1
EXHIBIT 13
Manor Care, Inc. and Subsidiaries
Financial Highlights
(REVENUES BAR GRAPH)
(NET INCOME FROM OPERATIONS PER SHARE* BAR GRAPH)
Years Ended May 31 (In thousands of dollars,
except per share data) 1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Total revenues $1,163,072 $1,009,675 $ 916,224 $ 815,469 $ 708,734
Income before non-recurring items* 77,184 62,383 47,850 32,083 26,678
Net income 78,362 59,364 62,452 32,083 26,678
---------- ---------- ---------- ---------- ----------
Average shares outstanding** 60,524 57,316 57,308 57,212 57,774
---------- ---------- ---------- ---------- ----------
Per share data:
Income before non-recurring items* $ 1.27 $ 1.09 $ .83 $ .56 $ .46
Non-recurring items* .02 (.05) .26 - -
Net income per common share** 1.29 1.04 1.09 .56 .46
Dividends per common share** .09 .09 .09 .09 .09
Market price range:
High** 29.25 26.63 19.00 15.17 11.92
Low** 17.50 15.63 11.75 6.83 8.17
---------- ---------- ---------- ---------- ----------
Cash provided by operating activities $ 175,397 $ 125,030 $ 159,591 $ 99,847 $ 93,039
Investments in property and equipment 90,871 90,364 63,497 64,325 81,400
---------- ---------- ---------- ---------- ----------
Total assets $1,186,525 $1,106,506 $1,015,289 $ 944,391 $ 867,853
Long-term debt 276,935 380,438 373,989 456,409 419,060
Stockholders' equity 533,815 361,994 304,982 244,951 221,644
---------- ---------- ---------- ---------- ----------
* Non-recurring items consist of net gain on sale of property and impact of
change in tax rate in 1994, net gain on sale of stock by subsidiary in 1992
and extraordinary items in 1993 and 1992.
** Retroactively adjusted for three-for-two stock split in March 1992.
One
2
Manor Care, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended May 31 (in thousands, except per share data) 1994 1993 1992
---- ---- ----
REVENUES
Healthcare $ 923,308 $ 830,968 $ 755,999
Lodging 239,764 178,707 160,225
---------- ---------- ----------
Total revenues 1,163,072 1,009,675 916,224
---------- ---------- ----------
EXPENSES
Healthcare 696,199 627,733 575,054
Lodging 175,400 128,988 113,851
Depreciation and amortization 66,540 60,999 56,986
General corporate 67,445 57,891 52,694
---------- ---------- ----------
Total expenses 1,005,584 875,611 798,585
---------- ---------- ----------
INCOME FROM OPERATIONS 157,488 134,064 117,639
---------- ---------- ----------
OTHER INCOME AND (EXPENSES)
Interest income and other 2,677 3,889 3,094
Gain on sale of property 7,978 - -
Gain on sale of stock by a subsidiary - - 30,077
Interest expense (31,281) (37,070) (44,092)
---------- ---------- ----------
Total other (expenses), net (20,626) (33,181) (10,921)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 136,862 100,883 106,718
INCOME TAXES 58,500 38,500 40,100
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 78,362 62,383 66,618
EXTRAORDINARY ITEM (DEBT REDEMPTION, NET OF
INCOME TAXES OF $1,851 AND $2,446, RESPECTIVELY) - (3,019) (4,166)
---------- ---------- ----------
NET INCOME $ 78,362 $ 59,364 $ 62,452
========== ========== ==========
AVERAGE SHARES OUTSTANDING 60,524 57,316 57,308
========== ========== ==========
INCOME PER SHARE OF COMMON STOCK
Income before extraordinary item $ 1.29 $ 1.09 $ 1.16
Extraordinary item (debt redemption) - (.05) (.07)
---------- ---------- ----------
Net income per share of common stock $ 1.29 $ 1.04 $ 1.09
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
Fourteen
3
Manor Care, Inc. and Subsidiaries
Management's Review of Operating Results
HEALTHCARE OPERATIONS
Healthcare revenues increased 11% to $923.3 million in fiscal year 1994
compared to an increase of 10% in fiscal year 1993. The increase in revenues
was due to higher occupancy and increased private and third-party payor rates
as well as added capacity in the Company's 82% owned institution pharmacy
subsidiary. The strong occupancy level in the nursing facilities (an increase
of approximately 2.5% over last year) and higher third-party payor rates
reflect an increase in value-added services geared toward residents with
special needs and higher levels of acuity.
