FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended May 31, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to _______________
Commission File Number 1-8195
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MANOR CARE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1200376
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11555 Darnestown Road, Gaithersburg, Maryland 20878
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 979-4000
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange On
Title of Each Class Which Registered
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Common Stock, Par Value $.10 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
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7-1/2% Senior Notes due June 15, 2006
_____________________________________________
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 _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in any amendment
to this Form 10-K. [X]
The aggregate market value of the Manor Care Common Stock held by non-
affiliates was approximately $1,479,527,673 as of August 10, 1998, based on a
closing price of $33.75 per share.
The number of shares of Manor Care Common Stock outstanding as of August 10,
1998 was 63,720,035.
PART I
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ITEM 1. BUSINESS.
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General
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Manor Care, Inc. ("Manor Care" or "the Company"), a Delaware corporation
organized in August 1981, is a holding company that conducts its business
through its principal subsidiary, ManorCare Health Services, Inc. ("MCHS").
MCHS and its subsidiaries have been engaged since October 1968 in the business
of developing, owning and managing skilled nursing facilities and assisted
living facilities, which provide skilled nursing and convalescent care ans
assisted living services principally for residents over the age of 65. As of
May 31, 1998, MCHS owned approximately 50% of Vitalink Pharmacy Services, Inc.
("Vitalink"), a public company that owns and operates institutional pharmacies,
and approximately 63% of the voting stock of In Home Health, Inc. ("In Home
Health"), a public company which specializes in providing comprehensive health
care services to clients of all ages in their home. MCHS also owns and operates
an acute care general hospital.
2
In fiscal year 1998, Manor Care derived approximately 66% of its total
revenues from continuing operations through Medicare and Medicaid programs;
aside from the foregoing, Manor Care has no few or single customers upon whom it
is dependent.
On June 10, 1998, Manor Care, Health Care and Retirement Corporation, a
Delaware corporation ("HCR"), and Catera Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of HCR ("Merger Sub"), entered into an
Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Merger
Sub will merge with and into Manor Care. The Merger Agreement provides that each
outstanding share of Manor Care's common stock, par value $.10 per share, shall
be converted into the right to receive one share of common stock of HCR, par
value $.01 per share. Upon completion of the transaction, Manor Care will
become a wholly owned subsidiary of HCR, the stockholders of Manor Care will
become stockholders of HCR, and HCR will change its name to "HCR Manor Care."
The consummation of the transactions contemplated by the Merger Agreement is
subject to the approval of the stockholders of each of Manor Care and HCR, the
receipt of certain regulatory approvals and the expiration of antitrust waiting
periods.
On November 1, 1996, Manor Care separated its lodging business from the
health care business via a tax-free spin-off of the lodging division.
Industry Segments
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Reference is made to Manor Care's Consolidated Statements of Income and the
information under the headings "Discontinued Pharmacy Operations", "Discontinued
Lodging Operations" and "Business Segment Information", set forth under Item 8,
Financial Statements and Supplementary Data, of this Form 10-K.
ManorCare Health Services, Inc. - Operations
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Manor Care, through MCHS and its subsidiaries, owns, operates or manages 171
skilled nursing and rehabilitation facilities and 39 assisted living facilities,
which provide high acuity services, long-term skilled-nursing care, Alzheimer's
services and assisted living services, principally for residents over the age of
65. Manor Care and its subsidiaries also own and operate an acute care hospital,
60 pharmacies and provide home health services in 19 markets.
Nursing Center Operations
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MCHS's nursing facilities provide, in general, three types of services:
-- High acuity services - focuses on short-term, post hospital care for
medically complex residents in need of aggressive rehabilitation. Manor Care
offers high acuity services in most of its skilled nursing and rehabilitation
facilities and operates 8 dedicated MedBridge high acuity units. MedBridge
units offer post-acute care for patients in need of aggressive rehabilitation.
These units feature high staff-to-patient ratios, sophisticated clinical
capabilities, on-staff physicians and state-of-the-art rehabilitation
departments.
3
-- Long-term care - focuses on chronically ill and frail individuals who
require 24-hour-a-day skilled nursing services and physical, occupational and
speech therapies. Through this core business, Manor Care provided nearly eight
million patient days in fiscal year 1998.
-- Alzheimer's services - focuses on meeting the needs of individuals in
the middle to late stages of Alzheimer's disease or related memory impairment.
With almost 15 years of Alzheimer's disease management, Manor Care operates 147
Arcadia special-care units in the Company's nursing centers, 6 of which opened
during the 1998 fiscal year.
Services provided to all patients include the required type of nursing care,
room and board, special diets, occupational, speech, physical and recreational
therapy and other services that may be specified by the patient's physician, who
directs the admission, treatment and discharge of that patient.
Each skilled nursing facility is under the direction of a state-licensed
nursing center administrator supported by other professional personnel, such as
a medical director, social worker, dietitian and recreation staff. Nursing
departments in each such facility are under the supervision of a director of
nurses who is state licensed. The nursing staffs are composed of other
registered nurses and licensed practical nurses, as well as nursing assistants.
Staff size and composition vary depending on the size and location of each
facility.
Manor Care has developed a Quality Assurance Program to ensure that high
standards of care are maintained in each facility. The Quality Assurance
Department is composed of registered nurses, dietitians, nutrition specialists,
an environmental services specialist and a recreational therapist. These staff
specialists set corporate standards for delivery of care, direct the Quality
Improvement Program, and provide consulting and educational services to the
facilities.
Manor Care's skilled nursing and rehabilitation facilities range in bed
capacity from 53 to 255 beds and have an aggregate bed capacity of 24,170 beds,
and its assisted living facilities have an aggregate bed capacity of 3,935 beds,
which together achieved an average occupancy rate of 88% during the 1998 fiscal
year. Manor Care's nursing facilities are located in 28 states: Arizona,
California, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa,
Kansas, Maryland, Michigan, Missouri, Nevada, New Jersey, New Mexico, North
Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South
Dakota, Texas, Utah, Virginia, Washington and Wisconsin. Eight MedBridge units
within skilled nursing facilities currently operate in New Jersey, Ohio, and
Pennsylvania.
The nursing facilities are modern structures generally of wall-bearing
masonry with fire resistive or protective floor and roof suspension systems.
Most have been designed to permit private and semi-private patient room
accommodations, and rooms at some facilities may be converted to accommodate up
to four beds. Most facilities have individually controlled heating and air-
conditioning units. Each nursing facility contains a fully equipped kitchen, an
isolation room, day room areas, administrative offices and most contain a
physical therapy gym. Many of Manor Care's nursing facilities have specialized
wings for assisted living, individuals with catastrophic injuries, and persons
desiring extra amenities and activities. Manor Care believes all of the nursing
facilities and related equipment are in good condition and well maintained.
4
Patients seeking the services of the nursing facilities come from a variety
of sources, and are principally referred by hospitals and physicians. Most of
Manor Care's nursing facilities participate in state Medicaid programs and in
the Federal Medicare program (see "Federal and State Assistance Programs").
However, Manor Care attempts to locate and operate its nursing facilities in a
manner designed to attract patients who pay directly or through insurance to the
facilities for services without benefit of any government assistance program
("private patients").
As a general rule, the profit margin is higher with private patients than
with patients to whom services are rendered with government assistance programs.
The following table sets forth certain information concerning revenues from
government assistance programs for all of Manor Care's health care operations
during fiscal year 1998:
Gross Contractual Net
Revenues Adjustment* Revenues
-------- ----------- --------
Medicare $430,611,000 $126,586,000 $304,025,000
Medicaid 462,208,000 137,515,000 324,693,000
*Represents the estimated difference between private billing rates and
amounts recoverable under government programs.
Assisted Living Operations
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Assisted living is an attractive option for seniors who need some assistance
with the activities of daily living but do not require around-the-clock skilled
nursing care. Manor Care's assisted living operations during fiscal year 1998
consisted of 20 Springhouse facilities serving the needs of the general assisted
living population and 19 Arden Courts assisted living facilities meeting the
needs of individuals with early to middle-stage Alzheimer's disease or related
memory impairment. These Springhouse facilities are located in Arizona,
California, Florida, Indiana, Illinois, Maryland, Ohio and Pennsylvania. The 19
Arden Courts are located in Connecticut, Delaware, Florida, Georgia, Illinois,
Maryland, Michigan, New Jersey, Ohio, Pennsylvania and Virginia, seven of which
opened in fiscal year 1998.
Nursing Center and Assisted Living Operations Highlights
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During fiscal year 1998, Manor Care opened two newly constructed skilled
nursing facilities located in California and 10 assisted living facilities
ranging in bed capacity from 55 to 129 located in Connecticut, Virginia,
Maryland (2), Delaware, Georgia (2) and Florida (3). The Company sold two
Springhouse facilities located in Florida and Michigan. As of May 31, 1998,
Manor Care had 31 nursing and assisted living facilities with a total of 2,438
beds under construction in Arizona, California, Colorado, Connecticut, Florida,
Georgia, Illinois, Kansas, Maryland, Nevada, New Jersey, North Carolina, Ohio,
Pennsylvania and Texas. Additions to six existing facilities with a total of
149 beds are also under construction. With its Arcadia units and its Arden
5
Courts assisted living facilities, Manor Care devoted 15% of its beds to
Alzheimer's care during the fiscal year.
The following table sets forth certain information concerning occupancy and
revenues of Manor Care's nursing and assisted living facilities and hospital
during fiscal year 1998:
Nursing and
Assisted Living Facilities Hospital
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% of % of % of % of
Occupancy Revenues Occupancy Revenues
------------ --------- --------- --------
Private patients 54% 56% 30% 58%
Medicaid patients 36% 19% 17% 15%
Medicare patients 10% 25% 53% 27%
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100% 100% 100% 100%
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Pharmacy Operations
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MCHS owns approximately 50% of Vitalink, a publicly-traded company that owns
and operates 60 pharmacies located in California, Colorado, Florida, Illinois,
Indiana, Iowa, Kentucky, Maryland, Michigan, New Jersey, New York, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Texas, Virginia,
and Wisconsin.
Vitalink operates institutional pharmacies, which provide, in general, three
types of services:
-- Customized filling of prescription and non-prescription medications for
individual patients pursuant to physician orders delivered to nursing
facilities.
-- Consultant pharmacist services to help ensure quality patient care
through monitoring and reporting on prescription drug therapy.
-- Infusion therapy services, consisting of a product (nutrient,
antibiotic, chemotherapy or other drugs or fluids) and its administration by
tube, catheter or intravenously. Vitalink prepares and delivers the product,
which is administered by nursing center staff.
Pursuant to various master agreements, a portion of Vitalink's business is
with Manor Care. As of May 31, 1998, Vitalink had contracts to serve 23,910
Manor Care beds and 146,090 beds not affiliated with Manor Care, resulting in
revenues of $94,770,000 and $404,587,000, respectively, for fiscal 1998.
On April 26, 1998, Vitalink entered into an Agreement and Plan of Merger
(the "Vitalink Merger Agreement") with Genesis Health Ventures, Inc., a
Pennsylvania corporation ("Genesis"), and V Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of Genesis ("Acquisition
Corporation"). Pursuant to the
6
Vitalink Merger Agreement, Vitalink will merge (the "Vitalink Merger") with and
into Acquisition Corporation and Acquisition Corporation will survive the
Vitalink Merger. In accordance with the Vitalink Merger Agreement, holders of
the common stock of Vitalink will receive for each share of Vitalink common
stock held, at the election of the holder, either cash consideration in the
amount of $22.50, or 0.045 shares of Series G Cumulative Convertible Preferred
Stock of Genesis (the "Genesis Preferred Stock") or a combination thereof.
The obligations of the parties to consummate the Vitalink Merger are
contingent on the approval of the stockholders of Genesis and Vitalink and the
satisfaction or waiver of other customary closing conditions.
Manor Care, which owns approximately 50% of the outstanding shares of
Vitalink common stock, and Genesis have entered into a Voting Agreement, dated
as of April 26, 1998 (the "Voting Agreement"), pursuant to which Manor Care
agreed to vote all of its shares of Vitalink common stock in favor of the
adoption and approval of the Vitalink Merger, the Vitalink Merger Agreement and
the transactions contemplated thereby. Manor Care has also agreed to elect to
receive Genesis Preferred Stock as consideration with respect to all of its
Vitalink common stock. Upon closing of the Vitalink Merger, it is anticipated
that Manor Care will own approximately 18% of the voting securities of Genesis,
assuming the Vitalink shareholders other than Manor Care elect to receive cash
for their Vitalink shares.
As a result of the Vitalink Merger, the consolidated financial statements in
Item 8 reflect the pharmacy segment as a discontinued operation for all periods
presented.
During fiscal year 1998, Vitalink purchased certain assets of a pharmacy
business for $5.6 million and acquired another pharmacy business in Oklahoma
City, Oklahoma for $0.1 million plus 351,318 shares of Vitalink common stock.
On February 12, 1997, Vitalink completed a merger with TeamCare, the
pharmacy subsidiary of GranCare, Inc. Vitalink issued 11.4 million shares in
exchange for all of the outstanding shares of GranCare, Inc.
Home Health Care Operations
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MCHS owns effective control of approximately 63% of the voting stock of In
Home Health, Inc., a publicly-traded company which provides services in 19
markets located in 14 states. In Home Health offers its clients a broad range
of professional and support services to meet medical and personal needs at home,
including skilled nursing, infusion therapy, hospice, rehabilitation, personal
care and homemaking.
In Home Health has two divisions: a Visit Division and an Extended Hour
Division. The Visit Division provides clients with short-term care, usually up
to two hours per visit. The Extended Care Division provides clients with care
up to 24 hours a day. Through the Visit Division, In Home Health operates
infusion pharmacies which provide pharmaceutical drugs, fluids and supplies.
7
Hospital Operations
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A subsidiary of Manor Care is the general partner and a limited partner of
Mesquite Community Hospital, L.P., which owns and operates Mesquite Community
Hospital in Mesquite, Texas, a Dallas suburb. The 172 licensed bed facility,
which opened in 1978, is a general medical/surgical acute care hospital fully
accredited by the Joint Commission for the Accreditation of Health Care
Organizations. Services include obstetrics, emergency services,
coronary/intensive care, day surgery, skilled nursing, and geriatric psychiatry.
Fully equipped, modern ancillary and diagnostic services include MRI, CT,
nuclear medicine, cardiac catheterization and ultrasound with doppler. The
medical staff, representing virtually every medical and surgical specialty,
admit and refer patients into the hospital from their private office practices.
Patient services are reimbursed from traditional insurance programs, managed
care (HMO and PPO), Medicare and Medicaid. Renovation of 14,300 square feet of
existing hospital space was completed in October, 1996.
Regulation
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Manor Care's health care facilities are subject to certain Federal statutes
and regulations and to regulatory licensing requirements by state and local
authorities. All of Manor Care's facilities are currently so licensed. In
addition, the facilities are subject to various local building codes and other
ordinances.
State and local agencies survey all nursing facilities on a regular basis to
determine whether such facilities are in compliance with governmental operating
and health standards and conditions for participation in government medical
assistance programs. Such surveys include reviews of patient utilization of
health care facilities and standards for patient care. Manor Care endeavors to
maintain and operate its facilities in compliance with all such standards and
conditions. Manor Care believes that at this time, none of its facilities is in
violation of any applicable regulation that would threaten the operation of its
business or materially affect the standard of care provided.
Federal and State Assistance Programs
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Substantially all Manor Care's nursing facilities and the Hospital are
currently certified to receive benefits provided under the Federal Health
Insurance for the Aged Act (commonly referred to as "Medicare"), and under
programs administered by the various states to provide medical assistance to the
medically indigent ("Medicaid"). Both initial and continuing qualification of a
nursing center or hospital to participate in such programs depends upon many
factors including accommodations, equipment, services, patient care, safety,
personnel, physical environment, and adequate policies, procedures and controls.
Services under Medicare consist of nursing care, room and board, social
services, physical and occupational therapies, medications, biologicals,
supplies, and surgical, ancillary diagnostic and other necessary services of the
type provided by extended care or acute care facilities.
On August 5, 1997, Congress enacted the Balanced Budget Act of 1997 ("Budget
Act"), which seeks to achieve a balanced federal budget by, among other things,
reducing federal spending on the Medicare and Medicaid programs. The law
contains numerous changes affecting Medicare payments to skilled nursing
8
facilities, home health agencies, hospices, and therapy providers, among others.
Medicare reimbursement for skilled nursing facilities currently operates on a
retrospective payment system in which each facility receives an interim payment
during the year, which is later adjusted to reflect actual allowable direct and
indirect costs of services based on the submission of a cost report at the end
of each year. The Budget Act will result in a shift to a prospective Medicare
payment system in which skilled nursing facilities will be reimbursed at a per
diem rate for specific covered services regardless of actual cost.
Specifically, the Budget Act provides that, over three cost reporting periods
beginning on or after July 1, 1998, the Medicare program will phase in this
prospective payment system. During the first reporting period, skilled nursing
facilities will receive 75% of their reimbursement based on 1995 actual costs
and 25% based on a federally scheduled per diem rate. In the second reporting
period, reimbursement will be 50% cost-based and 50% rate-based, in the third,
25% cost-based and 75% rate-based. Thereafter, skilled nursing facilities will
be reimbursed by Medicare solely based on a prospective payment system. A
similar prospective payment system is required to be established for home health
services, beginning October 1, 1999. The Budget Act also reduces payments to
many providers and suppliers, including therapy providers and hospices and gives
states greater flexibility in the administration of their Medicaid programs by
repealing the requirement that payment be reasonable and adequate to cover the
costs of "efficiently and economically operated" nursing facilities. There can
be no assurance that additional federal, state or local laws or regulations will
not be imposed or expanded in a manner that would have a material adverse effect
on Manor Care.
Under the various Medicaid programs, the federal government supplements
funds provided by the participating states for medical assistance to medically
indigent persons. The programs are administered by the applicable state welfare
or social service agencies. Although Medicaid programs vary from state to state,
typically they provide for the payment of certain expenses, up to established
limits, at rates based generally on either cost reimbursement principles or on a
fixed per diem basis or based on the acuity of the patient.
Funds received by Manor Care under Medicare and Medicaid are subject to
audit with respect to the proper application of various payment formulas. Such
audits can result in retroactive adjustments of revenue from these programs,
resulting in either amounts due to the government agency from Manor Care or
amounts due Manor Care from the government agency. Manor Care believes that its
payment formulas have been properly applied and that any future adjustments will
not have a material adverse impact on its financial position or results of
operations.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of which
may materially increase or decrease the rate of program payments to health care
facilities. Manor Care can give no assurance that payments under such programs
will in the future remain at a level comparable to the present level or be
sufficient to cover the operating and fixed costs allocable to such patients.
Competition
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Manor Care's nursing facilities compete on a local and regional basis with
other long-term health care providers, some of which have greater financial
resources or operate on a nonprofit basis. The degree of success with which
Manor Care's facilities compete varies from location to location and is
dependent on a number of
9
factors. Manor Care believes that the quality of care provided, reputation and
physical appearance of facilities, and, in the case of private patients, charges
for services, are significant competitive factors. Accordingly, it seeks to meet
competition in each locality by establishing a reputation within the local
medical communities for competent and competitive nursing center services. There
is limited, if any, competition in price with respect to Medicaid and Medicare
patients, since revenues for services to such patients are strictly controlled
and based on fixed rates and cost reimbursement principles.
Manor Care's hospital encounters competition in the Mesquite, Texas area
where it competes for community and physician acceptance with other hospitals.
Vitalink's pharmacies compete with other local distributors of pharmaceuticals.
In Home Health competes with hospitals, public health agencies, national
temporary employment agencies, national specialized home care providers and
other independent home care companies.
Employees
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As of May 31, 1998, Manor Care employed approximately 31,481 full and part-
time employees, 30,530 of whom were employed in health care operations and the
remainder in Manor Care's headquarters.
From time to time, some of Manor Care's nursing facilities and the Hospital
experience shortages of professional nursing help which may require Manor Care
to seek temporary employees through employment agencies at an increased cost.
Manor Care does not believe that use of these contract employees has had a
material adverse effect on its financial position to date.
A majority of the employees are covered by the federal minimum wage laws,
and a few employees are represented by labor unions. Attempts have been made
from time to time to unionize employees of certain other facilities. Manor Care
believes that it enjoys a good relationship with its employees.
Insurance
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Manor Care maintains property insurance on its health care facilities.
Manor Care insures most of its liability exposures and self insures, either
directly or indirectly through insurance arrangements requiring it to reimburse
insurance carriers, some of its liability risks other than catastrophic
exposures. Physicians and dentists practicing at the Hospital are responsible
for their own professional liability insurance coverage. Manor Care insures its
workers' compensation risks in some states and self insures in others.
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ITEM 2. PROPERTIES.
