<PAGE> 1
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10858
MANOR CARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1687107
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
333 N. SUMMIT STREET, TOLEDO, OHIO 43604-2617
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 252-5500
Registrants former name changed since last report: HCR Manor Care, Inc.
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 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on October 29, 1999.
Common stock, $0.01 par value -- 103,043,111 shares
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
------
<S> <C> <C>
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income -
Three months and nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
MANOR CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Note 1)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 91,776 $ 33,718
Receivables, less allowances for
doubtful accounts of $59,492 and $58,125 361,203 314,883
Prepaid expenses and other assets 30,863 33,920
Deferred income taxes 35,235 35,235
----------- -----------
Total current assets 519,077 417,756
Property and equipment, net of accumulated
depreciation of $626,321 and $582,290 1,546,924 1,740,326
Intangible assets, net of amortization 87,671 80,802
Net investment in Genesis preferred stock 293,120 293,120
Other assets 188,394 183,136
----------- -----------
Total assets $ 2,635,186 $ 2,715,140
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,127 $ 107,341
Employee compensation and benefits 57,332 60,976
Accrued insurance liabilities 32,680 26,313
Other accrued liabilities 74,688 72,534
Revolving loans 199,000 230,000
Long-term debt due within one year 6,463 6,547
----------- -----------
Total current liabilities 460,290 503,711
Long-term debt 696,132 693,180
Deferred income taxes 245,564 245,564
Other liabilities 76,061 73,517
Stockholders' equity:
Preferred stock, $.01 par value, 5 million shares authorized
Common stock, $.01 par value, 300 million shares authorized,
111.0 and 110.9 million shares issued 1,110 1,109
Capital in excess of par value 356,547 356,333
Retained earnings 962,804 841,726
----------- -----------
1,320,461 1,199,168
Less treasury stock, at cost (7.7 million shares) (163,322)
----------- -----------
Total stockholders' equity 1,157,139 1,199,168
----------- -----------
Total liabilities and stockholders' equity $ 2,635,186 $ 2,715,140
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except earnings per share)
<S> <C> <C> <C> <C>
Revenues $ 536,732 $ 557,386 $ 1,599,034 $ 1,653,928
Expenses:
Operating 424,244 428,085 1,252,041 1,281,829
General and administrative 23,210 22,027 67,735 74,297
Depreciation and amortization 29,361 31,270 86,376 89,482
Provision for restructuring charge, merger expenses,
asset impairment and other related charges 4,080 240,655 14,787 254,155
--------- ----------- ----------- -----------
480,895 722,037 1,420,939 1,699,763
--------- ----------- ----------- -----------
Income (loss) from continuing operations before
other income (expenses) and income taxes 55,837 (164,651) 178,095 (45,835)
Other income (expenses):
Interest expense (14,264) (11,942) (40,510) (34,064)
Dividend income 4,951 2,050 14,853 3,250
Equity earnings of affiliated companies 473 1,421 1,829 4,039
Interest income and other 1,376 2,857 2,365 6,108
--------- ----------- ----------- -----------
Total other income (expenses) (7,464) (5,614) (21,463) (20,667)
--------- ----------- ----------- -----------
Income (loss) from continuing operations before income taxes 48,373 (170,265) 156,632 (66,502)
Income taxes 14,876 (27,459) 48,491 7,342
--------- ----------- ----------- -----------
Income (loss) from continuing operations 33,497 (142,806) 108,141 (73,844)
Discontinued operations:
Income from discontinued pharmacy operations
(net of taxes of $136 and $7,256) 153 8,044
Gain on conversion of Vitalink stock (net of taxes of $39,908) 59,861 59,861
--------- ----------- ----------- -----------
Income (loss) before extraordinary items and cumulative effect 33,497 (82,792) 108,141 (5,939)
Extraordinary items - (net of taxes of $3,866, $12,690,
$8,271 and $12,690, respectively) 6,047 (19,036) 12,937 (19,036)
Cumulative effect of change in accounting principle
(net of taxes of $3,759) (5,640)
--------- ----------- ----------- -----------
Net income (loss) $ 39,544 $ (101,828) $ 121,078 $ (30,615)
========= =========== =========== ===========
Earnings per share - basic
Income (loss) from continuing operations $ .32 $ (1.32) $ .99 $ (0.68)
Income from discontinued pharmacy operations (net of taxes) .55 0.63
Extraordinary items (net of taxes) .06 (0.18) .12 (0.18)
Cumulative effect (net of taxes) (.05)
--------- ----------- ----------- -----------
Net income (loss) $ .37* $ (0.94)* $ 1.11 $ (0.28)
========= =========== =========== ===========
Earnings per share - diluted
Income (loss) from continuing operations $ .31 $ (1.32) $ .98 $ (0.68)
Income from discontinued pharmacy operations (net of taxes) .55 0.63
Extraordinary items (net of taxes) .06 (0.18) .12 (0.18)
Cumulative effect (net of taxes) (0.05)
--------- ----------- ----------- -----------
Net income (loss) $ .37 $ (0.94)* $ 1.10 $ (0.28)
========= =========== =========== ===========
Weighted average shares:
Basic 106,212 108,475 109,187 108,317
Diluted 107,253 108,475 110,379 108,317
*Doesn't add due to rounding
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 121,078 $ (30,615)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Income from discontinued pharmacy operations (67,905)
Depreciation and amortization 86,836 89,759
Asset impairment and other non-cash charges 12,240 170,010
Provision for bad debts 18,734 23,407
Deferred income taxes (41,857)
Gain on sale of assets (21,015) (5,515)
Equity in earnings of affiliated companies (1,829) (4,039)
Changes in assets and liabilities, excluding sold facilities and acquisitions:
Receivables (63,268) (51,463)
Prepaid expenses and other assets (15,103) (7,098)
Liabilities (11,104) 79,342
--------- ---------
Total adjustments 5,491 184,641
--------- ---------
Net cash provided by continuing operations 126,569 154,026
Net cash provided by discontinued pharmacy operations 17,836
--------- ---------
Net cash provided by operating activities 126,569 171,862
--------- ---------
INVESTING ACTIVITIES
Investment in property and equipment (132,957) (232,364)
Investment in systems development (22,158)
Acquisition of businesses (8,594) (9,841)
Proceeds from sale of assets 263,603 22,227
Decrease due to deconsolidation of subsidiary (13,948)
Advances to non-consolidated affiliates (2,799)
Other, net 15,273
--------- ---------
Net cash provided by (used in) investing activities of continuing operations 122,052 (243,610)
Net cash used in investing activities of discontinued pharmacy operations (6,810)
--------- ---------
Net cash provided by (used in) investing activities 122,052 (250,420)
--------- ---------
FINANCING ACTIVITIES
Net borrowings (repayments) under bank credit agreements (23,000) 133,339
Principal payments of long-term debt (5,132) (3,425)
Proceeds from exercise of stock options 1,325 1,889
Purchase of common stock for treasury (163,756) (4,838)
Dividends paid by Manor Care (2,805)
--------- ---------
Net cash provided by (used in) financing activities of continuing operations (190,563) 124,160
Net cash used in financing activities of discontinued operations (11,026)
--------- ---------
Net cash provided by (used in) financing activities (190,563) 113,134
--------- ---------
Net increase in cash and cash equivalents 58,058 34,576
Net Manor Care cash flows for December 1997 (3,213)
Cash and cash equivalents at beginning of period 33,718 47,933
--------- ---------
Cash and cash equivalents at end of period $ 91,776 $ 79,296
========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
MANOR CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Presentation
- ------------------------------
In accordance with the merger agreement, the Company's name changed from HCR
Manor Care, Inc. to Manor Care, Inc. (the Company) on September 25, 1999. As a
result of the parent company name change, in September 1999 Manor Care, Inc., a
wholly-owned subsidiary of the Company, changed its name to Manor Care of
America, Inc. (Manor Care).
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of the Company, the interim
data includes all adjustments necessary for a fair statement of the results of
the interim periods and, except as discussed in Note 2, all such adjustments are
of a normal recurring nature. Operating results for the three months and nine
months ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in HCR Manor Care, Inc.'s
annual report on Form 10-K for the year ended December 31, 1998.
At September 30, 1999, the Company operated 299 skilled and 45 assisted living
facilities, 85 outpatient therapy clinics, 1 acute care hospital, 105 medical
specialty units and 33 home health offices.
NOTE 2 - Restructuring Charge, Merger Expenses, Asset Impairment and Other
- --------------------------------------------------------------------------
Related Charges
- ---------------
The components of the charge consist of the following (in thousands):
<TABLE>
<CAPTION>
Cash/ Liability at Liability at
Non-cash 12/31/98 Charge Activity 9/30/99
-------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
Manor Care planned spin-off:
Employee benefits cash $617 $219 $(731) $105
HCR and Manor Care merger:
Employee benefits cash 28,294 (23,074) 5,220
Other exit costs cash 4,234 (1,005) 3,229
Other costs:
Amortization non-cash 12,240 (12,240)
Duplicate costs cash 2,328 (2,328)
Other cash 1,000 (850) 150
------- ---------- ---------- -------
Total $34,145 $14,787 $(40,228) $8,704
======= ======= ======== ======
</TABLE>
6
<PAGE> 7
In Manor Care's planned spin-off, the employees did not receive lump-sum
severance payments upon termination but receive their severance as biweekly
payments through 1999. In the HCR and Manor Care merger, 531 employees received
termination notices and at September 30, 1999 all but 2 employees have left the
Company. A number of employees who left the Company continue to be paid
severance payments on a biweekly basis through 1999. The non-cash charge for
amortization primarily related to certain Manor Care software applications which
are being used until the transition to HCR applications. The carrying value of
the software was amortized over its remaining estimated useful life. Certain
general and administrative costs of $2.3 million represented salaries and
benefits for employees performing duplicate services in Toledo or Gaithersburg
in the first quarter.