Healthcare operating expenses increased 11% to $696.2 million in fiscal
year 1994 compared to an increase of 9% in fiscal year 1993. Increases in
expenses were attributed to the increase in census, labor costs, the higher
level of acuity of the residents as well as increased capacity in the pharmacy
subsidiary. The Company actively controls costs and has generally been
successful at maintaining overall costs, other than labor, at a rate consistent
with the general rate of inflation. Programs designed to effectively manage
human resources through improved recruiting and training have helped to
moderate overall wage rate increases during fiscal years 1994 and 1993.
LODGING OPERATIONS
Lodging revenues increased 34% to $239.8 million in 1994 while operating
expenses increased 36%. This compares to increases in revenues and expenses of
12% and 13%, respectively, in 1993. The growth in both revenues and expenses
was largely due to the increase in the number of hotels the Company owns and
operates as well as the improved operating performance of hotels in the
Company's franchise system. Operating margins were negatively impacted as a
result of renovations to many of the recently acquired hotels and the opening
of four newly constructed hotels in Europe in the last eighteen months. The
number of hotels owned or leased and operated by the Company has increased from
23 to 44 during fiscal year 1994, principally as a result of the acquisition at
distressed prices of properties in select markets. The Company's franchise
subsidiary accounted for 69% and 77% of lodging revenues in fiscal 1994 and
1993, respectively, with the balance contributed by the owned or leased hotels.
OTHER INFORMATION
Depreciation and amortization increased 9% in fiscal year 1994 to $66.5
million. In fiscal year 1993, depreciation and amortization increased 7%. The
increases in both years were due primarily to acquisitions in the lodging
segment.
General corporate expenses represented 6% of revenues in fiscal years 1994
and 1993. General corporate expenses include all indirect operating expenses
as well as risk management, information systems, treasury, accounting, legal
and other administrative support for each of the Company's subsidiaries.
Interest expense decreased 16% in fiscal year 1994 to $31.3 million due
primarily to the redemption of $99.0 million of 6 3/8% debentures in October
1993. Interest expense decreased 16% in fiscal year 1993 to $37.1 million due
primarily to the redemption of $60.0 million in 11 3/8% debentures in May 1992.
Fifteen
4
Manor Care, Inc. and Subsidiaries
Consolidated Balance Sheets
May 31 (in thousands of dollars, except share data) 1994 1993
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 60,487 $ 80,844
Receivables (net of allowances of $24,431 and $16,501) 84,766 82,820
Inventories 12,954 13,489
Current deferred income tax benefit 12,317 6,381
Other 12,828 10,725
---------- ----------
Total current assets 183,352 194,259
---------- ----------
PROPERTY AND EQUIPMENT, AT COST, NET OF DEPRECIATION 824,350 753,746
---------- ----------
LODGING FRANCHISE RIGHTS, NET OF AMORTIZATION 64,454 67,343
---------- ----------
OTHER ASSETS 114,369 91,158
---------- ----------
$1,186,525 $1,106,506
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 5,869 $ 45,338
Accounts payable 50,231 44,504
Accrued expenses 97,597 85,377
Income taxes payable 12,681 5,254
---------- ----------
Total current liabilities 166,378 180,473
---------- ----------
MORTGAGES AND OTHER LONG-TERM DEBT 119,333 124,838
---------- ----------
SUBORDINATED LONG-TERM DEBT 157,602 255,600
---------- ----------
DEFERRED INCOME TAXES ($137,916 AND $125,647) AND OTHER 209,397 183,601
---------- ----------
STOCKHOLDERS' EQUITY
Common stock $.10 par, 80,000,000 shares authorized; 65,436,734 and
60,470,832 shares issued 6,545 6,047
Contributed capital 167,316 68,471
Retained earnings 402,520 329,532
Cumulative translation adjustment (31) 352
Treasury stock, 2,986,492 and 2,980,576 shares, at cost (42,535) (42,408)
---------- ----------
Total stockholders' equity 533,815 361,994
---------- ----------
$1,186,525 $1,106,506
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
Sixteen
5
Manor Care, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Cumulative
Common Stock Contributed Retained Translation
(in thousands of dollars, except share data) Shares Amount Capital Earnings Adjustment
------ ------ ------- -------- ----------
Balance, May 31, 1991 41,030,772 $ 4,103 $ 64,243 $ 217,846 $ (335)
Net income - - - 62,452 -
Exercise of stock options 197,248 20 3,673 - -
Cash dividends - - - (5,031) -
Stock split, three-for-two effective
March 27, 1992 19,135,568 1,913 (1,927) - -
Other - - 863 (3) (305)
---------- ------- --------- --------- ------
Balance, May 31, 1992 60,363,588 6,036 66,852 275,264 (640)
Net income - - - 59,364 -
Exercise of stock options 107,244 11 1,457 - -
Cash dividends - - - (5,096) -
Other - - 162 - 992
---------- ------- --------- --------- ------
Balance, May 31, 1993 60,470,832 6,047 68,471 329,532 352
Net income - - - 78,362 -
Exercise of stock options 222,380 23 2,186 - -
Cash dividends - - - (5,374) -
Debenture conversion 4,743,522 475 96,432 - -
Other - - 227 - (383)
---------- ------- --------- --------- ------
Balance, May 31, 1994 65,436,734 $ 6,545 $ 167,316 $ 402,520 $ (31)
========== ======= ========= ========= ======
The accompanying notes are an integral part of these consolidated statements.
