<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1997
REGISTRATION NO. 333-38065
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NEW MANORCARE HEALTH SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 8051 52-2053999
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
11555 DARNESTOWN ROAD
GAITHERSBURG, MD 20878-3200
(301) 979-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JAMES H. REMPE
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
NEW MANORCARE HEALTH SERVICES, INC.
11555 DARNESTOWN ROAD
GAITHERSBURG, MD 20878-3200
(301) 979-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
J. MICHAEL SCHELL
MARK C. SMITH
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NY 10022
(212) 735-3000
---------------
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS AND CONSENT SOLICITATION
(SUBJECT TO COMPLETION, DATED DECEMBER 15, 1997)
$150,000,000
NEW MANORCARE HEALTH SERVICES, INC.
(TO BE RENAMED MANORCARE HEALTH SERVICES, INC.)
OFFER TO EXCHANGE
$150,000,000 7 1/2% SENIOR NOTES OF NEW MANORCARE HEALTH SERVICES, INC. DUE
JUNE 15, 2006 FOR ANY AND ALL 7 1/2% SENIOR NOTES OF MANOR CARE, INC. DUE JUNE
15, 2006
AND
MANOR CARE, INC.
CONSENT SOLICITATION
----------
New ManorCare Health Services, Inc. ("ManorCare Health Services"), a newly
formed wholly owned subsidiary of Manor Care, Inc. ("Manor Care"), hereby
offers (the "Exchange Offer"), upon the terms and subject to the conditions set
forth in this Prospectus and Consent Solicitation (the "Prospectus") and in the
accompanying Letter of Transmittal and Consent (the "Letter of Transmittal"),
to exchange $1,000 principal amount of its 7 1/2% Senior Notes due June 15,
2006 (the "New MCHS Senior Notes") for each $1,000 principal amount of 7 1/2%
Senior Notes due June 15, 2006 of Manor Care (the "Old Senior Notes") properly
tendered.
Concurrently with the Exchange Offer, Manor Care is soliciting (the
"Solicitation") consents ("Consents") from the holders of Old Senior Notes to
certain amendments (the "Proposed Amendments") to the Indenture dated as of
June 4, 1996, as supplemented by the Supplemental Indenture thereto dated as of
June 4, 1996 between Manor Care and Wilmington Trust Company, as trustee (the
"Old Indenture") pursuant to which the Old Senior Notes were issued. The
Proposed Amendments would, among other things, eliminate the covenants in the
Old Indenture that restrict (i) the creation, incurrence or assumption of
liens, (ii) sale leaseback transactions and (iii) transactions with affiliates.
See "The Proposed Amendments." Holders of Old Senior Notes who tender into the
Exchange Offer will be deemed, as a condition to a valid tender, to have given
their consent to the Proposed Amendments. The proper completion, execution and
delivery of a Letter of Transmittal with respect to Old Senior Notes will
constitute the giving of a Consent to the Proposed Amendments with respect to
such Old Senior Notes. See "The Exchange Offer--The Solicitation."
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON , 1998, UNLESS
EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OLD
SENIOR NOTES MAY BE WITHDRAWN ONLY IF THE
EXPIRATION DATE IS AFTER 12:01 A.M. ON ,
1998. WITHDRAWAL OF TENDERED OLD SENIOR NOTES
WILL BE DEEMED A REVOCATION OF THE CONSENT TO
WHICH SUCH TENDERED OLD SENIOR NOTES RELATE.
----------
SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING THE EXCHANGE OFFER AND SOLICITATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS AND CONSENT SOLICITATION. ANY REPRESENTATION TO
THE CONTRARY IS CRIMINAL OFFENSE.
----------
Please handle this matter through your bank or broker. You may direct any
questions concerning the Exchange Offer to your bank or broker. To tender Old
Senior Notes and for further information relating to the Exchange Offer, please
call the Dealer Managers at the telephone numbers set forth on the back cover
page of this Prospectus. To obtain copies of this Prospectus and Consent
Solicitation, please contact the Information Agent.
----------
The Dealer Managers for the Exchange Offer and Solicitation are:
CHASE SECURITIES INC.__________________________SBC WARBURG DILLON READ INC.
, 1998
<PAGE>
(continuation of cover page)
The Exchange Offer is being made in connection with the contribution by
Manor Care to ManorCare Health Services of (i) all of the assets relating to
the assisted living business previously conducted by Manor Care and (ii) all
of Manor Care's stock in Vitalink Pharmacy Services, Inc. ("Vitalink") and In
Home Health, Inc. ("In Home Health"), following which Manor Care will
distribute on a pro rata basis 100% of the outstanding Common Stock, par value
$.01 per share, of ManorCare Health Services to the holders of Manor Care's
outstanding Common Stock, par value $.01 per share (the "Distribution"). As a
result of the Distribution, Manor Care will have separated into two
independent publicly traded companies: Manor Care Realty and ManorCare Health
Services. Manor Care Realty will (i) be a health care real estate company
focused on the ownership, construction, development and acquisition of health
care properties, including skilled nursing and assisted living facilities and
(ii) own Mesquite Community Hospital ("Mesquite Hospital") in Mesquite, Texas.
ManorCare Health Services will (i) own all the business and assets of, and
subject to certain exceptions, be responsible for the liabilities associated
with, Manor Care's assisted living business (the "Assisted Living Business"),
(ii) operate and manage Manor Care's skilled nursing facilities, (iii) own a
50% joint venture interest in three additional skilled nursing facilities (the
"Joint Venture Interests"), and (iv) own all of Manor Care's stock in Vitalink
and In Home Health. Following the Distribution, Manor Care will change its
name to Manor Care Realty, Inc. ("Manor Care Realty") and New ManorCare Health
Services, Inc. will change its name to ManorCare Health Services, Inc.
Consummation of the Exchange Offer is conditioned on, among other things,
acceptance of the Exchange Offer by holders of at least a majority in
principal amount of the outstanding Old Senior Notes (the "Minimum Tender
Condition"). ManorCare Health Services may in its reasonable discretion waive
the Minimum Tender Condition and any other condition and accept for exchange
any Old Senior Notes properly tendered.
New MCHS Senior Notes will be exchanged for Old Senior Notes promptly
following the Expiration Date and contemporaneously with or following the
Distribution (the "Exchange Date"). Interest on the New MCHS Senior Notes
issued in exchange for the Old Senior Notes will accrue from, and including,
the Exchange Date at the applicable interest rate on such New MCHS Senior
Notes. Interest on Old Senior Notes exchanged in the Exchange Offer will
continue to accrue up to, but not including, the Exchange Date and will be
paid in cash to exchanging holders concurrently with the delivery of New MCHS
Senior Notes to such holders.
The New MCHS Senior Notes will be senior unsecured obligations of ManorCare
Health Services and will rank pari passu in right of payment with all senior
debt of ManorCare Health Services, whether outstanding on the date hereof or
hereafter created, incurred, assumed or guaranteed. The terms of the New MCHS
Senior Notes will be identical in all material respects to the terms of the
Old Senior Notes prior to the implementation of the Proposed Amendments except
that the New MCHS Senior Notes (i) will be issued by ManorCare Health Services
and (ii) will except from the Limitation on Affiliate Transactions covenant
certain additional transactions, including the Distribution and related
transactions as well as certain other transactions after the Distribution
between Manor Care Realty and ManorCare Health Services. See "Description of
New MCHS Senior Notes" and "Risk Factors--Certain Considerations Relating to
New MCHS Senior Notes."
The Proposed Amendments cannot become effective unless and until the holders
of at least a majority in principal amount of the outstanding Old Senior Notes
have given Consents (the "Requisite Consents") and the Exchange Offer has been
consummated. The proper tender of Old Senior Notes will constitute the giving
of a Consent with respect to such Old Senior Notes. If the Exchange Offer is
consummated, then, unless the Requisite Consents have not been received, the
Proposed Amendments will become effective as to the Old Senior Notes and each
non-exchanging holder of such Old Senior Notes will be bound by the Proposed
Amendments even through such holder did not consent to the Proposed
Amendments. The proper completion, execution and delivery of a Letter of
Transmittal will constitute the giving of a Consent to the Proposed Amendments
with respect to such Old Senior Notes. See "The Exchange Offer--The
Solicitation."
Consummation of the Exchange Offer and adoption of the Proposed Amendments
with respect to the Old Senior Notes may have certain consequences for holders
of such Old Senior Notes who elect not to tender in the
i
<PAGE>
Exchange Offer, including the following: (i) the Old Indenture will be amended
to delete the principal restrictive covenants therein; (ii) upon consummation
of the Distribution the outstanding Old Senior Notes will continue to be
senior unsecured obligations of Manor Care Realty and will rank pari passu in
right of payment with all existing and future senior debt of Manor Care
Realty, whose senior debt securities will have a lower debt rating than that
of (x) the Old Senior Notes prior to the Distribution and (y) ManorCare Health
Services after the Distribution, and will be effectively subordinated to all
creditors of Manor Care Realty's subsidiaries including the holders of the
Manor Care Notes (as herein defined) and the lenders under the Credit
Facilities (as herein defined) and (iii) the trading market for such Old
Senior Notes could become more limited, which may adversely affect the market
price of such Old Senior Notes. The Old Senior Notes are currently rated Baa2
by Moody's Investors Services, Inc. ("Moody's") and BBB by Standard & Poors
Corporation ("Standard & Poors"). The New MCHS Senior Notes will be rated by
Moody's and BB+ by Standard & Poors. Old Senior Notes that do not accept the
Exchange Offer and remain obligations of Manor Care Realty following the
Distribution will be rated by Moody's and BB by Standard & Poors. See "Risk
Factors--Certain Considerations Relating to Holders Not Tendering in the
Exchange Offer" and "The Exchange Offer--The Solicitation."
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Registration
Statement and, if given or made, such information or representation may not be
relied upon as having been authorized by Manor Care, ManorCare Health Services
or the Dealer Managers. Neither the delivery of this Registration Statement
nor any sale hereunder shall, under any circumstances, create any implication
that the information herein is correct as of any time subsequent to the date
hereof, or that there has been no change in the affairs of Manor Care or
ManorCare Health Services as of such date.
AVAILABLE INFORMATION
ManorCare Health Services has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the New MCHS
Senior Notes offered hereby (together with all amendments thereto, the
"Registration Statement"). This Prospectus does not contain all of the
information set forth in such Registration Statement and the exhibits and
schedules thereto. For further information with respect to Manor Care,
ManorCare Health Services and the New MCHS Senior Notes, reference is made to
the Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed or
incorporated by reference as an exhibit to the Registration Statement and each
such statement is qualified in all respects by such reference.
Manor Care is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Following consummation of the Distribution, ManorCare Health
Services will be subject to the information requirements of the Exchange Act,
and, in accordance therewith, will file periodic reports and other information
with the Commission.
The Registration Statement, and exhibits thereto, and the proxy statements
and reports of Manor Care can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Northwestern Artium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511, and 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such materials can be obtained by mail from
the public reference branch of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Additionally, the Commission
maintains a Web site containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission through the Commission's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) System. The address for such Web site is http://www.sec.gov.
Certain of Manor Care's securities are listed on the New York Stock Exchange.
Reports, proxy statements and other information concerning Manor Care may also
be inspected at the offices of the New York Stock Exchange, Inc. located at 20
Broad Street, New York, New York 10005.
ii
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by Manor Care with the Commission
(File No. 1-8195) pursuant to the Exchange Act are incorporated by reference
and shall be deemed a part hereof:
(a) Manor Care's Annual Report on Form 10-K for the fiscal year ended May
31, 1997;
(b) Manor Care's Current Report on Form 8-K dated September 15, 1997;
(c) Manor Care's Quarterly Report on Form 10-Q for the period ended
August 31, 1997; and
(d) All other reports filed by Manor Care pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and Consent Solicitation and prior to the termination of the offering of
the securities offered hereby.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus and Consent Solicitation to the extent that a
statement contained herein, or in any other subsequently filed document that
also is incorporated or deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus and Consent Solicitation. Subject to the
foregoing, all information appearing in this Prospectus and Consent
Solicitation is qualified in its entirety by the information appearing in the
documents incorporated herein by reference.