NOTE 3 - Earnings Per Share
- ---------------------------
The calculation of earnings per share (EPS) is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------------ -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except earnings per share)
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing
operations (income available to
common stockholders) $33,497 $(142,806) $108,141 $(73,844)
======= ========= ======== ========
Denominator:
Denominator for basic EPS -
weighted-average shares 106,212 108,475 109,187 108,317
Effect of dilutive securities:
Stock options 1,041 1,192
-------- -------- -------- -------
Denominator for diluted EPS -
adjusted for weighted-average
shares and assumed conversions 107,253 108,475 110,379 108,317
======= ======= ======= =======
EPS - income (loss) from continuing
operations
Basic $.32 $(1.32) $.99 $(.68)
Diluted $.31 $(1.32) $.98 $(.68)
</TABLE>
NOTE 4 - Divestitures
- ---------------------
During the second quarter, the Company exercised a purchase option on Manor
Care's corporate headquarters in Gaithersburg, Maryland and sold the property
realizing net proceeds of $25 million and a $10.3 million gain ($6.3 million
after tax). In conjunction with selling the Manor Care corporate headquarters,
three interest rate swaps with a notional amount of $30.3 million that hedged
the operating lease payments for the property were terminated for a gain of $.5
million.
The Company formed a strategic alliance with Alterra Healthcare Corporation
(Alterra) in 1998. Two of the key provisions of the alliance include the sale of
twenty-six centers and the lease of two centers to Alterra in 1999 and the
creation of a joint venture to develop and construct up to $500
7
<PAGE> 8
million of specialized assisted living residences in the Company's core markets
over the next three to five years. During the second quarter the Company closed
on three of the twenty-six assisted living facilities for $13 million realizing
a $.6 million gain ($.3 million after tax). During the third quarter, the
Company closed on the sale of twenty-three additional facilities for $146
million realizing an $8.0 million gain ($4.9 million after tax). As part of the
development joint venture, the Company contributed fourteen properties (six of
which were open) on June 30, 1999 and six properties on September 30, 1999 with
a net book value of $74 million and recognizing no gain or loss.
The gains on asset sales have all been recorded as extraordinary items as
required after a business combination accounted for as a pooling of interests.
NOTE 5 - Debt
- -------------
The Company's $300 million credit agreement (364 Day Agreement) which matured
September 24, 1999 was amended and now provides for a $200 million credit
agreement. Loans under the amended 364 Day Agreement which mature September 22,
2000, bear interest at variable rates that reflect, at the election of the
Company, either the agent bank's base lending rate or an increment over
Eurodollar indices of .50% to 1.275%, depending on the quarterly performance of
a key ratio. In addition, the 364 Day Agreement provides for a fee on the total
amount of the facility, ranging from .125% to .225%, depending on the
performance of the same ratio. Whenever the aggregate utilization of the 364 Day
Agreement and the 5 Year Agreement exceeds $350 million, an additional fee of
.05% is charged on loans under the 5 Year Agreement and an additional fee
ranging from .10% to .125% is charged on loans under the 364 Day Agreement,
based on the performance of a key ratio.
The Company and Alterra have jointly and severally guaranteed a $200 million
revolving credit agreement of the development joint ventures in which each
company has a 50% interest. At September 30, 1999 there was $48 million of
guaranteed debt outstanding under the revolving credit agreement.
NOTE 6 - Stock Purchase
- -----------------------
On May 4, 1999 the Board of Directors authorized the Company to purchase up to
$200 million of its common stock through December 31, 2000. The shares may be
used for internal stock option and 401(k) match programs and for other uses,
such as possible future acquisitions. During the second and third quarter, the
Company purchased 7,601,100 shares for $164 million.
NOTE 7 - New Accounting Pronouncements
- --------------------------------------
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which was postponed in Statement
No. 137 and is now effective January 1, 2001. This Statement permits early
adoption as of the beginning of any fiscal quarter after its issuance. This
Statement requires the Company to recognize all derivatives on the balance sheet
at fair value. Management has not determined when it will adopt this Statement
nor has it determined the impact of adoption.
8
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
OVERVIEW
The Company is a provider of a range of health care services, including skilled
nursing care, assisted living, subacute medical care, rehabilitation therapy,
home health care and management services for subacute care, rehabilitation
therapy, vision care and eye surgery. The most significant portion of the
Company's business relates to skilled nursing care and assisted living
facilities. At September 30, 1999, the Company operated 299 skilled and 45
assisted living facilities. During the first nine months of 1999, the Company
opened two skilled nursing and 12 assisted living facilities, and divested 31
assisted living facilities as explained below.
The Company formed a strategic alliance with Alterra Healthcare Corporation
(Alterra) in 1998. Two of the key provisions of the alliance include the sale of
twenty-six centers and lease of two centers to Alterra in 1999 and the creation
of a joint venture to develop and construct up to $500 million of specialized
assisted living residences in the Company's core markets over the next three to
five years. During the second and third quarter of 1999, the Company sold
twenty-six assisted living facilities to Alterra, leased one facility to Alterra
and contributed twenty properties to development joint ventures. Thirty-one of
these assisted living facilities were open prior to being sold or leased.
Under the Balanced Budget Act of 1997, a new Medicare prospective payment system
(PPS) commenced on July 1, 1998. The new payment system becomes effective for
different segments of the health care continuum (hospitals, skilled nursing,
home health, etc.) at different times and even commences at different dates for
different nursing facilities. The former HCR long-term care facilities
transitioned onto PPS in January 1999 and the former Manor Care facilities in
June 1999.
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 1999 decreased $20.7 million
or 4% to $536.7 million as compared to the same period in 1998. Revenues from
skilled nursing and assisted living facilities decreased $24.1 million or 5% due
to decreases in rates ($20.3 million) and occupancy ($16.2 million) partially
offset by an increase in capacity ($12.4 million).
Revenues for the nine months ended September 30, 1999 decreased $54.9 million or
3% to $1.6 billion as compared to the same period in 1998. Revenues from skilled
nursing and assisted living facilities decreased $57.3 million or 4% due to
decreases in rates ($56.8 million), with the decrease in occupancy ($64.8
million) offsetting the increase in capacity ($64.3 million). The decrease in
revenues for the ancillary businesses due to the impact of PPS was offset by the
revenues recorded in association with the development activities and strategic
alliance with Alterra.
The decline in rates was primarily attributable to transitioning onto the
Medicare PPS in 1999. The occupancy levels for all facilities including
start-ups were 89% for the three months and nine months ended September 30, 1998
compared to 86% for the same periods in 1999, respectively. The occupancy for
the Company's skilled nursing facilities declined from 89% in the three months
and nine months ended September 30, 1998 to 88% and 87% in the same periods in
1999, respectively, reflecting the impact of transitioning onto the Medicare PPS
and a decline in private pay mix over the last year. The growth in bed capacity
between the first nine months of 1999 and the last three months of 1998 was due
to the timing of opening 19 assisted living and 2 skilled
9
<PAGE> 10
facilities partially offset by the divestiture of 31 assisted living facilities
in the second and third quarters of 1999.
The quality mix of revenue from Medicare, private pay and insured patients
related to skilled nursing and assisted living facilities and rehabilitation
operations decreased from 70% and 71% for the three months and nine months ended
September 30, 1998 to 66% and 67% for the same periods in 1999, respectively.
This decline was a result of the decrease in Medicare rates and census due to
the Medicare PPS, decline in private pay mix, and decrease in insurance rates
and census.
Operating expenses for the three months ended September 30, 1999 decreased $3.8
million or 1% to $424.2 million from the comparable period in 1998. Operating
expenses from skilled nursing and assisted living facilities decreased $8.9
million or 2% which was primarily attributable to the decline in ancillary costs
as the Company found alternate methods of service which resulted in lower costs.
Operating expenses for the nine months ended September 30, 1999 decreased $29.8
million or 2% to $1.3 billion from the comparable period in 1998. Operating
expenses from skilled nursing and assisted living facilities decreased $35.0
million or 3%. By excluding the effect of start-up facilities in the first nine
months of 1999 and 1998, operating expenses decreased $41.4 million which was
primarily attributable to the decline in ancillary costs as the Company found
alternate methods of service which resulted in lower costs.
General and administrative expenses decreased $6.6 million for the nine months
ended September 30, 1999 as compared to the same periods in 1998. By excluding
the net gains from sale of assets in 1998, general and administrative expenses
decreased $11.2 million for the same period primarily as a result of synergies
obtained from combining HCR and Manor Care and reclassifying $2.3 million of
duplicate costs in the first quarter to the provision for the restructuring
charge and other related charges, as explained below. Depreciation and
amortization decreased $1.9 million and $3.1 million for the three months and
nine months ended September 30, 1999 compared to the same periods in 1998 due to
a decline in the amortization of Manor Care's computer software and the
Company's goodwill related to the write down of assets in 1998.
In the first nine months of 1999, the Company recorded a charge of $14.8
million. The components of the charge and the remaining liability at September
30, 1999 consist of the following (in thousands):
<TABLE>
<CAPTION>
Cash/ Liability at Liability at
Non-cash 12/31/98 Charge Activity 9/30/99
-------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
Manor Care planned spin-off:
Employee benefits cash $617 $219 $(731) $105
HCR and Manor Care merger:
Employee benefits cash 28,294 (23,074) 5,220
Other exit costs cash 4,234 (1,005) 3,229
Other costs:
Amortization non-cash 12,240 (12,240)
Duplicate costs cash 2,328 (2,328)
Other cash 1,000 (850) 150
------- --------- --------- ------
Total $34,145 $14,787 $(40,228) $8,704
======= ======= ======== ======
</TABLE>
10
<PAGE> 11
In Manor Care's planned spin-off, the employees did not receive lump-sum
severance payments upon termination but receive their severance as biweekly
payments through 1999. In the HCR and Manor Care merger, 531 employees received
termination notices and at September 30, 1999 all but 2 employees have left the
Company. A number of employees who left the Company continue to be paid
severance payments on a biweekly basis through 1999. The non-cash charge for
amortization primarily related to certain Manor Care software applications which
are being used until the transition to HCR applications. The carrying value of
the software was amortized over its remaining estimated useful life. Certain
general and administrative costs of $2.3 million represented salaries and
benefits for employees performing duplicate services in Toledo or Gaithersburg
in the first quarter.