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As of May 31, 1998, Manor Care owned, leased or managed 171 skilled nursing
and rehabilitation facilities and 39 assisted living facilities in 29 states and
one acute care general hospital in Texas, as indicated below:
Number Number of
Property Of Units Operating Beds
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Nursing and Rehabilitation
and Assisted Living Facilities:
Owned 191 25,680
Leased 14 1,730
Managed 1 201
Partnership 4 494
Acute Care Hospital 1 172
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TOTALS 211 28,277
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As of May 31, 1998, Vitalink leased 60 pharmacies in 20 states and its
corporate offices in Naperville, Illinois, and In Home Health leased 37 offices
and its corporate offices in Minnetonka, Minnesota.
As of May 31, 1998, Manor Care owned one office building in Silver Spring,
Maryland which was leased to third parties, and which was subsequently sold. On
August 30, 1995, Manor Care leased a 400,000 square foot headquarters building
and a 200,000 square foot free-standing warehouse in Gaithersburg, Maryland,
which lease was guaranteed by Manor Care and certain of its subsidiaries. Manor
Care also owns several undeveloped parcels. Manor Care also leases office space
as needed to accommodate regional employees.
Twenty-three (23) nursing facilities have been pledged to secure related
mortgage and capital lease obligations.
ITEM 3. LEGAL PROCEEDINGS.
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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 and Liability Act,
as amended, 42 U.S.C. (S)(S) 9601 et seq. ("CERCLA") and similar state laws.
CERCLA imposes retroactive, strict joint and several liability on PRPs for the
costs of hazardous substance cleanup. The Actions arise out of the alleged
activities of Cenco Incorporated and its subsidiary and affiliated companies
("Cenco") which were acquired by MCHS in 1981. The Actions allege that such
parties transported and/or generated hazardous substances that came to be
located at the sites in question. These Actions allegedly occurred prior to
MCHS's acquisition of Cenco. Environmental proceedings such as the Actions may
involve owners and/or operators of the hazardous
11
waste site, multiple waste generators and multiple waste transportation disposal
companies. Such proceedings typically involve efforts of governmental entities
and/or private parties to allocate or recover site investigation and cleanup
costs, which costs may be substantial. Manor Care believes it has adequate
insurance coverage for a substantial portion of the claims asserted in the
Actions.
The most significant Action for Manor Care arises from the Kramer landfill,
located in Mantua, New Jersey. On October 30, 1989, the New Jersey Department
of Environmental Protection sued Manor Care and other defendants in U.S.
District Court, District of New Jersey, seeking clean-up costs at the site where
subsidiaries of Cenco allegedly transported waste. At about the same time, the
United States filed a lawsuit against approximately 25 defendants in the same
court seeking recovery of its expenses arising in connection with this site.
Manor Care is a defendant in the latter suit. Based upon a settlement that has
been reached with the United States, the State of New Jersey and the defendants,
which is pending court approval, and also in view of its insurance coverage,
Manor Care believes that the Kramer Action will not have a material adverse
effect on its financial condition or results of operation. Manor Care believes
that the settlement will be approved. If the settlement is not approved, a court
would have to allocate responsibility and Manor Care's allocation could change.
Although Manor Care, together with its insurers, is vigorously contesting
its liability in the Actions, it is not possible at the present time to estimate
the ultimate legal and financial liability of Manor Care in respect to the
Actions. Manor Care, believes, however, that any such Action will not be
material.
Manor Care also is subject to other regulatory and legal actions,
investigations or claims for damages that arise from time to time in the
ordinary course of business. Manor Care is defending the claims against it and
believes that these proceedings will not have a material adverse effect on its
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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The shares of Manor Care's Common Stock are listed and traded on the New
York Stock Exchange. Information on the high and low sales prices of Manor
Care's Common Stock and the frequency and amount of dividends declared during
the past two years is set forth in the table below.
Market Price Per Share Cash Dividends Paid Per Share
Quarters ended High Low Amount Date
- ----------------------------------------------------------------------------
FISCAL 1998
August $34.13 $28.13 $.022 8/27/97
November $36.44 $30.31 $.022 11/26/97
February $37.94 $33.06 $.022 2/27/98
May $40.19 $29.19 $.022 5/27/98
FISCAL 1997
August $39.63* $31.50* $.022 8/27/96
November $42.25* $23.75 $.022 11/27/96
February $28.00 $24.13 $.022 2/27/97
May $28.38 $21.88 $.022 5/27/97
- ----------------------------------------------------------------------------
* Market prices prior to November 1, 1996, are reflective of the stock value
prior to the spin-off of the discontinued lodging business.
As of August 10, 1998, there were approximately 4,976 record holders of
Manor Care Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA.
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Fiscal Years Ended May 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
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(In thousands)
STATEMENT OF INCOME DATA:
Revenues $1,359,329 $1,294,574 $1,141,911 $946,761 $859,394
Expenses:
Operating expenses 1,063,683 1,012,799 883,459 719,780 650,637
Depreciation and amortization 79,275 70,851 63,723 50,621 45,662
General corporate and other 60,721 68,563 72,322 63,197 45,666
Provisions for asset impairment and
restructuring 13,500 - 26,300 - -
---------- ---------- ---------- -------- --------
Total expenses 1,217,179 1,152,213 1,045,804 833,598 741,965
---------- ---------- ---------- -------- --------
Income from continuing operations before
other income and (expenses) and income
taxes 142,150 142,361 96,107 113,163 117,429
---------- ---------- ---------- -------- --------
Other income and (expenses):
Interest income from advances to
discontinued lodging segment 4,093 21,221 19,673 15,492 10,665
Interest expense (31,541) (40,599) (31,259) (23,534) (27,519)
Other income, net 20,352 11,098 6,125 7,195 1,504
---------- ---------- ---------- -------- --------
Income from continuing operations before
income taxes 135,054 134,081 90,646 112,316 102,079
Income taxes 50,831 51,186 36,694 44,338 44,214
---------- ---------- ---------- -------- --------
Income from continuing operations $ 84,223 $ 82,895 $ 53,952 $ 67,978 $ 57,865
========== ========== ========== ======== ========
As of May 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
(In thousands)
BALANCE SHEET DATA:
Total assets $1,741,277 $1,640,978 $1,656,927 $1,276,175 $1,073,487
Long-term debt 533,729 491,600 490,575 315,271 223,892
Shareholders' equity 779,460 690,431 707,769 624,873 533,815
Fiscal Years Ended May 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
(In thousands)
OTHER FINANCIAL DATA:
Cash provided by continuing operating
activities $130,732 $ 77,614 $186,848 $106,416 $ 123,104
Cash used in continuing investing
activities 141,131 115,324 247,404 177,015 67,304
Cash provided by (used in) continuing
financing activities 29,840 (6,541) 122,698 80,093 (123,241)
Investment in property and equipment and
systems development 270,456 178,821 132,795 89,737 71,365
14
ITEM 7.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
On June 10, 1998, Manor Care, Inc., ("Manor Care") or (the "Company"),
Health Care & Retirement Corporation, a Delaware corporation ("HCR"), and Catera
Acquisition Corp., a Delaware corporation and wholly owned subsidiary of HCR
("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which Merger Sub will merge with and into the Company
(the "Merger"). The Merger Agreement provides that each outstanding share of the
Company's common stock, par value $.10 per share, shall be converted into the
right to receive one share of common stock of HCR, par value $.01 per share.
Upon completion of the transaction, the Company will become a wholly owned
subsidiary of HCR and the stockholders of the Company will become stockholders
of HCR.
The consummation of the transactions contemplated by the Merger Agreement
are subject to the approval of the stockholders of Manor Care and HCR, the
receipt of certain regulatory approvals and the expiration of antitrust waiting
periods. The transaction is expected to be completed during the fourth quarter
of calendar year 1998. If completed, the transaction will be accounted for as a
pooling of interests. Due to the impending Merger, the Company no longer plans
to separate its skilled nursing facility management, assisted living and home
health businesses from its skilled nursing facility ownership, real estate and
health care facility development businesses.
A number of significant factors, which are discussed below, affected the
consolidated results of operations, financial condition and liquidity of the
Company during the three fiscal years ended May 31, 1998, May 31, 1997 and May
31, 1996. This discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto for such fiscal years, included under
Item 8 in this Form 10-K. The Consolidated Financial Statements include the
results of operations of In Home Health, Inc. ("In Home Health") and Manor
Care's assisted living and skilled nursing operations.
OVERVIEW AND OUTLOOK
The Company owns and operates skilled nursing and assisted living
facilities serving primarily the private pay elderly market. The Company's
skilled nursing facilities provide high acuity, long-term care and Alzheimer's
services principally to residents over the age of 65. The Company's assisted
living facilities operate under the brand names "Springhouse" and "Arden
Courts." Springhouse facilities serve the general assisted living population of
frail elderly, while Arden Courts facilities are specifically focused on
providing care to persons suffering from early to middle-stage Alzheimer's
disease and related memory impairment. These assisted living facilities provide
housing, personalized support and health care services in a non-institutional
setting designed to address the individual needs of the elderly or Alzheimer's
afflicted requiring assistance with activities of daily living, such as eating,
bathing, dressing and personal hygiene, but who do not require the level of care
provided by a skilled nursing facility.
15
The Company also owns approximately 50% of Vitalink Pharmacy Services, Inc.
("Vitalink"), 63% of the voting stock of In Home Health and an acute care
hospital. Vitalink is a publicly traded institutional pharmacy company which
provides medications, consulting, infusion and other ancillary services to
approximately 170,000 institutional beds as well as to home infusion patients
through 60 pharmacies. As a result of the anticipated merger of Vitalink with
and into Genesis Health Ventures, Inc. ("Genesis"), a Pennsylvania corporation,
the accompanying consolidated financial statements reflect the pharmacy
operations as a discontinued operation.
In Home Health is a publicly traded company which provides a broad range of
professional and support services to clients requiring medical and personal
assistance in their homes. Services provided include nursing care, infusion
therapy, rehabilitation, and personal care.
The Company has increased skilled nursing capacity by approximately 1.9%
annually over the last five fiscal years. Overall occupancy has remained
relatively stable during this period. Occupancy for mature facilities, those
facilities owned by the Company for a full two-year period, increased from 89.8%
to 90.0%, between fiscal year 1997 and fiscal year 1998. During the five-year
period from fiscal year 1994 to fiscal year 1998, the Company has increased
assisted living capacity substantially, from 6 facilities with 560 beds to 41
facilities with 4,047 beds.
Despite increasing competition for private pay customers, Manor Care has
consistently maintained a high ratio of private pay revenues. The slight
decline in Manor Care's private pay mix over the past four years can be
attributed primarily to the inroads that assisted living providers have achieved
in this market segment.
The health care industry is highly regulated by Federal, state and local
law. Certain of these regulations apply to the relationships between Manor Care,
Vitalink and In Home Health, including the provisions of the Medicare related
party rule and the federal and state anti-remuneration laws. The Medicare
related party rule limits the amount the Medicare program will reimburse for
products and services provided by a related party. The Company has treated
Vitalink and In Home Health as related parties in compliance with this rule. The
Company intends to continue to treat Vitalink and In Home Health as related
parties. Accordingly, the Company does not expect that the Medicare related
party rule will have a material effect on the conduct of its business. The anti-
remuneration laws govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. The Company has treated, and will continue to treat, Vitalink
and In Home Health as separate entities, capable of referring or recommending
patients to, or receiving referrals or recommendations from, the Company for
purposes of the anti-remuneration laws. Accordingly, the Company believes that
its business arrangements with Vitalink and In Home Health are in compliance
with the anti-remuneration laws.
Certain matters discussed in this Form 10-K constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. All of these forward-looking statements are based on estimates and
assumptions made by management of the Company which, although believed by
management of the Company to be reasonable, are inherently subject to risks and
uncertainties. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those
16
anticipated, estimated, projected or expected. Therefore, investors should not
place undue reliance upon such estimates and forward-looking statements.
Risk factors that could cause the Company's actual results, performance or
achievements to be different from any future results, performance or
achievements expressed or implied by such forward-looking statements include,
without limitation: (i) the Company's success in implementing its business
strategy, including its success in completing the Merger, (ii) the Company's
success in arranging financing where required, (iii) the nature and extent of
future competition, (iv) the extent of future health care reform and regulation,
including cost containment measures, (v) significant changes in the Company's
shareholder base, (vi) increases in the Company's cost of borrowing, (vii) costs
associated with the planned Merger, (viii) changes in the mix of payment sources
for patient services, including any decrease in the amount and percentage of
revenues derived from private payors, (ix) the ability of the Company to
continue to deliver high quality care and to attract private pay residents,
and/or (x) changes in general economic conditions (including the labor market)
and/or in the markets in which the Company may from time to time compete. Many
of such risk factors are beyond the control of the Company and its management.
Other risk factors that could cause the actual results, performance or
achievements of the Company to be different from any future results, performance
or achievements are also detailed from time to time in the Company's public
statements and/or filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Revenues recorded under Federal and state medical assistance programs are
subject to adjustment upon audit by appropriate government agencies. For fiscal
years 1998, 1997 and 1996, these revenues amounted to $628.7 million, $596.0
million and $502.0 million, respectively. In the opinion of management, any
difference between revenues recorded and final determination will not be
significant. The Company does not anticipate a material effect on revenues as a
result of the Balanced Budget Act of 1997. However, because the regulations
pertaining to this Act have neither been proposed nor implemented, this
preliminary conclusion is subject to change as a result. If the regulations do
have a material effect on the Company, the Company will disclose any such
material effect as may be required.
Fiscal Year 1998 compared to Fiscal Year 1997
SKILLED NURSING FACILITIES. Skilled nursing revenues increased $73.8
million (6.9%) to $1.1 billion for the fiscal year ended May 31, 1998 as
compared to the same period in the prior year. The increase in revenues is
principally attributable to increases in rates (3.4%) and capacity. The growth
in bed capacity is attributable to the construction of one skilled nursing
facility (120 beds) and additions or renovations at existing facilities (175
beds).
Operating expenses increased $52.1 million (6.5%) to $854.9 million for the
fiscal year ended May 31, 1998 as compared to the prior year. The increase in
operating expenses is attributable to additional capacity and increased staffing
necessitated by higher patient acuity and more complex product and service
offerings. As a result, the operating profit associated with the
17
operation of the skilled nursing facilities for the fiscal year ended May 31,
1998 increased to 25.0% from 24.7% in the prior year.
ASSISTED LIVING BUSINESS. Assisted living revenues increased by $15.4
million or 27.3% for fiscal year 1998 from $56.5 million in the prior year due
to capacity ($7.5 million), rate ($5.6 million) and occupancy ($2.3 million)
increases. The increase in capacity is due to the opening of nine Arden Courts
facilities and one Springhouse facility.
Operating expenses increased by $9.5 million or 21.0% in fiscal year 1998
compared to fiscal year 1997 as a result of increases in capacity and occupancy.
HOME HEALTH. Home health revenues decreased $28.8 million for fiscal year
1998 over the prior year, primarily due to adjustments to Medicare receivables
in connection with recent Medicare reimbursement decisions related to the
allowability of community liaison costs and required documentation to support
allowable costs. Revenues recorded under the Medicare program are subject to
adjustment upon audit by government intermediaries. As a result of these
decisions, In Home Health increased recorded reserves for other unresolved cost
disputes by approximately $15.5 million.
Operating expenses decreased $12.4 million or 10.0% for fiscal year 1998 as
compared to the prior year. The decrease in operating expenses is primarily due
to a plan to restructure In Home Health's field operations and reduce its cost
structure.
The majority of In Home Health's revenues is derived from services provided
to Medicare beneficiaries. Currently, Medicare reimburses participating Medicare
certified home health agencies for the reasonable costs incurred to provide
covered visits to eligible beneficiaries, subject to certain cost limits. Due to
certain limitations on the nature and amount of the costs that are reimbursable,
In Home Health incurs a loss on the Medicare business. During 1997, several cost
reimbursement issues that were in dispute for several years were resolved
through decisions by the Provider Reimbursement Review Board ("PRRB") and the
U.S. District Court. As a result of these decisions and other communications
from the Health Care Financing Administration ("HCFA"), it became clear that
some costs incurred by In Home Health would not be reimbursed by Medicare.
Although In Home Health has restructured its operations and eliminated a portion
of these nonreimbursable costs, In Home Health will continue to incur some costs
that are not reimbursed by Medicare, as management believes they constitute a
necessary function to the conduct of its business.
The Balanced Budget Act of 1997 requires HCFA to implement a prospective
payment system for home health agencies by October 1, 1999, with up to a four-
year phase-in period. Prospective rates determined by HHS would reflect a 15%
reduction to the cost limits and per patient limits as of September 30, 1999.
In the event the implementation deadline is not met, the reduction will be
applied to the reimbursement system then in place. The impact of such a change,
if implemented, on In Home Health's results of operations cannot be predicted
with any certainty at this time and would depend, to a large extent, on the
reimbursement rates for home nursing established on an interim basis and under
the prospective payment system. There can be no assurances that such
reimbursement rates, if enacted, would cover the costs incurred by In Home
Health to provide home nursing services. Until the prospective payment system
takes
18
effect on October 1, 1999, the Budget Act sets up an interim payment system (the
"IPS") that provides for lowering of reimbursement limits for home health
visits. Cost limit increases for fiscal 1995 and 1996 have been eliminated. In
addition, for cost reporting periods beginning on October 1, 1997, home health
agencies' cost limits will be determined at the lesser of (i) their actual
costs, (ii) cost limits based on 105% of median costs of free-standing home
health agencies or (iii) an agency-specific per patient cost cap, based on 98%
of 1994 costs adjusted for inflation. In Home Health is unable to determine the
effect of IPS until HCFA finalizes related regulatory guidance on the
implementation of IPS. The new cost limits will apply to In Home Health for the
cost reporting period beginning October 1, 1997. A reduction in these cost
limits could have a significant effect on In Home Health's results of
operations; however, the effect of such reductions cannot be predicted with any
level of certainty.
OTHER RESULTS OF OPERATIONS. Depreciation and amortization increased $8.4
million for the fiscal year 1998 due to increases in property and equipment
resulting from additions and renovations to existing facilities as well as new
construction during the past twelve months.
General corporate and other expenses for fiscal year 1998 decreased $7.8
million when compared to the same period last year. This decrease was due to
reengineering efforts in both organizational and financial systems.
Additionally, a gain of $6.8 million from the sale of three corporate office
buildings and a loss of $2.0 million on the sale of two Springhouse facilities
are included in general corporate and other expenses for fiscal year 1998. For
fiscal year 1997, a gain of $7.3 million from the sale of four nursing centers
and charitable contributions expense of $5.0 million are included in general
corporate and other expenses. General corporate and other expenses represented
4.5% of revenues during fiscal year 1998, compared to 5.3% for the prior year.
General corporate and other expenses include risk management, information
systems, treasury, accounting, legal, human resources and other administrative
support functions.
Interest income from advances to discontinued lodging operations decreased
by $17.1 million for fiscal year 1998 as compared to the prior year. This
reduction was attributable to the prepayment of $110.0 million of indebtedness
in the fourth quarter of fiscal year 1997 and the prepayment of the remaining
$115.7 million in the second quarter of fiscal year 1998.
Interest expense decreased $9.1 million for fiscal year 1998 over the prior
year. The decrease in interest expense resulted primarily from the retirement of
the 9 1/2% Senior Subordinated Debt Notes in November, 1997. Interest
capitalized in conjunction with construction programs amounted to $6.8 million
for fiscal year 1998 and $4.6 million for fiscal year 1997.
Income from continuing operations before income taxes for fiscal year 1998
was $135.1 million. This compares to income from continuing operations before
income taxes in the prior year of $134.1 million.
During fiscal year 1998, the Company recorded a restructuring charge of
$13.5 million in connection with the Company's plan to separate its skilled
nursing, assisted living and home health businesses from its skilled nursing
facility management, real estate and healthcare facility development business.
The charge includes $5.3 million of severance costs related to corporate staff
reductions, $4.6 million of consulting, legal and accounting fees incurred, and
$3.6 million
19
of printing, mailing, travel, relicensing and other miscellaneous expenses
related to the transaction and the related public filings. Due to the impending
Merger, the Company no longer plans to complete this transaction.
The decrease in income from discontinued pharmacy operations from $42.2
million in fiscal year 1997 to $12.1 million in fiscal year 1998 is due to the
$30.4 million after tax gain resulting from the issuance of 11.4 million shares
of Vitalink common stock in connection with Vitalink's merger with TeamCare, the
pharmacy subsidiary of GranCare, Inc. in February 1997.
On November 20, 1997, a consensus was reached by the Emerging Issues Task
Force regarding reengineering costs (Issue 97-13) providing that all
reengineering costs be expensed as incurred based on the fair value of the
services rendered. As a result, in November 1997, Manor Care expensed $3.2
million of reengineering costs (net of taxes) as the cumulative effect of a
change in accounting principle.
Fiscal Year 1997 Compared to Fiscal Year 1996
SKILLED NURSING FACILITIES. Skilled nursing revenues increased from $989.0
million to $1.1 billion ($77.1 million or 7.8%) in fiscal 1997 compared to the
prior year. The increase in revenues is attributable to an increase in average
daily rates of approximately 6.0% ($61 million) and an increase in bed capacity
of approximately 5.7%. The increase in average rates includes the incremental
impact of settlements with government agencies related to prior period cost
reports of approximately $4 million. The growth in bed capacity is attributable
to the purchase of two nursing facilities (279 beds), openings of newly
constructed facilities (398 beds) and additional bed development at existing
centers (467 beds), and is net of the sale of four facilities (498 beds) in the
second quarter of 1997.
