structure.
OTHER RESULTS OF OPERATIONS. Depreciation and amortization increased $15.9
million for the nine month period ended February 28, 1998 over the same prior
year period due to increases in property and equipment resulting from additions
and renovations to existing facilities as well as new construction during the
past twelve months.
General corporate and other expense for the nine month period ended
February 28, 1998 decreased by $4.8 million when compared to the same period
last year. This decrease was partially due to a reduction in employees related
to the discontinued lodging operations and reengineering efforts in both
organizational and financial systems. Additionally, a gain of $2.1 million from
the sale of a corporate office building is included in general corporate and
other expense for the nine month period ended February 28, 1998. General
corporate and other expense represented 3.2% of revenue as compared to 4.5% 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 income from advances to discontinued lodging operations decreased by
$11.1 million for the nine months ended February 28, 1998 compared to the same
period last year. This reduction was attributable to the prepayment of $110.0
million of indebtedness in the fourth quarter of fiscal year 1997 and the
prepayment of the remaining $115.7 million in the second quarter of fiscal year
1998.
Interest expense decreased $2.9 million for the three month period
ended February 28, 1998 over the same prior year period. The decrease in
interest expense for the three months ended February 28, 1998 as compared to the
prior year period resulted primarily from a decrease in the average outstanding
balance of the $250 million competitive advance and multi-currency revolving
credit facility (the "Existing Credit Facility") as well as the redemption of
all outstanding 9 1/2% Senior Subordinated Notes in November, 1997, offset by an
increase in borrowings under Vitalink's $200 million revolving credit facility
used to consummate the TeamCare merger. Interest capitalized in conjunction
with construction programs amounted to $4.4 million for the nine months ended
February 28, 1998 and $3.6 million for the nine months ended February 28, 1997.
Income from continuing operations before income taxes for the nine month
period ended February 28, 1998, was $127.1 million. This compares to income
from continuing operations before income taxes in the same period last year of
9
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (cont.)
- ---------------------
$177.3 million. Income from continuing operations excluding the gain on
issuance of Vitalink stock and before income taxes for the nine months ended
February 28, 1997 was $115.4 million.
On November 1, 1996, Manor Care completed the spin-off of its lodging
segment by contributing its net investment in discontinued lodging operations
totaling $165.7 million to Choice Hotels International, Inc. 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, 1998
include only five months of income and earnings per share from the discontinued
lodging segment.
On November 20, 1997, a consensus was reached by the Emerging Issues
Task Force regarding reengineering costs (Issue 97-13) providing that all
reengineering costs be expensed as incurred. As a result, in the nine months
ended February 28, 1998 , Manor Care expensed $3.2 million of reengineering
costs (net of taxes) as the effect of a cumulative change in accounting
principle.
The basic and diluted earnings per share amounts have been calculated
in accordance with Statement of Financial Accounting Standards ("SFAS") 128 for
both the current and prior year. The difference between the denominator used in
the basic earnings per share calculation and the diluted earnings per share
calculation is entirely due to dilutive stock options. As this is the first
period that the Company has followed SFAS 128, the earnings per share for the
three and nine months ended February 28, 1997 have been restated.
Long-Term Debt
- --------------
Long-term debt was $555.7 million at February 28, 1998 compared to
$596.5 million at May 31, 1997. The current portion of long-term debt amounted
to $7.9 million at February 28, 1998.
On November 17, 1997, the Company redeemed all outstanding 9 1/2% Senior
Subordinated Notes due 2002 at a redemption price of 103.56% with the proceeds
of borrowings under the Credit Facility. The Company recorded an extraordinary
item of $3.2 million after taxes representing the premium paid on redemption.
In October 1997, the Company received a $115.7 million prepayment on its
three year, 9% note with Choice Hotels International, Inc., the proceeds of
which were used to pay down borrowings under the Existing Credit Facility. At
February 28, 1998, bank lines totaled $275.0 million, of which $24.5 million
remained unused.
In June 1996, the Company issued $150.0 million of 7.5% Senior Notes due 2006
(the "Old Senior Notes"). 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 the 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 Existing Credit
Facility. In July 1996, the Company repurchased 9.5% Senior Notes with a face
amount of $9.9 million for $10.5 million.
10
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (cont.)