This Prospectus and Consent Solicitation incorporates documents by reference
with respect to Manor Care that are not presented herein or delivered
herewith. These documents are available without charge to any person,
including any beneficial owner, to whom this Prospectus and Consent
Solicitation is delivered, upon written or oral request to Secretary, Manor
Care, Inc., 11555 Darnestown Road, Gaithersburg, Maryland 20878-3200,
telephone: (301) 979-4000. To ensure timely delivery of the documents, any
request should be made by , 1998.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION...................................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ iii
SUMMARY.................................................................... 1
RISK FACTORS............................................................... 15
MANORCARE HEALTH SERVICES PRO FORMA CAPITALIZATION......................... 39
MANOR CARE REALTY PRO FORMA CAPITALIZATION................................. 40
DESCRIPTION OF THE TRANSACTIONS............................................ 41
THE EXCHANGE OFFER......................................................... 45
Introduction............................................................. 45
Terms of the Exchange Offer.............................................. 45
The Solicitation......................................................... 46
Expiration Date; Extensions; Termination; Amendments..................... 46
Effect of Tender......................................................... 47
Acceptance of Old Senior Notes Tendered for Exchange; Delivery of New
MCHS Senior Notes....................................................... 47
Procedures for Tendering Old Senior Notes and Giving Consents............ 48
Conditions to the Exchange Offer......................................... 49
Withdrawal Rights........................................................ 50
Exchange Agent........................................................... 51
Dealer Manager........................................................... 51
Other Fees and Expenses.................................................. 51
THE PROPOSED AMENDMENTS.................................................... 52
DESCRIPTION OF NEW MCHS SENIOR NOTES....................................... 53
BUSINESS OF MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION............... 62
MANORCARE HEALTH SERVICES PRO FORMA FINANCIAL DATA......................... 82
MANORCARE HEALTH SERVICES SELECTED HISTORICAL FINANCIAL DATA............... 88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MANORCARE HEALTH SERVICES' RESULTS
OF OPERATIONS AND FINANCIAL CONDITION..................................... 90
DESCRIPTION OF CERTAIN INDEBTEDNESS OF MANORCARE HEALTH SERVICES........... 99
MANAGEMENT OF MANORCARE HEALTH SERVICES.................................... 100
THE BOARD OF DIRECTORS OF MANORCARE HEALTH SERVICES........................ 107
CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... 110
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS............................ 111
BENEFICIAL OWNERSHIP OF MANAGEMENT......................................... 113
BUSINESS OF MANOR CARE REALTY AFTER THE DISTRIBUTION....................... 115
MANOR CARE REALTY PRO FORMA FINANCIAL DATA................................. 127
MANAGEMENT OF MANOR CARE REALTY AFTER THE DISTRIBUTION..................... 133
DESCRIPTION OF CERTAIN INDEBTEDNESS OF MANOR CARE REALTY................... 135
RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES AFTER
THE DISTRIBUTION.......................................................... 138
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.................................. 151
LEGAL MATTERS.............................................................. 153
EXPERTS.................................................................... 153
INDEX TO COMBINED FINANCIAL STATEMENTS OF NEW MANORCARE HEALTH SERVICES,
INC. ..................................................................... F-1
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iv
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto set forth elsewhere in
this Prospectus and Consent Solicitation. As used herein, "Manor Care" refers
to Manor Care, Inc. and its subsidiaries prior to the Distribution, "Manor Care
Realty" refers to Manor Care, Inc. and its subsidiaries after the Distribution
and "ManorCare Health Services," refers to New ManorCare Health Services, Inc.
and its subsidiaries after the Distribution. As used herein, "Distribution"
means, collectively, the Contribution of Assets, the Assumption of Liabilities,
the Capital Contribution, and the distribution of capital stock of ManorCare
Health Services to Manor Care's shareholders. See "Risk Factors" for a
discussion of certain factors that should be considered in connection with the
Exchange Offer and Solicitation.
GENERAL
The Exchange Offer is being made in connection with the pro rata distribution
by Manor Care to its stockholders of 100% of the outstanding stock of ManorCare
Health Services, a newly formed wholly owned subsidiary of Manor Care. As a
result of the Distribution, Manor Care will have separated into two independent
publicly traded companies: Manor Care Realty and ManorCare Health Services.
Manor Care Realty will (i) be a health care real estate company focused on the
ownership, construction, development and acquisition of health care properties,
including skilled nursing and assisted living facilities and (ii) own Mesquite
Community Hospital ("Mesquite Hospital") in Mesquite, Texas. ManorCare Health
Services will (i) own all the business and assets of, and subject to certain
exceptions, be responsible for the liabilities associated with, Manor Care's
assisted living business (the "Assisted Living Business"), (ii) operate and
manage Manor Care's skilled nursing facilities, (iii) own a 50% joint venture
interest in three additional skilled nursing facilities (the "Joint Venture
Interests"), and (iv) own all of Manor Care's stock in Vitalink Pharmacy
Services, Inc. ("Vitalink") and In Home Health, Inc. ("In Home Health"). See
"The Distribution."
MANORCARE HEALTH SERVICES
ManorCare Health Services was incorporated in the State of Delaware on August
29, 1997 and is currently a wholly owned subsidiary of Manor Care. ManorCare
Health Services was formed for the purpose of consummating the Distribution and
currently conducts no business other than that related to consummating the
Distribution. Following the Distribution, ManorCare Health Services will (i)
own all of the business and assets of, and, subject to certain exceptions, be
responsible for the liabilities associated with, the Assisted Living Business
currently conducted by Manor Care, (ii) operate and manage the 168 skilled
nursing facilities owned by Manor Care Realty the ("Skilled Nursing
Facilities,"), (iii) own the Joint Venture Interests, (iv) own approximately
51% of Vitalink, a public company that operates institutional pharmacies, and
(v) own approximately 64% of the voting stock of In Home Health, a public
company that provides health care services to clients in their homes. See
"Business of ManorCare Health Services After the Distribution," "Description of
The Transactions" and "Relationship Between Manor Care Realty and ManorCare
Health Services After the Distribution." ManorCare Health Services' principal
executive offices are located at 11555 Darnestown Road, Gaithersburg, Maryland
20878-3200 and its telephone number is: (301) 979-4000.
MANOR CARE REALTY
Manor Care Realty will own 168 Skilled Nursing Facilities in 28 states and
will be a health care real estate company focused on the ownership,
construction, development and acquisition of health care properties, including
skilled nursing and assisted living facilities. Manor Care Realty will also own
and operate Mesquite
1
<PAGE>
Hospital, a 172 licensed bed medical/surgical acute care hospital located in
Mesquite, Texas. At or prior to the Distribution, Manor Care Realty will enter
into a series of agreements with ManorCare Health Services pursuant to which
ManorCare Health Services will lease and operate all of Manor Care Realty's 168
Skilled Nursing Facilities and Manor Care Realty will develop assisted living
facilities for sale to ManorCare Health Services. Manor Care and its
predecessor companies have been engaged in the development, construction and
acquisition of health care properties since 1959. See "Business of Manor Care
Realty After the Distribution," "Description of The Transactions" and
"Relationship Between Manor Care Realty and ManorCare Health Services After the
Distribution."
Manor Care was incorporated in August 1981 in the State of Delaware. Manor
Care's principal executive offices are located at 11555 Darnestown Road,
Gaithersburg, Maryland 20878-3200 and its telephone number is: (301) 979-4000.
DESCRIPTION OF TRANSACTIONS
Pursuant to the Distribution Agreement to be entered into between Manor Care
and ManorCare Health Services (the "Distribution Agreement"), on or prior to
the date the Distribution is effected (the "Effective Date"), Manor Care will
convey or cause to be conveyed to ManorCare Health Services all of the right,
title and interest of Manor Care and its subsidiaries in: (i) all of the
business and assets of the Assisted Living Business; (ii) the shares of Common
Stock of Vitalink owned by Manor Care; (iii) the shares of Common and Preferred
Stock of In Home Health owned by Manor Care; and (iv) the Joint Venture
Interests (collectively, the "Contribution of Assets").
Manor Care will assign to ManorCare Health Services and ManorCare Health
Services will assume certain liabilities, including, subject to certain
exceptions, all liabilities arising from (i) the operation of the Assisted
Living Business or the ownership or use of assets or other activities in
connection therewith arising after the Effective Date, (ii) the operation of
the Skilled Nursing Facilities after the Effective Date, and (iii) the
ownership of stock in Vitalink and In Home Health whether arising before, on or
after the Distribution (collectively, the "Assumption of Liabilities").
At or prior to the Distribution, Manor Care will make or cause to be made a
capital contribution (the "Capital Contribution") to ManorCare Health Services
consisting of (i) approximately $250 million in cash and (ii) an inter-company
senior note in an aggregate principal amount of up to $250 million (the "Realty
Note") of ManorCare Health Services, Inc., Manor Care's principal operating
subsidiary ("Old ManorCare Health Services"), which will change its name to
Manor Care Real Estate Corp. ("Manor Care Real Estate"). See "Description of
Certain Indebtedness of Manor Care Realty--The Realty Note."
Following the Contribution of Assets, the Assumption of Liabilities and the
Capital Contribution, Manor Care will distribute to the holders of record of
Manor Care's common stock, par value $.01 per share ("Manor Care Common
Stock"), one share of the common stock, par value $.01 per share, of ManorCare
Health Services for every share of Manor Care Common Stock. Following the
Distribution, Manor Care will change its name to Manor Care Realty, Inc.
CONCURRENT FINANCINGS
Concurrently with the Exchange Offer made hereby, Manor Care Real Estate is
offering $350 million aggregate principal amount of % Senior Notes due 2008
(the "Manor Care Notes") pursuant to a separate prospectus (the "Debt
Offering"). The Manor Care Notes will be fully and unconditionally guaranteed
(the
2
<PAGE>
"Guarantees") by Manor Care Realty and substantially all of Manor Care Real
Estate's present and future subsidiaries, other than certain unrestricted
subsidiaries.
In addition, Manor Care, on behalf of Manor Care Real Estate, is negotiating
a commitment letter from The Chase Manhattan Bank ("Chase") and Chase
Securities Inc. ("CSI") relating to an eight-year $150 million term loan
facility, subject to earlier maturity under certain circumstances, (the "Term
Facility") and a five-year $300 million revolving credit facility (the
"Revolving Facility") (collectively, the "Credit Facilities").
The Realty Note will contain substantially the same terms as the Manor Care
Notes. Manor Care Realty may redeem the Realty Note after three years at a
redemption price equal to 100% of the principal amount thereof plus accrued and
unpaid interest. In addition, ManorCare Health Services has agreed not to
transfer the Realty Note on or prior to the six-month anniversary of the
issuance thereof. After such date, ManorCare Health Services may transfer the
Realty Note without restriction subject to Manor Care Realty's right to redeem
the Realty Note. On or after the third anniversary of the issuance of the
Realty Note, ManorCare Health Services may request that Manor Care Realty
redeem the Realty Note. For a description of the Realty Note, see "Description
of the Transactions--The Realty Note."
In addition, ManorCare Health Services is negotiating a commitment letter
with Chase and CSI relating to a five-year $100 million revolving credit
facility. ManorCare Health Services anticipates using borrowings under the
revolving credit facility for general corporate purposes, including funding its
working capital requirements. For a description of the Manor Care Notes, the
anticipated terms of the Credit Facilities and the Realty Note, see
"Description of Certain Indebtedness of Manor Care Realty." For a description
of the anticipated terms of the MCHS Credit Facility, see "Description of
Certain Indebtedness of ManorCare Health Services."
RELATED PARTY AGREEMENTS
Following the Distribution, Manor Care Realty will have a continuing
relationship with ManorCare Health Services as a result of the agreements being
entered into in connection with the Distribution, including the Lease
Agreements, the Development Agreement, the Non-Competition Agreement, the
Assisted Living Facility Management Agreement, the Distribution Agreement, the
Tax Sharing Agreement, the Tax Administration Agreement, the Employee Benefits
and Other Employment Matters Allocation Agreement, the Employee Benefits
Administration Agreement, the Office Lease Agreement, the Corporate Services
Agreement, the Trademark Agreement, the License Agreement, the Design Services
Agreement, the Cash Management Agreement, and the Risk Management Consulting
Services Agreement. See "Relationship Between Manor Care Realty and ManorCare
Health Services After the Distribution."