Skilled nursing operating expenses increased from $746.1 million in 1996 to
$802.8 million in 1997 ($56.7 million or 7.6%). Additional capacity accounts
for $20.5 million of this increase. The remainder of the increase is caused by
additional staffing necessitated by higher patient acuity and more complex
product and service offerings. Gross margin as a percentage of revenue
increased from 24.6% in fiscal year 1996 to 24.7% in fiscal year 1997.
ASSISTED LIVING. Assisted living revenues increased for fiscal year 1997 by
45.5% or $17.7 million due to increases in rates at existing facilities ($5.3
million), capacity increases ($11.1 million) and occupancy increases ($1.3
million). Capacity increases resulted from the opening of five Arden Courts and
one Springhouse facility.
Operating expenses increased $12.4 million to $45.3 million or 80.1% of net
revenues in fiscal year 1997 compared to $32.8 million or 84.4% of net revenues
in fiscal year 1996 as a result of increases in capacity and inflation.
HOME HEALTH. Home health revenues increased 67.7% or $50.2 million for the
fiscal year 1997, reflecting a full year of home health operations. The Company
entered into the home health business with the acquisition of In Home Health in
October 1995. Home health revenues of $74.2 million for fiscal year 1996
represent revenues contributed by In Home Health from its acquisition in October
1995 through May 1996.
20
Operating expenses increased $50.6 million to $124.5 million or 100.1% of
net revenues in fiscal year 1997 compared to $73.9 million or 99.6% of net
revenues in fiscal year 1996. The increase from 1996 to 1997 represents the
impact of a full year of expenses in fiscal year 1997 versus eight months of
expenses for fiscal year 1996.
OTHER RESULTS OF OPERATIONS. Depreciation and amortization increased $7.1
million for fiscal year 1997 due to increases in property and equipment
resulting from additions and renovations to existing facilities as well as
openings as a result of construction during the fiscal year.
General corporate and other expenses represented 5.3% of revenue in fiscal
year 1997 and 6.3% of revenue in fiscal year 1996. General corporate and other
expenses include all indirect operating expenses as well as risk management,
information systems, treasury, accounting, legal and other administrative
support for Manor Care and its various subsidiaries. The reduction of general
corporate and other expenses is partially due to a reduction in employees
related to the discontinued lodging segment and reengineering efforts in both
organizational and financial systems. Additionally, general corporate and other
expenses for fiscal year 1997 included a gain of $7.3 million from the sale of
four nursing centers and charitable contributions expense of $5.0 million.
Interest expense increased 29.9% in fiscal year 1997 primarily as a result
of additional borrowings in connection with newly developed facilities and
acquisitions, as discussed above.
On November 1, 1996, Manor Care completed the spin-off of its lodging
segment by contributing its net investment in discontinued lodging operations
totaling $164.2 million to Choice Hotels International, Inc. Manor Care
shareholders of record on October 10, 1996, received one share of Choice Hotels
International, Inc. common stock for each outstanding share of Manor Care common
stock. Accordingly, lodging results are reported as discontinued operations for
all periods presented. Fiscal year 1997 results contain five months of income
versus a full year of income in fiscal year 1996.
Manor Care recorded provisions of $26.3 million in fiscal year 1996 related
to the impairment of certain long lived assets and costs associated with Manor
Care's restructuring of its healthcare business. The most significant components
of the provisions were non-cash asset impairment charges of $21.2 million
relating to writedowns of property, equipment and capitalized system development
costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains adequate capital resources, including strong
operating cash flows and committed lines of credit, to support ongoing
operations and to fulfill capital requirements in the foreseeable future.
On November 1, 1996, the Company separated its lodging business from its
healthcare business via a tax-free spin-off of the lodging division. In
conjunction with this spin-off, the Company received a three-year, $225.7
million 9% note from its lodging segment. In April
21
1997, Manor Care received a prepayment of $110.0 million on the advances to the
discontinued lodging segment. In October 1997, the Company received prepayment
of the remaining $115.7 million. All proceeds were used to repay borrowings
under the $250 million competitive advance and multi-currency revolving credit
facility (the "Credit Facility").
In November 1992, the Company issued $150.0 million of 9 1/2% Senior
Subordinated Notes due November 2002. In July 1996, the Company repurchased $9.9
million of the 9 1/2 % Senior Subordinated Notes for $10.5 million. In November
1997, the Company redeemed all outstanding 9 1/2% Senior Subordinated Notes due
2002 at a redemption price of 103.56% with the proceeds of borrowings under the
Facility. The Company recorded an extraordinary item of $3.2 million after taxes
representing the premium paid on redemption.
In September 1996, the Company amended its Credit Facility to provide for
the spin-off of the lodging division. The Credit Facility expires in September
2001. At May 31, 1998, bank lines totaled $350.0 million, of which $28.5 million
remained unused.
In June 1996, the Company completed a public offering of unsecured Senior
Notes in the amount of $150.0 million, the proceeds of which were used to repay
borrowings under the Credit Facility. The notes are due in June 2006 and carry
a 7 1/2% interest rate.
The Company's working capital ratio was 1.7 at May 31, 1998 and 1.2 at May
31, 1997.
ACQUISITIONS, OPENINGS, DIVESTITURES AND SALES OF PROPERTY
During fiscal year 1998, investment in property and equipment utilized in
continuing operations and systems development amounted to $270.5 million. In
addition, Manor Care opened one newly constructed skilled nursing facility
located in California and ten assisted living facilities located in Connecticut,
Virginia, Maryland (2), Delaware, Georgia (2) and Florida (3). The Company sold
two Springhouse facilities located in Florida and Michigan for $4.7 million.
Three corporate office buildings located in Maryland were also sold for $18.4
million.
During fiscal year 1997, investment in property and equipment utilized in
continuing operations and systems development amounted to $178.8 million. In
addition, the Company acquired a nursing center in California for $4.4 million
and a nursing center in Michigan for $13.4 million. Through new construction,
the Company opened four skilled nursing centers and six assisted living
facilities. The Company sold four nursing centers in Indiana, Iowa, Illinois,
and Texas for $17.3 million and transferred an assisted living facility with an
approximate net book value of $4.9 million to the discontinued lodging segment.
During fiscal year 1996, investment in property and equipment utilized in
continuing operations and systems development amounted to $132.8 million.
Additionally, the Company acquired four nursing centers and an operating lease
for approximately $45.4 million, of which $32.4 million was cash and the
remainder was assumed liabilities. Additionally, six assisted living
facilities, with five attached skilled nursing units, were purchased for $74.3
million, of which $19.0 million was cash and the remainder was assumed
liabilities. In October 1995, the Company purchased approximately 41% of In
Home Health's common stock for $22.9 million and invested another $20.0 million
for 100% of its outstanding voting convertible preferred stock
22
and for warrants to purchase an additional 6.0 million shares of common stock.
On April 13, 1998 the Company entered into a Preferred Stock Modification
Agreement with In Home Health. Under this agreement, the Company agreed, with
respect to 70,000 shares (the "Modified Shares") of the preferred stock, to
waive the right to give notice on or after October 24, 2000 requiring the
Registrant to redeem the Modified Shares. The remaining 130,000 shares may be
redeemed in cash at the option of the Company on and after October 24, 2000. The
In Home Health redeemable preferred stock ranks senior to the In Home Health
common stock, has voting rights on an as-if converted basis, and is initially
convertible into 10 million shares of In Home Health common stock at a
conversion price of $2.00 per share. The In Home Health redeemable preferred
stock bears dividends at 12% per annum and has a liquidation preference of
$100.00 per share. The In Home Health redeemable preferred stock will accrete
over five years from its fair value of $18,500,000 on the date of issuance to
its redemption price of $20 million as of the redemption date. The In Home
Health warrants purchased by the Company have an exercise price of $3.75 per
share and expire in October 1998.
DISCONTINUED PHARMACY OPERATIONS
On April 26, 1998, Vitalink entered into an Agreement and Plan of Merger
(the "Vitalink Merger Agreement") with Genesis. Pursuant to the Vitalink Merger
Agreement, Vitalink will merge with and into Genesis (the "Vitalink Merger").
In accordance with the Vitalink Merger Agreement, holders of the common stock of
Vitalink will receive for each share of Vitalink common stock held, at the
election of the holder, either cash consideration in the amount of $22.50, or
0.045 shares of Series G Cumulative Convertible Preferred Stock of Genesis (the
"Genesis Preferred Stock").
The Vitalink Merger Agreement may be terminated (i) by either party, if the
Board of Directors of the other has withdrawn, changed or modified its
recommendation that its stockholders vote in favor of the Vitalink Merger; (ii)
by Vitalink prior to the approval of its stockholders of the Vitalink Merger, if
it receives a Superior Proposal (as defined in the Vitalink Merger Agreement)
which was not solicited after the date of the Vitalink Merger Agreement; (iii)
by either party if any court of competent jurisdiction or other governmental
body has issued a final and nonappealable order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Vitalink
Merger; and (iv) upon the occurrence of certain other events specified in the
Vitalink Merger Agreement. Under certain circumstances, Vitalink would be
obligated to pay Genesis a $20 million fee if the Vitalink Merger Agreement is
terminated.
Manor Care, the beneficial owner of approximately 50% of the outstanding
shares of Vitalink common stock, and Genesis have entered into a Voting
Agreement, dated April 26, 1998 (the "Voting Agreement"), pursuant to which
Manor Care agreed to vote all of its shares of Vitalink common stock in favor of
the adoption and approval of the Vitalink Merger, the Vitalink Merger Agreement
and the transactions contemplated thereby. Manor Care has also agreed to elect
to receive Genesis Preferred Stock as Vitalink Merger consideration with respect
to all of its Vitalink common stock.
The Genesis Preferred Stock will bear cash dividends at the initial annual
rate of 5.9375%. Genesis Preferred Stockholders will be initially entitled to
13.441 votes per share of Genesis Preferred Stock, and will vote together with
the holders of Genesis common stock as a single
23
class on all matters to be voted on by holders of Genesis common stock, and as a
separate class on matters as to which the Pennsylvania Business Corporation Law
requires a separate class vote.
At the option of Manor Care, each share of Genesis Preferred Stock will be
convertible at any time into Genesis common stock at the conversion price of
$37.20 per share, subject to adjustment under certain circumstances. Beginning
April 26, 2001, Genesis may under certain circumstances, force conversion of the
Genesis Preferred Stock, at conversion prices ranging from $37.20 to $38.87 per
share of Genesis common stock. Dividends will cease to accrue in respect of the
Genesis Preferred Stock as of the date of the conversion thereof.
THE YEAR 2000 ISSUE
The Company has assessed and continues to assess the potential impact of the
situation commonly referred to as the "Year 2000 Issue." The Year 2000 Issue,
which affects most corporations, concerns the inability of information systems,
primarily computer software programs, to properly recognize and process data
sensitive information relating to the year 2000 and beyond. The Company is in
the process of determining the costs and expenditures associated with the Year
2000 Issue and has several information system improvement initiatives underway
to ensure that the Company's computer systems will be Year 2000 compliant. The
Company is expected to incur expenditures of approximately $13 million over the
next few years to address this issue. The failure by third party payors, such as
private insurers, managed care organizations, health maintenance organizations,
preferred provider organizations and federal and state government agencies that
administer Medicare and/or Medicaid, to adequately address their Year 2000 Issue
could adversely affect the Company.
LONG-TERM DEBT
Total long-term debt was $539.8 million at May 31, 1998 compared to $504.3
million at May 31, 1997. The increase in long-term debt is mainly attributable
to the increased investment in property and equipment. The current portion of
debt as of May 31, 1998 amounted to $6.1 million.
SHAREHOLDERS' EQUITY
Shareholders' equity increased to $779.5 million at May 31, 1998 from
$690.4 million at May 31, 1997. The increase was primarily due to net income of
$89.9 million, the tax benefit of common stock transactions related to employee
benefits plans of $4.7 million, and stock options exercised of $2.4 million,
offset by dividends paid of $5.6 million. Shareholders' equity decreased to
$690.4 million at May 31, 1997 from $707.8 million at May 31, 1996 primarily due
to the $164.2 million dividend of the discontinued lodging segment and $6.1
million of cash dividends paid, offset by net income of $136.9 million and stock
options exercised of $12.3 million.
24
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities,"
which requires start-up activities to be expensed as incurred. The Company has
until June 2000 to adopt this statement. The Company has not determined when it
will adopt this statement nor has it determined the impact of adoption.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" ("SFAS 130"), which is effective for fiscal years
beginning after December 15, 1997. The statement establishes standards for
reporting and display of comprehensive income and its components. The Company is
in the process of determining the timing and the impact of adoption.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal
years beginning after December 15, 1997. The Company plans to adopt SFAS 131 in
fiscal year 1999 and has not determined the impact of adoption to be
significant.
During the quarter ended February 28, 1998, the Company adopted SFAS No. 128,
"Earnings Per Share" issued by the FASB, ("SFAS 128"). The statement requires
restatement of all prior-period earnings per share data presented after the
effective date. SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share and is substantially similar to the standard
recently issued by the International Accounting Standards Committee entitled
"International Accounting Standards, Earnings Per Share."
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" which provides guidance on accounting
for the costs of computer software developed or obtained for internal use. The
Company has until fiscal year 2000 to adopt this statement. The Company has not
determined when it will adopt this statement nor has it determined the impact of
adoption.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures About
Pensions and Other Postretirement Benefits" ("SFAS 132"), which is effective for
fiscal years beginning after December 31, 1997. This statement revises
employers' disclosures about pension and other postretirement benefit plans;
however, it does not change the measurement or recognition of those plans. The
Company will adopt the statement in fiscal year 1999 and has not determined the
impact to be significant.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative and
Hedging Activities" ("SFAS 133"), which addresses the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. This statement is effective for fiscal years
beginning after June 15, 1999. The Company has not determined when it will
adopt the statement nor has it determined the impact of adoption.
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Manor Care, Inc.:
We have audited the accompanying consolidated balance sheets of Manor Care,
Inc. (a Delaware corporation) and subsidiaries as of May 31, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended May 31, 1998. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above (appearing on pages
27-50) present fairly, in all material respects, the financial position of Manor
Care, Inc. and subsidiaries as of May 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended May 31, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index in Item 14, Schedule II is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
As explained in the footnote to the consolidated financial statements entitled
"Summary of Significant Accounting Policies-Impact of New Accounting
Pronouncements", effective November, 1997, the Company changed its method of
accounting for reengineering costs as prescribed by the Emerging Issues Task
Force Issue 97-13.
/s/ Arthur Andersen LLP
Washington, D.C.
July 3, 1998
26
MANOR CARE, INC.
CONSOLIDATED BALANCE SHEETS
As of May 31,
------------------------------
1998 1997
------------------------------
(In thousands of dollars)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 48,663 $ 29,222
Receivables (net of allowances for doubtful accounts of
$30,604 and $36,621) 167,222 135,446
Inventories 12,795 12,531
Income taxes 41,619 32,266
Other 4,831 7,988
---------- ----------
Total current assets 275,130 217,453
---------- ----------
PROPERTY AND EQUIPMENT, AT COST, NET OF
ACCUMULATED DEPRECIATION 1,132,427 1,004,663
---------- ----------
GOODWILL 28,777 29,576
----------- ----------
INVESTMENT IN DISCONTINUED PHARMACY SEGMENT 193,398 178,079
---------- ---------
ADVANCES TO DISCONTINUED LODGING SEGMENT - 115,723
---------- ----------
OTHER ASSETS 111,545 95,484
---------- ----------
TOTAL ASSETS $1,741,277 $1,640,978
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 6,104 $ 12,680
Accounts payable 55,599 59,590
Accrued expenses 96,395 109,540
---------- ----------
Total current liabilities 158,098 181,810
---------- ----------
MORTGAGES AND OTHER LONG-TERM DEBT 533,729 491,600
---------- ----------
DEFERRED INCOME TAXES ($198,132 AND $187,585)
AND OTHER 265,992 261,624
---------- ----------
MINORITY INTEREST 3,998 15,513
---------- ----------
SHAREHOLDERS' EQUITY
Common stock $.10 par, 160.0 million shares
authorized; 67.1 million and 66.8 million shares issued
and outstanding 6,712 6,682
Contributed capital 201,895 194,640
Retained earnings 622,661 538,630
Treasury stock, 3.2 million shares, at cost (51,808) (49,521)
---------- ----------
Total shareholders' equity 779,460 690,431
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,741,277 $1,640,978
========== ==========
The accompanying notes are an integral part of these consolidated statements.
27
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended May 31,
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
(In thousands of dollars, except per share data)
REVENUES $1,359,329 $1,294,574 $1,141,911
---------- ---------- ----------
EXPENSES
Operating expenses 1,063,683 1,012,799 883,459
Depreciation and amortization 79,275 70,851 63,723
General corporate and other 60,721 68,563 72,322
Provisions for asset impairment and restructuring 13,500 - 26,300
---------- ---------- ----------
Total expenses 1,217,179 1,152,213 1,045,804
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE OTHER
INCOME AND (EXPENSES) AND INCOME TAXES 142,150 142,361 96,107
---------- ---------- ----------
OTHER INCOME AND (EXPENSES)
Interest income from advances to discontinued lodging
segment 4,093 21,221 19,673
Interest income and other 8,292 8,499 5,385
Minority interest 12,060 2,599 740
Interest expense (31,541) (40,599) (31,259)
---------- ---------- ----------
Total other income and (expenses), net (7,096) (8,280) (5,461)
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 135,054 134,081 90,646
INCOME TAXES 50,831 51,186 36,694
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 84,223 82,895 53,952
DISCONTINUED OPERATIONS
Income from discontinued pharmacy operations (net of
taxes of $19,732, $33,514 and $9,306, respectively) 12,070 42,218 11,519
Income from discontinued lodging operations (net of
taxes of $0, $8,734 and $14,966, respectively) - 11,829 20,436
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 96,293 136,942 85,907
EXTRAORDINARY ITEM, NET OF TAXES OF $2,150 (3,216) - -
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAXES OF $2,115 (3,173) - -
---------- ---------- ----------
NET INCOME $ 89,904 $ 136,942 $ 85,907
========== ========== ==========
WEIGHTED AVERAGE SHARES OF COMMON STOCK-BASIC 63,794 63,257 62,628
---------- ---------- ----------
NET INCOME PER SHARE OF COMMON STOCK-BASIC
Income from continuing operations $ 1.32 $ 1.31 $ 0.86
Income from discontinued pharmacy operations (net of taxes) 0.19 0.67 0.18
Income from discontinued lodging operations (net of taxes) - 0.19 0.33
Extraordinary item (net of taxes) (.05) - -
Cumulative effect of change in accounting principle (net of
taxes) (.05) - -
----------- ---------- ----------
Net income per share of common stock - basic $ 1.41 $ 2.16(a) $ 1.37
========== ========== ==========
WEIGHTED AVERAGE SHARES OF COMMON STOCK - ASSUMING DILUTION 64,671 63,979 63,136
---------- ---------- ----------
NET INCOME PER SHARE OF COMMON STOCK - ASSUMING DILUTION
Income from continuing operations $ 1.30 $ 1.30 $ 0.85
Income from discontinued pharmacy operations (net of taxes) 0.19 0.66 0.18
Income from discontinued lodging operations (net of taxes) - 0.18 0.32
Extraordinary item (net of taxes) (.05) - -
Cumulative effect of change in accounting principle (net of
taxes) (.05) - -
----------- ---------- ----------
Net income per share of common stock - assuming dilution $ 1.39 $ 2.14 $ 1.36(a)
=========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
(a) Does not add due to rounding.