In the first nine months of 1998, the Company recorded a $254.2 million charge
related to restructuring, merger expenses, asset impairment and other related
charges. In the second quarter of 1998, Manor Care recorded a charge of $13.5
million in connection with its plan to separate its business which did not occur
as a result of the merger with HCR. In the third quarter of 1998, charges
related to the merger of HCR and Manor Care totaled $240.7 million.
Interest expense increased in 1999 compared to the prior year periods due to an
increase in average debt outstanding under bank credit facilities. Dividend
income increased during 1999 due to the $4.4 million quarterly dividend related
to the Company's ownership of Series G Cumulative Convertible Preferred Stock of
Genesis Health Ventures, Inc (Genesis) that was initially recorded in September
1998. The decrease in equity earnings of affiliated companies was attributable
to a decline in earnings of the pharmacy partnership due to a reduction in
prices as a result of the Medicare PPS. Interest income and other decreased
between 1999 and 1998 primarily due to a decline in rental income from Manor
Care's corporate office buildings that were sold during 1998.
The effective tax rate for the nine months ended September 30, 1999 was 31.0%
compared to 36.1% for the year ended December 31, 1998 after excluding the tax
effects of the provision for restructuring charge, merger expenses, asset
impairment and other related charges, as some of these items are not deductible
for income tax purposes. The decrease was attributable to an increase in the
exclusion on dividends received as a result of the Genesis dividend and an
adjustment of the Company's prior years' tax accruals.
In the third quarter of 1998, the Company recorded a gain of $99.8 million
($59.9 million after tax) from the conversion of Vitalink Pharmacy Services,
Inc. (Vitalink) common stock to Genesis preferred stock on August 28, 1998. The
financial results of Vitalink were recorded as income from discontinued
operations.
In the first nine months of 1999, the Company recorded the gains on sale of
assets as extraordinary items as required after a business combination accounted
for as a pooling of interests. In the second quarter, the Company exercised a
purchase option on Manor Care's corporate headquarters in Gaithersburg, Maryland
and sold the property realizing net proceeds of $25 million and a $10.3 million
gain ($6.3 million after tax). In conjunction with selling the Manor Care
corporate headquarters, three interest rate swaps with a notional amount of
$30.3 million that hedged the operating lease payments for the property were
terminated for a gain of $.5 million. In the second quarter, the Company closed
on three of the twenty-six assisted living facilities sold to Alterra for $13
million realizing a $.6 million gain ($.3 million after tax) and in the third
quarter closed on the remaining twenty-three facilities for $146 million
realizing an $8.0 million gain ($4.9 million after
11
<PAGE> 12
tax).
In the third quarter of 1998, the Company recorded an extraordinary loss from
the early extinguishment of debt totaling $31.7 million ($19.0 million after
tax). On September 25, 1998 the Company repaid the outstanding debt under HCR's
and Manor Care's prior credit arrangements. In conjunction with the
extinguishment of debt, the Company terminated three interest rate swaps with a
total notional amount of $350 million that were designated as a hedge of Manor
Care's debt. The extraordinary loss primarily related to the termination of the
swaps but also included the unamoritized debt issue costs.
In the first quarter of 1998, the Company recorded the cumulative effect of
expensing start-up costs capitalized as of January 1, 1998 totaling $9.4 million
($5.6 million after tax).
FINANCIAL CONDITION
The increase in cash at September 30, 1999 resulted from the sale of facilities
at the end of the month. The increase in receivables of $46.3 million between
December 31, 1998 and September 30, 1999 was primarily related to a $36.5
million receivable for facilities sold to Alterra and contributed to a
development joint venture in the third quarter. The funds are expected to be
received in the fourth quarter.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which was postponed in Statement
No. 137 and is effective January 1, 2001. This Statement permits early adoption
as of the beginning of any fiscal quarter after its issuance. This Statement
requires the Company to recognize all derivatives on the balance sheet at fair
value. Management has not determined when it will adopt this Statement nor has
it determined the impact of adoption.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1999, the Company satisfied its cash
requirements from a combination of cash generated from operating activities and
proceeds from sale of assets. The Company used the cash principally for capital
expenditures and the purchase of the Company's common stock. At September 30,
1999, the Company maintained $91.8 million in cash and cash equivalents.
Expenditures for property and equipment during the first nine months of 1999
consisted of $67.1 million for construction of new facilities and $65.8 million
for renovation and maintenance of existing facilities. The proceeds from the
sale of assets of $263.6 million included the sale of the former Manor Care
corporate headquarters ($25 million), twenty-six assisted living facilities to
Alterra ($159 million) and twenty properties to development joint ventures ($74
million).
On May 4, 1999 the Board of Directors authorized the Company to purchase up to
$200 million of its common stock through December 31, 2000. The shares may be
used for internal stock option and 401(k) match programs and for other uses,
such as possible future acquisitions. The Company purchased 7,601,100 shares for
$163.8 million in the second and third quarter and an additional 325,000 shares
for $5.5 million in October 1999.
12
<PAGE> 13
The Company's $300 million credit agreement (364 Day Agreement) which matured
September 24, 1999 was amended and now provides for a $200 million credit
agreement. Loans under the amended 364 Day Agreement mature September 22, 2000.
See Note 5 to the consolidated financial statements for discussion of the
interest rate. At September 30, 1999, outstanding borrowings aggregated $683
million under the bank credit agreements. After consideration of usage for
letters of credit, the remaining credit availability under the agreements
totaled $3.8 million. At October 31, 1999, the remaining credit availability
increased to $70.7 million after utilizing excess cash to pay down debt.
The Company has cash flow commitments related to the HCR and Manor Care merger
restructuring plan that will require approximately $6 million in the remainder
of 1999, primarily for employee benefits.
The Company believes that its cash flow from operations will be sufficient to
cover debt payments, future capital expenditures and operating needs. It is
likely that the Company will pursue growth from acquisitions, partnerships and
other ventures which would be funded from excess cash from operations, credit
available under the bank credit agreement and other financing arrangements that
are normally available in the marketplace.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the year. Any of the Company's computer
software and hardware that are date sensitive and all of our embedded chip
devices could recognize a two digit date of `00' as `1900' rather than `2000'.
This could result in system failures and miscalculations causing disruptions to
our operations.
In 1995, HCR began an evaluation and upgrade to all of its technical
infrastructure including hardware, operating systems and business applications.
With the completion of that upgrade process, the Company will have in place, a
complete package of technical solutions that properly utilize dates beyond
December 31, 1999. The estimated costs of this package are expected to be $35
million. Most of these costs will be capitalized and amortized over a five to
twelve year period. Since inception of the project, the Company has incurred
approximately $32.2 million ($3.4 million expensed and $28.7 million
capitalized) as of September 30, 1999. The Company has completed the technical
solution definition and is 95% complete with the implementation. All computer
hardware, software and operating system upgrades are expected to be in place by
the end of fourth quarter of 1999. It has not been necessary to accelerate our
original implementation plan due to the Year 2000 issue.
To insure that our embedded chip devices, vendor and supplier interfaces are
also Year 2000 compliant, the Company has put into place an assessment,
remediation, testing, implementation and contingency plan for all products,
services and relationships that do not meet our Year 2000 compliance standards.
The Company expects all phases along with the contingency plan to be completed
by the end of the fourth quarter of 1999 with internal resources. The Company
has queried our significant suppliers and at this point, based on their
representations, the Company does not believe that Year 2000 presents a material
exposure as it relates to our embedded chip devices, system interfaces,
significant suppliers or vendors. The Company believes today that the most
likely worst case scenario, if it occurred, would involve temporary disruptions
in delivery of medical and other supplies and temporary
13
<PAGE> 14
disruptions in payments, especially payments from Medicare and other government
programs. If the federal and state healthcare reimbursement agencies or their
intermediaries were to fail to implement Year 2000 compliant technologies before
December 31, 1999, a temporary cash flow disruption could result. Those agencies
and intermediaries have Year 2000 plans in place and the Company continues to
monitor the status of those projects. However, all of the governmental agencies
have stated that interim payment procedures would be implemented if their Year
2000 solutions are not in place by January 1, 2000.
The foregoing assessment is based on information currently available to the
Company. The Company will revise its assessment as it implements its Year 2000
strategy. The Company's Year 2000 compliance program is an ongoing process and
the risk assessments and estimates of costs and completion dates for various
phases of the program are subject to change. The cost of the Year 2000 program
and the dates on which the Company believes the phases of the program will be
completed are based on management's best estimates, which were derived using
numerous assumptions of future events. Factors that could cause such changes
include availability of qualified personnel and consultants, the actions of
third parties and material changes in governmental regulations. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-Q which are not historical facts may be
forward-looking statements within the meaning of federal law. Such
forward-looking statements reflect management's beliefs and assumptions and are
based on information currently available to management. Forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both nationally and in the regions in which the Company operates;
industry capacity; demographic changes; existing government regulations and
changes in, or the failure to comply with, governmental regulations; legislative
proposals for health care reform; the ability to enter into managed care
provider arrangements on acceptable terms; changes in Medicare and Medicaid
reimbursement levels; liability and other claims asserted against the Company;
competition; changes in business strategy or development plans; and the ability
to attract and retain qualified personnel. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the cautionary statements
set forth or referred to above in this paragraph. The Company disclaims any
obligation to update such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There have been no significant changes in the Company's long-term debt since
December 31, 1998. During the second quarter of 1999, the Company exercised a
purchase option on Manor Care's corporate headquarters in Gaithersburg, Maryland
and sold the property. In conjunction with selling the Manor Care corporate
headquarters, three interest rate swaps with a notional amount of $30.3 million
that hedged the operating lease payments for the property were terminated for a
gain of $.5 million.