Pursuant to the Lease Agreements, Manor Care Realty will lease to ManorCare
Health Services the 168 Skilled Nursing Facilities owned by Manor Care Realty
and Manor Care Realty will grant to ManorCare Health Services the right to
operate and manage the Skilled Nursing Facilities. The Lease Agreements provide
that Manor Care Realty will receive annual lease payments equal to the greater
of 10% of the value of each facility (as agreed to by Manor Care Realty and
ManorCare Health Services) or 77% of the Net Operating Profit (as defined
herein) of each facility. Pursuant to the Development Agreement, Manor Care
Realty will develop assisted living facilities for sale to ManorCare Health
Services. If at any time during the two-year period following the time a
particular facility opens occupancy reaches 75% for a period of five days,
ManorCare Health Services will be obligated to purchase the facility at a 15-
34% premium to total approved development costs of Manor Care Realty, based on
the number of months elapsed since the opening of the facility. If ManorCare
Health Services does not acquire a facility within the two-year stabilization
period, Manor Care Realty will have the right to sell the facility to a third
party. Total approved development costs include expenses incurred in connection
with the development and construction of the facilities, but do not include
operating losses incurred during the two-year stabilization period. The premium
to total approved development costs is intended to compensate Manor Care Realty
for the increasing value of its investment over time as well as for the risks
it
3
<PAGE>
takes in connection with developing assisted living facilities, including the
risks inherent in operating the facilities during the two year stabilization
period. Prior to purchase by ManorCare Health Services, ManorCare Health
Services will operate and manage the assisted living facilities for Manor Care
Realty for a fixed monthly fee pursuant to the terms of the Assisted Living
Facility Management Agreement. The Non-Competition Agreement will impose
certain non-competition restrictions on each of ManorCare Health Services and
Manor Care Realty in connection with each entity's ability to participate in
the skilled nursing business and the assisted living business. See "Risk
Factors" and "Relationship Between Manor Care Realty and ManorCare Health
Services After the Distribution" for a more detailed description of the
relationship between ManorCare Health Services and Manor Care Realty after the
Distribution and of the terms of the Lease Agreements, the Development
Agreement and the other agreements referred to above.
Set forth below is a chart which illustrates the corporate structure of Manor
Care prior to the Distribution and the corporate structure of Manor Care Realty
and ManorCare Health Services after giving effect to the Distribution and
related transactions:
[CHART DEPICTING MANOR CARE, INC. BEFORE THE DISTRIBUTION]
4
<PAGE>
THE EXCHANGE OFFER AND SOLICITATION
The Exchange Offer.......... ManorCare Health Services is offering to exchange
$1,000 principal amount of its 7 1/2% Senior
Notes due June 15, 2006 (i.e., the New MCHS
Senior Notes) in exchange for each $1,000
principal amount of 7 1/2% Senior Notes due June
15, 2006 of Manor Care properly tendered (i.e.,
the Old Senior Notes).
The terms of the New MCHS Senior Notes will be
identical in all material respects to the terms
of the Old Senior Notes prior to the Proposed
Amendments, except that the New MCHS Senior Notes
(i) will be issued by ManorCare Health Services
and, (ii) will except from the Limitation on
Affiliate Transactions covenant certain
additional transactions, including the
Distribution and related transactions as well as
certain other transactions after the Distribution
between Manor Care Realty and ManorCare Health
Services. See "The Exchange Offer--Terms of the
Exchange Offer" and "Description of New MCHS
Senior Notes."
Interest on New MCHS Senior
Notes; Accrued Interest on
Old Senior Notes...........
Interest on the New MCHS Senior Notes issued in
exchange for the Old Senior Notes will accrue
from, and include, the Exchange Date at the
applicable interest rate on the New MCHS Senior
Notes. Interest on the Old Senior Notes exchanged
in the Exchange Offer will continue to accrue up
to, but not include, the Exchange Date and will
be paid in cash to exchanging holders
concurrently with the delivery of New MCHS Senior
Notes to such holders. See "The Exchange Offer--
Acceptance of Old Senior Notes Tendered for
Exchange; Delivery of New MCHS Senior Notes."
Conditions of the Exchange
Offer....................... Consummation of the Exchange Offer is conditioned
upon, among other things, acceptance of the
Exchange Offer by holders of at least a majority
in principal amount of the Old Senior Notes
(i.e., the Minimum Tender Condition). ManorCare
Health Services may in its reasonable discretion
waive any such conditions and accept for exchange
any Old Senior Notes properly tendered. See "The
Exchange Offer--Conditions to the Exchange Offer"
and "Certain Federal Income Tax Considerations."
Solicitation................
Concurrently with the Exchange Offer, Manor Care
is soliciting Consents from the holders of the
Old Senior Notes to the Proposed Amendments to
the Old Indenture. The Proposed Amendments would,
among other things, eliminate the covenants in
the Old Indenture that restrict (i) the creation,
incurrence or assumption of liens, (ii) sale
leaseback transactions and (iii) transactions
with affiliates. If Consents are received from
the holders of at least a majority in principal
amount of the Old Senior Notes (i.e., the
Requisite Consents), the Old Indenture will be
amended in accordance with the Proposed
Amendments. Manor Care is soliciting the Consents
to the Proposed Amendments to (i) facilitate
5
<PAGE>
the financing being sought in connection with the
Distribution, and (ii) encourage holders of Old
Senior Notes to tender into the Exchange Offer.
See "The Exchange Offer--The Solicitation" and
"The Proposed Amendments."
Manor Care and Wilmington Trust Company, as
trustee (the "Old Trustee"), will execute a
supplemental indenture (the "Supplemental
Indenture") implementing the Proposed Amendments
to the Old Indenture after certification to the
Old Trustee that the Requisite Consents have been
received. The Proposed Amendments will become
operative only upon consummation of the Exchange
Offer. If the Exchange Offer is consummated,
then, unless the Requisite Consents have not been
obtained, the Proposed Amendments will become
effective and each non-exchanging holder of the
Old Senior Notes will be bound by such amendment
even though such holder did not consent to the
Proposed Amendments. See "The Exchange Offer--
Terms of the Exchange Offer--The Solicitation"
and "The Proposed Amendments." All references
herein to the Exchange Offer shall be deemed to
include the Solicitation unless otherwise
specified.
Holders of Old Senior Notes who tender into the
Exchange Offer will be required, as a condition
to valid tender, to have given their Consent to
the Proposed Amendments. The proper completion,
execution and delivery of a Letter of Transmittal
with respect to particular Old Senior Notes will
constitute the giving of a Consent to the
Proposed Amendments with respect to such Old
Senior Notes. Withdrawal of tendered Old Senior
Notes will be deemed a revocation of the Consent
to which such Old Senior Notes relate.
Expiration Date.............
The Exchange Offer will expire at 12:00 midnight,
New York City time, on , 1998 or at any
later time and date to which the Exchange Offer
may be extended by ManorCare Health Services
pursuant to the procedures described herein
(i.e., the Expiration Date). See "The Exchange
Offer--Expiration Date; Extensions; Termination;
Amendments."
Certain Consequences to
Holders Tendering in the Holders of Old Senior Notes who participate in
Exchange Offer............. the Exchange Offer will receive New MCHS Senior
Notes. The New MCHS Senior Notes will be
unsubordinated and unsecured senior obligations
of ManorCare Health Services and will rank pari
passu with all existing and future unsecured and
unsubordinated indebtedness of ManorCare Health
Services. The indenture pursuant to which the New
MCHS Senior Notes will be issued (the "New
Indenture") will be identical in all material
respects to the Old Indenture prior to
implementation of the Proposed Amendments except
(i) the New MCHS Senior Notes will be issued by
ManorCare Health Services and (ii) the New MCHS
Senior Notes will except from the Limitation on
Affiliate Transactions covenant certain
additional
6
<PAGE>
transactions, including the Distribution and
related transactions as well as certain other
transactions after the Distribution between Manor
Care Realty and ManorCare Health Services. After
giving pro forma effect to the debt offering, the
use of proceeds thereof, the Distribution and
related transactions (and assuming that 100% of
the Old Senior Notes accept the Exchange Offer),
as of August 31, 1997, ManorCare Health Services'
aggregate outstanding indebtedness would have
been $313 million, including approximately $46
million of secured borrowings. See "Description
of New MCHS Senior Notes" and "Risk Factors--
Certain Considerations Relating to New MCHS
Senior Notes."
Certain Consequences to
Holders Not Tendering in
the Exchange Offer......... Consummation of the Exchange Offer and the
adoption of the Proposed Amendments will have
certain consequences to holders of the Old Senior
Notes who elect not to tender in the Exchange
Offer, including the following: (i) the Old
Indenture will be amended to delete the principal
restrictive covenants therein, see "The Proposed
Amendments," (ii) upon consummation of the
Exchange Offer, the unexchanged Old Senior Notes
will continue to be senior unsecured obligations
of Manor Care Realty, which securities will have
a lower debt rating than the Old Senior Notes
prior to the Distribution and the New MCHS Senior
Notes after the Distribution, and will be
effectively subordinated to all creditors of
Manor Care Realty's subsidiaries including the
holders of the Manor Care Notes and the lenders
under the Credit Facilities and (iii) the trading
market for unexchanged Old Senior Notes could
become more limited, which may adversely affect
the market price of Old Senior Notes. The Old
Senior Notes are currently rated Baa2 by Moody's
and BBB by Standard & Poors. The New MCHS Senior
Notes will be rated by Moody's and BB+ by
Standard & Poors. Old Senior Notes that do not
accept the Exchange Offer and remain obligations
of Manor Care Realty following the Distribution
will be rated by Moody's and BB by Standard
and Poors. See "Risk Factors--Certain
Considerations Relating to Holders Not Tendering
in the Exchange Offer."
Procedure for Tendering Old
Senior Notes and Giving
Consents................... A holder of Old Senior Notes held with The
Depository Trust Company ("DTC") must follow the
following instructions to tender Old Senior Notes
in the Exchange Offer: (i) call such holder's
broker and inform such broker of such holder's
interest in tendering such holder's Old Senior
Notes pursuant to the Exchange Offer, (ii)
instruct such broker to effect a book-entry
transfer of all Old Senior Notes to be tendered
in the Exchange Offer by such holder into the
account of (the "Exchange Agent") at DTC,
(iii) instruct such broker to complete and sign
the Letter of Transmittal in accordance with the
instructions set forth therein, and (iv) instruct
such broker to deliver the properly completed and
executed Letter of Transmittal (or a facsimile
thereof) to the Exchange Agent on or
7
<PAGE>
prior to 12:00 midnight, New York City time, on
the Expiration Date. The proper completion,
execution and delivery of the Letter of
Transmittal will constitute the giving of a
Consent to the Proposed Amendments. See "Exchange
Offer--Procedures For Tendering Old Senior Notes
and Giving Consents."
LETTERS OF TRANSMITTAL MUST BE SENT ONLY TO THE
EXCHANGE AGENT. DO NOT SEND LETTERS OF
TRANSMITTAL TO MANORCARE HEALTH SERVICES, THE
INFORMATION AGENT, THE OLD TRUSTEE OR THE DEALER
MANAGERS.
Acceptance of Old Senior
Notes and Delivery of New
MCHS Senior Notes..........
Upon satisfaction or waiver of the conditions to
the Exchange Offer, ManorCare Health Services
will accept for exchange (and thereby acquire)
any and all Old Senior Notes that are properly
tendered in the Exchange Offer and not withdrawn
on or before 12:00 midnight, New York City time,
on the Expiration Date, and ManorCare Health
Services will (i) deliver the New MCHS Senior
Notes and (ii) pay accrued interest in cash on
the Old Senior Notes surrendered. See "The
Exchange Offer--Acceptance of Old Senior Notes
Tendered for Exchange; Delivery of New MCHS
Senior Notes."
Withdrawal Rights and
Revocation of Consents.....
Tenders of Old Senior Notes may be withdrawn by
delivering a written notice of withdrawal to the
Exchange Agent only if the Expiration Date is
after 12:01 a.m. , 1998. Withdrawal of
tendered Old Senior Notes will be deemed a
revocation of the consent with respect to such
Old Senior Notes. Any Old Senior Notes not
accepted for exchange for any reason will be
returned to the tendering holder thereof as
promptly as practicable after the expiration or
termination of the Exchange Offer. See "The
Exchange Offer--Withdrawal Rights."
Certain Federal Income Tax
Considerations.............
A holder of Old Senior Notes that exchanges Old
Senior Notes for New MCHS Senior Notes pursuant
to the Exchange Offer should recognize gain or
loss equal to the difference between (i) the fair
market value of the New MCHS Senior Notes and
(ii) the holder's adjusted tax basis in the Old
Senior Notes. A holder of Old Senior Notes who
does not exchange Old Senior Notes for New MCHS
Senior Notes pursuant to the Exchange Offer
should not, as a result of the adoption of the
Proposed Amendments, be treated as if such holder
engaged in a constructive exchange of Old Senior
Notes. If, however, the Proposed Amendments were
to cause such a constructive exchange, a holder
of Old Senior Notes would not recognize gain or
loss because the constructive exchange would
qualify as a tax-free recapitalization. See
"Certain Federal Income Tax Considerations."