Seventeen
6
Manor Care, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended May 31 (in thousands of dollars) 1994 1993 1992
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 78,362 $ 59,364 $ 62,452
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization 66,540 60,999 56,986
Amortization of debt discount, including extraordinary loss in 1992 1,014 940 5,320
Provision for bad debts 13,923 9,394 9,966
Increase in deferred taxes 6,333 7,500 19,963
Gain on sale of facilities (7,978) - -
Gain on sale of stock by subsidiary - - (30,077)
Changes in assets and liabilities (excluding sold facilities and acquisitions):
Change in receivables (15,206) (16,110) (5,182)
Change in inventories and other current assets (927) (57) (3,947)
Change in accounts payable and accrued expenses 15,831 (4,442) 20,741
Change in income taxes payable 7,427 719 4,175
Change in other liabilities 10,078 6,723 19,194
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 175,397 125,030 159,591
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (90,871) (90,364) (63,497)
Acquisition of operating hotels (44,200) (25,115) -
Acquisition of a hotel chain (10,400) - -
Acquisition of operating pharmacies (7,217) (29,188) -
Investment in a health care business (10,000) - -
Purchase of minority interest - - (18,482)
Proceeds from the sale of property 22,830 - -
Other items, net (3,338) 6,296 (881)
--------- --------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES (143,196) (138,371) (82,860)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 5,079 167,727 18,064
Principal payments of debt (54,472) (153,015) (76,771)
Proceeds from exercise of stock options 2,209 1,468 3,693
Purchases of common stock for treasury - - (1,988)
Proceeds from sale of stock by subsidiary - - 38,130
Dividends paid (5,374) (5,096) (5,031)
--------- --------- ---------
NET CASH (UTILIZED) PROVIDED BY
FINANCING ACTIVITIES (52,558) 11,084 (23,903)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (20,357) (2,257) 52,828
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 80,844 83,101 30,273
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 60,487 $ 80,844 $ 83,101
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
Eighteen
7
Manor Care, Inc. and Subsidiaries
Management's Review
of Financial Position and Cash Flows
WORKING CAPITAL
The Company's working capital ratio at both May 31, 1994 and May 31, 1993
was 1.1. The Company attempts to minimize its investment in net current
assets, and believes that the maintenance of minimal working capital is an
appropriate objective given the stability of the Company's operating cash flows
and the depth of its financial resources.
PROPERTY
During fiscal year 1994, additions to property and equipment amounted to
$90.9 million. Additions included routine capital expenditures and specialty
product conversions, plus three hotels which are being converted to assisted
living facilities, one of which opened in May 1994. An additional $44.2
million was spent to acquire 13 operating hotels and $10.4 million was spent to
acquire Resthotel Primevere, a franchise lodging chain operating primarily in
France. An investment of $10.0 million was made in a physician practice
management business and $7.2 million was spent to purchase two pharmacies
servicing 7,400 institutional beds.
LONG-TERM DEBT
Long-term debt was $276.9 million at May 31, 1994 compared to $380.4
million at May 31, 1993. In October 1993, the Company redeemed $99.0 million
of 6 3/8% Convertible Subordinated Debentures due 2011. At the election of the
bondholders, $96.9 million of the debentures were converted into common stock.