14
<PAGE> 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
On May 7, 1999 Genesis Health Ventures ("Genesis") filed suit
in federal district court in Delaware against the Company,
Manor Care, Paul A. Ormond and Stewart Bainum, Jr.
(collectively, the "Delaware Defendants"). Manor Care has been
a wholly-owned subsidiary of the Company since September 25,
1998. Mr. Ormond is President and Chief Executive Officer of
the Company and Mr. Bainum is Chairman of the Board of
Directors of the Company and formerly was Chairman of the
Board, President and Chief Executive Officer of Manor Care.
The complaint alleges that the Delaware Defendants
fraudulently induced Genesis to acquire, in August, 1998, all
of the outstanding stock of Vitalink Pharmacy Services, Inc.
("Vitalink") and that such alleged conduct constituted
violations of Section 10(b) of the Securities Exchange Act of
1934, common law fraudulent misrepresentation, negligent
misrepresentation and breach of contract. The suit seeks
compensatory and punitive damages in excess of $100 million
and preliminary and permanent injunctive relief enforcing a
covenant not to compete allegedly applicable to the Company.
On June 10, 1999, Genesis filed an amended complaint that was
substantively identical to the original complaint. The Company
believes that the material allegations of the amended
complaint are untrue and that it has substantial defenses to
the factual and legal assertions therein. On June 29, 1999,
the Delaware Defendants moved to dismiss or, in the
alternative, to stay the lawsuit in its entirety. That motion
is presently pending before the court. The Company intends to
vigorously defend the lawsuit. Although the ultimate outcome
of the case is uncertain, management believes that it is not
likely to have a material adverse effect on the financial
condition of the Company.
On August 27, 1999, Manor Care filed as a related lawsuit in
federal district court in Delaware a separate action against
Genesis concerning its 1998 acquisition of Vitalink. Manor
Care's lawsuit charges Genesis with violations of Section 11
and Section 12 of the Securities Act of 1933, based upon
Genesis' misrepresentations and/or misleading omissions in
connection with the Genesis' issuance of approximately $293
million of Genesis Preferred Stock as consideration to Manor
Care for its approximately fifty percent interest in Vitalink.
The complaint alleges that Genesis unlawfully failed to
disclose or made misrepresentations related to the effects of
the conversion to the prospective payment system, the
restructuring of the Multicare joint venture, the impact of
the acquisition of Multicare, the status of Genesis labor
relations, Genesis' ability to declare dividends on the
Preferred Stock and information relating to the ratio of
combined fixed charges and preference dividends to earnings.
Manor Care seeks, among other things, compensatory damages and
recission voiding Manor Care's purchase of the Genesis
Preferred Stock and requiring Genesis to return to Manor Care
the consideration that it paid at the time of the Vitalink
sale.
Additionally, on May 7, 1999 Vitalink, now known as
Neighborcare Pharmacy Services, Inc. ("Neighborcare"),
instituted a lawsuit in the Circuit Court for
15
<PAGE> 16
Baltimore City, Maryland (the "Maryland Action") against the
Company, Manor Care and ManorCare Health Services, Inc.(MHS)
(collectively, the "Maryland Defendants") seeking damages,
preliminary and permanent injunctive relief and a declaratory
judgment related to allegations that the Maryland Defendants
have improperly sought to terminate certain Master Service
Agreements ("MSAs") between Vitalink and MHS. Neighborcare has
also purported to institute arbitration proceedings (the
"Arbitration") against the Maryland Defendants with the
American Arbitration Association, seeking substantially the
same relief as sought in the Maryland Action with respect to
one of the MSAs at issue in the Maryland Action and also
certain additional permanent relief with respect to that
contract. On May 13, 1999, Neighborcare and the Maryland
Defendants agreed: (i) to consolidate the Maryland Action into
the Arbitration; (ii) to dismiss the Maryland Action with
prejudice as to jurisdiction and without prejudice as to the
merits; (iii) to stay termination of the agreements at issue
until a decision can be reached in the Arbitration; and (iv)
that Neighborcare shall not proceed on its claims for
preliminary relief in the Maryland Action or the Arbitration
in view of the May 13, 1999 agreement. Neighborcare has since
dismissed the Maryland Action and consolidated certain of
those claims into the Arbitration by filing an Amended Demand
for Arbitration. The Company believes that the material
allegations in the Amended Demand for Arbitration are untrue
and that it has substantial factual and legal defenses
thereto. The Company intends to vigorously defend the
Arbitration. Although the ultimate outcome of the Arbitration
is uncertain, management believes that it is not likely to
have a material adverse effect on the financial condition of
the Company.
On July 26, 1999, Neighborcare filed an additional complaint
against Omnicare, Inc. and Heartland Healthcare Services,
Inc.(a joint venture between subsidiaries of Omnicare and the
Company) seeking injunctive relief and compensatory and
punitive damages. The complaint includes counts for tortious
interference with Vitalink's purported contractual rights
under the MSAs. On October 4, 1999, the defendants moved to
dismiss or, in the alternative, to stay the lawsuit in its
entirety. That motion is presently pending before the court.
Although the ultimate outcome of the case is uncertain,
management believes that it is not likely to have a material
adverse effect on the financial condition of the Company.
One or more subsidiaries or affiliates of Manor Care have been
identified as potentially responsible parties (PRPs) in a
variety of actions (the Actions) relating to waste disposal
sites which allegedly are subject to remedial action under the
Comprehensive Environmental Response Compensation Liability
Act, as amended, 42 U.S.C. Sections 9601 et seq. (CERCLA) and
similar state laws. CERCLA imposes retroactive, strict joint
and several liability on PRPs for the costs of hazardous waste
clean-up. The Actions arise out of the alleged activities of
Cenco, Incorporated and its subsidiary and affiliated
companies (Cenco). Cenco was acquired in 1981 by a wholly
owned subsidiary of Manor Care. The Actions allege that Cenco
transported and/or generated hazardous substances that came to
be located at the sites in question. The Company believes the
waste disposal activities at issue occurred prior to the Manor
Care subsidiary's acquisition of Cenco.
16
<PAGE> 17
Environmental proceedings such as the Actions may involve
owners and/or operators of the hazardous waste site, multiple
waste generators and multiple waste transportation disposal
companies. Such proceedings involve efforts by governmental
entities and/or private parties to allocate or recover site
investigation and clean-up costs, which costs may be
substantial. The potential liability exposure for currently
pending environmental claims and litigation, without regard to
insurance coverage, cannot be quantified with precision
because of the inherent uncertainties of litigation in the
Actions and the fact that the ultimate cost of the remedial
actions for some of the waste disposal sites where Manor Care
is alleged to be a potentially responsible party has not yet
been quantified. Based upon its current assessment of the
likely outcome of the Actions, the Company believes that the
potential environmental liability exposure, after
consideration of insurance coverage, is approximately $4.5
million.
The Company is party to various other legal proceedings
arising in the ordinary course of business. The Company does
not believe the results of such proceedings, even if
unfavorable to the Company, would have a material adverse
effect on its financial position.
Item 2. Changes in Securities.
----------------------
None
Item 3. Defaults Upon Senior Securities.
--------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None
Item 5. Other Information.
------------------
None
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a)Exhibits
S-K Item
601 No.
-------
3 Form of Amended and Restated By-laws of the
Registrant
4 364 Day Credit Agreement dated as of
September 25, 1998, as amended as of
September 24, 1999, among HCR Manor Care,
Inc., Manor Care, Inc., Bank of America,
National Association, the Chase Manhattan
Bank, Deutsche Bank and the Other Financial
Institutions Party Hereto.
27 Financial Data Schedule for the nine months
ended September 30, 1999
(b) Reports on Form 8-K
None
17
<PAGE> 18
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 November 15, 1999 By /s/ Geoffrey G. Meyers
-------------------- -------------------------------------
Geoffrey G. Meyers, Executive Vice
President and Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
Exhibit
- -------
3 Form of Amended and Restated By-laws of the Registrant
4 364 Day Credit Agreement dated as of September 25, 1998, as
amended as of September 24, 1999, among HCR Manor Care, Inc.,
Manor Care, Inc., Bank of America, National Association, the
Chase Manhattan Bank, Deutsche Bank and the Other Financial
Institutions Party Hereto.
27 Financial Data Schedule for the nine months ended September 30,
1999
19
<PAGE> 1
Exhibit 3
AMENDED AND RESTATED
BY-LAWS OF
MANOR CARE, INC.