8
<PAGE>
No Dissenters' Rights....... Holders of Old Senior Notes do not have any
appraisal or dissenters' rights under the
Delaware General Corporation Law or the Old
Indenture in connection with the Exchange Offer.
Aggregate Principal Amount
of Old Senior Notes........
As of , 1998, there were $150,000,000
aggregate principal amount of Old Senior Notes
outstanding.
Exchange Agent..............
The Wilmington Trust Company
Dealer Managers........ Chase Securities Inc. and SBC Warburg Dillon Read
Inc. (the "Dealer Managers"). The addresses and
phone numbers of the Dealer Managers are set
forth on the back cover page of this Prospectus.
Toll Free Information Questions concerning the terms of the Exchange
Numbers..................... Offer should be directed to the Dealer Managers:
Chase Securities Inc. at 1-800-523-9736 or SBC
Warburg Dillon Read Inc. at [ ].
9
<PAGE>
TERMS OF NEW MCHS SENIOR NOTES
The terms of the New MCHS Senior Notes will be identical in all material
respects to the terms of the corresponding series of Old Senior Notes prior to
the implementation of the Proposed Amendments except that (i) the New MCHS
Senior Notes will be issued by ManorCare Health Services, and (ii) the New
Indenture will except from the Limitation on Affiliate Transactions covenant
certain additional transactions, including the Distribution and related
transactions as well as certain other transactions after the Distribution
between Manor Care Realty and ManorCare Health Services. After giving pro forma
effect to the debt offering, the use of proceeds thereof, the Distribution and
related transactions (and assuming that 100% of the Old Senior Notes accept the
Exchange Offer), as of August 31, 1997, ManorCare Health Services' aggregate
outstanding indebtedness would have been $313 million, including approximately
$46 million of secured borrowings.
Issuer...................... New ManorCare Health Services, Inc. (to be
renamed ManorCare Health Services, Inc.)
Ranking..................... The New MCHS Senior Notes will be senior
unsecured obligations of ManorCare Health
Services and will rank pari passu in right of
payment with all senior debt of ManorCare Health
Services whether outstanding on the date hereof
or hereafter created, incurred, assumed or
guaranteed.
<TABLE>
<CAPTION>
MATURITY INTEREST INTEREST
DATE RATE PAYMENT DATES
-------- -------- -------------
<C> <C> <S>
June 15, 2006 7 1/2% payable semi-annually on June 15 and
December 15 each year, commencing
, 1998
</TABLE>
New MCHS Senior Notes.......
Optional Redemption......... The New MCHS Senior Notes will be redeemable, at
the option of ManorCare Health Services, in whole
at any time or in part from time to time, on at
least 30 days but not more than 60 days prior
notice mailed to the registered address of each
holder of New MCHS Senior Notes to be so
redeemed, at a redemption price equal to the
greater of (i) 100% of their principal amount and
(ii) the sum of the present values of the
remaining scheduled payments of principal and
interest thereon discounted, on a semiannual
basis (assuming a 360-day year consisting of
twelve 30-day months), at the Treasury Rate (as
defined herein), plus 15 basis points, plus
accrued interest thereon to the date of
redemption.
Certain Covenants........... The New Indenture will contain substantially
identical covenants to those contained in the Old
Indenture prior to implementation of the Proposed
Amendments, except that (i) the New MCHS Senior
Notes will be issued by ManorCare Health Services
and (ii) the New Indenture will except from the
Limitation on Affiliate transactions covenant
certain additional transactions including: (w)
transactions pursuant to existing agreements; (x)
the Distribution and the related transactions;
(y) any transaction between ManorCare Health
Services and Manor Care Realty in the ordinary
course of business or approved by a majority of
the Independent Directors (as defined herein) of
ManorCare Health Services; and (z) post-
Distribution transactions contemplated by the
agreements to be entered into by ManorCare Health
Services and Manor Care Realty in connection with
the Distribution.
For more detailed information regarding the New MCHS Senior Notes, see
"Description of New MCHS Senior Notes."
10
<PAGE>
MANORCARE HEALTH SERVICES SUMMARY PRO FORMA AND HISTORICAL FINANCIAL DATA
The following table sets forth a summary of selected historical and pro forma
financial data for ManorCare Health Services. The historical financial data
relates to the businesses of ManorCare Health Services as they were operated as
part of Manor Care and may not necessarily be indicative of the results of
operations or financial position that would have been obtained if ManorCare
Health Services had been a separate, independent company during the periods
shown nor necessarily indicative of ManorCare Health Services' future
performance as an independent company. See "Risk Factors--Operating History and
Future Prospects." The historical statements of income data for the fiscal
years ended May 31, 1995, 1996 and 1997 and the historical balance sheet data
as of May 31, 1996 and 1997 are derived from the audited combined financial
statements of ManorCare Health Services. The historical statements of income
data for the three month periods ended August 31, 1996 and 1997 and the
historical balance sheet data as of August 31, 1997 are derived from the
unaudited combined financial statements of ManorCare Health Services. The
historical financial data set forth below should be read in conjunction with
ManorCare Health Services' Combined Financial Statements and the notes thereto
found elsewhere in this Registration Statement. The operations of ManorCare
Health Services will consist principally of the pharmacy operations, assisted
living operations and home health operations formerly conducted by Manor Care
directly or through Manor Care's subsidiaries. As such, historical statements
of income and other financial data include results of pharmacy, assisted living
and home health operations. See "Management's Discussion and Analysis of
Results of ManorCare Health Services' Operations and Financial Condition." The
summary pro forma financial data for the fiscal year ended May 31, 1997 and the
three month period ended August 31, 1997 make adjustments to the historical
balance sheet and the historical statements of income, as if the Distribution
had occurred on August 31, 1997 for purposes of the pro forma balance sheet,
and on June 1, 1996 and June 1, 1997, respectively for purposes of the pro
forma statements of income. See "Pro Forma Financial Data of ManorCare Health
Services" and the accompanying footnotes for a discussion of the principal
adjustments made in the preparation of the pro forma financial information. The
pro forma financial statements of ManorCare Health Services may not reflect the
future results of operations or financial position of ManorCare Health Services
or what the results of operations would have been if ManorCare Health Services
had been a separate, independent company during such period. The pro forma
adjustments reflect the impact of the Distribution, Lease Agreements, Assisted
Living Facility Management Agreements, net additional costs associated with
general corporate functions, TeamCare (as defined herein) operations from June
1, 1996 to January 31, 1997 (the portion of the fiscal year prior to the
TeamCare Merger (as defined herein)), the issuance of the New MCHS Senior
Notes, and the related income tax effects of these adjustments. See "Pro Forma
Financial Data of ManorCare Health Services."
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEARS ENDED MAY 31, ENDED AUGUST 31,
---------------------------------------- ----------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
-------- -------- -------- ---------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues.................. $125,987 $263,047 $471,152 $1,681,966 $86,253 $158,696 $436,932
Expenses:
Operating expenses...... 99,011 227,410 413,762 1,494,809 74,533 153,619 403,446
Depreciation and
amortization........... 6,090 11,583 20,135 27,797 3,718 7,199 6,939
General corporate and
other.................. 2,957 9,195 8,385 70,592 1,814 3,292 13,921
Provision for asset
impairment............. -- 1,200 -- -- -- -- --
-------- -------- -------- ---------- ------- -------- --------
Total expenses........ 108,058 249,388 442,282 1,593,198 80,065 164,110 424,306
-------- -------- -------- ---------- ------- -------- --------
Income before other income
and (expenses) and income
taxes.................... 17,929 13,659 28,870 88,768 6,188 (5,414) 12,626
Other income and
(expenses):
Gain on issuance of
Vitalink stock......... -- -- 50,271 50,271 -- -- --
Interest expense........ (3,898) (11,387) (17,317) (25,113) (3,840) (4,527) (4,228)
Interest income and
other.................. (1,152) 276 (1,719) 16,215 150 7,727 13,196
-------- -------- -------- ---------- ------- -------- --------
Income before income
taxes.................... 12,879 2,548 60,105 130,141 2,498 (2,214) 21,594
Income taxes.............. 6,055 1,437 23,917 55,074 1,273 750 9,841
-------- -------- -------- ---------- ------- -------- --------
Net income................ $ 6,824 $ 1,111 $ 36,188 $ 75,067 $ 1,225 $ (2,964) $ 11,753
======== ======== ======== ========== ======= ======== ========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF AUGUST 31,
----------------- --------------------
PRO FORMA
1996 1997 1997 1997
-------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................ $334,880 $787,377 $ 782,767 $1,412,392
Long-term debt.......................... 51,387 180,843 193,308 312,808
Investments and advances from Manor
Care................................... 193,807 277,066 277,235 --
Common stock and paid-in-capital........ -- -- -- 681,453
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31, THREE MONTHS ENDED AUGUST 31,
---------------------------------------- -------------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
-------- -------- --------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(1)............... $ 24,019 $ 26,442 $ 49,005 $116,565 $ 9,906 $ 1,785 $ 19,565
EBITDA margin........... 19.06% 10.05% 10.40% 6.9% 11.48% 1.12% 4.48%
Ratio of EBITDA to
interest expense....... 6.16x 2.32x 2.83x 4.64x 2.58x 0.39x 4.63x
Ratio of earnings to
fixed charges(2)....... 3.53x 1.15x 3.77x 5.44x N/A 0.57x 5.11x
Cash provided (used) by
operating activities... 16,701 8,043 4,401 N/A 8,793 (11,015) N/A
Cash (used in) provided
by investing
activities............. (59,183) (86,603) (185,602) N/A (20,083) 6,938 N/A
Cash provided by
financing activities... 42,072 101,908 172,097 N/A 8,663 13,222 N/A
Investment in property
and equipment.......... 25,020 32,001 39,974 N/A 9,527 4,246 N/A
</TABLE>
- --------
(1) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and certain other special charges, including $1.2 million in
fiscal year 1996 relating to the impairment of assets. EBITDA is presented
to assist in understanding ManorCare Health Services' operating results.
Additionally, certain covenants in the MCHS Credit Facility are expected to
be calculated based on EBITDA. EBITDA is not intended to represent cash
flows for the period, is not presented as an alternative to operating
income as an indicator of operating performance, may not be comparable to
other similarly titled measures of other companies and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. The
items excluded from the calculation of EBITDA are significant components in
understanding and assessing the financial performance of ManorCare Health
Services. EBITDA is included herein to provide additional information with
respect to the ability of ManorCare Health Services to meet future debt
service, capital expenditures and working capital requirements. See
ManorCare Health Services' consolidated financial statements and the notes
thereto appearing elsewhere in this Information Statement.
(2) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income from continuing operations before provision for
income taxes including dividends from less than 50% owned companies and
ManorCare Health Services' share of pre-tax income of 50%-owned companies
carried at equity, before fixed charges net of capitalized interest. Fixed
charges comprise interest on long-term and short-term debt, including
capitalized interest, the portion of rentals representative of an interest
factor and ManorCare Health Services' share of fixed charges of 50%-owned
companies carried at equity.
12
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF MANOR CARE
AND PRO FORMA FINANCIAL DATA OF MANOR CARE REALTY
The following table sets forth a summary of selected historical financial
data of Manor Care and pro forma financial data of Manor Care Realty. The
historical financial data are not necessarily indicative of the results of
operations or financial position that would have been obtained if Manor Care
Realty had been a separate company during the periods shown nor necessarily
indicative of Manor Care Realty's future performance as a separate company. See
"Risk Factors--Operating History and Future Prospects." The historical
statements of income data for the fiscal years ended May 31, 1995, 1996 and
1997 and the historical balance sheet data as of May 31, 1996 and 1997 are
derived from the audited consolidated financial statements of Manor Care. The
historical financial data set forth below should be read in conjunction with
Manor Care's Consolidated Financial Statements and the notes thereto found
elsewhere in this Registration Statement.
The consolidated balance sheet as of August 31, 1997, the consolidated
statements of income and the consolidated statements of cash flows for the
three months ended August 31, 1997 and 1996, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows at August 31, 1997 and for all
periods presented have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with Manor
Care's audited consolidated financial statements and notes thereto found
elsewhere in this Registration Statement. The results of operations and cash
flows for the three month periods ended August 31, 1997 and 1996 are not
necessarily indicative of the operating results or cash flows for the full
year.