In November 1992, the Company issued $150 million of 9 1/2% Senior Subordinated
Notes due 2002. In January 1993, proceeds of this offering were used to redeem
$125.0 million of 11 3/8% Senior Subordinated Notes due 1998.
The Company's long-term debt to equity ratio was .5 to 1 at May 31, 1994,
compared to 1.1 to 1 at May 31, 1993. In evaluating leverage and debt
capacity, the Company considers cash flow and interest coverage. The Company's
consolidated cash flow coverage ratio, as defined by the Company's bank
agreements, was 4.16 to 1 for fiscal 1994. The Company's bank agreements
require a minimum cash flow coverage of 1.75 to 1.
The current portion of debt as of May 31, 1994 amounts to $5.9 million.
STOCKHOLDERS' EQUITY
Stockholders' equity increased from $362.0 million at May 31, 1993 to
$533.8 million at May 31, 1994. This increase was primarily due to the
conversion of $96.9 million of subordinated debentures into common stock and
net income of $78.4 million, reduced by dividend payments amounting to $5.4
million.
LIQUIDITY AND CAPITAL RESOURCES
Adequate capital resources, including strong operating cash flows, are
maintained to support ongoing operations and fulfill projected requirements for
debt service and capital expenditures.
In June 1993, the Company restated and extended its agreement with seven
banks for a $100.0 million revolving credit facility. That facility was
repriced on more favorable terms and extended to expire in June 1999. In
December 1992, the Company entered into an agreement with a group of seven
banks for a three-year, $65.0 million, multi-currency revolving credit facility
to be used to fund international development and acquisition programs. At May
31, 1994, bank lines totaled $210.0 million of which $164.8 million remained
unused.
The Company maintains adequate debt capacity as evidenced by Standard &
Poor's assignment of an investment grade BBB- to the Company's senior debt.
The Company's ratio of senior debt to equity plus subordinated debt is .2 to 1.
Furthermore, a significant portion of the Company's property and equipment
remains unencumbered.
Nineteen
8
MANAGEMENT'S REPORT
The Company has developed and maintains internal control systems designed
to provide reasonable assurance that assets are safeguarded and that
transactions are executed and recorded in accordance with management
authorization. Control systems are supported by written policies and are
regularly evaluated by the Company's internal auditors.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which require that
business judgments be applied. While management is responsible for the
preparation of financial statements, the Company's outside auditors have
examined the financial statements as described in their report.
The Audit Committee of the Company's Board of Directors is comprised of two
external directors. This Committee meets periodically with management, the
internal auditors and the external auditors. The Committee reviews the
Company's annual financial statements in advance of their release and monitors
and reviews the audit programs conducted by both the Company's internal audit
department and the external auditors. Audit Committee meetings are designed to
facilitate any private communications with the Committee desired by either the
internal or external auditors.
/S/ STEWART BAINUM, JR.
- - -----------------------
Stewart Bainum, Jr.
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
/S/ JAMES A. MacCUTCHEON
- - ------------------------
James A. MacCutcheon
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders 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, 1994 and 1993,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended May 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 14, 16, 17, 18 and 21-24) present fairly, in all material respects, the
financial position of MANOR CARE, INC., and subsidiaries as of May 31, 1994 and
1993, and the results of their operations and their cash flows for each of the
three years in the period ended May 31, 1994, in conformity with generally
accepted accounting principles.
Arthur Andersen & Co.
WASHINGTON, D.C.
JUNE 22, 1994
Twenty
9
Manor Care, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Manor Care,
Inc. and its subsidiaries (the "Company"). All significant intercompany
transactions have been eliminated.
CASH
The Company considers all highly liquid securities purchased with a
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
The components of property and equipment at May 31 were:
(in thousands of dollars) 1994 1993
---- ----
Land $ 92,838 $ 80,944
Building and improvements 813,131 749,261
Capitalized leases 18,991 18,991
Furniture, fixtures and
equipment 187,804 168,321
Facilities in progress 19,632 11,762
---------- ----------
1,132,396 1,029,279
Less: Accumulated depreciation (308,046) (275,533)
---------- ----------
$ 824,350 $ 753,746
========== ==========
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 $8,231,000 at May 31, 1994 and $7,593,000
at May 31, 1993 relating to capitalized leases. Capitalized leases are
amortized on a straight-line basis over the lesser of the lease term or the
remaining useful lives of the leased properties.