- ---------------------
Acquisitions, Openings, Divestitures and Sales of Property
- ----------------------------------------------------------
During the first nine months of fiscal year 1998, the Company opened one
newly constructed skilled nursing facility located in California and four
assisted living facilities located in Connecticut, Virginia, Georgia and
Maryland. The Company also sold a corporate office building located in
Maryland. During the first nine months of fiscal 1997, the Company transferred
an assisted living facility to the discontinued lodging operations with an
approximate net book value of $4.9 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. In addition, the Company sold four nursing centers in
Indiana, Iowa, Illinois and Texas for $17.3 million. The Company also opened
four newly constructed skilled nursing facilities and five assisted living
facilities.
Liquidity and Capital Resources
- -------------------------------
The Company has available cash balances of $51.8 million as of February 28,
1998. In connection with the Distribution, Manor Care Realty, through its
wholly-owned subsidiary, Manor Care Real Estate, anticipates offering $350.0
million Senior Notes due 2008. Concurrent with the sale of the Notes, the
Company anticipates entering into new credit facilities (the "New 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 New
Credit Facilities, are anticipated to 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, Manor Care plans to offer to exchange
each $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 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 conditional 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.
In connection with the Distribution, it is anticipated that ManorCare Health
Services will receive cash of approximately $250 million and the Real Estate
Note in an aggregate principal amount of up to $250.0 million. ManorCare
Health Services has agreed not to transfer the Real Estate Note on or prior to
the six month anniversary of the date of issuance thereof. In addition, on or
after the third anniversary of the issuance of the Real Estate Note, Manor Care
Real Estate may not have adequate funds to effect such redemption and in such
case may seek to obtain funds through additional debt or equity financing.
There can be no assurance that Manor Care Real Estate would be able to obtain
such financing. In addition, the terms of Manor Care Real Estate's outstanding
indebtedness may prohibit such redemption. In the event that ManorCare Health
Services requests that Manor Care Real Estate redeem the Real Estate Note and
Manor Care Real Estate does not redeem the Real Estate Note, the interest rate
on the Real Estate Note will increase by 200 basis points; provided that such
interest rate will not be so increased unless, as of the time such request for
redemption is made, the aggregate amount of rent paid by ManorCare Health
Services under the skilled nursing facility lease agreements with respect to all
11
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (cont.)
- ----------------------
properties subject to such lease agreements shall be equal to or exceed the
aggregate Priority Sum for all such properties on a cumulative basis from the
Effective Date through the third anniversary thereof, (such aggregate amount of
rent being herein referred to as the "Threshold Rent"). Solely for purposes of
calculating the Threshold Rent, (i) the aggregate Priority Sum for the fiscal
year ended May 31, 1999 shall be deemed to be the aggregate Priority Sum
calculated pursuant to the Lease Agreements plus $5 million and (ii) the
aggregate Priority Sum for the fiscal year ended May 31, 2000 and thereafter
shall be deemed to be the aggregate Priority Sum calculated pursuant to the
Lease Agreements plus $10 million. Manor Care Real Estate's high degree of
leverage could adversely affect Manor Care Real Estate's ability to pay
principal and interest on or to redeem the Real Estate Notes and may adversely
effect the ability of ManorCare Health Services to sell the Real Estate Note.
The failure of Manor Care Real Estate to pay principal and interest on the Real
Estate Note in a timely manner or the inability of ManorCare Health Services to
sell the Real Estate Note to a third party for its principal amount could have a
material adverse effect on ManorCare Health Services and could require ManorCare
Health Services to seek alternate sources of liquidity for its operations. There
can be no assurances that such alternate sources of liquidity will be available.
ManorCare Health Services believes that cash flows from operations, together
with the proceeds from the Capital Contribution and available borrowings under
the Existing Credit Facility, will provide it with sufficient resources to meet
its working capital needs, to finance projected capital expenditures and to meet
its liquidity requirements through fiscal year 2001.
ManorCare Health Services' five year strategic plan includes the acquisition
of 170 Arden Courts and 38 Springhouse facilities from Manor Care Real Estate
pursuant to the Development Agreement. The aggregate capital required to
complete these acquisitions over the 5 year period is estimated at $1.5 billion.
Principal capital sources planned to fund the acquisitions include $500 million
of cash and notes received in connection with the Distribution and cash provided
from operations. ManorCare Health Services' plans call for the acquisition of 9
Arden Courts and 4 Springhouse facilities during fiscal year 1999. Total
expenditures for these acquisitions are projected to be approximately $90
million in fiscal year 1999. Additionally, ManorCare Health Services expects to
incur minor expenditures for routine renovation and maintenance of existing
properties.