28
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Contributed Retained Translation Treasury Stock
(In thousands of dollars, except share information) Shares Amount Capital Earnings Adjustment Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1995 65,513,734 $6,553 $168,699 $ 491,520 $ 709 2,989,264 $42,608
Net income - - - 85,907 - - -
Exercise of stock options 269,156 28 3,279 - - - -
Treasury shares acquired - - - - - 30,208 1,131
Cash dividends - - - (5,502) - - -
Other - - 2,386 - (2,071) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1996 65,782,890 6,581 174,364 571,925 (1,362) 3,019,472 43,739
Net income - - - 136,942 - - -
Exercise of stock options 1,011,951 101 12,153 - - - -
Treasury shares acquired - - - - - 134,118 5,782
Cash dividends - - - (6,108) - - -
Dividend of discontinued -
lodging segment - - - (164,225) 1,362 - -
Tax benefit of common
stock transactions
related to employee
benefit plans - - 6,818 - - - -
Other - - 1,305 96 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1997 66,794,841 6,682 194,640 538,630 - 3,153,590 49,521
Net income - - - 89,904 - - -
Exercise of stock options 296,361 30 2,415 - - - -
Treasury shares acquired - - - - - 71,890 2,287
Cash dividends - - - (5,600) - - -
Tax benefit of common
stock transactions
related to employee
benefit plans - - 4,738 - - - -
Other - - 102 (273) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1998 67,091,202 $6,712 $201,895 $ 622,661 $ - 3,225,480 $51,808
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
29
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31,
--------------------------------------
1998 1997 1996
--------------------------------------
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 89,904 $ 136,942 $ 85,907
Reconciliation of net income to net cash provided by operating activities:
Income from discontinued pharmacy operations (12,070) (42,218) (11,519)
Income from discontinued lodging operations - (11,829) (20,436)
Depreciation and amortization 79,275 70,851 63,723
Cumulative effect of change in accounting principle 5,288 - -
Provisions for asset impairment and restructuring 13,500 - 26,300
Write-off of In Home Health Medicare receivables 15,451 - -
Amortization of debt discount 271 513 455
Provisions for bad debts 26,189 15,930 13,778
Increase (decrease) in deferred taxes 1,194 26,354 (4,949)
Gain on sale of facilities (4,811) (7,322) -
Gain on sale of investments (315) - -
Minority interest (12,060) (2,599) (740)
Changes in assets and liabilities (excluding sold facilities and
acquisitions):
Change in receivables (50,708) (64,864) (30,890)
Change in inventories and other current assets 2,846 (3,783) 44
Change in current liabilities (17,043) (21,829) 46,807
Change in income taxes payable - (5,444) 13,062
Change in other liabilities (6,179) (13,088) 5,306
--------- ----------- ---------
NET CASH PROVIDED BY CONTINUING OPERATIONS 130,732 77,614 186,848
--------- ----------- ---------
NET CASH PROVIDED (UTILIZED) BY DISCONTINUED PHARMACY OPERATIONS 5,051 (234) 11,768
--------- ----------- ---------
NET CASH PROVIDED BY DISCONTINUED LODGING OPERATIONS - 40,599 52,682
--------- ----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 135,783 117,979 251,298
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (237,516) (163,068) (118,359)
Acquisition of assisted living facilities - - (19,050)
Investment in systems development (32,940) (15,753) (14,436)
Acquisition of skilled nursing facilities - (17,793) (32,369)
Acquisition of Vitalink stock - (30,000) -
Purchase of home health business - - (22,950)
Proceeds from sale of facilities 23,180 17,283 -
(Advances to) receipts from discontinued pharmacy segment (9,373) (15,857) 22
Receipts from (advances to) discontinued lodging segment 115,723 113,267 (27,201)
Other items, net (205) (3,403) (13,061)
--------- ---------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS (141,131) (115,324) (247,404)
--------- ---------- ---------
NET CASH PROVIDED (UTILIZED) BY INVESTING ACTIVITIES OF DISCONTINUED
PHARMACY OPERATIONS 15,687 (93,911) (11,714)
NET CASH UTILIZED BY INVESTING ACTIVITIES OF DISCONTINUED LODGING --------- ----------- ---------
OPERATIONS - (29,424) (169,641)
--------- ----------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES (125,444) (238,659) (428,759)
CASH FLOWS FROM FINANCING ACTIVITIES: --------- ----------- ---------
Borrowings of long-term debt 260,380 179,981 149,000
Principal payments of long-term debt (78,998) (176,986) (22,976)
Proceeds from exercise of stock options 2,445 12,254 3,307
Treasury stock acquired (2,287) (5,782) (1,131)
Retirement of debentures (146,100) (9,900) -
Dividends paid (5,600) (6,108) (5,502)
--------- ----------- ---------
NET CASH PROVIDED (UTILIZED) BY FINANCING ACTIVITIES OF
CONTINUING OPERATIONS 29,840 (6,541) 122,698
--------- ----------- ---------
NET CASH (UTILIZED) PROVIDED BY FINANCING ACTIVITIES OF DISCONTINUED
PHARMACY OPERATIONS (20,738) 94,145 (54)
--------- ----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF
DISCONTINUED LODGING OPERATIONS - 654 43,687
--------- ----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,102 88,258 166,331
--------- ----------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 19,441 (32,422) (11,130)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 29,222 61,644 72,774
--------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 48,663 $ 29,222 $ 61,644
========= =========== =========
NON-CASH ACTIVITIES:
Liabilities assumed in connection with acquisition of property $ - $ - $ 68,250
========= =========== =========
The accompanying notes are an integral part of these consolidated statements.
30
MANOR CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUBSEQUENT EVENT - MERGER
On June 10, 1998, Manor Care, Inc. ("Manor Care") or (the "Company"), Health
Care & Retirement Corporation, a Delaware corporation ("HCR"), and Catera
Acquisition Corp., a Delaware corporation and wholly owned subsidiary of HCR
("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which Merger Sub will merge with and into Manor Care.
The Merger Agreement provides that, with certain limited exceptions, each
outstanding share of Manor Care's common stock, par value $.10 per share, shall
be converted into the right to receive one share of common stock of HCR, par
value $.01 per share. Upon completion of the transaction, Manor Care will
become a wholly owned subsidiary of HCR and the stockholders of Manor Care will
become stockholders of HCR. The consummation of the transactions contemplated
by the Merger Agreement are subject to the approval of the stockholders of Manor
Care and HCR, the receipt of certain regulatory approvals and the expiration of
antitrust waiting periods.
The transaction is expected to be completed during the fourth quarter of
calendar year 1998. If completed, the transaction will be accounted for as a
pooling of interests. Due to the impending Merger, the Company no longer plans
to separate its skilled nursing facility management, assisted living and home
health businesses from its skilled nursing facility ownership, real estate and
healthcare facility development businesses.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Manor Care, Inc.
and its subsidiaries (the "Company"). As a result of the Company's spin-off of
its lodging operations, and the anticipated merger of Vitalink Pharmacy
Services, Inc. ("Vitalink") with and into Genesis Health Ventures, Inc.
("Genesis"), the accompanying consolidated financial statements reflect the
lodging and pharmacy segments as discontinued operations. All significant
intercompany transactions have been eliminated, except for advances to the
discontinued lodging segment and the related interest income.
CASH
The Company considers all highly liquid securities purchased with a maturity
of three months or less to be cash equivalents.
31
PROPERTY AND EQUIPMENT
The components of property and equipment at May 31, were as follows.
1998 1997
---- ----
(In thousands of dollars)
Land $ 102,601 $ 97,569
Building and improvements 1,034,109 969,660
Capitalized leases 12,747 12,747
Furniture, fixtures and equipment 231,145 214,239
Facilities in progress 138,839 58,200
---------- ----------
1,519,441 1,352,415
Less: Accumulated depreciation and amortization (387,014) (347,752)
---------- ----------
$1,132,427 $1,004,663
========== ==========
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows.
Building and improvements 10-40 years
Furniture, fixtures and equipment 3-20 years
Accumulated depreciation includes $9.9 million and $9.4 million at May 31,
1998 and 1997, respectively, relating to capitalized leases. Capitalized leases
are amortized on a straight-line basis over the lesser of the lease term or the
remaining useful life of the leased property.
CAPITALIZATION POLICIES
Major renovations and replacements are capitalized to appropriate property and
equipment accounts. Upon sale or retirement of property, the cost and related
accumulated depreciation are eliminated from the accounts and the related gain
or loss is taken into income. Maintenance, repairs, and minor replacements are
charged to expense.
Construction overhead and costs incurred to ready a project for its intended
use are capitalized for major development projects and are amortized over the
lives of the related assets.
The Company capitalizes interest on borrowings applicable to facilities in
progress. Interest has been capitalized as follows: 1998, $6.8 million; 1997,
$4.6 million; 1996, $3.1 million.
ACCOUNTING FOR CAPITALIZED SYSTEMS DEVELOPMENT COSTS
Costs incurred for systems development include direct payroll and consulting
costs. These costs are capitalized and are amortized over the lesser of the
estimated useful lives of the related systems or ten years.
32
ACCOUNTING FOR INVESTMENTS IN JOINT VENTURES
The Company uses the equity method to account for investments in entities in
which it has less than a majority interest but can exercise significant
influence. These investments are classified on the accompanying balance sheets
as other long-term assets. Under the equity method, the investment, originally
recorded at cost, is adjusted to recognize the Company's share of the net
earnings or losses of the affiliate as they occur. Losses are limited to the
extent of the Company's investments in, advances to and guarantees for the
investee.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of
certain acquisitions over the recorded fair value of the net assets. Goodwill
is amortized over 40 years. Amortization expense amounted to $0.8 million, $0.3
million and $0.2 million in each of the years ended May 31, 1998, 1997 and 1996,
respectively.
MINORITY INTEREST
The Company has controlling investments in certain entities which are not
wholly-owned. Amounts reflected as minority interest represent the minority
owners' share of income in these entities. Minority interest liability
represents the cumulative minority owners' share of income in these entities.
INSURANCE PROGRAMS
The Company was self-insured for general, professional and automobile
liability as well as workers' compensation coverage in prior fiscal years. On
April 20, 1998, the Company paid $17.9 million to Hartford Insurance Company in
order to effect a loss portfolio transfer, transferring all workers'
compensation, professional, general and automobile liabilities prior to June 1,
1997, except for certain liabilities relating to the discontinued lodging and
pharmacy segments. These liabilities continue to be self-insured. The estimated
costs of these programs are accrued at a discount rate of 6% based on actuarial
projections for known and incurred but not reported claims. The balance of the
Company's exposure for general and professional liability, automobile liability
and workers' compensation coverage is fully insured.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected the disclosure-only alternative permitted under
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). The Company has disclosed herein pro
forma net income and pro forma earnings per share in the footnotes using the
fair value based method. Refer to the "Capital Stock" footnote for further
information.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" ("SFAS 128"). The Company adopted this statement effective
for the quarter ended
33
February 28, 1998. SFAS 128 replaced the calculation of primary and fully
diluted earnings per share pursuant to Accounting Principles Board Opinion
("APB") No. 15, "Earnings Per Share," with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is computed similarly to fully diluted earnings per share.
Earnings per share amounts for all years have been presented in conformity with
SFAS 128.
Basic and diluted earnings per common share are computed by dividing income
from continuing operations, income from discontinued pharmacy and lodging
operations, extraordinary item (loss on extinguishment of debt), cumulative
effect of change in accounting principle, and net income by the weighted average
number of shares of common stock outstanding. The weighted average number of
shares outstanding was 63,794,000, 63,257,000 and 62,628,000 for basic earnings
per share and 64,671,000, 63,979,000 and 63,136,000 for earnings per share
assuming dilution for fiscal years 1998, 1997, and 1996 respectively. The
difference between the weighted average number of shares of common stock
outstanding used in the basic and diluted earnings per share computations is
entirely due to the assumed exercise of outstanding stock options for diluted
earnings per common share.
REVENUE RECOGNITION
Revenues are recognized at the time the service is provided to the resident.
The Company records revenue for services to Medicare beneficiaries at the time
the services are rendered and based on the Medicare cost reimbursement
principles. Under those principles, Medicare reimburses the Company for the
reasonable costs (as defined) incurred in providing care to Medicare
beneficiaries. The Company reports as reimbursable costs in the Medicare cost
reports only those costs it believes to be reimbursable under the applicable
Medicare cost reimbursement principles. In determining the amount of revenue to
be recorded, those costs are reduced for costs that are in excess of
reimbursable cost limits, and for costs for which reimbursement may be
questionable based on the Company's understanding of reimbursement principles in
effect at that time. Accordingly, this process results in recording revenue only
for the costs that the Company believes are reasonably assured of recovery.
Refer to the "Commitments and Contingencies" footnote for additional
information.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported or disclosed in its financial statements and the notes
related thereto. Actual results could differ from those estimates.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities,"
which requires start-up activities
34
to be expensed as incurred. The Company has until June 2000 to adopt this
statement. The Company has not determined when it will adopt this statement nor
the impact of adoption.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130 "Reporting Comprehensive Income" ("SFAS 130"), which is effective for
fiscal years beginning after December 15, 1997. The statement establishes
standards for reporting and display of comprehensive income and its components.
The Company is in the process of determining the timing and impact of adoption.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal
years beginning after December 15, 1997. The Company plans to adopt SFAS 131 in
fiscal year 1999 and has not determined the impact of adoption to be
significant.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" which provides guidance on accounting
for the costs of computer software developed or obtained for internal use. The
Company has until fiscal year 2000 to adopt this statement. The Company has not
determined when it will adopt this statement nor has it determined the impact of
adoption.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures About
Pensions and Other Postretirement Benefits" ("SFAS 132"), which is effective for
fiscal years beginning after December 31, 1997. This statement revises
employers' disclosures about pension and other postretirement benefit plans;
however, it does not change the measurement or recognition of those plans. The
Company will adopt the statement in fiscal year 1999 and has not determined the
impact to be significant.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative and
Hedging Activities" ("SFAS 133"), which addresses the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. This statement is effective for fiscal years
beginning after June 15, 1999. The Company has not determined when it will adopt
the statement nor has it determined the impact of adoption.
On November 20, 1997 a consensus was reached by the Emerging Issues Task Force
regarding reengineering costs (Issue 97-13) providing that all reengineering
costs be expensed as incurred based on the fair value of the services rendered.
As a result, in November 1997, the Company expensed $3.2 million of
reengineering costs (net of taxes) as the cumulative effect of a change in
accounting principle.
LONG-TERM RECEIVABLES
Long-term receivables of $1.2 million and $22.0 million at May 31, 1998 and
1997, respectively, represent accounts receivable from Medicare at In Home
Health, Inc. ("In Home
35
Health"), relating primarily to the reimbursement of disputed costs from prior
years, and are included in Other Assets on the Consolidated Balance Sheets.
Approximately 51% of In Home Health's revenue is derived from services
provided to Medicare beneficiaries through cost reimbursement programs.
Virtually all of the payments for these services are based on the Medicare
program's reimbursable costs incurred in rendering the services. Cost reports
are filed annually and are subject to audit and retroactive adjustment. In Home
Health reports revenue for those costs that it believes are probable of recovery
under applicable Medicare statutes and regulations.
Over the years Medicare auditors have claimed that certain costs were not
reimbursable under the Medicare program. These positions are based on
interpretations promulgated after the period covered by the cost reports that
are contrary to In Home Health's interpretation or on what In Home Health
believes is the misapplication of specific reimbursement principles.
As of May 31, 1998 and 1997, total In Home Health accounts receivable due from
Medicare were approximately $9.3 million and $40.5 million, respectively,
including disputed costs of $4.7 million and $37.7 million. On a consolidated
basis, In Home Health has established reserves against these disputed costs of
$3.5 million and $9.8 million for fiscal years 1998 and 1997. The Company does
not believe that the resolution of these disputed costs will be accomplished in
the next year. Therefore, they have been classified as non-current assets.
Additionally, as of May 31, 1998 and 1997, In Home Health had received
approximately $9.3 million and $12.5 million in payment from Medicare for
disputed costs. Because Medicare may require repayment of these amounts, the
potential liability is recorded as an offset to Receivables on the Consolidated
Balance Sheets. In August 1997, In Home Health received three court decisions
relating to certain of these amounts. In Home Health evaluated these decisions
on its recorded accounts receivable and, accordingly, recorded a reserve of
$15.5 million in fiscal year 1998. The net impact to the Company after taxes
and minority interest was approximately $3.8 million.
As of May 31, 1997, In Home Health had received reports challenging $18.9
million of these costs. An additional $18.8 million of costs similar to the
costs which had been challenged had been incurred through May 31, 1997 related
to open cost reporting years. Of this $37.7 million, approximately $22.5
million related to the treatment of certain community liaison personnel costs,
which Medicare alleged were unreimbursable sales costs. Other significant
disputed costs related to physical therapists employed by In Home Health and
certain other branch and corporate expenses.
36
ACCRUED EXPENSES
Accrued expenses at May 31, 1998 and 1997 were as follows.
1998 1997
--------------------------------------------------------------------------
(In thousands of dollars)
Payroll $55,723 $ 55,120
Taxes, other than income 14,175 14,125
Insurance - 17,346
Interest 5,790 7,457
Other 20,707 15,492
------- --------
$96,395 $109,540
======= ========
LONG-TERM DEBT
Maturities of long-term debt at May 31, 1998 were as follows.
Fiscal year
-----------------------------------------------
(In thousands of dollars)
1999 $ 6,104
2000 5,822
2001 5,285
2002 5,402
2003 8,524
2004 to 2024 508,696
-------
$539,833
=======
Long-term debt, consisting of mortgages, capital leases, Senior Notes, Senior
Subordinated Notes, borrowings under the Company's $250.0 million
competitive advance and multi-currency revolving credit facility (the
"Facility"), and borrowings under two lines of credit, was net of discount of
$0.9 million and $1.2 million at May 31, 1998 and 1997, respectively.
Amortization of discount was $0.3 million in 1998 and $0.5 million in 1997 and
1996. At May 31, 1998, the Company had mortgages and capital leases of $68.9
million.
Interest paid was $33.2 million in 1998, $34.1 million in 1997 and $29.8
million in 1996. During fiscal year 1998, the interest rate on the Senior Notes
was 7.5%. Interest rates on mortgages and other long-term debt ranged from 3.0%
to 12.0%. The weighted average interest rate in fiscal year 1998 was 6.4%.
In June 1996, the Company issued $150.0 million of 7 1/2% Senior Notes due
2006. These notes are redeemable at the option of the Company at any time at a
price equal to the greater of (a) the principal amount or (b) the sum of the
present values of the remaining scheduled payments of principal and interest,
discounted with an applicable treasury rate plus 15 basis points, plus accrued
interest to the date of redemption. The proceeds of this offering were used to
repay borrowings under the Facility.
37
In November 1992, the Company issued $150.0 million of 9 1/2% Senior
Subordinated Notes due November 2002. In July 1996, the Company repurchased $9.9
million of the 9 1/2% Senior Subordinated Notes for $10.5 million. In November
1997, the Company redeemed all outstanding 9 1/2% Senior Subordinated Notes due
2002 at a redemption price of 103.56% with the proceeds of borrowings under the
Facility. The Company recorded an extraordinary item of $3.2 million after taxes
representing the premium paid on redemption.
In September 1996, the Company amended the Facility provided by a group of
sixteen banks. The Facility provides that up to $75.0 million is available for
borrowings in foreign currencies. Borrowings under the Facility are, at the
option of the Company, at one of several rates including LIBOR plus 20 basis
points. In addition, the Company has the option to request participating banks
to bid on loan participation at lower rates than those contractually provided by
the Facility. The Facility presently requires the Company to pay fees of 1/10
of 1% on the entire loan commitment. The Facility will terminate on September
6, 2001. At May 31, 1998, outstanding revolver borrowings amounted to $245.0
million. The Company also has $76.5 million in borrowings under two lines of
credit with an available limit totaling $100.0 million. These lines of credit
expire on September 1, 1998 and on December 31, 1998, and are expected to be
refinanced prior to their expiration dates. Therefore, the outstanding
borrowings are classified as long-term on the Consolidated Balance Sheet at May
31, 1998.
Various debt agreements impose, among other restrictions, restrictions
regarding financial ratios. Pursuant to such restrictions, owned property with
a net book value of $121.4 million was pledged or mortgaged.
LEASES
The Company operates certain property and equipment under leases, some with
purchase options that expire at various dates through 2035. Future minimum
lease payments from continuing operations are as follows.
Operating Capitalized
Leases Leases
------ ------
Fiscal Year (In thousands of dollars)
-----------
1999 $ 9,126 $1,176
2000 8,115 741
2001 7,297 313
2002 6,302 292
2003 33,977 292
Thereafter 11,417 1,612
------- ------
Total minimum lease payments $76,234 4,426
Less: Amount representing interest ======= 1,007
------
Present value of lease payments 3,419
Less: Current portion 1,176
------
Lease obligations included in long-term debt $2,243
======
38
Rental expense from continuing operations under noncancelable operating leases
was $10.5 million in 1998, $8.0 million in 1997, and $6.3 million in 1996.
INTEREST RATE HEDGING
The Company has entered into multiple interest rate swap agreements to hedge
its exposure to fluctuations in interest rates on its long-term debt and
operating leases. At May 31, 1998, the Company had six interest rate swap
agreements outstanding, with a total notional principal amount of $380.3
million. Three of these agreements effectively convert the Company's interest
rate exposure on a floating rate operating lease to a fixed interest rate of
5.60% and mature simultaneously with the relevant operating lease in 2002. The
remaining three interest rate swap agreements have a notional principal amount
of $350.0 million and effectively convert the Company's interest rate exposure
on certain floating rate debt to a weighted average fixed rate of 6.53%. These
agreements mature on August 4, 2008. While the Company is exposed to credit loss
in the event of nonperformance by other parties to outstanding interest rate
swap agreements, the Company does not anticipate any such credit losses.
In conjunction with the June 1996 issuance of $150.0 million of 7 1/2% Senior
Notes, the Company also entered into a series of interest rate swap and treasury
lock agreements having a total notional principal amount of $150.0 million.