CAPITALIZATION POLICIES
Maintenance, repairs and minor replacements are charged to expense. 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.
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. Pre-opening marketing, personnel
recruitment and training costs related to facilities under construction are
deferred until construction is completed and then amortized over two years.
The Company capitalizes interest on borrowings applicable to facilities in
progress. Interest has been capitalized as follows:1994, $748,000; 1993,
$2,621,000; 1992, $789,000.
LODGING FRANCHISE RIGHTS
Franchise rights are recorded at their estimated fair values at the date
acquired and amortized over an average life of twenty-six years.
SELF-INSURANCE PROGRAMS
The Company self-insures for certain levels of general liability and
workers' compensation coverage. Estimated costs of workers' compensation
self-insurance programs are accrued at present values based on actuarial
projections for known and anticipated claims.
NET INCOME PER COMMON SHARE
Net income per common share has been computed based on the weighted average
number of shares of common stock outstanding. The effect of outstanding and
unexercised stock options on the computation is insignificant.
INCOME TAXES
The income tax provisions for fiscal years 1994 and 1993 were accounted for
under Statement of Financial Accounting Standards No. 109. Included in the
1994 tax provision was a charge of $3,600,000 due to the impact on prior
periods of a change in the rates. In fiscal year 1993, the Company adopted
Statement of Financial Accounting Standards No. 109. This adoption did not
have a material effect on the Company's financial statements. The income tax
provision for fiscal year 1992 was accounted for under Statement of Financial
Accounting Standards No. 96. Income tax provisions were as follows:
(in thousands of dollars) 1994 1993 1992
---- ---- ----
Current tax expense:
Federal $44,367 $23,382 $19,009
State 10,823 7,604 4,051
Deferred tax expense:
Federal 4,131 7,696 14,528
State (821) (182) 2,512
------- ------- -------
$58,500 $38,500 $40,100
======= ======= =======
Deferred tax assets (liabilities) are comprised of the following at May 31:
(in thousands of dollars) 1994 1993 1992
---- ---- ----
Depreciation and amortization $ (86,138) $ (75,127) $ (73,504)
Purchased tax benefits (47,506) (47,689) (47,991)
Gain on stock issuance (11,895) (11,616) (11,616)
Other (5,084) (6,386) (6,541)
--------- --------- ---------
Gross deferred tax liabilities (150,623) (140,818) (139,652)
--------- --------- ---------
Gross deferred tax assets 25,024 21,552 27,886
--------- --------- ---------
Net deferred tax $(125,599) $(119,266) $(111,766)
========= ========= =========
Twenty One
10
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the consolidated statements of income follows:
(in thousands of dollars) 1994 1993 1992
---- ---- ----
Federal income tax rate 35% 34% 34%
------- ------- -------
Federal taxes at statutory rate $47,902 $34,300 $36,284
State income taxes, net of
Federal tax benefit 6,501 4,899 4,331
Effect of tax rate change 3,600 - -
Tax credits (910) (726) (1,007)
Other 1,407 27 492
------- ------- -------
Income tax expense $58,500 $38,500 $40,100
======= ======= =======
Income taxes paid $48,005 $27,746 $13,539
======= ======= =======
ACCRUED EXPENSES
Accrued expenses at May 31, 1994 and 1993 were as follows:
(in thousands of dollars) 1994 1993
---- ----
Payroll $52,906 $47,222
Taxes, other than income 11,503 9,911
Insurance 8,681 8,097
Interest 1,207 4,302
Other 23,300 15,845
------- -------
$97,597 $85,377
======= =======
LONG-TERM DEBT
Maturities of long-term debt at May 31, 1994, were as follows:
Fiscal Year (in thousands of dollars)
-------------------------------------
1995 $ 5,869
1996 65,986
1997 8,585
1998 16,499
1999 6,153
2000 to 2024 179,712
--------
$282,804
========
Long-term debt, consisting of mortgages, capital leases and subordinated
debt, was net of discount of $2,357,000 and $4,114,000 at May 31, 1994 and
1993, respectively. Amortization of discount was $1,014,000 in 1994, $940,000
in 1993 and $5,320,000 in 1992, including the write-off associated with debt
redemptions.
During fiscal 1994 interest rates on subordinated debt ranged from 4.5% to
9.5%; interest rates on mortgages and other long-term debt ranged from 3.6% to
13.8%.