12
<PAGE>
MANOR CARE, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- -------
(a) Exhibits
27.1 - Financial Data Schedule as of and for the 9 months ended
February 28, 1998
27.2 - Financial Data Schedule as of and for the 9 months ended
February 28, 1997 (Revised)
27.3 - Financial Data Schedule as of and for the year ended May 31,
1997 (Revised)
27.4 - Financial Data Schedule as of and for the year ended May 31,
1996 (Revised)
27.5 - Financial Data Schedule as of and for the year ended May 31,
1995 (Revised)
(b) On March 11, 1998, the Company filed a report on Form 8-K (reporting under
Item 5 thereof) with respect to the distribution of one Right for each
outstanding share of common stock of the Company to holders of record on
April 3, 1998. The description and terms of the Rights are set forth in a
Rights Agreement between the Company and Chase Mellon Shareholder Services,
L.L.C., as Rights Agent, a copy of which was filed as an exhibit to such
report on Form 8-K.
13
<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: April 13, 1998 -----------------------------------
-------------- By: Leigh C. Comas
Vice President Finance and Treasurer
/s/ James H. Rempe
Date: April 13, 1998 --------------------------------------
-------------- By: James H. Rempe
Senior Vice President,
General Counsel and Secretary
/s/ Margarita Schoendorfer
Date: April 13, 1998 ---------------------------------------
-------------- By: Margarita Schoendorfer
Vice President and Controller
14
<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<CASH> 51,839
<SECURITIES> 0
<RECEIVABLES> 302,602
<ALLOWANCES> 45,446
<INVENTORY> 39,912
<CURRENT-ASSETS> 412,329
<PP&E> 1,499,926
<DEPRECIATION> 385,591
<TOTAL-ASSETS> 2,022,785
<CURRENT-LIABILITIES> 242,834
<BONDS> 555,636
0
0
<COMMON> 6,715
<OTHER-SE> 749,440
<TOTAL-LIABILITY-AND-EQUITY> 2,022,785
<SALES> 0
<TOTAL-REVENUES> 1,353,765
<CGS> 1,066,500
<TOTAL-COSTS> 72,773
<OTHER-EXPENSES> 43,550
<LOSS-PROVISION> 28,167
<INTEREST-EXPENSE> 10,290
<INCOME-PRETAX> 29,683
<INCOME-TAX> 53,463
<INCOME-CONTINUING> 73,595
<DISCONTINUED> 0
<EXTRAORDINARY> (3,216)
<CHANGES> (3,173)
<NET-INCOME> 67,206
<EPS-PRIMARY> 1.05<F1>
<EPS-DILUTED> 1.04<F1>
<FN>
<F1>
The Company now presents basic earnings per share (EPS) as well as diluted EPS
on the face of its income statement which are calculated in accordance with SFAS
128. The Company has presented basic EPS data in the Earnings per share -primary
line and diluted EPS data in the Earnings per share - fully diluted line.
</FN>
</TABLE>
<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<CASH> 54,843
<SECURITIES> 0
<RECEIVABLES> 187,325
<ALLOWANCES> 43,033
<INVENTORY> 36,479
<CURRENT-ASSETS> 338,538
<PP&E> 1,336,040
<DEPRECIATION> 338,204
<TOTAL-ASSETS> 2,073,355
<CURRENT-LIABILITIES> 291,721
<BONDS> 637,544
0
0
<COMMON> 6,677
<OTHER-SE> 659,231
<TOTAL-LIABILITY-AND-EQUITY> 2,073,355
<SALES> 0
<TOTAL-REVENUES> 1,076,811
<CGS> 0
<TOTAL-COSTS> 833,048
<OTHER-EXPENSES> 48,328
<LOSS-PROVISION> 13,215
<INTEREST-EXPENSE> 29,676
<INCOME-PRETAX> 177,257
<INCOME-TAX> 71,565
<INCOME-CONTINUING> 105,692
<DISCONTINUED> 11,829
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,521
<EPS-PRIMARY> 1.86<F1>
<EPS-DILUTED> 1.83<F1>
<FN>
<F1>The Company now presents basic earnings per share (EPS) on the face of its
income statement as well as diluted EPS which are calculated in accordance with
SFAS 128. The Company has presented basic EPS data in the Earnings per
share-primary line and diluted EPS data in the Earnings per share - fully
diluted line.