The summary pro forma financial data make adjustments to the historical
balance sheet and the historical statements of income, as if the Distribution
and related transactions (including the Exchange Offer) had occurred on August
31, 1997 for purposes of the pro forma balance sheet, and on June 1, 1996 and
June 1, 1997 for purposes of the pro forma statements of income. The pro forma
financial statements of Manor Care Realty may not reflect the future results of
operations or financial position of Manor Care Realty or what the results of
operations would have been if Manor Care Realty had been a separate company
during such period. The pro forma adjustments reflect the impact of the
Distribution and related transactions, including the Credit Facilities and the
Realty Note, the Lease Agreements, the Assisted Living Facility Management
Agreements, net additional costs associated with general corporate functions,
the consummation of the Exchange Offer, the Offering and the use of proceeds
thereof, and the related income tax effects of these adjustments. See "Manor
Care Realty Pro Forma Financial Data" and the accompanying footnotes for a
discussion of the principal adjustments made in the preparation of the pro
forma financial information.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31, THREE MONTHS ENDED AUGUST 31,
------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
-------- -------- ---------- ----------- -------- ----------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Income Da-
ta:
Revenues................ $893,471 $985,150 $1,056,095 $217,132 $250,226 $274,054 $41,429
Expenses:
Operating.............. 670,987 735,671 789,074 59,013 191,539 208,247 5,559
Depreciation and
amortization.......... 48,284 56,503 60,243 60,608 14,586 15,985 16,245
General corporate and
other................. 60,240 63,127 60,177 -- 14,163 11,265 --
Provisions for asset
impairment and
restructuring......... -- 25,100 -- -- -- -- --
-------- -------- ---------- -------- -------- -------- -------
Total expenses......... 779,511 880,401 909,494 119,621 220,288 235,497 21,804
-------- -------- ---------- -------- -------- -------- -------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 113,960 104,749 146,601 97,511 29,938 38,557 19,625
-------- -------- ---------- -------- -------- -------- -------
Interest income from
advances to
discontinued lodging
segment............... 15,492 19,673 21,221 21,221 5,079 2,604 2,604
Interest expense....... (18,872) (18,951) (24,514) (64,414) (5,302) (6,829) (17,118)
Interest income and
other................. 6,372 3,452 6,400 6,400 1,653 2,592 2,592
-------- -------- ---------- -------- -------- -------- -------
Income from continuing
operations before
income taxes........... 116,952 108,923 149,708 60,718 31,368 36,924 7,703
Income taxes............ 46,101 44,563 60,783 25,587 12,327 14,100 2,892
-------- -------- ---------- -------- -------- -------- -------
Income from continuing
operations............. 70,851 64,360 88,925 35,131 19,041 22,824 4,811
Income from discontinued
assisted living,
pharmacy and home
health operations...... 6,824 1,111 36,188 -- 1,225 (2,964) --
Income from discontinued
lodging operations..... 16,811 20,436 11,829 11,829 3,419 -- --
-------- -------- ---------- -------- -------- -------- -------
Net income.............. $ 94,486 $ 85,907 $ 136,942 $ 46,960 $ 23,685 $ 19,860 $ 4,811
======== ======== ========== ======== ======== ======== =======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF AUGUST 31,
---------------------- -----------------------
PRO FORMA
1996 1997 1997 1997
---------- ---------- ---------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......... $ (33,357) $ 33,718 $ 200,813 $ 124,001
Total assets............ 1,593,193 1,547,578 1,638,292 1,192,977
Long-term debt.......... 490,575 491,190 551,507 804,547
Total equity............ 707,769 690,431 710,677 14,224
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED MAY 31, AUGUST 31,
----------------------------------------------- ----------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
---------- ---------- ---------- ----------- -------- ------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Financial and
Operating Data:
Operating margin........ 12.8% 10.6% 13.9% 44.9% 11.9% 14.1% 47.4%
EBITDA(1)............... $162,244 $186,352 $206,844 $158,119 $44,524 $54,542 $35,870
EBITDA margin........... 18.16% 18.92% 19.59% 72.82% 17.79% 19.90% 86.58%
Number of operating
beds................... 22,252 23,227 23,865 23,510 23,221 24,079 23,724
Ratio of EBITDA to
interest expense....... 8.60x 9.83x 8.44x 2.45x 8.40x 7.99x 2.10x
Ratio of earnings to
fixed charges(2) ...... 6.43x 5.62x 6.03x 1.73x n/a 5.46x 1.31x
Cash provided by (used
in) continuing
operating activities... 104,059 191,264 75,750 n/a (3,930) (286) n/a
Cash used in investing
activities............. (174,602) (275,318) (98,900) n/a (45,351) (48,769) n/a
Cash provided by (used
in) financing
activities............. 80,037 123,539 (9,226) n/a 31,808 60,722 n/a
</TABLE>
- -------
(1) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and certain other special charges, including $25.1 million in
fiscal year 1996 relating to the impairment of assets. EBITDA is presented
to assist in understanding Manor Care and Manor Care Realty's operating
results. Additionally certain covenants in the Notes, the Realty Note and
the Credit Facilities are expected to be calculated based on EBITDA. EBITDA
is not intended to represent cash flows for the period, is not presented as
an alternative to operating income as an indicator of operating
performance, may not be comparable to other similarly titled measures of
other companies and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles. The items excluded from the
calculation of EBITDA are significant components in understanding and
assessing the financial performance of Manor Care and Manor Care Realty.
EBITDA is included herein to provide additional information with respect to
the ability of Manor Care Realty to meet future debt service, capital
expenditures and working capital requirements. See Manor Care's
consolidated financial statements and the notes thereto appearing elsewhere
in this Prospectus.
(2) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income from continuing operations before provision for
income taxes including dividends from less than 50% owned companies and
Manor Care's share of pre-tax income of 50%-owned companies carried at
equity, before fixed charges net of capitalized interest. Fixed charges
comprise interest on long-term and short-term debt, including capitalized
interest, the portion of rentals representative of an interest factor and
Manor Care's share of fixed charges of 50%-owned companies carried at
equity.
14
<PAGE>
RISK FACTORS
The following factors and other information described elsewhere herein
should be carefully considered by each prospective investor before deciding
whether to tender Old Senior Notes pursuant to the Exchange Offer.
CERTAIN CONSIDERATIONS RELATING TO OLD SENIOR NOTES
THE PROPOSED AMENDMENTS
The Proposed Amendments would, among other things, delete the principal
restrictive covenants therein. The Proposed Amendments would eliminate the
covenants in the Old Indenture that restrict: (i) the creation, incurrence or
assumption of liens; (ii) sale leaseback transactions; and (iii) transactions
with affiliates. Consummation of the Exchange Offer and the adoption of the
Proposed Amendments will have certain consequences to holders of Old Senior
Notes who elect not to tender in the Exchange Offer, including the following:
(i) the Old Indenture will be amended to delete the restrictive covenants
therein, (ii) upon consummation of the Exchange Offer, the unexchanged Old
Senior Notes will continue to be senior unsecured obligations of Manor Care
Realty and will be effectively subordinated to all creditors of Manor Care
Realty's subsidiaries including the holders of the Manor Care Notes and the
lenders under the Credit Facilities, and (iii) the trading market for
unexchanged Old Senior Notes could become more limited, which may adversely
affect the market price of the Old Senior Notes. If the Proposed Amendments
become operative, the holders of the Old Senior Notes will be bound thereby
regardless of whether they consented to the Proposed Amendments.
MANOR CARE REALTY'S INDEBTEDNESS AND DEBT RATING OF UNEXCHANGED OLD SENIOR
NOTES
Upon consummation of the Distribution, unexchanged Old Senior Notes will
remain obligations of Manor Care Realty. After giving pro forma effect to the
Debt Offering and the use of proceeds thereof, the Distribution and related
transactions (and assuming that 100% of the Old Senior Notes accept the
Exchange Offer), as of August 31, 1997, Manor Care Realty's aggregate
outstanding indebtedness would have been approximately $805 million, including
approximately $205 million of secured borrowings. See "--Substantial Leverage;
Ability to Service Indebtedness." The unexchanged Old Senior Notes will have a
debt rating lower than the Old Senior Notes' current debt rating and the New
MCHS Senior Notes. The Old Senior Notes are currently rated Baa2 by Moody's
and BBB by Standard & Poors. The New MCHS Senior Notes will be rated by
Moody's and BB+ by Standard & Poors. Old Senior Notes that do not accept the
Exchange Offer and remain obligations of Manor Care Realty following the
Distribution will be rated by Moody's and BB by Standard & Poors.
REDUCED LIQUIDITY OF OLD SENIOR NOTES
The trading market for unexchanged Old Senior Notes could become more
limited due to the reduction in the amount of Old Senior Notes outstanding
after the Exchange Offer, which might adversely affect the liquidity and
market price of such Old Senior Notes. There is no assurance that an active
market in the unexchanged Old Senior Notes will develop and no assurance as to
the prices at which the unexchanged Old Senior Notes may be traded.
FORWARD-LOOKING INFORMATION; HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
This Registration Statement contains various forward-looking statements and
information that are based on management's belief as well as assumptions made
by and information currently available to management. When used in this
document, the words "anticipate," "estimate," "project," "intend," "expect"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks, uncertainties and assumptions.
All of these forward-looking statements are based on estimates and assumptions
made by management of Manor Care Realty which, although believed by management
of Manor Care Realty to be reasonable, are inherently uncertain. Therefore,
undue reliance should not be placed upon such estimates and statements. No
assurance can be given that any of such estimates will be realized and it is
likely that actual results will differ materially from those contemplated by
such forward-looking statements. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated,
projected or expected.
15
<PAGE>
Among the key factors that may have a direct bearing on Manor Care Realty's
operating results is Manor Care Realty's ability to implement its plan to
construct, develop, acquire or sell skilled nursing and assisted living
facilities. In addition, actual future results and trends may differ materially
depending on a variety of factors discussed in this "Risk Factors" section and
elsewhere in this Registration Statement. Factors that may affect such plans or
results include, without limitation, (i) Manor Care Realty's success in
implementing its business strategy, including its success in arranging
financing where required, (ii) the nature and extent of future competition,
(iii) the extent of future health care reform and regulation, including cost
containment measures, (iv) ManorCare Health Services' ability to manage and
operate the Skilled Nursing Facilities, (v) the loss or retirement of key
members of management or significant changes in the shareholder bases of Manor
Care Realty or ManorCare Health Services, (vi) increases in Manor Care Realty's
cost of borrowing, (vii) any costs associated with Manor Care Realty's
transition to an independent public company; (viii) changes in the mix of
payment sources for patient services provided by ManorCare Health Services,
including any decrease in the amount and percentage of revenues derived from
private payors, (ix) the ability of ManorCare Health Services to continue to
deliver high quality care and to attract private pay residents, and (x) changes
in general economic conditions and/or in the markets in which Manor Care Realty
may, from time to time, compete. Many of such factors are beyond the control of
Manor Care Realty and its management. Because Manor Care Realty will be
dependent to a large extent on ManorCare Health Services, Manor Care Realty
will also be affected adversely to the extent that any of the above factors
affect ManorCare Health Services.
The historical financial statements and data of Manor Care included, or
incorporated by reference herein, do not give effect to the Distribution and
related transactions. Manor Care, prior to the Distribution, had different
management, revenue base and cost structures, as well as significantly
different capitalization. In addition, Manor Care Realty did not operate as a
separate company during such periods. Consequently, the historical financial
statements and data included herein do not indicate the results of operations
or financial condition of Manor Care Realty that would have been reported for
the periods indicated. In addition, the pro forma financial statements and
data, which give effect to the Distribution and related transactions, are
included herein for informational purposes and, while management believes that
they may be helpful in understanding the operations of Manor Care Realty, on
such a pro forma basis, undue reliance should not be placed thereon. Such pro
forma financial statements and data do not reflect the future results of Manor
Care Realty.
NO OPERATING HISTORY AS AN INDEPENDENT PUBLIC COMPANY AND UNCERTAINTY OF FUTURE
PROSPECTS
Manor Care Realty does not have an operating history as an independent public
company, and therefore, there are no historical financial results of Manor Care
Realty for investors to evaluate. However, Manor Care Realty will own and
conduct the operations of Manor Care's real estate development business and
Mesquite Hospital. These businesses were previously conducted by Manor Care as
divisions of a large public company with greater financial strength. In
addition, the division of Manor Care may result in some temporary dislocation
and inefficiencies to the business operations, as well as to the organizational
and personnel structure. There can be no assurance that Manor Care Realty's
operations will be profitable in 1998 or in future years.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
As a result of the Distribution, Manor Care Realty will be highly leveraged,
with indebtedness that is substantial in relation to its stockholders' equity.