In October 1993, the Company redeemed the $99,000,000 of 6 3/8% Convertible
Subordinated Debentures due 2011. Approximately $3,000,000 were redeemed for
cash, at a premium, while the remaining debentures were converted into common
stock at $20.31 per share which resulted in 4,743,522 shares being issued.
In November 1992, the Company issued $150,000,000 of 9 1/2% Senior
Subordinated Notes due 2002. The notes are redeemable at the option of the
Company at a premium after November 15, 1997 and at par after November 15,
2000. In January 1993, the proceeds were used, in part, to redeem the
Company's $125,000,000 of 11 3/8% Senior Subordinated Notes. The early
redemption resulted in an extraordinary after-tax charge of $3,019,000.
In May 1992, the Company redeemed the $60,000,000 of 11 3/8% Senior
Subordinated Debentures due 2003. The early redemption resulted in an
extraordinary after-tax charge of $4,166,000.
In June 1993, the Company restated and extended the $100,000,000 revolving
credit facility provided by a group of seven banks. Borrowings under the
facility are, at the option of the Company, at the Base Rate, Certificate of
Deposit rates or Eurodollar rates, as defined. In addition, when requested by
the Company, participating banks may bid for loan participation at lower rates
than those contractually provided by the facility. The facility requires the
Company to pay fees of 1/8 of 1% on the entire co mmitment and 3/16 of 1% on
the unused portion of the commitment. Revolving borrowings outstanding under
this facility convert to a term loan in June 1996 and are payable over three
years in equal semi-annual payments of principal. At May 31, 1994, there were
no outstanding revolving borrowings.
In December 1992, the Company entered into an agreement with a group of
seven banks for a three year, $65,000,000, multi-currency revolving credit
facility to be used to fund international development and acquisition programs.
The facility requires the Company to pay fees on the same basis as the
revolving credit facility. The facility will mature in December 1995. At May
31, 1994, the outstanding borrowings amounted to $45.2 million.
Compensating balances of $902,000 are required by certain debt agreements.
In addition, various debt agreements impose certain restrictions regarding
financial ratios and payment of dividends. At May 31, 1994, approximately
$109,000,000 of retained earnings were not available for cash dividends and
owned property with a net book value of $147,000,000 was pledged or mortgaged.
LEASES
The Company operates certain property and equipment under leases, some with
purchase options, that expire at various dates through 2051. Future minimum
lease payments are as follows:
Operating Capitalized
(in thousands of dollars) Leases Leases
--------- -----------
1995 $ 4,703 $ 1,451
1996 3,561 1,471
1997 3,679 1,449
1998 3,058 1,449
1999 2,855 1,178
Thereafter 17,469 4,391
------- -------
Total minimum lease payments $35,325 11,389
=======
Less: Amount representing
interest 3,962
-------
Present value of lease payments 7,427
Less: Current portion 611
-------
Lease obligations included in
long-term debt $ 6,816
=======
Rental expense under noncancelable operating leases was $5,169,000 in 1994,
$4,711,000 in 1993 and $4,434,000 in 1992.
Twenty Two
11
CAPITAL STOCK
There are 5,000,000 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 when the shares are issued. There are
80,000,000 authorized shares of $.10 par value common stock.
During fiscal 1992, prior to the three-for-two split in March 1992, the
Company acquired 100,561 shares of its common stock for a total cost of
$1,988,000.
In September 1993, the stockholders approved the Company's Key Executive
Stock Option Plan of 1993 and authorized 2,000,000 shares of common stock to be
granted to key executive officers and key employees until August 31, 2003, at
which date the plan will expire. During the current period, 436,500 options
were granted and will become exercisable from 1995 to 2001 and expire in
December 2003.