DATED NOVEMBER 15, 1999
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I. OFFICES-----------------------------------------------------------------------------------------1
Section 1. Registered Office-------------------------------------------------------------------------------1
Section 2. Other Offices-----------------------------------------------------------------------------------1
ARTICLE II. MEETINGS OF STOCKHOLDERS------------------------------------------------------------------------1
Section 1. Place of Meetings-------------------------------------------------------------------------------1
Section 2. Annual Meeting of Stockholders------------------------------------------------------------------1
Section 3. Quorum; Adjourned Meetings and Notice Thereof---------------------------------------------------3
Section 4. Voting------------------------------------------------------------------------------------------3
Section 5. Special Meetings--------------------------------------------------------------------------------4
Section 6. Notice of Stockholders'Meetings-----------------------------------------------------------------4
Section 7. Maintenance and Inspection of Stockholder List--------------------------------------------------5
ARTICLE III. DIRECTORS---------------------------------------------------------------------------------------5
Section 1. Number of Directors; Qualifications-------------------------------------------------------------5
Section 2. Nomination of Directors-------------------------------------------------------------------------6
Section 3. Vacancies---------------------------------------------------------------------------------------8
Section 4. Powers------------------------------------------------------------------------------------------9
Section 5. Place of Directors'Meetings---------------------------------------------------------------------9
Section 6. Regular Meetings--------------------------------------------------------------------------------9
Section 7. Special Meetings--------------------------------------------------------------------------------9
Section 8. Quorum------------------------------------------------------------------------------------------9
Section 9. Action Without Meeting-------------------------------------------------------------------------10
Section 10. Telephone Meetings-----------------------------------------------------------------------------10
Section 11. Committees of Directors------------------------------------------------------------------------10
Section 12. Minutes of Committee Meetings------------------------------------------------------------------11
Section 13. Compensation of Directors----------------------------------------------------------------------11
Section 14. Indemnification--------------------------------------------------------------------------------12
ARTICLE IV. OFFICERS---------------------------------------------------------------------------------------13
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 1. Officers---------------------------------------------------------------------------------------13
Section 2. Election of Officers---------------------------------------------------------------------------14
Section 3. Subordinate Officers---------------------------------------------------------------------------14
Section 4. Compensation of Officers-----------------------------------------------------------------------14
Section 5. Term of Office; Removal and Vacancies----------------------------------------------------------14
Section 6. Chairman of the Board--------------------------------------------------------------------------14
Section 7. President and Chief Executive Officer----------------------------------------------------------15
Section 8. Vice Presidents--------------------------------------------------------------------------------15
Section 9. Secretary--------------------------------------------------------------------------------------15
Section 10. Assistant Secretaries--------------------------------------------------------------------------16
Section 11. Treasurer--------------------------------------------------------------------------------------16
Section 12. Assistant Treasurers---------------------------------------------------------------------------16
ARTICLE V. CERTIFICATES OF STOCK--------------------------------------------------------------------------17
Section 1. Certificates-----------------------------------------------------------------------------------17
Section 2. Signatures on Certificates---------------------------------------------------------------------17
Section 3. Statement of Stock Rights, Preferences, Privileges---------------------------------------------17
Section 4. Lost Certificates------------------------------------------------------------------------------18
Section 5. Transfers of Stock-----------------------------------------------------------------------------18
Section 6. Registered Stockholders------------------------------------------------------------------------18
ARTICLE VI. AMENDMENTS-------------------------------------------------------------------------------------19
</TABLE>
ii
<PAGE> 4
ARTICLE I.
OFFICES
-------
Section 1. REGISTERED OFFICE. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware as
provided in the Corporation's Certificate of Incorporation, as amended or
amended and restated from time to time (the "Certificate of Incorporation").
Section 2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. PLACE OF MEETINGS. All meetings of the stockholders shall be
held at any place within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of such
meeting. In the absence of any such designation, stockholders' meetings shall be
held at the principal executive office of the Corporation.
Section 2. ANNUAL MEETING OF STOCKHOLDERS. An annual meeting of
stockholders shall be held each year on a date and at a time designated by the
Board of Directors and stated in the notice of such meeting, but no later than
June 1 of each such year unless otherwise determined by at least 75% of the
then-appointed members of the Board of Directors of the Corporation. Directors
shall be elected at each annual meeting of stockholders.
To be properly brought before the annual meeting, business must be
either (i) specified in the notice of annual meeting (or any supplement or
amendment thereto) given by or
<PAGE> 5
at the direction of the Board of Directors, (ii) otherwise brought before the
annual meeting by or at the direction of the Board of Directors, or (iii)
otherwise properly brought before the annual meeting by a stockholder.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the secretary of the Corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation not less than sixty (60)
days nor more than ninety (90) days prior to the meeting; provided, however,
that in the event that less than seventy (70) days notice or prior public
disclosure of the date of the annual meeting is given or made to stockholders,
notice by a stockholder, to be timely, must be received no later than the close
of business on the tenth (10th) day following the day on which such notice of
the date of the annual meeting was mailed or such public disclosure was made,
whichever first occurs. A stockholder's notice to the secretary of the
Corporation shall set forth (a) as to each matter the stockholder proposes to
bring before the annual meeting (1) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (2) any material interest of the stockholder (or
of the beneficial owner, if any, on whose behalf the business is being brought)
in such business; (b) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the business is being brought (1) the name and
record address of the stockholder and of such beneficial owner and (2) the
class, series and number of shares of capital stock of the Corporation which are
owned of record and beneficially by the stockholder and such beneficial owner;
(c) a representation that the stockholder giving notice is a holder of record of
stock of the Corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the
2
<PAGE> 6
meeting to propose such business; and (d) a representation as to whether the
stockholder giving notice intends or is part of a group which intends to solicit
proxies from other stockholders in support of such business. Notwithstanding
anything in these By-laws to the contrary, no business shall be conducted at the
annual meeting except in accordance with the procedures set forth in this
Article II, Section 2.
Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF. Except as
otherwise provided by law, by the Certificate of Incorporation or by these
By-laws, a majority in voting power of the stock issued and outstanding and
entitled to vote at any meeting of stockholders, the holders of which are
present in person or represented by proxy, shall constitute a quorum for the
transaction of business. A quorum, once established, shall not be broken by the
withdrawal of enough votes to leave less than a quorum, and the votes present
may continue to transact business until adjournment. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, holders
of a majority in voting power of the stock issued and outstanding and entitled
to vote at the meeting represented in person or by proxy may adjourn the meeting
from time to time, without notice other than announcement at the meeting of the
time and place to which the meeting has been adjourned, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. If the adjournment is for more
than thirty (30) days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote thereat.
Section 4. VOTING. When a quorum is present at any meeting, the vote of the
holders of a majority in voting power of the stock present in person or
represented by proxy and entitled
3
<PAGE> 7
to vote on the subject matter shall decide any question brought before such
meeting, unless the question is one upon which by express provision of law, the
Certificate of Incorporation or these By-laws, a different vote is required in
which case such express provision shall govern and control the decision of such
question; PROVIDED, HOWEVER, that directors shall be elected by a plurality of
the votes of the shares present in person or represented by proxy at the meeting
and entitled to vote on the election of directors.
Section 5. SPECIAL MEETINGS. Unless otherwise prescribed by law or by the
Certificate of Incorporation, special meetings of stockholders may be called at
any time, for any purpose or purposes, by a majority of the members of the Board
of Directors, or by a committee of the Board of Directors that has been duly
designated by the Board of Directors and whose powers and authority as provided
in a resolution of the Board of Directors or these By-laws include the power to
call such meetings. Special meetings of stockholders of the Corporation may not
be called by any other person or persons. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the notice of
such meeting.
Section 6. NOTICE OF STOCKHOLDERS' MEETINGS. Whenever stockholders are
required or permitted to take any action at a meeting, a written notice of the
meeting shall be given, which notice shall state the place, date and hour of the
meeting and, in the case of a special meeting, the purpose or purposes for which
the meeting is called. The written notice of any meeting shall be given not less
than ten (10) nor more than sixty (60) days before the date of such meeting to
each stockholder entitled to vote at such meeting. If mailed, notice shall be
deemed to be given when deposited in the United States mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of the
Corporation.
4
<PAGE> 8
Section 7. MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST. The officer in
charge of the stock ledger of the Corporation shall prepare and make, at least
ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
ARTICLE III.
DIRECTORS
---------
Section 1. NUMBER OF DIRECTORS; QUALIFICATIONS. The Board of Directors
shall consist of ten (10) directors. Until and including the second annual
stockholders' meeting following the effective time (the "Effective Time") of the
merger of Catera Acquisition Corp., a Delaware corporation, with and into Manor
Care, Inc., a Delaware corporation ("Manor Care") (such period, the "Post-Merger
Period"), the number of directors shall not be changed unless at least
seventy-five percent (75%) of the then-appointed directors approve such change.
After the Post-Merger Period, the number of directors may be changed from time
to time, within a minimum of one (1) and a maximum of fifteen (15) directors, by
a majority of the directors then in office. The directors need not be
stockholders. Except as provided in the Certificate of Incorporation or in
Sections 2 or 3 of this Article III, the directors shall be elected at the
annual meeting of the stockholders and each director elected shall hold office
until such director's successor is duly
5
<PAGE> 9
elected and qualified or until such director's earlier death, retirement,
resignation or removal. Except as may otherwise be provided pursuant to Article
IV of the Certificate of Incorporation (including under any certificate of
designation filed thereunder) with respect to any rights of holders of preferred
stock, no director may be removed during his term except for cause.
Section 2. NOMINATION OF DIRECTORS. Nominations of persons for election to
the Board of Directors at a meeting of stockholders may be made at such meeting
by or at the direction of the Board of Directors, by any committee of the Board
of Directors that has been duly designated by the Board of Directors whose
powers and authority as provided in a resolution of the Board of Directors or
these By-laws include the power to so nominate persons for election to the Board
of Directors or persons appointed by the Board of Directors or by any
stockholder of the Corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in the third
paragraph of this Article III, Section 2.
If, during the Post-Merger Period, any vacancy on the Board of
Directors occurs as the result of the death, resignation or removal of a Manor
Care Director (as defined below) or an HCR Director (as defined below) or if,
during the Post-Merger Period, any seat on the Board of Directors held by a
Manor Care Director or HCR Director is subject to nomination for election of a
director, then, subject to the fiduciary duties of its members, the Board of
Directors shall promptly take all necessary actions and appoint or nominate, as
the case may be, such person or persons as may be requested by the remaining
Manor Care Directors (in the case of a vacancy or nomination concerning a seat
held by a Manor Care Director) or by the remaining HCR Directors (in the case of
a vacancy or nomination concerning a seat held by an HCR Director).
The term "Manor Care Director" means (i) any person who was named as
such in the joint proxy statement/prospectus dated August 18, 1998 (the "Joint
Proxy") or a person
6
<PAGE> 10
substituted therefor prior to the Effective Time in the manner described in the
Joint Proxy and (ii) any person who becomes a member of the Board of Directors
upon the request of the Manor Care Directors pursuant to the preceding
paragraph. The term "HCR Director" means (i) any person who was named as such in
the Joint Proxy or a person substituted therefor prior to the Effective Time in
the manner described in the Joint Proxy and (ii) any person who becomes a member
of the Board of Directors upon the request of the HCR Directors pursuant to the
preceding paragraph.