After giving pro forma effect to the Offering, the use of proceeds thereof, the
Distribution and related transactions (and assuming the holders of 100% of the
outstanding Old Senior Notes accept the Exchange Offer), as of August 31, 1997,
Manor Care Realty's aggregate outstanding indebtedness would have been $805
million and Manor Care Realty's stockholders' equity would have been $14.2
million. The indebtedness consists of the following: (i) $350 million of Manor
Care Notes, (ii) the Realty Note in an aggregate principal amount of $250
million, (iii) $178 million drawn under the Credit Facilities, of which $150
million applies to the Term Facility at % (the Term Facility amortizes in
years six through eight), and $28 million applies to the Revolving Facility at
an interest rate of % (the Revolving Facility has a bullet maturity), and
(iv) $27 million of facility-specific mortgage bond indebtedness with
maturities and interest rates ranging from one to twenty-six years, and 4% to
12%, respectively. Manor Care Realty expects
16
<PAGE>
that the Credit Facilities and the indenture relating to the Manor Care Notes
will permit Manor Care Realty to incur additional indebtedness, subject to
certain limitations. Manor Care Realty will need to incur additional
indebtedness over the next five years to fund the planned development of
skilled nursing and assisted living facilities over the next five years, and it
is expected that this will be funded through the Revolving Credit Facility. The
Credit Facilities will be subject for mandatory repayment in certain
circumstances. See "Description of Certain Indebtedness of Manor Care Realty."
Manor Care Realty's ability to repay the indebtedness to be incurred in
connection with the Distribution at its scheduled maturity is expected to be
dependent in whole or in part on its obtaining additional debt and/or equity
financing or, alternatively, the disposition of assets. The Credit Facilities
are expected to be secured by a majority of the assets of Manor Care Realty and
Manor Care Real Estate and by a pledge of the capital stock of Manor Care Real
Estate and Manor Care Realty's other subsidiaries and by an assignment of
certain agreements with ManorCare Health Services, including the Lease
Agreements and the Development Agreement. No assurances can be given as to
Manor Care Realty's ability to repay other indebtedness with a combination of
operating cash flow and refinancings or seek additional financing, which
ability may be impaired as a result of such security. However, based on current
management expectations and assuming no material change in general economic
conditions, Manor Care Realty believes that it will be able to repay its
maturing indebtedness with a combination of operating cash flow and
refinancings in the capital and bank markets, as applicable, as it is currently
scheduled to become due. In the event Manor Care Realty is unable to obtain the
necessary funds to repay its indebtedness, Manor Care Realty would be in
default under the terms of its indebtedness. Such a default could result in,
among other things, a foreclosure or other actions by creditors against
collateral securing such indebtedness, and in cross defaults to other
indebtedness resulting in the acceleration of the maturity of all principal and
interest of indebtedness subject to such cross defaults. In the event of such a
default and a resulting foreclosure on the skilled nursing facilities, Manor
Care Realty would not receive any further lease payments from ManorCare Health
Services under the terms of the Lease Agreements. The loss of lease payments
payable to Manor Care Realty under the Lease Agreements would have a material
adverse effect on Manor Care Realty's revenues and results of operations.
The degree to which Manor Care Realty is leveraged could have important
consequences, including the following: (i) Manor Care Realty's ability to
obtain additional financing in the future to fund construction of facilities,
for working capital, capital expenditures, acquisitions or general corporate
purposes may be impaired; (ii) a substantial portion of Manor Care Realty's
cash flow from operations must be dedicated to the payment of principal and
interest on its indebtedness, thereby reducing the funds available to Manor
Care Realty for its operations; (iii) certain of Manor Care Realty's borrowings
will be at variable rates of interest, which will cause Manor Care Realty to be
vulnerable to increases in interest rates and (iv) Manor Care Realty's
substantial leverage may make it more vulnerable to cost increases and adverse
economic conditions and limit its ability to withstand competitive pressures or
take advantage of business opportunities.
Manor Care Realty's ability to make scheduled principal payments or to
refinance its obligations with respect to its indebtedness depends primarily on
the financial and operating performance of ManorCare Health Services, which, in
turn, is subject to prevailing economic conditions and to financial, business,
industry and other factors which are beyond its control. See "--Forward-Looking
Information; Historical and Pro Forma Financial Information" for a description
of certain factors that may affect Manor Care Realty's and ManorCare Health
Service's financial and operating performance. There can be no assurance that
Manor Care Realty's operating results will be sufficient for payment of Manor
Care Realty's indebtedness.
Manor Care Realty currently anticipates investing between $1.5 billion and
$1.9 billion over the next five years in the development of skilled nursing and
assisted living facilities. This includes acquisitions of existing skilled
nursing facilities and includes capital improvements for new and existing
facilities. The amount of additional indebtedness required to fund this capital
requirement currently is anticipated to be approximates $250 million. The
balance is currently expected to be funded from the proceeds from the sales of
assisted living facilities to ManorCare Health Services, an equity offering
expected to occur in late fiscal year 1998, and from cash provided from
operating activities. There can be no assurances that Manor Care Realty will be
able to obtain
17
<PAGE>
debt or equity financing on terms acceptable to it or that the proceeds of such
financings will be available or sufficient to fund assisted living and skilled
nursing development over the next five years.
Manor Care Realty's business is capital intensive and Manor Care Realty will
continue to have significant capital requirements in the future. As a highly
leveraged corporation, any new financings and refinancings by Manor Care Realty
of its existing debt may be at higher interest rates and on less advantageous
terms than would have been the case had the Distribution not taken place. Manor
Care Realty's ability to meet certain financial tests in the Credit Facilities
will be dependent upon its ability to reduce its leverage over the next three
to five years. Such reductions may require Manor Care Realty to raise
additional equity, which will be dependent upon conditions then prevailing in
the United States equity capital markets. See "Description of Certain
Indebtedness of Manor Care Realty--The Credit Facilities."
HOLDING COMPANY STRUCTURE
Manor Care Realty is a holding company with no material business operations,
sources of income or assets of its own other than the shares of its
subsidiaries. Because substantially all of Manor Care Realty's operations are
conducted through subsidiaries, Manor Care Realty's cash flow and,
consequently, its ability to meet its debt service obligations, including
payment of principal, premium, if any, and interest on the Old Senior Notes, is
dependent upon the cash flow of its subsidiaries and the payment of funds by
those subsidiaries to Manor Care Realty in the form of loans, dividends, fees
or otherwise. The subsidiaries are separate and distinct legal entities and
will have no obligation, contingent or otherwise, to pay any amounts due
pursuant to the Old Senior Notes or to make any funds available therefor,
whether in the form of loans, dividends or otherwise. See "--Fraudulent
Transfer Considerations, Legal Dividend Requirements." Any right of Manor Care
Realty to receive assets of any of its subsidiaries upon its liquidation or
reorganization (and the consequent right of the holders of the Old Senior Notes
to participate in the distribution of proceeds from those assets) will be
effectively subordinated to the claims of such subsidiary's creditors
(including holders of the Manor Care Notes, tax authorities, trade creditors,
and the lenders under the Credit Facilities, subject to the considerations
described under "--Fraudulent Transfer Considerations; Legal Dividend
Requirements," as well as other lenders to those subsidiaries), except to the
extent that Manor Care Realty or Manor Care Real Estate, as the case may be, is
itself a creditor of such subsidiary, in which case such entity's claims would
still be subordinated to any security interest in the assets of such subsidiary
and indebtedness of such subsidiary senior to that held by such entity. See "--
Asset Encumbrances." The terms of the Indenture relating to the Manor Care
Notes will provide for the release of a Subsidiary Guarantor's Guarantee under
the Indenture in the event such Subsidiary Guarantor is not an obligor under
the Credit Facilities. In addition, although the indenture relating to the
Manor Care Notes limits the ability of Manor Care Realty's subsidiaries to
incur additional indebtedness and to enter into agreements that restrict the
ability of each subsidiary to pay dividends or make or repay loans or other
payments to Manor Care Realty, Manor Care Realty's subsidiaries may
nevertheless be able to incur substantial additional indebtedness. See
"Description of Certain Indebtedness of Manor Care Realty--The Manor Care
Notes."
ASSET ENCUMBRANCES
The Notes and the Guarantees will be effectively subordinated to any secured
Indebtedness of Manor Care Real Estate and the Guarantors, respectively, to the
extent of the assets securing such Indebtedness. It is expected that the Credit
Facilities will be secured (i) by a pledge of the capital stock of Manor Care
Real Estate and Manor Care Realty's other subsidiaries, (ii) by a majority of
the assets of Manor Care Realty and Manor Care Real Estate, and (iii) by an
assignment of certain agreements between Manor Care Real Estate or a subsidiary
of Manor Care Real Estate on the one hand, and ManorCare Health Services, on
the other hand, including the Lease Agreements and the Development Agreement.
The Lease Agreements and the Development Agreement are expected to generate
substantially all of the revenues and cash flow of Manor Care Real Estate. On a
pro forma basis after giving effect to the Distribution and related
transactions (and assuming the holders of 100% of the outstanding Old Senior
Notes accept the Exchange Offer), as of August 31, 1997, Manor Care Realty
would
18
<PAGE>
have had approximately $205 million of secured borrowings (including $178
million of indebtedness under the Credit Facilities and $27 million of
mortgage bond indebtedness), and unused commitments under the Credit
Facilities of $272 million. The Indenture will permit Manor Care Realty, Manor
Care Real Estate and the Restricted Subsidiaries to incur additional secured
Indebtedness, subject to certain limitations.
RESTRICTIONS IMPOSED BY TERMS OF MANOR CARE REALTY'S INDEBTEDNESS
The Indenture relating to the Manor Care Notes will restrict, among other
things, the ability of Manor Care Realty and its subsidiaries other than the
unrestricted subsidiaries, to incur additional indebtedness, incur liens, pay
dividends or make certain other restricted payments. In addition, Manor Care
Realty anticipates that the Credit Facilities will impose upon Manor Care
Realty certain financial and operating covenants, including, among others,
requirements that Manor Care Realty maintain certain financial ratios and
satisfy certain financial tests, limitations on capital expenditures, and
restrictions on the ability of Manor Care Realty to incur debt, pay dividends,
or take certain other corporate actions, all of which may restrict Manor Care
Realty's ability to expand or to pursue its business strategies. The terms of
the Indenture will provide for the release of a Subsidiary Guarantor's
Guarantee under the indenture relating to the Manor Care Notes in the event
such Subsidiary Guarantor is not an obligor under the Credit Facilities. There
can be no assurance that Manor Care Realty will be able to comply with the
covenants and in addition, changes in economic or business conditions, results
of operations or other factors could in the future cause a violation of one or
more covenants in Manor Care Realty's debt instruments. Failure by Manor Care
Realty to comply with such covenants may result in an event of default which,
if not cured or waived, could have a material adverse effect on Manor Care
Realty. See "--Substantial Leverage; Ability to Service Indebtedness," and
"Description of Certain Indebtedness of Manor Care Realty."
FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
It is a condition to the consummation of the Distribution that each of Manor
Care Realty and ManorCare Health Services shall have received an opinion
satisfactory to the Board of Directors regarding the solvency of Manor Care
Realty and ManorCare Health Services and the permissibility of the
Contribution of Assets, the Capital Contribution, the Assumption of
Liabilities, and the Distribution under Section 170 of the Delaware General
Corporation Law (the "DGCL"). Manor Care's Board of Directors does not intend
to consummate the Distribution unless it is satisfied regarding the
permissibility of the Distribution under Section 170 of DGCL and the solvency
of Manor Care and ManorCare Health Services as of the declaration by Manor
Care of the distribution of the capital stock of ManorCare Health Services to
Manor Care's shareholders and as of the consummation of the Distribution.
There is no certainty, however, that a court would reach the same conclusions
set forth in such opinion in determining whether Manor Care Real Estate, Manor
Care Realty or ManorCare Health Services was insolvent at the time of, or
after giving effect to, the Contribution of Assets, the Capital Contribution,
the Assumption Liabilities, and the Distribution.