Under the Company's 1969 stock option plan, as amended and extended,
stockholders authorized 5,223,437 shares of common stock to be granted to key
executive employees until September 30, 1993. At May 31, 1994, options for the
purchase of an aggregate of 3,068,750 shares were outstanding at prices equal
to the market value of the stock at date of grant. During the current period,
40,000 options were granted to executive officers and key employees. Options
totaling 903,508 are presently exercisable and 2,165,242 will become
exercisable from 1995 to 2002 and will expire at various dates to September
2003. Option activity under both the 1969 and 1993 plans adjusted for prior
stock splits, dividends and previously granted non-qualified options was as
follows:
Number of Shares Average Option Price
Options 1994 1993 1992 1994 1993 1992
---- ---- ---- ---- ---- ----
Granted 476,500 444,000 597,750 $22.42 $20.97 $14.00
Exercised 222,380 107,244 286,873 $ 9.93 $10.14 $11.21
Cancelled 149,700 206,700 112,749 $ 7.38 $12.66 $ 9.06
Outstanding
at May 31 3,505,250 3,400,830 3,270,774 $14.26 $12.27 $10.48
Available
for grant
at May 31 1,563,500 52,696 -
ACQUISITIONS AND DIVESTITURES
During fiscal year 1994, the Company purchased thirteen operating hotels
containing over 1,900 rooms for approximately $44,200,000. An additional
$10,400,000 was spent to acquire a hotel chain (Resthotel Primevere) operating
primarily in France. In December 1993, the Company invested $10,000,000 in a
minority interest in a physicians practice management business. The Company
also sold three nursing homes for $15,630,000 and a hotel for $7,200,000. The
after tax gain recognized from these sales was $4,778,000.
During fiscal year 1994, the Company's 82% owned institutional pharmacy
subsidiary, Vitalink Pharmacy Services, Inc., purchased two pharmacies based in
Oregon and in Colorado which service over 7,400 institutional beds for a total
of $7,200,000.
During fiscal year 1993, the Company purchased seven operating hotels
containing a total of 1,306 rooms for approximately $25,000,000 and sold two
nursing facilities for $5,200,000. The realized gain from the sale was
immaterial.
During fiscal year 1993, Vitalink Pharmacy Services, Inc., purchased a
pharmacy located in Baltimore, Maryland, servicing 2,600 institutional beds and
a pharmacy business in New Jersey, servicing over 9,100 institutional beds, for
approximately $29,200,000.
In March 1992 the Company's institutional pharmacy subsidiary, Vitalink
Pharmacy Services, Inc., sold 18% of its common stock in an initial public
offering. The proceeds from this offering amounted to approximately
$38,000,000, which was used to grow Vitalink through acquisitions and the
development of new pharmacies.
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 1994, 1993 and 1992 these revenues amounted to $377,337,000;
$337,047,000; and $295,662,000, respectively. In the opinion of management,
any difference between revenues recorded and final determination will not be
significant.
As of May 31, 1994, the Company was contingently liable for notes amounting
to $4,250,000 and for lease obligations amounting to $2,169,000. These notes
and leases were assumed by purchasers and are secured by the related properties
or rights thereto.
As of May 31, 1994, the Company had contractual commitments of $15,520,000
relating to its internal construction program.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
The Company has various pension and profit sharing plans, and contributes
to certain union welfare plans. The provision for these plans amounted to
$10,280,000 in 1994; $8,355,000 in 1993; and $7,669,000 in 1992. All vested
benefits under retirement plans are funded or accrued.
Included in the Company's various retirement plans is a defined benefit
pension plan covering substantially all of its employees. The benefits are
based on service credit for each year of participation after January 1, 1992.
In addition, there is a prior benefit equal to the accrued benefit at December
31, 1991 for a predecessor plan.
Service cost benefits earned during fiscal years 1994 and 1993 approximated
the Plan's annual costs of $3,100,000 and $2,500,000, respectively. As of
February 28, 1994 and 1993 Plan assets of approximately $8,300,000 and
$6,600,000 compared to vested benefit obligations of $9,000,000 and $7,000,000,
respectively.
Projected benefit obligations were not significantly different from
accumulated benefit obligations of $11,100,000 and $8,600,000 as of the same
dates. Liabilities recorded on the Company's balance sheets as of May 31, 1994
and 1993 were $2,850,000 and $1,800,000, respectively. Projected benefit
obligations were determined for both years using an assumed discount rate of
8%, an assumed rate of return on plan assets of 8.25% and an assumed
compensation increase of 4.5%.
The Company also has various incentive compensation plans for certain
personnel. Incentive compensation accrued was $6,262,000 in 1994; $4,545,000
in 1993; and $3,753,000 in 1992.
Twenty Three
12
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair value of its financial
instruments in accordance with Statement of Financial Accounting Standards No.
107 "Disclosures about Fair Value of Financial Instruments." Fair values of
material balances were determined by using market rates currently available.