Agreements with a total notional principal amount of $100.0 million were
terminated concurrent with the pricing of the notes offering on May 30, 1996
with a $2.7 million cash gain. The remaining agreement, with a total notional
principal amount of $50.0 million was terminated on October 23, 1996 with a $1.4
million cash gain. The gains on the termination of the agreements have been
deferred and are being amortized against interest expense over the life of the
7 1/2% Senior Notes, effectively reducing the interest rate on the notes to
7.1%. The effect of the agreements on interest expense during the period that
the agreements were outstanding was to reduce interest expense to 6.9%.
INCOME TAXES
The Company files a separate income tax return for In Home Health. The
consolidated tax provision, therefore, is based upon the separate tax provisions
of each of the companies. Income tax provisions were as follows for the year
ended May 31.
1998 1997 1996
------------ ------------- -------------
(In thousands of dollars)
Current tax expense:
Federal $17,761 $20,239 $33,968
State 3,361 4,237 7,165
Deferred tax expense:
Federal 23,417 21,513 (3,614)
State 6,292 5,197 (825)
------- ------- -------
$50,831 $51,186 $36,694
======= ======= =======
39
Deferred tax (liabilities) assets are comprised of the following at May 31.
1998 1997 1996
------------ ------------- -----------
(In thousands of dollars)
Depreciation and amortization $(115,056) $(98,185) $ (81,906)
Purchased tax benefits (39,892) (44,110) (45,527)
Gain on stock issuance (31,778) (37,187) (11,896)
Other (24,345) (22,400) (18,916)
--------- --------- ---------
Gross deferred tax liabilities (211,071) (201,882) (158,245)
--------- --------- ---------
Tax deposit - 5,754 5,754
Reimbursement reserve 229 9,550 16,882
Reserve for doubtful accounts 11,450 12,454 9,242
Deferred compensation 11,323 13,982 9,526
Other 4,338 4,675 6,629
--------- --------- ---------
Gross deferred tax assets 27,340 46,415 48,033
--------- --------- ---------
Net deferred tax $(183,731) $(155,467) $(110,212)
========= ========= =========
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the consolidated statements of income follows.
1998 1997 1996
---------------- ---------------- ----------------
(In thousands of dollars)
Federal income tax rate 35% 35% 35%
======= ======= =======
Federal taxes at statutory rate $47,269 $46,928 $31,726
State income taxes, net of Federal
tax benefit 6,274 6,132 4,121
Minority interest (4,221) (910) (259)
Tax credits (709) (143) (19)
Other 2,218 (821) 1,125
------- ------- -------
Income tax expense $50,831 $51,186 $36,694
======= ======= =======
Income taxes paid on a consolidated basis for the years ended May 31, 1998,
1997, and 1996 were $45.1 million, $41.7 million, and $48.2 million,
respectively.
CAPITAL STOCK
There are 5.0 million shares of authorized but unissued preferred stock with a
par value of $1.00 per share. The rights of the preferred shares will be
determined by the Board of Directors if the shares are issued.
During fiscal years 1998 and 1997, the Company acquired 71,890 and 134,118
shares of its common stock for a total cost of $2.5 million and $5.8 million,
respectively. A total of 8.9 million shares of common stock have been
authorized, under various stock option plans, to be granted to key executive
officers and key employees. At May 31, 1998 and 1997, options for the purchase
of an aggregate of 3,328,106 and 3,041,807 shares were outstanding at prices
equal
40
to the market value of the stock at date of grant. Options totaling 1,136,015
are presently exercisable and 2,192,091 will become exercisable from fiscal year
1999 to 2003 and will expire at various dates to April 2008. In addition, 52,291
options are outstanding for non-employee directors. Options totaling 18,593 are
presently exercisable and 33,698 options will become exercisable from fiscal
year 1999 to 2002 and will expire at various dates to September 2002. Pursuant
to the Merger Agreement, each holder of stock options granted by the Company,
whether vested or not vested, shall receive (subject to any applicable income
tax withholding) HCR Common Stock having a value equal to the fair market value
of the option.
Option activity under the above plans was as shown in the table below.
Options 1998 1997 1996
- --------------------------------------------------------------------------------------------
Outstanding, beginning of year:
No. of shares 3,091,764 3,702,527 3,538,250
Avg. Option price $ 14.87 $ 16.87 $ 14.36
Granted: No. of shares 767,850 956,400 582,168
Avg. Option Price $ 32.78 $ 38.82 $ 30.89
Adjustment as a result of the
spin-off: No. of shares - 1,454,915 -
Exercised: No. of shares 296,361 1,011,951 269,156
Avg. Option Price $ 8.89 $ 8.45 $ 12.34
Canceled: No. of shares 182,856 2,010,127 148,735
Avg. Option Price $ 26.39 $ 22.42 $ 20.57
Outstanding, end of year:
No. of shares 3,380,397 3,091,764 3,702,527
Avg. Option Price $ 18.83 $ 14.87 $ 16.87
Available for grant at
May 31: No. of shares 1,070,683 1,680,826 1,089,899
In connection with the spin-off of the Company's lodging segment, the
outstanding options held by current and former employees of the Company as of
November 1, 1996 were redenominated in both Company and lodging company stock
and the number and exercise prices of the options were adjusted based on the
relative trading prices of shares of the common stock of the two companies to
retain the intrinsic value of the options. The total number of options
outstanding increased by 1,454,915 as a result of this adjustment.
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its various stock option plans and employee
stock purchase plan and, accordingly, no compensation expense has been
recognized for options granted and shares purchased under the provisions of
these plans. Had compensation expense for options granted and shares purchased
under the stock-based compensation plans been determined based on the fair value
at the grant dates, net income and earnings per share would have been as follows
for the years ended May 31.
41
(In thousands of dollars,
except per share data) 1998 1997 1996
- ------------------------------------- -------- --------- --------
Net income:
As reported $89,904 $136,942 $85,907
Pro forma $82,922 $128,141 $81,697
Earnings per share:
As reported, basic $ 1.41 $ 2.16 $ 1.37
As reported, assuming dilution $ 1.39 $ 2.14 $ 1.36
Pro forma, basic $ 1.30 $ 2.03 $ 1.30
Pro forma, assuming dilution $ 1.28 $ 2.00 $ 1.29
The effects of applying SFAS 123 in this pro forma disclosure are not likely
to be representative of the effects on reported net income for future years.
SFAS 123 does not apply to awards granted prior to fiscal year 1996 and
additional awards are anticipated in future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. In computing these pro forma
amounts, the Company has assumed a risk-free interest rate equal to
approximately 5.55%, 6.36% and 6.37% for fiscal years 1998, 1997 and 1996,
respectively, expected volatility of 25.5%, dividend yields based on historical
dividends of $.088 per share annually and expected option lives of eight years.
The average fair values of the options granted during 1998, 1997 and 1996, as
measured on the dates of the grants, are estimated to be $15.07, $15.12 and
$11.96, respectively.
ACQUISITIONS & DIVESTITURES
During fiscal year 1998, Manor Care opened one newly constructed skilled
nursing facility located in California and ten assisted living facilities
located in Connecticut, Virginia, Maryland (2), Delaware, Georgia (2) and
Florida (3). The Company sold two Springhouse facilities located in Florida and
Michigan for $4.7 million and three corporate office buildings located in
Maryland for $18.4 million.
During fiscal year 1997, the Company acquired a nursing center in California
for $4.4 million and a nursing center in Michigan for $13.4 million. Through new
construction, the Company opened four skilled nursing centers and six assisted
living facilities. The Company sold four nursing centers in Indiana, Iowa,
Illinois, and Texas for $17.3 million and transferred an assisted living
facility with an approximate net book value of $4.9 million to the discontinued
lodging segment.
During fiscal year 1996, the Company acquired four nursing centers and an
operating lease for approximately $45.4 million, of which $32.4 million was cash
and the remainder was assumed liabilities. Additionally, six assisted living
facilities, with five attached skilled nursing units, were purchased for $74.3
million, of which $19.0 million was cash and the remainder was assumed
liabilities. In October 1995, the Company purchased for $22.9 million
approximately 41% of the common stock of In Home Health, a provider of home
health services. The Company paid an additional $20.0 million to In Home Health
for 100% of its outstanding voting
42
convertible preferred stock and for warrants to purchase an additional 6.0
million shares of common stock. On April 13, 1998 the Company entered into a
Preferred Stock Modification Agreement with In Home Health. Under this
agreement, the Company agreed, with respect to 70,000 shares (the "Modified
Shares") of the preferred stock, to waive the right to give notice on or after
October 24, 2000 requiring the Registrant to redeem the Modified Shares. The
remaining 130,000 shares may be redeemed in cash at the option of the Company on
and after October 24, 2000. The In Home Health redeemable preferred stock ranks
senior to the In Home Health common stock, has voting rights on an as-if
converted basis, and is initially convertible into 10 million shares of In Home
Health common stock at a conversion price of $2.00 per share. The In Home Health
redeemable preferred stock bears dividends at 12% per annum and has a
liquidation preference of $100.00 per share. The In Home Health redeemable
preferred stock will accrete over five years from its fair value of $18,500,000
on the date of issuance to its redemption price of $20 million as of the
redemption date. The In Home Health warrants purchased by the Company have an
exercise price of $3.75 per share and expire in October 1998. As a result of the
purchase of In Home Health common and preferred stock, the Company currently has
effective control of approximately 63% of the voting stock of In Home Health. In
Home Health is consolidated in the Company's financial statements.
Unless otherwise noted, acquisitions are accounted for as purchases.
Acquisition costs in excess of fair market value of the assets acquired are
allocated to goodwill.
PROVISIONS FOR ASSET IMPAIRMENT AND RESTRUCTURING
The Company periodically reviews the net realizable value of its long-term
assets based on certain circumstances which indicate the carrying amount of an
asset may not be recoverable. If the carrying amount exceeds the net realizable
value, an impairment loss is recorded in the period the impairment is
determined.
During fiscal year 1998, the Company recorded $13.5 million in restructuring
charges in connection with the Company's abandoned plan to separate its skilled
nursing facility management, assisted living and home health businesses from its
skilled nursing facility ownership, real estate and healthcare facility
development businesses. The charge includes $5.3 million of severance costs
related to corporate staff reductions as a result of the Merger, $4.6 million of
consulting, legal and accounting fees incurred, and $3.6 million of printing,
mailing, travel, relicensing and other miscellaneous expenses related to the
transaction and the related public filings. Due to the impending Merger, the
Company no longer plans to complete this transaction.
The Company recorded provisions of $26.3 million in fiscal year 1996 related
to the impairment of certain long-lived assets and costs associated with the
Company's restructuring. The most significant components of the provision were
non-cash impairment charges of $21.2 million relating to writedowns of property,
equipment and capitalized systems development costs and $5.1 million related to
the spin-off of the lodging segment in fiscal year 1996.
43
In fiscal year 1996, the Company determined that it incurred costs in excess
of the original amount expected to complete a systems development project for
billing and receivables which began in fiscal year 1995. Intensive testing
during a six month pilot identified over 100 major system problems. At this
time, it was determined that the newly developed system was not functional and
that a major system re-write was needed. Therefore, the Company compared the
estimated net realizable value of the systems, based on the fair value of
similar assets, to the carrying amount of these costs. The carrying amount was
determined to be in excess of the fair value and accordingly, the related assets
were written down by $13 million to the net realizable value.
44
DISCONTINUED LODGING OPERATIONS
On November 1, 1996, the Company completed the spin-off of its lodging
segment. The Company's shareholders of record on October 10, 1996 received one
share of Choice Hotels International, Inc. common stock for each outstanding
share of Manor Care common stock. Accordingly, lodging results are reported as
discontinued operations for all periods presented.
The revenues, income from discontinued lodging operations before income taxes,
and net income from discontinued lodging operations for the years ended May 31,
1997 and 1996 were as follows.
1997 1996
------------ ---------------
(In thousands of dollars)
Revenues $89,849 $374,873
Income from discontinued operations before
income taxes $20,563 $ 35,402
Net income from discontinued operations $11,829 $ 20,436
Income from discontinued lodging operations for the year ended May 31, 1996
includes the results of operations of the lodging segment through March 7, 1996,
the measurement date. During the period from the measurement date through May
31, 1996, the lodging segment incurred a net loss of $12.0 million. The net loss
was primarily the result of provisions for asset impairment and costs and
expenses directly associated with the spin-off totaling $33.3 million.
The non-cash provision for asset impairment in the discontinued lodging
segment reflects primarily the writedown of European hotel assets based on
expected future cash flows. This non-cash provision was recorded in accordance
with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". No loss on the disposal of the
discontinued lodging operations was recognized as the discontinued lodging
segment generated income between the measurement date and the date of the spin-
off.
Included in discontinued lodging operations is interest expense charged by the
continuing healthcare segment to the discontinued lodging segment relating to
cash advances provided to the discontinued lodging segment for the acquisition
and renovation of lodging assets. For the years ended May 31, 1997 and 1996,
interest so allocated amounted to $3.4 million and $19.7 million, respectively.
The indebtedness related to lodging acquisitions and renovations is reflected as
advances to discontinued lodging segment in the consolidated balance sheets.
Such advances amounted to $115.7 million at May 31, 1997. The Company received a
prepayment of $110.0 million of indebtedness in the fourth quarter of fiscal
year 1997 and the prepayment of the remaining $115.7 million in the second
quarter of fiscal year 1998. These payments were subject to prepayment penalties
of $1.9 million.
General corporate expenses of $5.5 million and $7.4 million, respectively,
were charged to discontinued lodging operations for the years ended May 31, 1997
and 1996. Allocation of general corporate charges was principally determined
based on time allocations.
45
For purposes of providing an orderly transition after the spin-off, the
Company entered into various agreements with the discontinued lodging segment,
including, among others, a Tax Sharing Agreement, Corporate Services Agreement,
Employee Benefits Allocation Agreement and Support Services Agreement. These
agreements provide, among other things, that the Company (i) will provide
certain corporate and support services, such as accounting, tax, and computer
systems support and (ii) will provide certain risk management services and other
miscellaneous administrative services. These agreements extend for a period of
30 months from the spin-off date or until such time as the discontinued lodging
segment has arranged to provide such services in-house or through another
unrelated provider of such services.
DISCONTINUED PHARMACY OPERATIONS
On April 26, 1998, Vitalink entered into an Agreement and Plan of Merger (the
"Vitalink Merger Agreement") with Genesis. Pursuant to the Vitalink Merger
Agreement, Vitalink will merge with and into Genesis (the "Vitalink Merger"). In
accordance with the Vitalink Merger Agreement, holders of the common stock of
Vitalink will receive for each share of Vitalink common stock held, at the
election of the holder, either cash consideration in the amount of $22.50, or
0.045 shares of Series G Cumulative Convertible Preferred Stock of Genesis (the
"Genesis Preferred Stock").
The Vitalink Merger Agreement may be terminated (i) by either party, if the
Board of Directors of the other has withdrawn, changed or modified its
recommendation that its stockholders vote in favor of the Vitalink Merger; (ii)
by Vitalink prior to the approval of its stockholders of the Vitalink Merger, if
it receives a Superior Proposal (as defined in the Vitalink Merger Agreement)
which was not solicited after the date of the Vitalink Merger Agreement; (iii)
by either party if any court of competent jurisdiction or other governmental
body has issued a final and nonappealable order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Vitalink
Merger; and (iv) upon the occurrence of certain other events specified in the
Vitalink Merger Agreement. Under certain circumstances, Vitalink would be
obligated to pay Genesis a $20 million fee if the Vitalink Merger Agreement is
terminated.
Manor Care, the beneficial owner of approximately 50% of the outstanding
shares of Vitalink common stock, and Genesis have entered into a Voting
Agreement, dated April 26, 1998 (the "Voting Agreement"), pursuant to which
Manor Care agreed to vote all of its shares of Vitalink common stock in favor of
the adoption and approval of the Vitalink Merger, the Vitalink Merger Agreement
and the transactions contemplated thereby. Manor Care has also agreed to elect
to receive Genesis Preferred Stock as Vitalink Merger consideration with respect
to all of its Vitalink common stock.
The Genesis Preferred Stock will bear cash dividends at an initial annual rate
of 5.9375%. Genesis Preferred Stockholders will be initially entitled to 13.441
votes per share of Genesis Preferred Stock, and will vote together with the
holders of Genesis common stock as a single class on all matters to be voted on
by holders of Genesis common stock, and as a separate class on matters as to
which the Pennsylvania Business Corporation Law requires a separate class vote.
46
At the option of Manor Care, each share of Genesis Preferred Stock will be
convertible at any time into Genesis common stock at a conversion price of
$37.20 per share, subject to adjustment under certain circumstances. Beginning
April 26, 2001, Genesis may under certain circumstances, force conversion of the
Genesis Preferred Stock, at conversion prices ranging from $37.20 to $38.87 per
share of Genesis common stock. Dividends will cease to accrue in respect of the
Genesis Preferred Stock as of the date of the conversion thereof. The revenues
from discontinued pharmacy operations for fiscal years 1998, 1997 and 1996
(including sales to the Company's skilled nursing and assisted living facilities
of $44,715, $41,365 and $34,829) are $499,307, $274,038 and $141,115,
respectively.
The income from discontinued pharmacy operations before income taxes and net
income from discontinued pharmacy operations for the years ended May 31, 1998,
1997 and 1996 were as follows.
1998 1997 1996
------------- ------------ ------------
(In thousands of dollars)
Income from discontinued pharmacy operations
before income taxes $31,802 $75,732(a) $20,825
Net income from discontinued pharmacy operations $12,070 $42,218 $11,519
(a) Income from discontinued pharmacy operations before income taxes includes a
$50.3 million pretax gain resulting from the issuance of 11.4 million
shares of Vitalink common stock in connection with Vitalink's merger with
TeamCare, the pharmacy subsidiary of GranCare, Inc. in February 1997.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and counsel to the Company, the
ultimate outcome of such litigation will not have a material adverse effect on
the Company's financial position or results of operations.
Revenues recorded under Federal and state medical assistance programs are
subject to adjustment upon audit by appropriate government agencies. For fiscal
years 1998, 1997, and 1996 these revenues amounted to $628.7 million, $596.0
million, and $502.0 million, respectively. In the opinion of management, any
difference between revenues recorded and final determination will not be
significant. The Company does not anticipate a material effect on revenues as a
result of the Balanced Budget Act of 1997. However, the regulations pertaining
to this act have neither been proposed nor implemented and therefore, this
preliminary conclusion may change as a result.
47
In fiscal year 1996, the Health Care Financing Administration issued a
modification to regulations governing the treatment of interest expense and
investment income offsets for Medicare reimbursement purposes. As a result of
this modification the Company recognized revenues of approximately $20 million
in fiscal year 1997, which had been reserved in prior years.
As of May 31, 1998, the Company had contractual commitments of $112.0 million
relating to its internal construction program.
One or more subsidiaries or affiliates of the Company 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. (S)(S)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 the Company. The Actions
allege that Cenco transported and/or generated hazardous substances that came to
be located at the sites in question. The Company believes that the waste
disposal activities at issue occurred prior to the Manor Care subsidiary's
acquisition of Cenco. 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 typically
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 the Company is alleged to be a potentially responsible
party has not yet been quantified. The Company believes that the potential
environmental liability exposure, after consideration of insurance coverage, is
approximately $3 million. Future liabilities for the pending environmental
claims and litigation, without regard to insurance, currently are not expected
to exceed approximately $46 million. The Company estimated future liabilities
without regard to insurance based on counsel's evaluation of the range of
potential liability and cost of defense in each of the Actions. The Company has
accrued the liabilities based on its estimate of the likely outcome of the
Actions, taking into account insurance coverage available for the liabilities.
48
BUSINESS SEGMENT INFORMATION
The Company operates principally in three segments: skilled nursing
operations, assisted living operations and home health operations. Income (loss)
from operations consists of total revenues less operating, depreciation and
amortization, and general corporate and other expenses.
- --------------------------------------------------------------------------------------------------------
Skilled Assisted Home
(In thousands of dollars) Nursing(a) Living Health Eliminations Total
- --------------------------------------------------------------------------------------------------------
1998
Revenues $1,191,811 $ 71,937 $ 95,581 - $1,359,329
Income (loss) from operations 157,586(c) 969 (20,455) 4,050 142,150
Identifiable assets 1,295,635 213,456 38,788 - 1,547,879(d)
Depreciation and amortization 68,049 8,521 2,705 - 79,275
Capital expenditures 133,101 136,578 777 - 270,456
- --------------------------------------------------------------------------------------------------------
1997
Revenues $1,113,690 $ 56,530 $124,354 - $1,294,574
Income (loss) from operations 144,836 (2,710) (2,928) 3,163 142,361
Identifiable assets 1,223,317 180,228 60,407 - 1,463,952(d)
Depreciation and amortization 60,943 6,848 3,060 - 70,851
Capital expenditures 122,812 55,967 42 - 178,821
- --------------------------------------------------------------------------------------------------------
1996
Revenues $1,028,901 $ 38,857 $ 74,153 - $1,141,911
Income (loss) from operations 99,189(b) (6,997)(b) 67 3,848 96,107
Identifiable assets 1,381,516 148,713 72,598 - 1,602,827(d)
Depreciation and amortization 56,242 5,733 1,748 - 63,723
Capital expenditures 109,063 23,170 562 - 132,795
- --------------------------------------------------------------------------------------------------------
(a) Includes skilled nursing operations, hospital and corporate operations.