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that at the time
Manor Care effected the Distribution and issued the Notes, Manor Care, Manor
Care Real Estate or any of the Guarantors (i) (a) was insolvent, (b) was
rendered insolvent by reason of the Distribution or the incurrence of the
indebtedness represented by the Notes and the Guarantees, (c) was engaged in a
business or transaction for which its remaining assets, as the case may be,
constituted unreasonably small capital, or (d) intended to incur, or believed
it would incur, debts beyond its ability to pay as such debts matured and
received less than fair consideration or reasonably equivalent value or (ii)
made the Distribution, issued the Notes or guaranteed the Notes with actual
intent to hinder, delay or defraud existing or future creditors of Manor Care,
Manor Care Real Estate or the Guarantors, such court may be asked to void the
Distribution (in whole or in part), the Manor Care Notes and/or the Guarantees
as fraudulent conveyances. If a court finds that the Distribution or the
Offering and use of proceeds thereof constituted a fraudulent conveyance of
assets of Manor Care, Manor Care Real Estate or the Guarantors, such court may
void or subordinate the obligations of the Manor Care Notes and/or the
Guarantees. The measure of insolvency for purposes of the foregoing will vary
depending upon the jurisdiction whose law is being applied. Generally,
however, Manor Care, Manor Care Real Estate or a Subsidiary Guarantor would be
considered insolvent if the fair value of its assets were less than the amount
of
19
<PAGE>
its liabilities or if it incurred debt beyond its ability to repay such debt as
it matures. In determining the debts of Manor Care, Manor Care Real Estate or a
Subsidiary Guarantor for such purpose, a court may disregard, in whole or in
part, the effect of the Assumption of Liabilities by ManorCare Health Services
if it finds that ManorCare Health Services was at the time of the Assumption of
Liabilities unable to pay assumed debts.
After giving pro forma effect to the Distribution and related transactions as
if they occurred on August 31, 1997, (and assuming the holders of 100% of the
Old Senior Notes accept the Exchange Offer), ManorCare Health Services would
have assumed approximately (i) $195.1 million of Manor Care Realty's
indebtedness, (ii) liabilities of Manor Care relating to benefits and workers'
compensation of approximately $49.8 million, (iii) current liabilities of the
skilled nursing facilities of approximately $55.5 million, and (iv) deferred
tax liabilities of approximately $38.4 million. In addition, pursuant to the
Distribution Agreement, ManorCare Health Services will assume certain
contingent liabilities of Manor Care. If, applying the foregoing standards,
ManorCare Health Services is found to have effected a fraudulent conveyance in
assuming debts of Manor Care pursuant to the Assumption of Liabilities, a court
in a suit by an unpaid creditor or representative of creditors may void the
Assumption of Liabilities (in whole or in part) with the result that Manor Care
Realty may be required to pay all or part of such liabilities.
Manor Care's Board of Directors and management believe that, in accordance
with the solvency opinion rendered in connection with the Distribution, both
prior to and immediately following the consummation of the Distribution, (i)
Manor Care, Manor Care Realty and ManorCare Health Services each (a) will be
solvent (in accordance with the foregoing definitions), (b) will be able to
repay its debts as they mature, and (c) will have sufficient capital to carry
on its businesses and (ii) the Distribution will be made entirely out of Manor
Care's surplus, as required under Section 170 of the Delaware General
Corporation Law. Manor Care's Board of Directors and management further believe
that neither Manor Care nor ManorCare Health Services is entering into the
Distribution with any actual intent to hinder, delay or defraud existing or
future creditors of Manor Care Realty or ManorCare Health Services. Therefore,
the Notes should not be voided as a fraudulent conveyance. The Board is not
expected to receive an opinion, however, with respect to the solvency of each
Subsidiary Guarantor.
The ability of Manor Care Real Estate, Manor Care Realty and the Subsidiary
Guarantors to honor their obligations under the Manor Care Notes may depend, in
part, on the continued payment of rentals under one or more leases entered into
between Manor Care Real Estate or a subsidiary thereof as lessor and ManorCare
Health Services or a subsidiary thereof as lessee. However, in the event that
ManorCare Health Services becomes the subject of bankruptcy proceedings, a
trustee in bankruptcy for ManorCare Health Services, or ManorCare Health
Services as "debtor in possession," may elect to reject such leases, with the
result that rental payments under such leases may terminate. Pending assumption
or rejection of leases, Manor Care Realty may be subjected to delay in
receiving rental payments. Although, in the event of such a rejection of
leases. Manor Care Realty may be able to assert claims for damages against
ManorCare Health Services, the permissible amount of such claims may be limited
by provisions of bankruptcy law, and no assurance can be given as to the
ranking of Manor Care Realty's claims. In addition, in the event of a ManorCare
Health Services bankruptcy, no assurance can be given that Manor Care Real
Estate will be permitted to reduce its liability to ManorCare Health Services
under the Realty Note by setting off liabilities owed to it by ManorCare Health
Services, whether arising from the rejection or termination of leases or
otherwise. Further, the benefit of any such offset may be claimed by the
secured lenders. Manor Care Realty and Manor Care Real Estate may be deemed
"insiders" of ManorCare Health Services for purposes of the preferential
transfer provisions of the federal bankruptcy law. As a result, it is possible
that payments made by ManorCare Health Services to or for the benefit of Manor
Care Realty or Manor Care Real Estate on account of pre-existing debts within
one year of the commencement of bankruptcy proceedings for ManorCare Health
Services may be voided and recovered from Manor Care Realty as preferential
transfers. Payments made by ManorCare Health Services to third parties under
the Assumption of Liabilities may be deemed payments for the benefit of Manor
Care Realty for this purpose, and as a result, such payments, if made within
one year of the commencement of bankruptcy proceedings, may be recoverable from
Manor Care Realty.
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DEPENDENCE UPON MANORCARE HEALTH SERVICES
ManorCare Health Services will account for the vast majority of Manor Care
Realty's revenues over at least the first five years after the Distribution.
Following the Distribution, Manor Care Realty's principal sources of revenue
will arise from payments pursuant to the lease of the Skilled Nursing
Facilities to ManorCare Health Services, the proceeds of the sale to ManorCare
Health Services of assisted living facilities developed by Manor Care Realty
and revenues derived from Mesquite Hospital. In addition, pursuant to the terms
of the Non-Competition Agreement, Manor Care Realty may not, subject to certain
exceptions, enter into management agreements with third parties with respect to
acquired or developed skilled nursing facilities properties unless ManorCare
Health Services has declined to manage such facilities. The Non-Competition
Agreement imposes other restrictions on Manor Care Realty. See "Relationship
between Manor Care Realty and ManorCare Health Services after the
Distribution-- Non-Competition Agreement." Accordingly, Manor Care Realty's
financial and operating performance will depend primarily on the financial and
operating performance of ManorCare Health Services. Poor performance of the
Skilled Nursing Facilities operated by ManorCare Health Services or the
assisted living facilities developed for ManorCare Health Services would have a
material adverse effect on Manor Care Realty or render Manor Care Realty unable
to meet its debt service requirements. Although Manor Care Realty will
consider, subject to capital constraints and the terms of the Non-Competition
Agreement, diversifying its business, there can be no assurance that it will be
able to do so or if able, to be successful in this effort. In the event that
Manor Care Realty pursues its strategy to diversify its business, Manor Care
Realty may require substantial additional capital resources. See "Business of
Manor Care Realty after the Distribution."
DEPENDENCE BY MANOR CARE REALTY ON RELATED PARTY AGREEMENTS WITH MANORCARE
HEALTH SERVICES; FAILURE TO ACHIEVE OCCUPANCY RATES AT NEWLY DEVELOPED ASSISTED
LIVING FACILITIES
In connection with the Distribution, Manor Care Realty will enter into
agreements with ManorCare Health Services, including the Development Agreement,
the Lease Agreements and the Assisted Living Management Agreement. Pursuant to
the Development Agreement, Manor Care Realty will develop assisted living
facilities for ManorCare Health Services. ManorCare Health Services will be
obligated to purchase such facility if at any time during the two-year period
measured from the time a particular facility opens occupancy reaches 75% for a
period of five days. Such purchases shall be at fixed prices based upon a
stated premium to approved construction costs as determined under the
Development Agreement. Total approved development costs include expenses
incurred in connection with the development and construction of the facilities,
but do not include operating losses incurred during the two-year stabilization
period. The premium to total approved development costs is intended to
compensate Manor Care Realty for the increasing value of its investment over
time as well as for the risks it takes in connection with developing assisted
living facilities, including the risks inherent in operating the facilities
during the two year stabilization period. Pursuant to the Assisted Living
Facility Management Agreement, ManorCare Health Services will manage assisted
living facilities for Manor Care Realty for a fixed monthly fee during the two-
year stabilization period under the Development Agreement. See "Relationship
between Manor Care Realty and ManorCare Health Services after the
Distribution--Development Agreement."
The 14 Arden Courts facilities, including seven mature facilities (facilities
that have been operated by Manor Care for a minimum of two years) and seven
start-up facilities, had an average occupancy of 87% as of December 1, 1997.
Twelve of the Arden Courts attained occupancy of 75% or greater as of December
1, 1997. For the 12 facilities that have reached 75% occupancy, the 75%
occupancy level was achieved on average in 11 months. With the three most
recent openings, Manor Care has intensified pre-marketing efforts in an attempt
to shorten the time period required to reach full occupancy.
The 21 Springhouse senior residences, including 19 mature facilities and two
start-up facilities, had an average occupancy of 86% as of December 1, 1997.
Eighteen of the Springhouse senior residences were acquired and two were built
in the late 1980's. Manor Care recently developed a prototypical design for the
future development of its Springhouse product and opened the first such
facility in February, 1997 in Tucson, Arizona. The Tucson Springhouse facility
had an occupancy of 53% as of December 1, 1997.
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If ManorCare Health Services does not acquire a facility within such two-
year period, Manor Care Realty will have the right to sell the facility to a
third party. ManorCare Health Services will retain the rights to the Arden
Courts and Springhouse brand names in the event of a third-party sale.
Accordingly, the risks related to construction and the initial occupancy and
operation of the assisted living facilities developed by Manor Care Realty
will be borne by Manor Care Realty. There can be no assurance that the
requisite occupancy levels will be achieved at a particular facility. In such
event there can be no assurance that Manor Care Realty would be able to sell
the facility to a third party on attractive terms. Pursuant to the Lease
Agreements, Manor Care Realty will lease to ManorCare Health Services all of
its Skilled Nursing Facilities, and Manor Care Realty will grant to ManorCare
Health Services, pursuant to the Lease Agreements or by separate agreement,
the right to manage all of Manor Care Realty's current and future skilled
nursing facilities. Under the Lease Agreements, Manor Care Realty will, in
effect, bear the economic and other costs associated with the operation of the
Skilled Nursing Facilities and share in a portion of the operating profit of
each such facility. Lease payments payable to Manor Care Realty under the
Lease Agreements are, in effect, subordinated to operating expenses and
certain management fees payable to ManorCare Health Services under the Lease
Agreements. Manor Care Realty's revenues will be dependent on the fees
generated by the Lease Agreements and revenues derived from Mesquite Hospital
as well as on any proceeds received from the sale of assisted living
facilities to ManorCare Health Services under the Development Agreement;
however, ManorCare Realty will, in effect, bear the risks that the Skilled
Nursing Facilities cannot be operated profitably and that the assisted living
facilities will not be developed within their budget or will not reach 75%
occupancy within two years of their opening. Pursuant to the Distribution
Agreement, Manor Care Realty (and not ManorCare Health Services) will remain
liable for certain pre-Distribution liabilities (other than certain tax
liabilities which are the subject of the Tax Sharing Agreement)). However, the
assumption of such liabilities will not release Manor Care Realty therefrom if
ManorCare Health Services should fail for any reason to perform its
obligations pursuant to such assumed liabilities. See "Relationship Between
Manor Care Realty and ManorCare Health Services after the Distribution."
The financial terms of the Lease Agreements were structured by Manor Care's
management under the general direction of Manor Care's Board of Directors to
create a risk/reward sharing arrangement at each of the Skilled Nursing
Facilities pursuant to which each of the companies would be fairly and
reasonably compensated for the contributions it made and the risks it assumed.
Manor Care did not seek proposals from unaffiliated third parties. Such a
solicitation would not have been practical in view of the proposed
relationship and make-up of the two companies to be parties to the Lease
Agreements. However, after the terms of the Lease Agreements were finalized,
Manor Care's Board of Directors reviewed them in light of the objectives
listed above taking into account that alternative third party proposals were
not solicited. Based on that review, the Board concurred with management's
judgement that the terms of the Lease Agreements are no less favorable to
either party than would be available from an unaffiliated third party.
Similarly, the financial terms of the Development Agreement and the Assisted
Living Facility Management Agreements were structured to achieve the following
objectives: (i) Manor Care Realty should receive a fair return on its capital
invested in developing new assisted living facilities; (ii) ManorCare Health
Services should be required to purchase a facility immediately upon its
achievement of a profitable occupancy level; and (iii) each party should
receive returns based on the magnitude and duration of risks assumed by that
party pursuant to the Development Agreement and Assisted Living Facility
Management Agreement. After the terms of the Development Agreement and the
Assisted Living Facility Management Agreements were finalized, Manor Care's
Board of Directors reviewed them in light of the objectives listed above
taking into account that Manor Care Realty would be functioning substantially
as ManorCare Health Services' developer of assisted living facilities. Based
on that review, the Board concurred with management's judgement that the terms
of the Development Agreement and the Assisted Living Facility Management
Agreements are no less favorable to either party than would be available from
an unaffiliated third party.