Nominations of persons for election to the Board of Directors
by any stockholder shall be made pursuant to timely notice in writing to the
secretary of the Corporation. To be timely, a stockholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
Corporation not fewer than sixty (60) days nor more than ninety (90) days prior
to the meeting; provided however, that in the event that fewer than seventy (70)
days' notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder, to be timely, must be received
no later than the close of business on the tenth (10th) day following the day on
which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever first occurs. Such stockholder's notice to the
secretary of the Corporation shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director, (1)
the name, age, business address and residence address of the person, (2) the
principal occupation or employment of the person, (3) the class and number of
shares of capital stock of the Corporation which are beneficially owned by the
person, and (4) any other information relating to the person that is required to
be disclosed in solicitations for proxies for election of directors pursuant to
the Rules and Regulations of the Securities and Exchange Commission under
Section 14 of the Securities
7
<PAGE> 11
Exchange Act of 1934, as amended; and (b) as to the stockholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination is being
made, (1) the name and record address of the stockholder and of such beneficial
owner, (2) the class and number of shares of capital stock of the Corporation
which are owned of record and beneficially by the stockholder and such
beneficial holder, (3) a representation that the stockholder giving notice is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to propose such
nomination, and (4) a representation as to whether the stockholder giving notice
intends or is part of a group which intends to solicit proxies from other
stockholders in support of such nomination. The Corporation may require any
proposed nominee to furnish such other information as may reasonably be required
by the Corporation to determine the eligibility of such proposed nominee to
serve as a director of the Corporation. No person shall be eligible for election
as a director of the Corporation unless nominated in accordance with the
procedures set forth herein.
Section 3. VACANCIES. Except as may otherwise be provided pursuant to
Articles IV or XI of the Certificate of Incorporation (including under any
certificate of designation issued thereunder) with respect to any rights of
holders of preferred stock to elect additional directors or Section 2 of this
Article III with respect to vacancies arising during the Post-Merger Period,
should a vacancy in the Board of Directors occur or be created (whether arising
through death, retirement, resignation or removal or through an increase in the
number of authorized directors), such vacancy shall be filled by the affirmative
vote of a majority of the remaining directors, even though less than a quorum of
the Board of Directors. A director so elected to fill a vacancy shall serve for
the remainder of the term of the class to which he was elected and until his
successor shall be duly elected and qualified.
8
<PAGE> 12
Section 4. POWERS. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors. In addition to the
powers and authorities expressly conferred upon them by these By-laws, the Board
of Directors may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by law or by the Certificate of Incorporation
or by these By-laws directed or required to be exercised or done by the
stockholders.
Section 5. PLACE OF DIRECTORS' MEETINGS. The directors may hold their
meetings at any location either within or outside of the State of Delaware.
Section 6. REGULAR MEETINGS. Regular meetings of the Board of Directors may
be held without notice at such time and place as shall from time to time be
determined by the Board of Directors.
Section 7. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be called on at least twenty-four (24) hours' notice to each director,
either personally or by mail or by telegram, only upon the written request of
two (2) directors, unless the Board of Directors consists of only one director,
in which case special meetings shall be called on the written request of the
sole director, in any case such notice to be sent by the president or the
secretary of the Corporation.
Section 8. QUORUM. Except as may be otherwise specifically provided by law,
the Certificate of Incorporation or these By-laws, at all meetings of the Board
of Directors, a majority of the entire Board of Directors shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board
9
<PAGE> 13
of Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 9. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these By-laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 10. TELEPHONIC MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation or these By-laws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors or any such committee, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
Section 11. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution passed by a majority of the then-appointed directors, designate one
or more committees, each committee to consist of one or more directors of the
Corporation; PROVIDED, HOWEVER, that during the Post-Merger Period, each such
committee shall, subject to the Board of Directors' fiduciary duties, consist of
exactly two (2) Manor Care Directors and two (2) HCR Directors (except that,
during the Post-Merger Period, any committee of only two (2) directors of the
Corporation shall consist of exactly one (1) Manor Care Director and one (1) HCR
Director). The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee; PROVIDED, HOWEVER,
10
<PAGE> 14
that during the Post-Merger Period, only a Manor Care Director may act as an
alternate for a Manor Care Director and only an HCR Director may act as an
alternate for an HCR Director. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member; PROVIDED,
HOWEVER, that during the Post-Merger Period, only a Manor Care Director may act
in place of a Manor Care Director and only an HCR Director may act in place of
an HCR Director. Any committee, to the extent allowed by law and provided in the
resolution establishing such committee, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation; PROVIDED, HOWEVER, that during the Post-Merger
Period no committee other than one concerning audit and compensation shall be
formed without the approval of at least seventy-five percent (75%) of the
members of the then-appointed Board of Directors.
Section 12. MINUTES OF COMMITTEE MEETINGS. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.
Section 13. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the
Certificate of Incorporation or these By-laws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation
11
<PAGE> 15
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 14. INDEMNIFICATION. The Corporation shall indemnify every person
who was or is a party or is or was threatened to be made a party to any action,
suit, or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he is or was a director or officer of the Corporation
or, while a director or officer of the Corporation, is or was serving at the
request of the Corporation as a director, officer, employee, agent or trustee of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including counsel fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding, to the full extent permitted by
law. Expenses incurred by a person who is or was a director or officer of the
Corporation in appearing at, participating in or defending any such action, suit
or proceeding shall be paid by the Corporation at reasonable intervals in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized by this Article III, Section 14. If
a claim under this Article III, Section 14 is not paid in full by the
Corporation within ninety days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be paid also the expense of prosecuting
such claim. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending any proceeding in
advance of its final disposition where the required undertaking, if any is
required, has been tendered to the Corporation) that the claimant has not met
the standards of
12
<PAGE> 16
conduct which make it permissible under the Delaware General Corporation Law or
other applicable law for the Corporation to indemnify the claimant for the
amount claimed, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including the Board of
Directors (or any committee thereof), independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the Delaware
General Corporation Law or other applicable law, nor an actual determination by
the Corporation (including the Board of Directors (or a committee thereof),
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
ARTICLE IV.
OFFICERS
--------
Section 1. OFFICERS. The officers of the Corporation shall be chosen by the
Board of Directors and shall include a chairman of the board, a president and
chief executive officer, a vice president and a secretary. The Corporation may
also have at the discretion of the Board of Directors such other officers as are
desired, including additional vice presidents, one or more assistant
secretaries, a treasurer, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article IV. In the event there are two (2) or more vice presidents, then
one or more may be designated as executive vice president, senior vice
president, vice president marketing or other title. At the time of the election
of officers, the directors may by resolution determine the order of their rank.
Any
13
<PAGE> 17
number of offices may be held by the same person, unless the Certificate of
Incorporation or these By-laws otherwise provide.
Section 2. ELECTION OF OFFICERS. The Board of Directors, at its first
meeting after each annual meeting of stockholders, shall choose the officers of
the Corporation.
Section 3. SUBORDINATE OFFICERS. The Board of Directors may appoint such
other officers and agents, as it shall deem necessary or appropriate, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Board of Directors.
Section 4. COMPENSATION OF OFFICERS. The compensation of all officers and
agents of the Corporation shall be fixed by the Board of Directors.
Section 5. TERM OF OFFICE; REMOVAL AND VACANCIES. The officers of the
Corporation shall hold office until their successors are chosen and qualified or
until their earlier death, retirement, resignation or removal. Any officer
elected or appointed by the Board of Directors may be removed at any time,
either with or without cause, by the Board of Directors. If the office of any
officer or officers becomes vacant for any reason, the vacancy may be filled by
the Board of Directors.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board shall, if
present, preside at all meetings of the Board of Directors and shall exercise
and perform such other powers and duties as may be from time to time assigned to
him by a vote of (i) not less than seventy-five percent (75%) of the
then-appointed members of the Board of Directors of the Corporation during the
Post-Merger Period and (ii) thereafter, a majority of the then-appointed members
of the Board of Directors.
14
<PAGE> 18
Section 7. PRESIDENT AND CHIEF EXECUTIVE OFFICER. The president shall be
the chief executive officer of the Corporation (and shall carry such additional
title as well) and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
Corporation. In the absence or disability of the chairman of the board, or if
there is none, the president shall preside at all meetings of the Board of
Directors. The president shall have such additional powers and duties as may be
prescribed by the Board of Directors or these By-laws.
Section 8. VICE PRESIDENTS. In the absence or disability of the president,
the vice presidents in order of their rank as fixed by the Board of Directors,
or if not ranked, the vice president designated by the Board of Directors, shall
perform all the duties of the president, and when so acting shall have all the
powers of and be subject to all the restrictions upon the president. The vice
presidents shall have such other duties as from time to time may be prescribed
for them, respectively, by the Board of Directors.
Section 9. SECRETARY. The secretary shall record the proceedings of the
meetings of the stockholders and directors in a book to be kept for that
purpose; and shall perform like duties for the standing committees when required
by the Board of Directors. The secretary shall give, or cause to be given,
notice of all meetings of the stockholders and of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or these By-laws. The secretary shall keep in safe custody the seal of the
Corporation, and affix the same to any instrument requiring it, and when so
affixed it shall be attested by the signature of the secretary or by the
signature of an assistant secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by such officer's signature.
15
<PAGE> 19
Section 10. ASSISTANT SECRETARIES. The assistant secretary, or if there be
more than one, the assistant secretaries in the order determined by the Board of
Directors, or if there be no such determination, the assistant secretary
designated by the Board of Directors, shall, in the absence or disability of the
secretary, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
Section 11. TREASURER. The treasurer, if such an officer is elected, shall
have the custody of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation and shall deposit all moneys, and other valuable effects in the name
and to the credit of the Corporation, in such depositories as may be designated
by the Board of Directors. The treasurer shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements, and shall render to the Board of Directors, at its
regular meetings, or when the Board of Directors so requires, an account of all
such transactions and of the financial condition of the Corporation. If required
by the Board of Directors, the treasurer shall give the Corporation a bond, in
such sum and with such surety or sureties as shall be satisfactory to the Board
of Directors, for the faithful performance of the duties of such office and for
the restoration to the Corporation, in case of the treasurer's death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in the treasurer's possession or under
the treasurer's control belonging to the Corporation.