(b) Includes total provisions for asset impairment and restructuring of $26.3
million, of which $25.1 million relates to skilled nursing operations and
$1.2 million relates to assisted living operations.
(c) Includes total provisions for restructuring of $13.5 million.
(d) Does not include investment in discontinued pharmacy segment of $193,398,
$178,079 and $71,010 or advances from discontinued pharmacy segment of $0,
$1,053 and $16,910 at May 31, 1998, 1997 and 1996, respectively.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
The Company has various pension and profit sharing plans, including a
supplemental executive retirement plan, and contributes to certain union welfare
plans. The provision for these plans amounted to $9.9 million in 1998, $11.8
million in 1997, and $11.6 million in 1996. All vested benefits under retirement
plans are funded or accrued.
The Company sponsors a defined contribution profit sharing plan covering
substantially all of its employees. Contributions of up to 6% of each covered
employee's salary are determined based on the employee's level of contribution
to the plan, years of service and Company profitability. The cost of the plan
totaled $5.7 million in 1998, $7.2 million in 1997, and $5.8 million in 1996.
49
Also included in the Company's retirement plans are two defined benefit
pension plans. The benefits for the first plan are based on service credits for
years of participation after January 1, 1992. In addition, there is a prior
benefit equal to the accrued benefit at December 31, 1991 for certain
individuals who were participants in a predecessor plan. No new participants
were eligible to enter this plan after August 15, 1996 and service credits for
all participants were frozen as of December 31, 1996. The second plan is a
supplemental executive retirement plan based on years of service.
Service cost benefits earned during fiscal years 1998, 1997, and 1996
approximated the plans' annual costs of $0.2 million, $4.0 million, and $2.8
million, respectively. As of February 28, 1998, 1997, and 1996, plan assets of
approximately $22.5 million, $20.3 million, and $14.4 million, compared to
vested benefit obligations of $20.4 million, $17.0 million, and $12.4 million,
respectively.
Projected benefit obligations were not significantly different from
accumulated benefit obligations of $24.9 million, $21.0 million, and $16.3
million, as of the same dates. Liabilities recorded on the Company's
Consolidated Balance Sheets as of May 31, 1998, 1997, and 1996 were $4.5
million, $2.3 million, and $2.0 million, respectively. Projected benefit
obligations were determined using an assumed discount rate of 7.0% for 1998,
7.5% for 1997, and 7.0% for 1996, an assumed rate of return on plan assets of
8.25%, and an assumed compensation increase of 4.5%.
In fiscal years 1997 and 1996, Vitalink participated in the various pension
and profit sharing plans of the Company. The Company charged Vitalink $0.5
million and $0.4 million, respectively, for fiscal year 1997 and 1996 to
participate in these plans. Vitalink had its own pension and profit sharing
plans in fiscal year 1998.
The Company also has various incentive compensation plans for certain
personnel. Incentive compensation expense was $4.6 million in 1998, $3.8 million
in 1997, and $3.4 million in 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of long-term debt instruments were determined by discounting
future cash flows using the Company's current market rates and do not vary
substantially from the amounts recorded on the consolidated balance sheets.
The balance sheet carrying amounts of cash, cash equivalents, receivables and
payables approximate fair value due to the short-term nature of these items.
Management believes that the fair value of the advances to the discontinued
lodging segment approximates the carrying value.
Total fair market value for the outstanding interest rate swap agreements
at May 31, 1998 and 1997 was ($11.0) million and $1.4 million, respectively.
Fair values were determined based on quoted rates.
SUMMARY OF QUARTERLY RESULTS
(Unaudited)
INCOME FROM
CONTINUING
OPERATIONS
QUARTERS ENDED BEFORE OTHER
(IN THOUSANDS OF INCOME AND
DOLLARS EXCEPT PER (EXPENSES) AND
SHARE DATA) REVENUES INCOME TAXES NET INCOME PER SHARE-BASIC
- ---------------------------------------------------------------------------------------------------------------------------------
Fiscal 1998
August $ 325,071 $ 24,018 $ 19,860 $ 0.31
November 340,451 40,520 19,317 0.30
February 349,459 42,765 28,029 0.44
May* 344,348 34,847 22,698 0.36
---------- --------- --------- ---------
$1,359,329 $ 142,150 $ 89,904 $ 1.41
========== ========= ========= =========
FISCAL 1997
August $ 306,445 $ 30,161 $ 23,685 $ 0.38
November 317,080 35,449 32,444 0.51
February 332,631 39,046 61,392 0.97
May 338,418 37,705 19,421 0.31
---------- --------- --------- ---------
$1,294,574 $ 142,361 $ 136,942 $ 2.16**
========== ========= ========= =========
* Income from continuing operations before other income and (expenses) and
income taxes, net income and per share amounts for the quarter ended May,
1998 and fiscal year 1998 reflect provision for restructuring charge of
$13,500 ($8,100 after-tax).
** Does not add due to rounding.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------- --------------------------------------------------
DIRECTORS
The name, age, and business experience for the past five years of each
director of Manor Care are set forth below.
Stewart Bainum, Jr. (52) Served as a Director of Manor Care since 1976; as
-------------------
Chairman of the Board since March 1987; and as Vice Chairman from June 1982 to
March 1987. Director: Choice Hotels International, Inc., Sunburst Hospitality
Corporation (until July 1998), and Vitalink Pharmacy Services, Inc. Also see
the biographical information set forth under "Executive Officers" below.
Stewart Bainum. (79) Served as a Director of Manor Care since 1968; Vice
---------------
Chairman of the Board since March 1987; Chairman of the Board from 1968 to March
1987; President from December 1980 through October 1981, and May 1982 through
July 1985; Chairman of the Board of Realty Investment Company, Inc. (private
real estate investment company) since 1965. Director: Choice Hotels
International, Inc. (until July 1998), and Sunburst Hospitality Corporation.
Regina E. Herzlinger. (54) Served as a Director of Manor Care since 1992.
---------------------
Nancy R. McPherson Professor of Business Administration, Harvard Business
School, since 1971. Director: C. R. Bard, Inc., Deere & Company, Cardinal
Health, Inc., Schering-Plough Corporation and Total Renal Care, Inc.
William H. Longfield. (60) Served as a Director of Manor Care since 1989.
---------------------
Chairman and Chief Executive Officer of C. R. Bard, Inc. (medical devices) since
September 1995; President and Chief Executive Officer from June 1994 to
September 1995; President and Chief Operating Officer of C. R. Bard, Inc. from
September 1991 to June 1994; Executive Vice President and Chief Operating
Officer of C. R. Bard, Inc. from February 1989 to September 1991. Director: C.
R. Bard, Inc., Horizon Health Corporation, United Dental Care, Inc., and The
West Company.
Frederic V. Malek. (61) Served as a Director of Manor Care since 1990.
------------------
Chairman, Thayer Capital Partners since March 1993; Co-chairman of CB Commercial
Real Estate Group, Inc. since April 1989; Campaign Manager, Bush-Quayle '92
Campaign from January 1992 to December 1992; Vice Chairman of NWA, Inc.
(airlines) from July 1990 to December 1991. Director: American Management
Systems, Inc., Automatic Data Processing Corp., CB Richard Ellis Services, Inc.,
Choice Hotels International, Inc., FPL Group, Inc., Northwest Airlines, Inc.,
Sunburst Hospitality Corporation, and various Paine Webber mutual funds.
Jerry E. Robertson, Ph.D. (65) Served as a Director of Manor Care since
-------------------------
1989. Retired; Executive Vice President of 3M Life Sciences Sector and
Corporate Services from November 1984 to March 1994. Director: Allianz Life
Insurance Company of North America, Cardinal Health, Inc., Choice Hotels
International, Inc., Coherent, Inc., Haemonetics Corporation, Medwave, Inc., and
Steris Corporation.
51
Kennett L. Simmons. (56) Served as a Director of Manor Care since 1996.
-------------------
Private Investor; Chairman and Chief Executive Officer of the Metra Health
Companies from June 1994 to October 1995; Senior Advisor to E. M. Warburg,
Pincus & Co. from 1991 to 1994; Chairman and Chief Executive Officer of United
Healthcare Corporation from October 1987 to February 1991.
EXECUTIVE OFFICERS
The name, age, title, and business experience for the past five years of
each of the executive officers of Manor Care are set forth below. The business
address of each executive officer is 11555 Darnestown Road, Gaithersburg,
Maryland 20878-3200.
Stewart Bainum, Jr. (52) Chairman of the Board of Manor Care and MCHS
------------------
since March 1987; Chief Executive Officer of Manor Care since March 1987 and
President since June 1989; Chairman of the Board of Vitalink since February
1997; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995; Vice Chairman of the Board of Vitalink from
February 1995 to February 1997; Chairman of the Board of Choice Hotels
International, Inc. ("Choice") since October 1997; Chairman of the Board of
Sunburst Hospitality Corporation from November 1996 to July 1998.
Donald C. Tomasso. (53) Executive Vice President of Manor Care and
-----------------
President of MCHS from September 1996 through May 1998; President, Long-Term
Care Division, of MCHS from February 1995 to August 1996 and a Director of MCHS
from June 1991 through May 1998; President and Chief Operating Officer of MCHS
from May 1991 to February 1995; Chairman and Chief Executive Officer of Vitalink
from February 1995 to February 1997 and Vice Chairman from September 1991 to
February 1995.
James H. Rempe. (68) Senior Vice President, General Counsel and Secretary
--------------
of Manor Care since August 1981, of Choice and its predecessors from February
1981 to November 1996, and of MCHS since December 1980; Secretary of Vitalink
from January 1983 to January 1997.
Joseph R. Buckley. (50) Executive Vice President of Manor Care and MCHS
-----------------
since March 1996; President, Assisted Living Division, of MCHS from February
1995 to March 1996; Senior Vice President-Information Resources and Development
of Manor Care from June 1990 to February 1995; Chairman of the Board of In Home
Health, Inc. since June 1997.
Scott J. Van Hove. (41) Senior Vice President and Chief Administrative
-----------------
Officer of Manor Care since December 1995; Executive Vice President, Operations
of MCHS since February 1997; Senior Vice President of MCHS from December 1995 to
January 1997; Vice President of Operations, of Manor Care from March 1990 to
December 1995.
Wolfgang von Maack. (58) President and Chief Executive Officer of In Home
------------------
Health, Inc. since May 1997; and Senior Vice President, Healthcare Services of
MCHS since June 1990.
52
Leigh C. Comas. (32) Vice President, Finance and Treasurer of Manor Care
--------------
and MCHS since September 1996; Vice President, Finance and Assistant Treasurer
of Manor Care from September 1995 to September 1996; Assistant Treasurer of
Manor Care and MCHS from September 1993 to September 1995.
Margarita A. Schoendorfer. (49) Vice President-Controller of Manor Care
-------------------------
and MCHS since November 1990; Vice President-Controller of Choice from November
1990 to November 1996.
Stewart Bainum, Jr. is Stewart Bainum's son. Aside from the foregoing, no
director or executive officer has any family relationship with any other
director or executive officer of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") requires the Company's reporting officers and directors, and
persons who own more than ten percent of the Company's Common Stock, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Securities and Exchange Commission (the "Commission"), the New York Stock
Exchange and the Company. Based solely on the Company's review of the forms
filed with the Commission and representations from reporting persons, the
Company believes that all of its reporting officers, directors and greater than
ten percent beneficial owners complied with all filing requirements applicable
to them during the fiscal year ended May 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
- ------- ----------------------
The following table sets forth certain information concerning the annual and
long term compensation for services in all capacities to the Company for the
fiscal years ended May 31, 1998, 1997 and 1996, of the chief executive officer
and the four other most highly compensated executive officers in the Company's
employ on May 31, 1998.
53
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------------------------- ----------------------
Restricted
Stock Stock Option All Other
Name and Principal Position Year Salary Bonus Other Awards(#) Shares(#)(1) Compensation(2)
--------------------------- ---- -------- ------- ----- --------- ------------ ---------------
Stewart Bainum, Jr. 1998 $516,890 $305,792 (3) - 60,000 $30,267
Chairman, Chief 1997 568,062 340,827 (3) - 60,000 (4) 35,074
Executive Officer 1996 625,102 337,555 (3) - 60,000 (4) 33,543
Donald C. Tomasso 1998 447,799 241,543 (3) - 45,000 (5) 20,283
Executive Vice President 1997 428,002 235,401 (3) - 35,000 (6) 18,760
President, ManorCare Health 1996 400,005 145,602 (3) - 50,000 (7) 5,750
Services, Inc.
James H. Rempe 1998 293,592 140,038 (3) - 27,000 17,706
Senior Vice President, 1997 281,507 140,754 (3) $271,250 15,000 (8) 16,727
General Counsel and Secretary 1996 269,048 121,072 (3) - 15,000 (9) 15,969
Joseph R. Buckley 1998 273,000 147,256 (3) - 30,000 16,147
Executive Vice President 1997 255,154 140,335 (3) - 20,000 (10) 15,466
1996 233,617 69,209 (3) - 30,000 (11) 13,406
Scott Van Hove 1998 263,501 128,378 (3) - 25,000 15,595
Senior Vice President and 1997 240,192 116,753 (3) - 50,000 (12) 14,542
Chief Administrative Officer 1996 210,310 89,754 (3) - 40,000 (13) 8,690
Executive Vice President-Operations,
ManorCare Health Services, Inc.
- -----------------------------------------------
(1) On November 1, 1996, the Company distributed the shares of its wholly-owned
subsidiary, Choice Hotels International, Inc. ("Choice"), to its
shareholders via a tax-free spin-off (the "Choice Spin-off"). In connection
with the Choice Spin-off, outstanding options to purchase Company Common
Stock were converted into options to purchase Company Common Stock and
options to purchase Choice common stock. In all cases, however, the
exercise prices of the converted options were adjusted to maintain the same
financial value to option holder before and after the Choice Spin-off.
(2) Represents amounts contributed by the Company for fiscal 1998, 1997 and
1996 for the five individuals named in the above Summary Compensation Table
(the "Named Officers") under the the Company's 401(k) Plan and Nonqualified
Retirement Savings and Investment Plan, which provide retirement and other
benefits to eligible employees, including the Named Officers. Amounts
contributed in cash or stock by the Company during fiscal 1998 under the
401(k) Plan for the Named Officers were as follows: Mr. Bainum, Jr. $9,500;
Mr. Tomasso, $7,125; Mr. Buckley, $8,089; Mr. Rempe, $8,853 and Mr. Van
Hove, $7,812. Amounts contributed in cash or stock by the Company during
fiscal 1998 under the Nonqualified Savings and Investment Plan for the
Named Officers were as follows: Mr. Bainum, $20,767; Mr. Tomasso, $13,158;
Mr. Buckley, $8,058; Mr. Rempe, $8,853; and Mr. Van Hove, $7,783.
(3) The value of perquisites and other compensation does not exceed the lesser
of $50,000 or 10% of the amount of annual salary and bonus paid as to any
of the Named Officers.
(4) In connection with the Choice Spin-off, these options were converted on a
pro rata basis into options to purchase Company Common Stock and options to
purchase Choice common stock.
54
(5) A total of 18,000 of these options were subsequently canceled in connection
with Mr. Tomasso's resignation which became effective on May 31, 1998.
(6) In connection with the Choice Spin-off, these options were converted into
options to purchase 55,272 shares of Company Common Stock at an adjusted
exercise price of $25.0505 per share, 11,054 of which were subsequently
canceled in connection with Mr. Tomasso's resignation which became
effective on May 31, 1998.
(7) In connection with the Choice Spin-off, these options were converted into
options to purchase 74,617 shares of Company Common stock at an adjusted
exercise price of $19.1932 per share and 7,500 shares of Choice common
stock at an adjusted exercise price of $11.1168.
(8) In connection with the Choice Spin-off, these options were converted into
options to purchase 20,430 shares of Company Common stock at an adjusted
exercise price of $25.0505 per share and 5,625 shares of Choice common
stock at an adjusted exercise price of $14.5095.
(9) In connection with the Choice Spin-off, these options were converted into
options to purchase 19,036 shares of Company Common stock at an adjusted
exercise price of $19.1932 per share and 7,568 shares of Choice common
stock at an adjusted exercise price of $11.1168.
(10) In connection with the Choice Spin-off, these options were converted into
options to purchase 27,239 shares of Company Common stock at an adjusted
exercise price of $25.0505 per share and 7,500 shares of Choice common
stock at an adjusted exercise price of $14.5095.
(11) In connection with the Choice Spin-off, these options were converted into
options to purchase 39,557 shares of Company Common stock at an adjusted
exercise price of $19.1932 per share and 13,500 shares of Choice common
stock at an adjusted exercise price of $11.1168.
(12) In connection with the Choice Spin-off, 25,000 of these options were
converted into options to purchase 39,480 shares of Company Common stock at
an adjusted exercise price of $25.0505 per share.
(13) In connection with the Choice Spin-off, these options were converted into
options to purchase 37,309 shares and 22,385 shares of Company Common stock
at an adjusted exercise price of $21.4918 and $19.1932, respectively, per
share and 3,750 shares and 2,250 shares of Choice common stock at adjusted
exercise prices of $12.4482 and $11.1168, respectively, per share.
The following tables set forth certain information as of May 31, 1998, and
for the fiscal year then ended concerning stock options granted to the Named
Officers. All Common Stock figures and exercise prices have been adjusted to
reflect stock dividends and stock splits effective in prior fiscal years. In
connection with the Choice Spin-off, existing options to purchase Company Common
Stock were converted into options to purchase Company Common Stock and Choice
common stock.
55
STOCK OPTION GRANTS IN FISCAL 1998
Potential Realizable Value at
Assumed Annual Rate of
Stock Price Appreciation for
Individual Grants Option Term (1)
-------------------------------------------------------- -------------------------
Percentage of
Total Options
Number of Granted to all Exercise
Options Employees in Base Price Expiration
Name Granted Fiscal 1998 Per Share Date 5%(2) 10%(3)
- ------------------------- -------------- ----------- --------- ---------- ---------- ----------
Stewart Bainum, Jr.(4) 60,000 7.9% $32.19 6/23/07 $1,214,400 $3,078,000
Donald C. Tomasso(4)(5) 45,000 5.9% $32.19 6/23/07 $ 546,480 $1,385,100
James H. Rempe(4) 27,000 3.5% $32.19 6/23/07 $ 546,480 $1,385,100
Joseph R. Buckley(4) 30,000 3.9% $32.19 6/23/07 $ 607,200 $1,539,000
Scott Van Hove(4) 25,000 3.3% $32.19 6/23/07 $ 506,000 $1,282,500
- --------------------------------------
(1) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast future possible appreciation, if
any, of the Company's stock price. Since options are granted at market
price, a zero percent gain in the stock price will result in no realizable
value to the optionees.
(2) A 5% per year appreciation in stock price from $32.19 per share yields
$52.43 per share.
(3) A 10% per year appreciation in stock price from $32.19 per share yields
$83.49 per share.
.
(4) The options granted to the officers vest at the rate of 20% per year
commencing on the first through the fifth anniversary of the date of the
stock option grant.
(5) A total of 18,000 of these options were subsequently canceled in connection
with Mr. Tomasso's resignation from the Company which became effective on
May 31, 1998.
56
AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND YEAR-END OPTION VALUES
Shares Number of Unexercised Value of
Acquired Value Options at May 31, 1998 Unexercised in-the-money
on Exercise Realized Exercisable Unexercisable Options at May 31, 1998 (1)
----------- ---------- --------------------------- ---------------------------
# $ # # Exercisable Unexercisable
----------- ---------- ----------- ------------ ----------- -------------
Stewart Bainum, Jr. 110,000 $3,079,427 128,000 217,000 $2,482,627 $2,218,626
Donald C. Tomasso -- -- 181,782 210,981 3,483,260 2,805,868
James H. Rempe 27,454 504,279 24,510 80,752 495,768 793,838
Joseph R. Buckley 11,250 302,255 121,701 116,932 2,699,248 1,260,110
Scott Van Hove 600 16,341 117,618 180,818 2,258,039 2,106,396
____________________
(1) The closing price of the Company's Common Stock as reported by the New York
Stock Exchange on May 29, 1998, was $31.5625. The value of the options is
calculated on the basis of the difference between the option exercise price
and such closing price multiplied by the number of shares of Common Stock
underlying the option.