The balance sheet carrying amounts of cash, cash equivalents and
receivables approximate fair value due to the short-term nature of these items.
Mortgages and other long-term debt consist of bank loans, mortgages and capital
leases. Interest rates on bank loans adjust frequently based on current market
rates; accordingly, the carrying amount of bank loans is equivalent to fair
value. Fair values for mortgages and capital leases were determined by
discounting future cash flows using the Company's current market rate for
secured debt. Fair value of subordinated debt was determined by pricing the
debt at quoted market prices.
Carrying Estimated
Balances at May 31, 1994 Amount Value
-------- ---------
(in thousands of dollars)
Assets
Cash & cash equivalents $ 60,487 $ 60,487
Receivables, net $ 84,766 $ 84,766
Liabilities (including current portion)
Mortgages and other long-term debt $125,202 $124,541
Subordinated long-term debt $157,602 $160,995
BUSINESS SEGMENT INFORMATION
Revenues by principal business segment are included in the Consolidated
Statements of Income. Income from operations, depreciation and amortization,
identifiable assets and capital expenditures by principal business segment
follows:
Fiscal Year Ended May 31, 1994 1993 1992
---- ---- ----
(in thousands of dollars)
Income from Operations
Healthcare $ 126,818 $ 112,320 $ 95,998
Lodging 33,247 23,946 24,232
Corporate and other (2,577) (2,202) (2,591)
---------- ---------- ----------
$ 157,488 $ 134,064 $ 117,639
========== ========== ==========
Depreciation and Amortization
Healthcare $ 44,138 $ 41,227 $ 39,299
Lodging 17,187 14,253 12,580
Corporate and other 5,215 5,519 5,107
---------- ---------- ----------
$ 66,540 $ 60,999 $ 56,986
========== ========== ==========
Identifiable Assets
Healthcare $ 798,113 $ 755,259 $ 741,986
Lodging 289,841 237,425 180,625
Corporate and other 98,571 113,822 92,678
---------- ---------- ----------
$1,186,525 $1,106,506 $1,015,289
========== ========== ==========
Capital Expenditures
Healthcare $ 66,032 $ 41,346 $ 40,316
Lodging 67,171 68,599 20,815
Corporate and other 6,967 6,627 2,366
---------- ---------- ----------
$ 140,170 $ 116,572 $ 63,497
========== ========== ==========
SUMMARY OF QUARTERLY RESULTS
(Unaudited)
Income
Quarters from Net Per
Ended Revenues Operations Income Share*
-------- ---------- ------ ------
(in thousands of dollars, except per share data)
FISCAL 1993
- - -----------
August $ 245,427 $ 34,470 $15,958 $ .28
November 253,680 35,992 17,276 .30
February 244,945 27,641 8,827 .15
May 265,623 35,961 17,303 .30
---------- -------- ------- --------
$1,009,675 $134,064 $59,364 $ 1.04**
========== ======== ======= ========
FISCAL 1994
- - -----------
August $ 284,628 $ 39,032 $19,762 $ .34
November 284,625 41,583 20,241 .34
February 284,071 33,323 15,651 .25
May 309,748 43,550 22,708 .36
---------- -------- ------- --------
$1,163,072 $157,488 $78,362 $ 1.29
========== ======== ======= ========
* February 1993 includes an extraordinary item (debt redemption).
**Does not add due to rounding.
QUARTERLY MARKET PRICE RANGE
OF COMMON STOCK AND DIVIDENDS PAID
(Unaudited)
Cash Dividends
Market Price Per Share* Paid Per Share*
-------------------------------------------------------
Quarters Ended High Low Amount Date
---- --- ------ ----
Fiscal 1992
- - -----------
August $16.00 $11.75 $.022 8/27/91
November 16.00 12.33 .022 11/27/91
February 19.00 13.42 .022 2/27/92
May 17.63 14.75 .022 5/27/92
Fiscal 1993
- - -----------
August $21.25 $15.63 $.022 8/27/92
November 24.50 17.75 .022 11/27/92
February 26.63 19.00 .022 2/26/93
May 22.38 18.63 .022 5/27/93
Fiscal 1994
- - -----------
August $24.00 $17.50 $.022 8/27/93
November 23.25 19.38 .022 11/26/93
February 28.00 20.88 .022 2/25/94
May 29.25 23.25 .022 5/27/94
*Retroactively adjusted for three-for-two stock split on March 27, 1992.
Twenty Four