Section 12. ASSISTANT TREASURERS. The assistant treasurer, or if there
shall be more than one, the assistant treasurers in the order determined by the
Board of Directors, or if there be no such determination, the assistant
treasurer designated by the Board of Directors, shall, in the
16
<PAGE> 20
absence or disability of the treasurer, perform the duties and exercise the
powers of the treasurer and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
ARTICLE V.
CERTIFICATES OF STOCK
---------------------
Section 1. CERTIFICATES. Every holder of stock of the Corporation shall be
entitled to have a certificate signed by, or in the name of the Corporation by,
the chairman of the board, or the president or a vice president, and by the
secretary or an assistant secretary, or the treasurer or an assistant treasurer
of the Corporation, certifying the number of shares represented by the
certificate owned by such stockholder in the Corporation.
Section 2. SIGNATURES ON CERTIFICATES. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES. If the
Corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualification, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of the Delaware General Corporation Law or other applicable law, in lieu of
the foregoing requirements, there may be set forth on the face or
17
<PAGE> 21
back of the certificate which the Corporation shall issue to represent such
class or series of stock, a statement that the Corporation will furnish without
charge to each stockholder who so requests the powers, designations, preferences
and relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
Section 4. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to give the Corporation a bond in
such sum as the Board of Directors deems sufficient to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss,
theft or destruction of such certificates or the issuance of such new
certificates.
Section 5. TRANSFERS OF STOCK. Upon surrender to the Corporation, or the
transfer agent of the Corporation, of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon the stock ledger of the Corporation.
Section 6. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and accordingly shall not be bound to recognize any equitable or other
claim or interest in such share on the part of any
18
<PAGE> 22
other person, whether or not it shall have express or other notice thereof, save
as expressly provided by the Delaware General Corporation Law or other
applicable law.
ARTICLE VI.
AMENDMENTS
----------
These By-laws may be altered, amended or repealed or new By-laws may be
adopted by the stockholders or by the Board of Directors at any regular meeting
of the stockholders or of the Board of Directors or at any special meeting of
the stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new By-laws is contained in the notice of such
special meeting. The power of the Board of Directors to adopt, amend or repeal
these By-laws shall not divest or limit any power of the stockholders under the
Delaware General Corporation Law or other applicable law, the Certificate of
Incorporation or these By-laws to adopt, amend or repeal these By-laws.
Notwithstanding the foregoing, none of Sections 1, 2, 3 or 11 of Article III of
these By-laws or this Article VI may be amended (whether through amendment,
repeal or restatement of these By-laws or adoption of new By-laws) (i) during
the Post-Merger Period, without the approval of either (1) at least seventy-five
percent (75%) of the members of the then-appointed Board of Directors or (2) the
holders of eighty percent (80%) in voting power of the stock of the Corporation
issued and outstanding and entitled to vote thereon, and (ii) after the
Post-Merger Period, by either (1) a majority of the members of the
then-appointed Board of Directors or (2) the holders of majority in voting power
of the stock of the Corporation issued and outstanding and entitled to vote
thereon.
19
<PAGE> 1
Exhibit 4
364 DAY
CREDIT AGREEMENT
DATED AS OF SEPTEMBER 25, 1998,
AS AMENDED AS OF SEPTEMBER 24, 1999
AMONG
HCR MANOR CARE, INC.,
MANOR CARE, INC.,
BANK OF AMERICA, NATIONAL ASSOCIATION,
AS ADMINISTRATIVE AGENT,
THE CHASE MANHATTAN BANK,
AS SYNDICATION AGENT,
DEUTSCHE BANK AG,
AS DOCUMENTATION AGENT,
AND
THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO
ARRANGED BY
BANK OF AMERICA SECURITIES, LLC,
AS LEAD ARRANGER
AND
CHASE SECURITIES INC.
AND
DEUTSCHE BANC ALEX.BROWN,
AS CO-ARRANGERS
A-1
<PAGE> 2
FIRST AMENDMENT TO
364 DAY CREDIT AGREEMENT
THIS FIRST AMENDMENT TO 364 DAY CREDIT AGREEMENT is made and dated as
of September 24, 1999 (the "FIRST AMENDMENT") among HCR MANOR CARE, INC., a
Delaware corporation (the "COMPANY"), MANOR CARE, INC., a Delaware corporation
("MANOR CARE"; Manor Care and the Company are collectively called the
"BORROWERS" and are each individually called a "BORROWER"), the financial
institution's party to the Credit Agreement referred to below, and BANK OF
AMERICA, NATIONAL ASSOCIATION, a national banking association, as Administrative
Agent (the "AGENT"), and amends that certain 364 Day Credit Agreement dated as
of September 25, 1998 (as amended or modified from time to time, the "CREDIT
AGREEMENT").
RECITALS
--------
WHEREAS, the Borrowers have requested that the Agent and the Banks
amend certain provisions of the Credit Agreement, and the Agent and the Banks
are willing to do so, on the terms and conditions specified herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. TERMS. All terms used herein shall have the same meanings as in the
Credit Agreement unless otherwise defined herein.
2. AMENDMENTS. The Credit Agreement is hereby amended as follows:
2.1 AMENDMENTS TO COVER PAGE. The cover page of the Credit
Agreement is hereby amended and restated in its entirety to read as set forth in
Exhibit A hereof.
2.2 AMENDMENTS TO SECTION 1.1.
(a) The chart that appears in the definition of the term
"Applicable Facility Fee Rate" in Section 1.1 of the Credit Agreement is hereby
amended and restated in its entirety to read as follows:
-----------------------------------------------------------------------
Level Leverage Ratio Applicable
----- -------------- Facility Fee Rate
-----------------
-----------------------------------------------------------------------
Level 1 (less than) 1.50 0.125%
-----------------------------------------------------------------------
Level 2 (greater than or equal to) 1.50
but (less than) 2.00 0.150%
-----------------------------------------------------------------------
<PAGE> 3
-----------------------------------------------------------------------
Level Leverage Ratio Applicable
----- -------------- Facility Fee Rate
-----------------
-----------------------------------------------------------------------
Level 3 (greater than or equal to) 2.00
but (less than) 2.50 0.175%
-----------------------------------------------------------------------
Level 4 (greater than or equal to) 2.50
but (less than) 3.00 0.200%
-----------------------------------------------------------------------
Level 5 (greater than or equal to) 3.00 0.225%
-----------------------------------------------------------------------
(b) The chart that appears in the definition of the term
"Applicable Margin" in Section 1.1 of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Level Leverage Ratio Applicable Offshore
----- -------------- Rate Margin
-----------
<S> <C> <C>
---------------------------------------------------------------------------------
Level 1 (less than) 1.50 +0.500%
---------------------------------------------------------------------------------
Level 2 (greater than or equal to) 1.50 but (less than) 2.00 +0.600%
---------------------------------------------------------------------------------
Level 3 (greater than or equal to) 2.00 but (less than) 2.50 +0.700%
---------------------------------------------------------------------------------
Level 4 (greater than or equal to) 2.50 but (less than) 3.00 +0.925%
---------------------------------------------------------------------------------
Level 5 (greater than or equal to) 3.00 +1.275%
---------------------------------------------------------------------------------
</TABLE>
(c) There shall be added to Section 1.1 of the Credit
Agreement a new definition of the term "Applicable Utilization Fee Rate" reading
in its entirety as follows:
"APPLICABLE UTILIZATION FEE RATE" means a rate per annum
determined by reference to the Leverage Ratio as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Level Leverage Ratio Applicable Utilization
----- -------------- Fee Rate
--------
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Level 1 (less than) 1.50 +0.100%
-------------------------------------------------------------------------------------------------
Level 2 (greater than or equal to) 1.50 but (less than) 2.00 +0.125%
-------------------------------------------------------------------------------------------------
Level 3 (greater than or equal to) 2.00 but (less than) 2.50 +0.125%
-------------------------------------------------------------------------------------------------
Level 4 (greater than or equal to) 2.50 but (less than) 3.00 +0.125%
-------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Level Leverage Ratio Applicable Utilization
----- -------------- Fee Rate
--------
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Level 5 (greater than or equal to) 3.00 +0.125%
-------------------------------------------------------------------------------------------------
</TABLE>
The Applicable Utilization Fee Rate shall be effective from
and including the date on which the Agent receives a Compliance
Certificate to but excluding the date on which the Agent receives the
next Compliance Certificate; PROVIDED, HOWEVER, that if the Agent does
not receive a Compliance Certificate by the date required by SECTION
5.1, the Applicable Utilization Fee Rate shall, effective as of such
date, be Level 5 to but excluding the date the Agent receives such
Compliance Certificate.
(d) The first parenthetical phrase in the definition of the
term "Interest Period" in Section 1.1 of the Credit Agreement is hereby amended
by deleting the words "or twelve" therefrom.
(e) The definition of the term "Revolving Termination Date" in
Section 1.1 of the Credit Agreement is hereby amended by deleting the date
"September 24, 1999" from clause (a) thereof and replacing it with the date
"September 22, 2000."
2.3 AMENDMENT TO SECTION 2.9. Clause (c) of Section 2.9 of the
Credit Agreement is hereby amended by deleting ".05 of 1% (one percent) of" and
replacing it with "the Applicable Utilization Fee Rate times".