EMPLOYMENT AGREEMENTS
Certain officers (the "Manor Care Executives") of Manor Care, including two
of its named executive officers (Joseph R. Buckley and James H. Rempe) have
entered into employment agreements with Manor Care and Health Care & Retirement
Corporation ("HCR") (the "Manor Care Employment Agreements") pursuant to which
they are entitled to receive their base salaries and to participate in Manor
Care's annual bonus program. Pursuant to the Manor Care Employment Agreements,
a Manor Care Executive is entitled to certain benefits if Manor Care terminates
the Manor Care Executive's employment without Cause or if the Manor Care
Executive terminates employment for Good Reason. Such benefits generally
include a lump sum payment of two times the sum of the Manor Care Executive's
base salary, maximum bonus opportunity and car allowance; a pro rata portion of
the maximum annual bonus for the year of termination of employment; benefits to
reflect continued coverage under certain Manor Care benefit programs for a
period of time; outplacement assistance; and, in the case of certain Manor Care
Executives (including one named executive officer), subject to certain
limitations, if any of these benefits are subject to the federal excise tax on
"excess parachute payments", a gross-up payment designed to put the Manor Care
Executive in the same after-tax position as if the excise tax and any related
interest and penalties had not been imposed (a "Manor Care Gross-Up Payment").
"Cause" means (i) a Manor Care Executive's willfully engaging in conduct which
is materially and demonstrably injurious to Manor Care, or (ii) a Manor Care
Executive's willfully engaging in an act or acts of dishonesty resulting in
material personal gain at the expense of Manor Care. "Good Reason" means (i) a
significant reduction in the scope of a Manor Care Executive's authority,
position, title, functions, duties or
57
responsibilities, (ii) the relocation of a Manor Care Executive's office
location to a location more than 25 miles away from Manor Care's corporate
offices in Gaithersburg, Maryland, (iii) any reduction in a Manor Care
Executive's base salary, (iv) a significant change in Manor Care's annual bonus
program adversely affecting a Manor Care Executive, or (v) a significant
reduction in the other Manor Care Executive benefits provided to a Manor Care
Executive. If a Manor Care Executive remains in employment with Manor Care until
December 31, 1998 (or is terminated without Cause or terminates with Good Reason
before that date), such Manor Care Executive will be entitled to receive, within
30 days thereafter, in a lump sum, a special bonus in an amount equal to the sum
of (i) his or her annual rate of base salary on December 31, 1998 (or at earlier
termination of employment), (ii) the maximum bonus that such Manor Care
Executive could receive under Manor Care's annual bonus program for Manor Care's
fiscal year ending May 31, 1999 (or the fiscal year of termination of
employment), and (iii) such Manor Care Executive's car allowance for the fiscal
year ending May 31, 1999 (or the fiscal year of termination of employment). One
of the executive officers has certain additional benefits under an employment
agreement previously entered into with Manor Care, including country or lunch
club dues, payment of his share of employment taxes on certain supplemental
retirement benefits (grossed up for taxes thereon), security for the payment of
nonqualified deferred compensation benefits upon termination of employment (plus
a gross-up payment for any accelerated taxes), and accelerated vesting of
restricted stock upon termination of employment (other than by Manor Care for
Cause or by him without Good Reason). If Messrs. Buckley and Rempe were each
terminated immediately upon the Merger, they would receive $999,930 and
$1,059,588, respectively, without giving effect to any Manor Care Gross-Up
Payment.
Manor Care and HCR have entered into a Retention Agreement and a
Noncompetition Agreement with Stewart Bainum, Jr. dated as of June 10, 1998.
Pursuant to the Retention Agreement, Mr. Bainum, Jr. is entitled to a stay bonus
of $838,724 if he remains in employment with Manor Care until December 31, 1998
or if he is terminated without Cause or terminates for Good Reason before that
date. "Cause" and "Good Reason" are defined as described above, except that a
change in Mr. Bainum, Jr.'s position from Chairman of the Board, President, and
Chief Executive Officer to Special Consultant to HCR Manor Care effective as of
the effective time of the merger of Manor Care and a subsidiary of HCR (the
"Effective Time") will not constitute Good Reason. Under the Retention
Agreement, Mr. Bainum, Jr. is also entitled, upon termination of employment by
Manor Care without Cause or by Mr. Bainum, Jr. for Good Reason, to a pro rata
portion of the maximum annual bonus for the year of termination of employment
and additional benefits under Manor Care's supplemental executive retirement
plan and nonqualified retirement savings and investment plan designed to reflect
continued coverage under those plans for a period of two years (or, if greater,
the period from termination of employment until June 9, 2001). Pursuant to the
Noncompetition Agreement, Mr. Bainum, Jr. agrees not to accept a position with a
competitor in the skilled nursing, assisted living, institutional pharmacy
and/or home health care industry or induce employees of Manor Care or HCR Manor
Care to leave employment on behalf of a competitor for the period beginning on
June 10, 1998 and continuing for a period of two years following termination of
Mr. Bainum, Jr.'s employment (or, if later, until June 9, 2001). In exchange for
Mr. Bainum, Jr.'s agreement to those terms, he will receive pursuant to the
Noncompetition Agreement a lump sum payment within 30 days after consummation of
the merger in an amount equal to two (or, if greater, the number of years and
portions thereof from termination of employment to June 9, 2001) times the sum
of $840,000. HCR has entered into a Chairman's Service Agreement with Mr.
Bainum, Jr., the current Chairman, President, and Chief Executive Officer of
Manor Care, pursuant to which Mr. Bainum, Jr. will serve as Chairman of the
Board of HCR Manor Care for the period beginning as of the Effective Time of the
merger
58
and continuing until the third anniversary thereof or until such earlier date as
determined by the Board of Directors consistent with their fiduciary duties.
Under this agreement, Mr. Bainum, Jr. will receive, commencing as of the
Effective Time, fees at the same rate as other directors of HCR Manor Care;
certain insurance and other benefits; and other benefits generally available to
HCR Manor Care directors.
SEVERANCE ARRANGEMENTS
Manor Care adopted the Manor Care Severance Plan for Selected Employees on
June 1, 1998 covering certain designated employees not covered by Manor Care
Employment Agreements. Under this Plan, a covered employee is entitled to
certain benefits if Manor Care terminates the employee's employment without
Cause or if the employee terminates employment for Good Reason. ("Cause" and
"Good Reason" are defined in the same manner as in the Manor Care Employment
Agreements described above.) Such benefits include a lump sum payment of one-
half, one or two times the sum of the employee's base salary, maximum bonus
opportunity and car allowance; a pro rata portion of the maximum annual bonus
for the year of termination of employment; benefits to reflect continued
coverage under certain Manor Care benefit programs for a period of time;
outplacement assistance; and, in the case of one covered employee and subject to
certain limitations, if any of these benefits are subject to the federal excise
tax on "excess parachute payments", a gross-up payment designed to put the
employee in the same after-tax position as if the excise tax and related
interest and penalties had not been imposed.
On June 4, 1998, Manor Care entered into an agreement with Donald C. Tomasso
in connection with the termination of Mr. Tomasso's employment with the Company
which became effective on May 31, 1998. Pursuant to this agreement, the Company
agreed to pay Mr. Tomasso his base salary in effect as of May 31, 1998 ($447,799
per year) for a period of 18 months, commencing June 1, 1998. In addition, the
Company agreed to continue to provide Mr. Tomasso with a car allowance and
country club dues allowance during the severance period.
RETIREMENT PLANS
In February 1985, the Board of Directors adopted the Supplemental Executive
Retirement Plan (the "SERP"). Participants are selected by the Board and are at
the level of Senior Vice President or above. A total of six officers of the
Company, including all of the Named Officers, have been selected to participate
in the SERP.
Participants in the SERP will receive a monthly benefit for life based upon
final average salary and years of service. Final average salary is the average
of the monthly base salary, excluding bonuses or commissions, earned in a 60
month period out of the 120 months of employment, which produces the highest
average, prior to the first occurring of the early retirement date or the normal
retirement date. The normal retirement age is 65, and participants must have a
minimum of 15 years of service. Participants may retire at age 60 and may elect
to receive reduced benefits commencing prior to age 65, each subject to Board
approval. All of the Named Officers who are participants, except for Mr. Rempe,
are age 55 or younger, so that none of their compensation reported above would
be included in the final average salary calculation.
59
Assuming that the following officers continue to be employed by the Company
until they reach age 65, their credited years of service would be as follows:
Current Years Years of Service
Name of Individual of Service at Age 65
- ------------------ ------------- ----------------
Stewart Bainum, Jr. 24.5 38
Joseph R. Buckley 18 33
Scott Van Hove 11 35
The table below sets forth estimated annual benefits payable upon retirement
to persons in specified compensation and years of service classifications. These
benefits are straight life annuity amounts, although participants have the
option of selecting a joint and 50% survivor annuity or ten-year certain
payments. The benefits are not subject to offset for Social Security and other
amounts.
Years of Service/Benefit as
Percentage of Final Average Salary
------------------------------------
25 or
Remuneration 15/15% 20/22.5% more/30%
------------ ------ -------- --------
$300,000 $45,000 $ 67,500 $ 90,000
350,000 52,500 78,750 105,000
400,000 60,000 90,000 120,000
450,000 67,500 101,250 135,000
500,000 75,000 112,500 150,000
600,000 90,000 135,000 180,000
Effective January 1, 1992, the Company established the Manor Care, Inc.
Retirement Savings and Investment Plan (the "401(k) Plan"), a defined
contribution retirement, savings and investment plan for its employees and the
employees of its participating affiliated companies. The 401(k) Plan is
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and includes a cash or deferred arrangement under Section 401(k)
of the Code. All employees age 21 or over and who have worked for the Company
for a twelve month period during which such employee completed at least 1,000
hours are eligible to participate. Subject to certain non-discrimination
requirements, each employee may contribute an amount to the 401(k) Plan on a
pre-tax basis up to 15% of the employee's salary, but not more than the current
federal limit of $10,000. The Company will match contributions made by its
employees subject to certain limitations described in greater detail below. The
amount of the match will be equal to a percentage of the amount of salary
reduction contribution made on behalf of a participant during the plan year
based upon a formula that involves the profits of the Company for the year and
the number of years of service of the participant. In no event will the Company
make a matching contribution which exceeds 6% of a participant's salary. Amounts
contributed by the Company pursuant to the 401(k) Plan for the Named Officers
for the three fiscal years ended May 31, 1998, 1997 and 1996 are included in the
Summary Compensation Table under the column headed "All Other Compensation".
60
Effective January 1, 1992, the Company adopted the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan (the "Nonqualified Savings
Plan"). Certain select highly compensated members of management of the Company
are eligible to participate in the Nonqualified Savings Plan. The Nonqualified
Savings Plan mirrors the provisions of the 401(k) Plan, to the extent feasible,
and is intended to provide the participants with a pre-tax savings vehicle to
the extent that pre-tax savings are limited under the 401(k) Plan as a result of
various governmental regulations, such as non-discrimination testing. All of the
Named Officers have elected to participate in the Nonqualified Savings Plan.
Amounts contributed by the Company under the Nonqualified Savings Plan for
fiscal years ended May 31, 1998, 1997 and 1996 for the Named Officers are
included in the Summary Compensation Table under the column headed "All Other
Compensation."
The Company match under the 401(k) Plan and the Nonqualified Savings Plan is
limited to a maximum aggregate of 6% of the annual salary of a participant.
Prior to January 1, 1997, participants were given the right to elect to receive
the Company matching contribution either in Company stock or cash or a
combination. After January 1, 1997, the Company matching contribution has been
made only in Company Stock. Participant contributions under the two plans may
not exceed the aggregate of 15% of the annual salary of a participant.
Effective January 1, 1992, the Company adopted a non-contributory Cash
Accumulation Retirement Plan (the "CARP") maintained by the Company for its
employees and those employees of its participating affiliated companies. The
CARP is qualified under Section 401(a) of the Code. All employees age 21 or over
and who have worked for the Company for a twelve month period during which such
employee completed at least 1,000 hours are automatically members of the CARP.
Each year the account of each employee is adjusted to reflect interest at a rate
calculated in accordance with the CARP. Amounts accrued under the CARP become
fully vested after five years of service. On July 2, 1996, the Board of
Directors voted to not allow any new participants in the CARP after August 15,
1996, and to discontinue the annual benefit accrual by the Company after
December 31, 1996. However, the interest will continue on the balance of a
participating employee's account. Until December 31, 1996, the annual benefit
accrual was made by the Company based on salary as follows:
Base Percentage Base Percentage Base Percentage
If Age Plus Service If Age Plus Service If Age Plus Service
Annual Salary Is Less Than 45 Is 45 to 54 Is 55 or More
- ------------- --------------- ------------------- -------------------
First $12,000........................... 3% 3.5% 4%
Next $6,000............................. 2% 2.5% 3%
Additional Compensation up to $100,000.. 1% 1.5% 2%
Directors who are full-time employees of the Company receive no separate
remuneration for their services as directors. Beginning in fiscal year 1997, the
remuneration of all non-employee directors for Board meetings attended is a
grant of restricted stock, the fair market value of which is equal to $30,000,
pursuant to the Manor Care, Inc. Non-Employee Director Stock Compensation Plan.
Non-employee directors also receive $1,610 per diem for Committee meetings
attended, except where the Committee meeting is on the same day as a Board
meeting. In addition, directors are also reimbursed for travel expenses and
other out-of-pocket costs incurred in attending meetings.
61
The purpose of the Non-Employee Director Stock Compensation Plan is to
encourage stock ownership by directors and to further align the interests of
directors and stockholders.
Pursuant to the Manor Care, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan, approved by the stockholders on
September 9, 1994 ("1994 Plan"), eligible non-employee directors may elect,
prior to May 31 of each year, to defer a minimum of 25% of committee fees earned
during the ensuing fiscal year. The fees which are so deferred will be used to
purchase Common Stock on the open market within 15 days after December 1,
February 28 and May 31 of such fiscal year. Pending such purchases, the funds
are credited to an Interest Deferred Account, which will be interest bearing.
Stock which is so purchased is deposited in a Stock Deferred Account pending
distribution in accordance with the Plan. Two of the incumbent Directors
(Messrs. Longfield and Malek) have elected to participate in the 1994 Plan for
the 1999 fiscal year. The amount of compensation that will accrue to such
participating directors is not currently determinable.
In addition, pursuant to the 1994 Plan, eligible non-employee directors will
be granted options to purchase 5,000 shares of Common Stock on their date of
initial election and will be granted options to purchase 1,000 shares on the
date of election in subsequent calendar years. Pursuant to the 1994 Plan, on
September 15, 1997, each non-employee director was granted options to purchase
1,000 shares of Common Stock for $33.88 per share.
COMPENSATION/KEY EXECUTIVE STOCK OPTION PLAN COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The compensation philosophy of Manor Care, Inc. (the "Company") is to be
competitive with the leading service companies and selected direct competitors
in the marketplace, to attract, retain and motivate a highly qualified
workforce, and to provide career opportunities. The Company uses various
compensation surveys, primarily conducted and evaluated by independent
consultants, to provide data to support the development of competitive
compensation plans which reinforce this philosophy. Summary data on service
companies of similar size participating in each survey are utilized as the basis
for the evaluations along with comparable data from peer group companies. This
is the same philosophy applied by the Compensation/Key Executive Stock Option
Plan Committee and the Compensation/Key Executive Stock Option Plan Committee
No. 2 ("Committee No. 2") of the Board of Directors (collectively, the
"Committee") in determining compensation for the CEO and executive officers. In
evaluating the CEO's performance, the Committee, in addition to financial
performance, considers factors important to the Company such as ethical business
conduct, progress against the Company's strategic plan objectives, management
succession planning, customer service satisfaction and the general overall
perception of the Company by financial leaders and customers.
The Committee is responsible for setting and administering the policies
which govern executive compensation and the stock based programs of the Company.
The members of the Committee are Messrs. Robertson (Chairman), Bainum (not a
member of Committee No. 2), Longfield (not a member of Committee No. 2) and
Malek. Mr. Bainum served as Chairman and CEO of the Company prior to March
1987.
62
Compensation of the Company's officers is reviewed annually by the
Committee. Changes proposed for these employees are evaluated and approved by
the Committee on an individual basis.
There are three components in the Company's executive compensation program:
1. Base salary
2. Cash bonus
3. Long-term incentive compensation
The Committee continues to believe that compensation for the CEO and other
executive officers should be weighted in favor of more "pay at risk" or
"variable pay."
BASE SALARY
Base salary is the only component that is not variable. Scope and complexity
of the position as well as external market factors are used to determine base
salary levels. The base salary practice is to target pay at the 55th percentile
of the market range among the comparison group. Salary changes are based on
guidelines established for all employees using individual performance to
determine the change. Mr. Bainum, Jr.'s base salary paid in fiscal 1998 is shown
under the heading "Salary" in the Summary Compensation Table.
CASH BONUS
Awards under the Annual Cash Bonus Program for fiscal year 1998 were based
on certain performance measurements consisting of return on beginning equity,
business unit quality revenue and profit and customer satisfaction surveys of
the business unit. These measurements were used to focus management's attention
on customer services, financial results, profits and the effective use of
Company assets. For fiscal year 1998, the performance measurements were met or
exceeded.
LONG-TERM INCENTIVE COMPENSATION
Long-term compensation has been established to:
a. Focus attention on the Company's and stockholders' long term goals;
b. Increase ownership and retention in the Company's stock.
The Manor Care, Inc. 1995 Long-Term Incentive Plan ("Long-Term Incentive
Plan") provides the Committee with the discretion to grant Restricted Shares,
Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights
or Performance Shares as it may determine to be desirable in order to recruit
and retain management and to focus the optionees on the long term goals of the
Company to be more closely aligned with the interests of stockholders. In July
1996, the Compensation Committee reviewed and approved a Stock Option Guidechart
to be used to determine stock option awards for executives. The Stock Option
Guidechart utilized a market based salary multiple based on performance of the
Company.
63
The Committee believes the Company has an overall compensation plan which
fulfills current Company philosophy and, in addition, promotes increased
stockholder value through performance-based compensation.
EXECUTIVE STOCK OWNERSHIP PROGRAM
Effective June 1, 1995, the Company established an Executive Stock Ownership
program for the Chairman and the officers who report directly to the Chairman.
The program requires the relevant officers to own qualifying Common Stock as a
condition of employment in order to ensure a direct relationship between such
executives and the stockholders. The relevant officers will be required to reach
and maintain ownership of a specified amount of Common Stock within five years
from the effective date of the program, or upon the fifth anniversary of
employment as Chairman or a direct report officer, whichever is later. The
amount of shares of Common Stock required to be owned by each officer is
determined by the beginning base salary times a multiple which varies from 2.5
to 6 depending upon the level of responsibility of the particular officer.
IMPACT OF INTERNAL REVENUE CODE SECTION 162(M)
The Omnibus Budget Reconciliation Act of 1993 disallows, effective January
1, 1994, a federal income tax deduction for compensation, other than certain
performance-based compensation, in excess of $1 million annually paid by the
Company to any currently serving Named Officer identified in the Summary
Compensation Table. Stock option awards under the Key Executive Stock Option
Plan of 1969, which expired in 1993, and under the Key Executive Stock Option
Plan of 1993, which has been terminated, qualify as performance-based
compensation and are exempt from consideration for purposes of calculating the
$1 million limit. With respect to the 1995 Long-Term Incentive Plan, appropriate
steps have been and will continue to be taken to qualify awards made thereunder
as performance-based compensation which are exempt from consideration for
purposes of calculating the $1 million limit. No individual named in the Summary
Compensation Table is likely to receive compensation, not including performance-
based compensation, in fiscal 1999 which would be in excess of $1 million. The
Committee intends to monitor the Company's compensation programs with respect to
such laws.
COMPENSATION/KEY EXECUTIVE STOCK OPTION PLAN COMMITTEE
Jerry E. Robertson, Ph.D., Chairman
Stewart Bainum (not a member of Committee No. 2)
William H. Longfield (not a member of Committee No. 2)
Frederic V. Malek
64
PERFORMANCE GRAPH-STOCKHOLDER RETURN
The following graph compares the yearly percentage change in the cumulative
total stockholder return on the Company's Common Stock against the cumulative
total return on the S&P Composite-500 Stock Index and a peer group selected by
the Company for the five fiscal years ended May 31, 1998, assuming reinvestment
of dividends.
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG MANOR CARE, INC., S&P 500 AND PEER GROUP
[GRAPH APPEARS HERE]
Assumes $100 invested on June 1, 1993 in the Common Stock of Manor
Care, Inc., the S&P500 Index and Peer Group Companies (weighted by
market capitalization). Total return assumes reinvestment of
dividends.
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
Manor Care, Inc. 100 122 139 185 215 237
S&P 500 100 104 125 161 208 272
Peer Group (Weighted Average) 100 126 134 161 183 192
65
The Peer Group consists of eight other companies involved in the Company's
lines of business. Seven of the companies are involved in ownership and
operation of nursing homes: Beverly Enterprises, Inc., Integrated Health
Services, Inc., Mariner Health Group, Inc., National HealthCare, L.P., Paragon
Health Network, Inc., Sun Healthcare Group, Inc. and Vencor, Inc. One company,
Omnicare, Inc., is involved in the institutional pharmacy business. Paragon
Health Network, Inc., an owner and operator of nursing homes, has replaced
GranCare Inc., which was in the Peer Group last year, due to the acquisition of
GranCare Inc. by Paragon Health Network, Inc. in October 1997. Horizon/CMS
Healthcare Corp. and Regency Health Services, which were in the Peer Group last
year, were excluded this year because they were acquired in October 1997.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- --------------------------------------------------------------
The following table sets forth as of August 10, 1998 the amount of the
Company's Common Stock beneficially owned by (1) each director and nominee, (2)
the chief executive officer and the four other most highly compensated executive
officers, (3) all such executive officers and directors as a group, and (4) all
persons who own beneficially more than 5% of the Company's Common Stock. Unless
otherwise specified, the address for each of them is 11555 Darnestown Road,
Gaithersburg, Maryland 20878.