</FN>
</TABLE>
<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 32,882
<SECURITIES> 0
<RECEIVABLES> 256,684
<ALLOWANCES> 41,493
<INVENTORY> 37,724
<CURRENT-ASSETS> 337,470
<PP&E> 1,382,509
<DEPRECIATION> 354,938
<TOTAL-ASSETS> 1,979,704
<CURRENT-LIABILITIES> 227,821
<BONDS> 596,473
0
0
<COMMON> 6,682
<OTHER-SE> 683,749
<TOTAL-LIABILITY-AND-EQUITY> 1,979,704
<SALES> 0
<TOTAL-REVENUES> 1,527,247
<CGS> 0
<TOTAL-COSTS> 1,182,495
<OTHER-EXPENSES> 80,378
<LOSS-PROVISION> 20,341
<INTEREST-EXPENSE> 41,831
<INCOME-PRETAX> 209,813
<INCOME-TAX> 84,700
<INCOME-CONTINUING> 125,113
<DISCONTINUED> 11,829
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136,942
<EPS-PRIMARY> 2.16<F1>
<EPS-DILUTED> 2.15<F1>
<FN>
<F1>The Company now presents basic earnings per share (EPS) on the face of its
income statement as well as diluted EPS which are calculated in accordance with
SFAS 128. The Company has presented basic EPS data in the Earnings per
share-primary line and diluted EPS data in the Earnings per share - fully
diluted line.
</FN>
</TABLE>
<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 62,533
<SECURITIES> 0
<RECEIVABLES> 137,368
<ALLOWANCES> 24,311
<INVENTORY> 18,734
<CURRENT-ASSETS> 235,061
<PP&E> 1,250,917
<DEPRECIATION> 332,710
<TOTAL-ASSETS> 1,681,840
<CURRENT-LIABILITIES> 231,828
<BONDS> 490,575
0
0
<COMMON> 6,581
<OTHER-SE> 701,188
<TOTAL-LIABILITY-AND-EQUITY> 1,681,840
<SALES> 0
<TOTAL-REVENUES> 1,248,197
<CGS> 0
<TOTAL-COSTS> 946,891
<OTHER-EXPENSES> 68,086
<LOSS-PROVISION> 16,190
<INTEREST-EXPENSE> 30,338
<INCOME-PRETAX> 111,471
<INCOME-TAX> 46,000
<INCOME-CONTINUING> 65,471
<DISCONTINUED> 20,436
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,907
<EPS-PRIMARY> 1.37<F1>
<EPS-DILUTED> 1.33<F1>
<FN>
<F1>
The Company now presents basic earnings per share (EPS) on the face of its
income statement as well as diluted EPS which are calculated in accordance with
SFAS 128. The Company has presented basic EPS data in the Earnings per share -
primary line and diluted EPS data in the Earnings per share - fully diluted
line.
</FN>
</TABLE>
<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> MAY-31-1995
<CASH> 72,972
<SECURITIES> 0
<RECEIVABLES> 93,000
<ALLOWANCES> 18,797
<INVENTORY> 16,849
<CURRENT-ASSETS> 202,924
<PP&E> 1,025,034
<DEPRECIATION> 288,399
<TOTAL-ASSETS> 1,289,817
<CURRENT-LIABILITIES> 139,367
<BONDS> 315,271
0
0
<COMMON> 6,553
<OTHER-SE> 618,320
<TOTAL-LIABILITY-AND-EQUITY> 1,289,817
<SALES> 0
<TOTAL-REVENUES> 1,019,458
<CGS> 0
<TOTAL-COSTS> 887,569
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,587
<INTEREST-EXPENSE> 22,769
<INCOME-PRETAX> 129,831
<INCOME-TAX> 52,156
<INCOME-CONTINUING> 77,675
<DISCONTINUED> 16,811
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,486
<EPS-PRIMARY> 1.51<F1>
<EPS-DILUTED> 1.48<F1>
<FN>
<F1>The Company now presents basic earnings per share (EPS) as well as diluted
EPS on the face of its income statement which are calculated in accordance with
SFAS 128. The Company has presented basic EPS data in the Earnings per
share-primary line and diluted EPS data in the Earnings per share - fully
diluted line.
</FN>
</TABLE>