2.4 AMENDMENTS TO SECTION 5.5. Section 5.5 of the Credit
Agreement is hereby amended and restated to read in its entirety as follows:
"5.5 FINANCIAL INFORMATION
(a) The audited consolidated balance sheet as of
December 31, 1998 and the related consolidated statements of
income, of shareholders equity and of cash flow for the fiscal
year then ended, of the Company and its Subsidiaries, audited
by Ernst & Young LLP have been prepared in accordance with
GAAP consistently applied (except as disclosed therein)
throughout the period involved, present fairly the financial
position of the Company and such Subsidiaries as of the date
applicable and the results of their operations and cash flows
for the period then ended and show all material indebtedness
and other liabilities,
<PAGE> 5
direct or contingent, of the Company and its consolidated
Subsidiaries as of the date thereof, including liabilities for
taxes, material commitments and Contingent Obligations.
(b) The unaudited consolidated balance sheet as of
June 30, 1999 and the related consolidated statements of
income, of shareholders equity and of cash flow for the fiscal
quarter then ended of the Company and its Subsidiaries have
been prepared in accordance with GAAP consistently applied
(except as disclosed therein) throughout the period involved
and present fairly the financial position of the Company and
its Subsidiaries as of the date applicable and results their
operations and cash flows for the period then ended."
2.5 AMENDMENT TO SECTION 5.6. Section 5.6 of the Credit
Agreement is hereby amended by deleting the date "December 31, 1997" and
replacing it with "December 31, 1998."
2.6 AMENDMENT TO SCHEDULE 2.1. Schedule 2.1 to the Credit
Agreement is hereby amended and restated to read as set forth on Schedule 2.1
hereof.
3. REPRESENTATIONS AND WARRANTIES. The Borrowers represent and warrant
to the Agent and the Banks that, on and as of the date hereof, and after giving
effect to this First Amendment:
3.1 AUTHORIZATION. The execution, delivery and performance by
the Borrowers of this First Amendment have been duly authorized by all necessary
corporate action, and this First Amendment has been duly executed and delivered
by the Borrowers.
3.2 BINDING OBLIGATION. This First Amendment constitutes the
legal, valid and binding obligation of the Borrowers, enforceable against the
Borrowers in accordance with its terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, or similar laws affecting the enforcement
of creditors' rights generally or by equitable principles relating to
enforceability.
3.3 NO LEGAL OBSTACLE TO AMENDMENT. The execution, delivery
and performance of this First Amendment will not (a) contravene the Organization
Documents of either Borrower; (b) constitute a breach or default under any
material Contractual Obligation or violate or contravene any law or governmental
regulation or court decree or order binding on or affecting either Borrower
which individually or in the aggregate could reasonably be expected to have a
Material Adverse Effect; or
5
<PAGE> 6
(c) result in, or require the creation or imposition of, any Lien on any of
either Borrower's properties. No approval or authorization of any governmental
authority is required to permit the execution, delivery or performance by the
Borrowers of this First Amendment, or the transactions contemplated hereby.
3.4 INCORPORATION OF CERTAIN REPRESENTATIONS. After giving
effect to the terms of this First Amendment, the representations and warranties
of the Company set forth in Article V of the Credit Agreement are true and
correct in all respects on and as of the date hereof as though made on and as of
the date hereof, except as to such representations made as of an earlier
specified date.
3.5 DEFAULT. No Default or Event of Default under the Credit
Agreement has occurred and is continuing.
4. CONDITIONS, EFFECTIVENESS. The effectiveness of this First Amendment
shall be subject to the compliance by the Borrowers with their agreements herein
contained, and to the delivery of the following to Agent in form and substance
satisfactory to Agent:
4.1 AUTHORIZED SIGNATORIES. A certificate, signed by the
Secretary or an Assistant Secretary of each of the Borrowers and dated the date
of this First Amendment, as to the incumbency of the person or persons
authorized to execute and deliver this First Amendment and any instrument or
agreement required hereunder on behalf of the Borrowers.
4.2 NOTES. A Note in favor of each Bank duly executed by the
Borrowers.
4.3 GUARANTOR AFFIRMATION. An acknowledgment and reaffirmation
letter in the form of EXHIBIT B hereto duly executed by each party to the
Guaranty (a "Guarantor").
4.4 LEGAL OPINIONS. An opinion of counsel to the Borrowers and
the Guarantor, addressed to the Agent and the Banks, in a form reasonably
satisfactory to the Agent.
4.5 OTHER EVIDENCE. Such other evidence with respect to the
Borrowers or any other person as the Agent or any Bank may reasonably request to
establish the consummation of the trans-actions contemplated hereby, the taking
of all corporate action in connection with this First Amendment and the Credit
Agreement and the compliance with the conditions set forth herein.
6
<PAGE> 7
5. MISCELLANEOUS.
5.1 EFFECTIVENESS OF THE CREDIT AGREEMENT AND THE NOTES.
Except as hereby expressly amended, the Credit Agreement shall each remain in
full force and effect and is hereby ratified and confirmed in all respects on
and as of the date hereof.
5.2 WAIVERS. This First Amendment is limited solely to the
matters expressly set forth herein and is specific in time and in intent and
does not constitute, nor should it be construed as, a waiver or amendment of any
other term or condition, right, power or privilege under the Credit Agreement or
under any agreement, contract, indenture, document or instrument mentioned
therein; nor does it preclude or prejudice any rights of the Agent or the Banks
thereunder, or any exercise thereof or the exercise of any other right, power or
privilege, nor shall it require the Majority Banks to agree to an amendment,
waiver or consent for a similar transaction or on a future occasion, nor shall
any future waiver of any right, power, privilege or default hereunder, or under
any agreement, contract, indenture, document or instrument mentioned in the
Credit Agreement, constitute a waiver of any other right, power, privilege or
default of the same or of any other term or provision.
5.3 COUNTERPARTS. This First Amendment may be executed in any
number of counterparts, and all of such counterparts taken together shall be
deemed to constitute one and the same instrument. This First Amendment shall not
become effective until the Borrowers, the Agent and the Majority Banks shall
have signed a copy hereof and the same shall have been delivered to the Agent.
Delivery of an executed counterpart of a signature page to this First Amendment
should be effective as delivery of a manually executed counterpart of this First
Amendment.
5.4 GOVERNING LAW. This First Amendment shall be governed by
and construed in accordance with the laws of the State of New York.
5.5 SEVERABILITY. The illegality or unenforceability of any
provision of this First Amendment or any instrument or agreement required
hereunder shall not in any way affect or impair the legality or enforceability
of the remaining provisions of this First Amendment or any instrument or
agreement required hereunder.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.
HCR MANOR CARE, INC.
By: ___________________________
Title: ________________________
MANOR CARE, INC.
By: ___________________________
Title: ________________________
BANK OF AMERICA, NATIONAL
ASSOCIATION, as Agent
By: ___________________________
Title: ________________________
BANK OF AMERICA, NATIONAL
ASSOCIATION, as a Bank
By: ___________________________
Title: __________________________
THE CHASE MANHATTAN BANK
By: ___________________________
Title: ________________________
8
<PAGE> 9
DEUTSCHE BANK AG, NEW YORK BRANCH
AND/OR CAYMAN ISLANDS BRANCH
By: ___________________________
Title: ________________________
By: ___________________________
Title: ________________________
FLEET NATIONAL BANK
By: ___________________________
Title: ________________________
THE HUNTINGTON NATIONAL BANK
By: ___________________________
Title: ________________________
ALLFIRST BANK
By: ___________________________
Title: ________________________
BANK OF MONTREAL
By: ___________________________
Title: ________________________
THE BANK OF NEW YORK
By: ___________________________
Title: ________________________
9
<PAGE> 10
NATIONAL CITY BANK
By: ___________________________
Title: ________________________
WACHOVIA BANK, N.A.
By: ___________________________
Title: ________________________
THE FIFTH THIRD BANK
By: ___________________________
Title: ________________________
BANK ONE, N.A.
By: ___________________________
Title: ________________________
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION
By: ___________________________
Title: ________________________
10
<PAGE> 11
SCHEDULE 2.1
COMMITMENTS AND PRO RATA SHARES
-------------------------------
<TABLE>
<CAPTION>
BANK COMMITMENT SHARE
- ---- ---------- -----
<S> <C> <C>
Bank of America, National Association $ 35,000,000 17.5000%
The Chase Manhattan Bank $ 25,000,000 12.5000%
Deutsche Bank AG $ 25,000,000 12.5000%
Fleet National Bank $ 18,000,000 9.0000%
The Huntington National Bank $ 16,375,000 8.1875%
AllFirst Bank $ 11,250,000 5.6250%
Bank of Montreal $ 11,250,000 5.6250%
The Bank of New York $ 11,250,000 5.6250%
National City Bank $ 11,250,000 5.6250%
Wachovia Bank, N.A. $ 11,250,000 5.6250%
The Fifth Third Bank $ 9,375,000 4.6875%
Bank One, N.A. $ 7,500,000 3.7500%
SunTrust Bank, Central Florida, National Association $ 7,500,000 3.7500%
TOTAL $200,000,000 100%
</TABLE>
1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 91,776
<SECURITIES> 0
<RECEIVABLES> 420,695
<ALLOWANCES> 59,492
<INVENTORY> 0
<CURRENT-ASSETS> 519,077
<PP&E> 2,173,245
<DEPRECIATION> 626,321
<TOTAL-ASSETS> 2,635,186
<CURRENT-LIABILITIES> 460,290
<BONDS> 696,132
0
0
<COMMON> 1,110
<OTHER-SE> 1,156,029
<TOTAL-LIABILITY-AND-EQUITY> 2,635,186
<SALES> 0
<TOTAL-REVENUES> 1,599,034
<CGS> 0
<TOTAL-COSTS> 1,252,041
<OTHER-EXPENSES> 86,376
<LOSS-PROVISION> 18,734
<INTEREST-EXPENSE> 40,510
<INCOME-PRETAX> 156,632
<INCOME-TAX> 48,491
<INCOME-CONTINUING> 108,141
<DISCONTINUED> 0
<EXTRAORDINARY> 12,937
<CHANGES> 0
<NET-INCOME> 121,078
<EPS-BASIC> 1.11
<EPS-DILUTED> 1.10
</TABLE>