Percent
Name of Beneficial Owner Total of Class(1)
------------------------ --------------- -----------
Stewart Bainum 10,174,503 (2) 15.59%
Stewart Bainum, Jr. 15,346,903 (3) 23.52%
Regina E. Herzlinger 13,929 (4) *
William H. Longfield 13,910 (5) *
Frederic V. Malek 8,984 (6) *
Jerry E. Robertson 24,783 (7) *
Kennett L. Simmons 4,837 (8) *
Donald C. Tomasso 225,714 (9) *
Joseph R. Buckley 143,078 (10) *
James H. Rempe 89,191 (11) *
Scott J. Van Hove 157,714 (12) *
All Directors and Officers
as a Group (11 persons) 20,632,014 (13) 31.62%
Ronald Baron 12,794,486 (14) 19.61%
Barbara Bainum 5,524,815 (15) 8.47%
Bruce Bainum 5,521,302 (15) 8.46%
________________________
* Less than 1% of class.
(1) Percentages are based on 63,720,035 shares outstanding on August 10, 1998
plus shares which would be issued upon the exercise of all options which are
exercisable within 60 days thereafter.
66
(2) Includes 3,717,542 shares held directly or indirectly by the Stewart Bainum
Declaration of Trust, the sole trustee of which is Mr. Bainum (the "SB
Trust"); 904,473 shares owned by Bainum Associates Limited Partnership
("Bainum Associates"), and 1,099,190 shares owned by MC Investments Limited
Partnership ("MC Investments"), each of which is a limited partnership in
which the SB Trust is a limited partner and as such has the right to
acquire at any time a number of shares equal in value to the liquidation
preference of its limited partnership interest; 3,567,869 shares owned by
Realty Investment Company, Inc. ("Realty Investment"), a real estate
investment and management company in which Mr. Bainum and his wife have
shared voting authority with other family members; and 79,305 shares held
by the Commonweal Foundation of which Mr. Bainum is Chairman of the Board
of Directors and has shared voting authority; 798,711 shares held by the
Jane L. Bainum Declaration of Trust, the sole trustee of which is Mr.
Bainum's wife; and 5,999 shares which Mr. Bainum has the right to acquire
pursuant to stock options which are exercisable within 60 days after August
10, 1998.
(3) Includes 5,417,761 shares owned by Bainum Associates and 4,415,250 shares
owned by MC Investments, in both of which the Stewart Bainum, Jr.
Declaration of Trust, the sole trustee of which is Stewart Bainum, Jr. (the
"SB, Jr. Trust"), is managing general partner with the sole right to
dispose of the shares. Authority to vote such shares is held by the voting
general partner, Mr. B. Houston McCeney. Also includes 1,779,628 shares
owned by Mid-Pines Associates, L.P. ("Mid-Pines"), in which the SB, Jr.
Trust is managing general partner and has shared voting authority;
3,567,869 shares held by Realty Investment in which the SB, Jr. Trust has
shared voting authority; and 164,000 shares which Mr. Bainum, Jr. has the
right to acquire pursuant to stock options which are exercisable within 60
days after August 10, 1998.
(4) Includes 6,845 shares which Professor Herzlinger has the right to acquire
pursuant to stock options which are exercisable within 60 days after August
10, 1998. Also includes 200 shares held by Professor Herzlinger's spouse as
custodian for a minor.
(5) Includes 9,478 shares which Mr. Longfield has the right to acquire pursuant
to stock options which are exercisable within 60 days after August 10,
1998.
(6) Includes 5,999 shares which Mr. Malek has the right to acquire pursuant to
stock options which are exercisable within 60 days after August 10, 1998.
(7) Includes 13,500 shares held by the JJ Robertson Limited Partnership, of
which Mr. Robertson and his wife are the general partners with shared
voting authority; also includes 2,333 shares which Mr. Robertson has the
right to acquire pursuant to stock options which are exercisable within 60
days after August 10, 1998.
(8) Includes 3,159 shares which Mr. Simmons has the right to acquire pursuant
to stock options which are exercisable within 60 days after August 10,
1998.
(9) Includes 217,629 shares which Mr. Tomasso has the right to acquire pursuant
to stock options which are exercisable within 60 days after August 10,
1998.
(10) Includes 141,320 shares which Mr. Buckley has the right to acquire pursuant
to stock options which are exercisable within 60 days after August 10,
1998.
(11) Includes 38,082 shares which Mr. Rempe has the right to acquire pursuant to
stock options which are exercisable within 60 days after August 10, 1998.
(12) Includes 154,992 shares which Mr. Van Hove has the right to acquire
pursuant to stock options which are exercisable within 60 days after August
10, 1998.
(13) Includes a total of 749,836 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are exercisable within 60 days after August 10, 1998. A total of
5,571,532 shares are counted in the total number of shares beneficially
owned by both of Stewart Bainum and Stewart Bainum, Jr.; such shares are
only counted once for purposes of this item.
(14) Includes 1,033,620 shares as to which Mr. Baron has sole voting and
dispositive power, and 11,760,866 shares as to which Mr. Baron has shared
voting and dispositive power; 880,000 shares as to which Baron Capital
Group, Inc. ("BCG") has sole voting and dispositive power, and 11,760,866
shares as to which BCG has shared voting and dispositive power; 880,000
shares as to
67
which Baron Capital Management, Inc. ("BCM"), a registered investment
adviser, has sole voting and dispositive power, and 1,305,866 shares as to
which BCM has shared voting and dispositive power; 10,455,000 shares as to
which BAMCO, Inc., a registered investment adviser, has shared voting and
dispositive power; and 9,730,000 shares as to which Baron Asset Fund, an
investment company registered under the Investment Company Act of 1940, has
shared voting and dispositive power. The business address of Mr. Baron and
the foregoing entities is 767 Fifth Avenue, 24th Floor, New York, New York
10153. All of the foregoing information was reported in Amendment No. 11 to
Schedule 13D dated February 24, 1998 filed by Mr. Baron and the foregoing
entities.
(15) Includes 3,567,869 shares held by Realty Investment, 1,779,628 shares held
by Mid-Pines, and 79,305 shares held by the Commonweal Foundation, in each
of which Barbara Bainum and Bruce Bainum have shared voting authority.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
CHOICE/SUNBURST AGREEMENTS
On November 1, 1996, Manor Care spun off the shares of Choice Hotels
International, Inc. ("Old Choice"). In October 1997, Old Choice changed its name
to Sunburst Hospitality Corporation ("Sunburst") and spun off the shares of a
corporation now named Choice Hotels International, Inc. ("Choice"). In November
1996, Manor Care entered into certain agreements with Old Choice/Sunburst, which
agreements were amended in October 1997 to add Choice as an additional party
thereto and as a guarantor of certain obligations of Sunburst.
Stewart Bainum served as a director of Choice during the fiscal year ended
May 31, 1998 and is Chairman of the Board of Sunburst. Stewart Bainum, Jr. is
Chairman of the Board of Choice and served as Chairman of the Board of Sunburst
during the fiscal year ended May 31, 1998. Mr. Bainum and Mr. Bainum, Jr. each
own beneficially more than 10% of the outstanding common stock of both of Choice
and Sunburst.
LEASE AGREEMENTS
In connection with the spinoff by Manor Care of Sunburst, Manor Care and
Sunburst entered into a lease agreement (the "Silver Spring Lease") with respect
to the office complex in Silver Spring, Maryland at which Sunburst's principal
executive offices are located. Sunburst leases from Manor Care for a period of
30 months certain office space (approximately 38% of the complex initially, with
provisions to allow Sunburst to use additional square footage as needed) at a
monthly rental rate equal to one-twelfth of the operating expenses (as defined
therein) of the complex, net of third party rental income paid to Manor Care by
other tenants of the complex, less a pro rata portion of the operating expenses
attributable to the space occupied by Manor Care (initially approximately 29% of
the complex; 0% as of May 31, 1998). Operating expenses include all of the
costs associated with operating and maintaining the complex including, without
limitation, supplies and materials used to maintain the complex, wages and
salaries of employees who operate the complex, insurance for the complex, costs
of repairs and capital improvements to the complex, the fees of the property
manager (which may be Manor Care), costs and expenses associated with leasing
space at the complex and renovating space rented to tenants, costs of
environmental inspection, testing or cleanup, principal and interest payable on
indebtedness secured by mortgages against the complex, or any portion thereof,
and charges for utilities, taxes and facilities services.
68
Sunburst and Manor Care also entered into (i) a sublease agreement with
respect to certain office space in Gaithersburg, Maryland (the "Gaithersburg
Lease") pursuant to which Sunburst is obligated to rent from Manor Care, on
terms similar to the Silver Spring Lease, certain additional space as such space
becomes available during the 30 month period commencing November 1, 1996, and
(ii) a sublease agreement with respect to the Comfort Inn N.W., Pikesville,
Maryland, pursuant to which Sunburst subleases the property from Manor Care on
the same terms and conditions that govern Manor Care's rights and interests
under the lease relating to such property.
During the fiscal year ended May 31, 1998, Manor Care charged Sunburst a
total of approximately $5.05 million under the Silver Spring Lease and the
Gaithersburg Lease. Manor Care has now sold all three of the office buildings
covered by the Silver Spring Lease.
LOAN AGREEMENT
On November 1, 1996, Sunburst and a subsidiary of Manor Care entered into a
loan agreement governing the repayment by Sunburst of an aggregate of $225.7
million previously advanced by Manor Care to Sunburst. On April 23, 1997,
Sunburst prepaid approximately $110 million of the principal amount of the loan.
Sunburst made a yield maintenance payment of approximately $1.9 million to Manor
Care as a result of such prepayment. On October 15, 1997, Sunburst repaid the
entire outstanding balance of the loan (approximately $115.7 million).
CORPORATE SERVICES AGREEMENT
Sunburst, Choice and Manor Care entered into the Corporate Services Agreement
under which Manor Care provides certain corporate services, including
administrative, corporate travel, payroll, accounting, information technology,
telecommunications systems, and facilities services on a time and materials
and/or fixed fee basis. In the fiscal year ended May 31, 1998, Manor Care
charged Choice and Sunburst a total of approximately $1.7 million for such
services. In addition Manor Care provides certain consulting services to
Sunburst under the Corporate Services Agreement for a fixed annual fee of $1
million. The term of the Corporate Services Agreement runs until April 30, 1999,
provided that Sunburst or Choice may terminate any services provided thereunder,
other than the Consulting Services, at any time upon 60 days prior written
notice.
RISK MANAGEMENT CONSULTING SERVICES
Pursuant to the Risk Management Consulting Services Agreements between Manor
Care, Sunburst and Choice, Manor Care provided Sunburst and Choice with risk
management consulting services during the fiscal year ended May 31, 1998 for an
annual fee of $394,200 and $43,800, respectively. The term of each of the
agreements runs until April 30, 1999, provided that any party may terminate its
agreement at any time upon 60 days prior written notice.
TIME SHARING AGREEMENT
Manor Care, Sunburst and Choice were parties to a Time Sharing Agreement
pursuant to which Sunburst and Choice were entitled to lease Manor Care's
corporate aircraft. For fiscal year 1998, Sunburst
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and Choice paid a total of $204,981 for aircraft usage under the Time Sharing
Agreement. The term of the agreement runs until April 30, 1999, provided that
any party may terminate its obligations under the agreement at any time upon 60
days prior written notice. Manor Care terminated the Time Sharing Agreement with
respect to Sunburst in March 1998.
In the opinion of management, the foregoing transactions were on terms at
least as advantageous to the Company as could have been obtained from non-
affiliated persons.
In addition, during the fiscal year ended May 31, 1998, Manor Care purchased
from vendors, in connection with the Company's Employee Purchase Program, home
furnishings and other personal property with a net cost of approximately
$316,000 on behalf of Stewart Bainum, Jr. Mr. Bainum, Jr. reimbursed the Company
in full in May 1998, and, in accordance with Manor Care's standard policy, paid
an administrative fee to the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------- ----------------------------------------------------------------
(a) Financial Statement Schedules
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts
(b) Exhibits
2.1 - Amended and Restated Agreement and Plan of Merger among Manor
Care, Inc., Health Care and Retirement Corporation and Catera
Acquisition Corp.
3.1 - Articles of Incorporation, as amended. Exhibit 3.1 to Form 10-Q
for the quarter ended August 31, 1994 is incorporated herein by
reference.
3.2 - By-Laws, as amended. Exhibit 3.2 to Form 10-K for the year
ended May 31, 1988 is incorporated herein by reference.
4.1 - Indenture dated as of June 4, 1996 between Manor Care, Inc. and
Wilmington Trust Company, Trustee. Exhibit 4.1 to Form 8-K
dated June 4, 1996 is incorporated herein by reference.
70
4.2 - Supplemental Indentures dated as of June 4, 1996 between Manor
Care, Inc. and Wilmington Trust Company, Trustee. Exhibit 4.2
to Form 8-K dated June 4, 1996 is incorporated herein by
reference.
4.3 - Indenture dated as of November 22, 1996 between Manor Care,
Inc. and Chase Manhattan Bank. Exhibit 4.1 to Report on Form
8-K dated November 22, 1996 is incorporated herein by
reference.
4.4 - Rights Agreement, dated as of February 25, 1998, between Manor
Care, Inc. and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent (incorporated by reference to Exhibit 4.1 to Manor
Care's Report on Form 8-K filed March 12, 1998).
4.5 - Amendment to Rights Agreement between Manor Care, Inc. and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
dated June 10, 1998 (incorporated by reference to Exhibit 4.2
to Manor Care's Report on Form 8-K filed June 16, 1998).
10.1 - Supplemental Executive Retirement Plan. Exhibit 10.2 to Form
10-K for the year ended May 31, 1986 is incorporated herein by
reference.
10.2 - Form of Executive Cash Incentive Plan. Exhibit 10.2 to Form
10-K for the year ended May 31, 1995 is incorporated herein by
reference.
10.3 - Non-Employee Director Stock Option and Deferred Compensation
Stock Purchase Plan. Exhibit A to the Proxy Statement dated
August 10, 1994 is incorporated herein by reference.
10.4 - Long-Term Incentive Plan. Exhibit A to Proxy Statement dated
August 28, 1995 which is Exhibit 99 to Form 10-K for the year
ended May 31, 1995 is incorporated herein by reference.
10.5 - Non-Employee Director Stock Compensation Plan. Exhibit A to
Proxy Statement dated August 28, 1996 which is Exhibit 99 to
the Report on Form 10-K for the year ended May 31, 1997 is
incorporated herein by reference.
10.6 - Master Aircraft Lease Agreement dated September 1, 1994 between
Manor Care, Inc. and Wilderness Investment Company, Inc.
Exhibit 10.17 to Form 10-K for the year ended May 31, 1995 is
incorporated herein by reference.
10.7 - Lease dated as of August 30, 1995 between The Gaithersburg
Realty Trust and Manor Care, Inc. Exhibit 10.11 to Form 10-K
for the year ended May 31, 1996 is incorporated herein by
reference.
71
10.8 - Guarantee dated as of August 30, 1995 made by Manor Care, Inc.,
ManorCare Health Services, Inc., Choice Hotels International,
Inc., Quality Hotels Europe, Inc., Four Seasons Nursing Center,
Inc., MNR Financial Corp., Boulevard Motel Corp. and Chemical
Bank. Exhibit 10.12 to Form 10-K for the year ended May 31,
1996 is incorporated herein by reference.
10.9 - Loan Agreement dated as of November 1, 1996 between MNR Finance
Corp. and Choice Hotels International, Inc. Exhibit 2.6 to
Report on Form 8-K dated November 5, 1996 is incorporated
herein by reference.
10.10 - Amended and Restated Competitive Advance and Multi-Currency
Revolving Credit Facility Agreement dated as of November 30,
1994, as amended and restated as of September 6, 1996 between
Manor Care, Inc. and Chase Manhattan Bank. Exhibit 10.1 to the
Report on Form 8-K dated November 5, 1996 is incorporated
herein by reference.
10.11 - Manor Care Severance Plan for Selected Employees
10.12 - Noncompetition Agreement made as of June 10, 1998 among Manor
Care, HCR and Stewart Bainum, Jr.
10.13 - Retention Agreement made as of June 10, 1998 among Manor Care,
HCR and Stewart Bainum, Jr.
10.14 - Employment Agreement made as of June 10, 1998 among Manor Care,
HCR and Margarita A. Schoendorfer.
10.15 - Employment Agreement made as of June 10, 1998 among Manor Care,
HCR and Leigh C. Comas.
10.16 - Employment Agreement made as of June 10, 1998 among Manor Care,
HCR and Joseph R. Buckley.
10.17 - Employment Agreement made as of October 27, 1997 between Manor
Care and James H. Rempe.
10.18 - Amendment to Employment Agreement made as of June 10, 1998
among Manor Care, HCR and James H. Rempe.
21 - Subsidiaries of the Registrant.
23 - Consent of Independent Public Accountants.
27 - Financial Data Schedule.
(c) Reports on Form 8-K.
Manor Care filed a report on Form 8-K on March 12, 1998 to report under
Item 5 thereof the adoption of Manor Care's Shareholder Rights Plan.
Manor Care filed a report on Form 8-K on June 16, 1998 to report under
Item 5 thereof the execution of the Merger Agreement and the issuance of
a joint press release by Manor Care and HCR relating thereto, as well as
the amendment of Manor Care's Shareholder Rights Plan in connection
therewith.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: August 17, 1998 MANOR CARE, INC.
By:/s/ James H. Rempe
-------------------------------
James H. Rempe
Senior Vice President,
General Counsel & Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Stewart Bainum, Jr. Chairman, Director, August 17, 1998
- ----------------------------
Stewart Bainum, Jr. President and Chief
Executive Officer
/s/ Stewart Bainum Vice Chairman August 17, 1998
- ----------------------------
Stewart Bainum and Director
/s/ Kennett L. Simmons Director August 17, 1998
- ----------------------------
Kennett L. Simmons
/s/ Regina E. Herzlinger Director August 17, 1998
- ----------------------------
Regina E. Herzlinger
/s/ William H. Longfield Director August 17, 1998
- ----------------------------
William H. Longfield
/s/ Frederic V. Malek Director August 17, 1998
- ----------------------------
Frederic V. Malek
/s/ Jerry E. Robertson Director August 13, 1998
- ----------------------------
Jerry E. Robertson
/s/ Margarita Schoendorfer Vice President- August 17, 1998
- ----------------------------
Margarita Schoendorfer Corporate Controller
73
Schedule II
MANOR CARE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
Balance at Charged to Balance at
Beginning Profit End
Description of Period and Loss Other Write-offs of Period
- ----------- --------- -------- ----- ----------- ----------
Year ended May 31, 1998
Allowance for doubtful accounts $36,621 $26,189 $- 0 - $(32,206) $30,604
Year ended May 31, 1997
Allowance for doubtful accounts $22,148 $15,930 $- 0 - $( 1,457) $36,621
Year ended May 31, 1996
Allowance for doubtful accounts $17,419 $13,778 $ 1,030/(A)/ $(10,079) $22,148
/(A)/Represents reserves of acquired companies.
74
__________________________________________________________________
__________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________
EXHIBITS
to
FORM 10-K
Annual Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the Fiscal Year Ended May 31, 1998
________
MANOR CARE, INC.
__________________________________________________________________
__________________________________________________________________
75
EXHIBIT INDEX
-------------
2.1 - Amended and Restated Agreement and Plan of Merger among Manor Care,
Inc., Health Care and Retirement Corporation and Catera Acquisition
Corp.
10.11 - Manor Care Severance Plan for Selected Employees
10.12 - Noncompetition Agreement made as of June 10, 1998 among Manor Care,
HCR and Stewart Bainum, Jr.
10.13 - Retention Agreement made as of June 10, 1998 among Manor Care, HCR
and Stewart Bainum, Jr.
10.14 - Employment Agreement made as of June 10, 1998 among Manor Care, HCR
and Margarita A. Schoendorfer.
10.15 - Employment Agreement made as of June 10, 1998 among Manor Care, HCR
and Leigh C. Comas.
10.16 - Employment Agreement made as of June 10, 1998 among Manor Care, HCR
and Joseph R. Buckley.
10.17 - Employment Agreement made as of October 27, 1997 between Manor Care
and James H. Rempe
10.18 - Amendment to Employment Agreement made as of June 10, 1998 among
Manor Care, HCR and James H. Rempe.
21 - Subsidiaries of the Registrant.
23 - Consent of Independent Public Accountants.
27 - Financial Data Schedule.
76