NEED FOR ADDITIONAL FINANCING TO FUND DEVELOPMENT OF ASSISTED LIVING
FACILITIES
During the first five years after the Distribution, Manor Care Realty plans
to develop approximately 200 new facilities for ManorCare Health Services. The
estimated cost to complete these facilities is approximately
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$1.4 billion. Manor Care Realty's ability to achieve its development goals will
depend upon a variety of factors, many of which are beyond Manor Care Realty's
control. Manor Care Realty plans to finance this development with borrowings
under the Credit Facilities, proceeds from sales of assisted living facilities
to ManorCare Health Services pursuant to the terms of the Development
Agreement, cash flow from operations and proceeds from additional debt and/or
equity financings. In this regard, within one year of the consummation of the
Distribution, Manor Care Realty plans to raise approximately $100 to $150
million in equity and may use the proceeds of such offering to reduce
indebtedness and/or to fund the development of assisted living facilities. Such
equity financing will be dependent upon conditions then prevailing in the
United States equity capital markets. There can be no assurance that any such
additional financings will be available at all, or if available, on terms
acceptable to Manor Care Realty. In addition, Manor Care Realty expects that
its ability to borrow under the Credit Facilities will be subject to Manor Care
Realty's compliance with certain covenants and other conditions and that the
obligation of ManorCare Health Services to purchase assisted living facilities
pursuant to the Development Agreement will be subject to achieving certain
occupancy levels in the facilities. See "Description of Certain Indebtedness of
Manor Care Realty--The Credit Facilities" and "Relationship Between Manor Care
Realty and ManorCare Health Services After the Distribution--Development
Agreement Relating to Assisted Living Facilities". There can be no assurance
that Manor Care Realty will satisfy the conditions to borrowing under the
Credit Facilities or that the requisite occupancy levels will be achieved at
the assisted living facilities developed by Manor Care Realty for sale to
ManorCare Health Services. If Manor Care Realty is unable to obtain additional
financing or if it is unable to satisfy the conditions to borrowing under the
Credit Facilities or if ManorCare Health Services does not purchase
substantially all of the assisted living facilities developed by Manor Care
Realty, Manor Care Realty may be required to delay or eliminate some or all of
its development projects all of which could have a material adverse effect on
Manor Care Realty.
DEVELOPMENT AND CONSTRUCTION RISKS
There can be no assurance that Manor Care Realty will not suffer delays in
its development program. The successful development of additional facilities
will involve a number of risks, including the possibility that Manor Care
Realty will not be able to locate suitable sites at acceptable prices or may be
unable to obtain, or may experience delays in obtaining, necessary certificates
of need, zoning, land use, building, occupancy, licensing and other required
governmental permits and authorizations. Manor Care Realty may also incur
construction costs that exceed original estimates or even so-called guaranteed
maximum cost construction contracts, and may not complete construction projects
on schedule. Manor Care Realty will rely on third-party general contractors to
construct its new facilities. There can be no assurance that Manor Care Realty
will not experience difficulties in working with general contractors and
subcontractors, which could result in increased construction costs and delays.
Further, facility development is subject to a number of contingencies over
which Manor Care Realty will have little control and that could have a material
adverse effect on project cost and completion time, including shortages of, or
the inability to obtain, labor or materials, the inability of the general
contractor or subcontractors to perform under their contracts, strikes, or
adverse weather conditions. Moreover, Manor Care Realty will be a highly
leveraged company which may make it more difficult to secure short-term
construction financing for these facilities and which will make it more
immediately vulnerable to adverse changes in prevailing interest rates and in
general business conditions, as well as conditions in the real estate
development industry. The failure of Manor Care Realty to maintain substantial
compliance with its schedule for completing these new assisted living
facilities or to build them at a cost substantially as planned or to secure all
necessary financing for development and construction of the facilities on
acceptable terms could have a material adverse effect on Manor Care Realty.
SIGNIFICANT BAINUM FAMILY INTEREST
Upon completion of the Distribution, Messrs. Stewart Bainum and Stewart
Bainum, Jr. are expected to own beneficially approximately 15.22% and 22.86%,
respectively, of the Common Stock of Manor Care Realty, in each case including
shares with respect to which voting power is shared with each other and with
other individuals or entities. Collectively, members of the Bainum family are
expected to own beneficially approximately 29.95% of the Common Stock. In
addition, Mr. Bainum, Jr. will be a director and Chairman of
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the Board of Manor Care Realty. As a result, the Bainum family may be in a
position to influence significantly the affairs of Manor Care Realty, including
the election of directors.
REGULATION
Manor Care Realty is affected by government regulation of the health care
industry in that (i) the payments due to Manor Care Realty from ManorCare
Health Services in connection with the Lease Agreements are generally based on
ManorCare Health Services' gross revenue from its management of skilled nursing
facilities and (ii) the underlying value of Mesquite Hospital depends on the
revenue and profit that facility is able to generate. Compliance with these
regulations at the Skilled Nursing Facilities will be the responsibility of
ManorCare Health Services. The health care industry is highly regulated by
federal, state and local law, state and local licensing requirements, facility
inspections, reimbursement policies, regulations concerning capital and other
expenditures, certification requirements and other laws, regulations and rules.
The failure of ManorCare Health Services to comply with such laws, requirements
and regulations could affect ManorCare Health Services' ability to operate the
Skilled Nursing Facilities which it leases from Manor Care Realty and thus its
ability to pay rent to Manor Care Realty with respect to such facilities. Such
failure could, therefore, have a material adverse effect on Manor Care Realty.
In addition, since the assisted living industry is relatively new, the manner
and extent to which it is regulated at the federal, state and local levels are
evolving. Changes in laws or new interpretations of existing laws as applied to
the assisted living business may have a significant impact on ManorCare Health
Services' methods and costs of doing business. ManorCare Health Services'
success will depend in part upon its ability to satisfy applicable regulations
and requirements and to procure and maintain required licenses in rapidly
changing regulatory environments. Any failure to satisfy applicable regulations
or to procure or maintain a required license could have a material adverse
effect on ManorCare Health Services which could in turn negatively impact Manor
Care Realty. Certain regulatory developments such as revisions in the building
code requirements for assisted living or skilled nursing facilities, mandatory
increases in the scope and quality of care to be offered to residents and
revisions in licensing and certification standards could have a material
adverse effect on Manor Care Realty. See "Business of Manor Care Realty After
the Distribution--Government Regulation."
HEALTH CARE REFORM
The health care industry is facing various challenges, including increased
government and private payor pressure on health care providers to control
costs, the migration of patients from acute care facilities into extended care
and home care settings and the vertical and horizontal consolidation of health
care providers. The pressure to control health care costs intensified during
1994 and 1995 as a result of the national health care reform debate and
continued into 1996 and 1997 as Congress attempted to slow the rate of growth
of federal health care expenditures as part of its effort to balance the
federal budget. Pursuant to the Balanced Budget Act of 1997, between November
1998 and June 1999, the Medicare payment system for ManorCare Health Services
will become prospective rather than retrospective. See "Business of Manor Care
Realty after the Distribution--Government Regulation." Manor Care Realty cannot
predict the impact that this change will have on ManorCare Health Services and,
indirectly, on Manor Care Realty.
Manor Care Realty believes that government and private efforts to contain or
reduce health care costs will continue. These trends are likely to lead to
reduced or slower growth in reimbursement for certain services provided by
Manor Care Realty at Mesquite Hospital and ManorCare Health Services, which in
turn will affect the revenue derived by Manor Care Realty from ManorCare Health
Services. However, Manor Care Realty cannot predict whether any of the above
proposals or any proposals will be adopted and, if adopted, no assurance can be
given that the implementation of such reforms will not have a material adverse
effect on Manor Care Realty.
DEPENDENCE ON KEY PERSONNEL
Manor Care Realty believes that its success depends to a significant extent
on the management and other skills of its chief executive and chief development
officers, as well as its ability to retain other key employees
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and to attract skilled personnel in the future to manage the growth of Manor
Care Realty. Although Manor Care Realty believes it has incentive and
compensation programs designed to retain key employees, there can be no
assurance that these key employees will remain with Manor Care Realty. There
can be no assurance that a suitable replacement for any of the employees could
be found in the event of termination of any of their employment.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property or an
entity that arranges for the disposal or treatment of hazardous or toxic
substances at a disposal site may be held jointly and severally liable for the
cost of removal or remediation of certain hazardous or toxic substances,
including, without limitation, asbestos-containing material, that could be
located on, in or under such property. Such laws and regulations often impose
liability whether or not the owner, operator or otherwise responsible party
knew of, or caused, the presence of the hazardous or toxic substances. The
costs of any required remediation or removal of these substances can be
substantial and the liability of a responsible party as to any property is
generally not limited under such laws and regulations and could exceed the
property's value and the aggregate assets of the liable party.
Certain federal and state laws govern the handling and disposal of medical,
infectious and hazardous waste. Failure to comply with such laws or the
regulations promulgated thereunder could subject an entity covered by these
laws to fines, criminal penalties and other enforcement actions. Manor Care
Realty has developed policies with respect to the handling and disposal of
medical, infectious and hazardous waste to ensure compliance with those laws
and regulations. Manor Care Realty believes that it is in material compliance
with applicable laws and regulations governing medical, infectious and
hazardous waste.
One or more subsidiaries or affiliates of Manor Care have been identified as
potentially responsible parties ("PRPs") in a variety of actions (the
"Actions") relating to waste disposal sites which allegedly are subject to
remedial action under the Comprehensive Environmental Response Compensation
Liability Act, as amended, 42 U.S.C. (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
Manor Care. The Actions allege that Cenco transported and/or generated
hazardous substances that came to be located at the sites in question. The
Company believes the waste disposal activities at issue occurred prior to the
Manor Care subsidiary's acquisition of Cenco. Environmental proceedings such as
the Actions may involve owners and/or operators of the hazardous waste site,
multiple waste generators and multiple waste transportation disposal companies.
Such proceedings involve efforts by governmental entities and/or private
parties to allocate or recover site investigation and clean-up costs, which
costs may be substantial. The potential liability exposure for currently
pending environmental claims and litigation, without regard to insurance
coverage, cannot be quantified with precision because of the inherent
uncertainties of litigation in the Actions and the fact that the ultimate cost
of the remedial actions for some of the waste disposal sites where Manor Care
is alleged to be a potentially responsible party has not yet been quantified.
Manor Care 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.
After the Distribution, Manor Care Realty will retain liability for certain
environmental litigation, including the Actions. See "Business Of Manor Care
Realty After The Distribution--Government Regulation" and "--Legal
Proceedings."
CONFLICTS WITH MANORCARE HEALTH SERVICES
Subsequent to the Distribution, the interests of ManorCare Health Services
and Manor Care Realty may potentially conflict due to the ongoing relationships
between the companies. Such sources of conflict include the fact that after the
Distribution, (i) ManorCare Health Services will lease, manage and operate
Manor Care Realty's skilled nursing facilities pursuant to the Lease
Agreements, (ii) Manor Care Realty will develop assisted
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living facilities for ManorCare Health Services and ManorCare Health Services
will manage each of those facilities until certain sustained occupancy targets
are achieved, at which point ManorCare Health Services will be obligated to
purchase the facility pursuant to the Development Agreement at pre-determined
prices, (iii) pending the possible purchase of an assisted living facility by
ManorCare Health Services pursuant to the terms of the Development Agreement,
ManorCare Health Services will manage the facility for a fixed monthly fee to
be agreed upon with Manor Care Realty, (iv) Manor Care Realty will be indebted
to ManorCare Health Services as a result of the Realty Note, (v) ManorCare
Health Services and Manor Care Realty will enter into the Non-Competition
Agreement that will limit the competition between the companies, (vi) ManorCare
Health Services may manage assisted living facilities not developed by Manor
Care Realty and (vii) other corporate and administrative services will be
provided by ManorCare Health Services to Manor Care Realty. Consequently, Manor
Care Realty will be dependent upon ManorCare Health Services for the vast
majority of its revenues for the first five years and for the operation of its
skilled nursing facilities. See "Relationship between Manor Care Realty and
ManorCare Health Services after the Distribution."
With respect to these matters, the potential exists for disagreements as to
the quality of the services provided by the parties and as to contract
compliance. However, Manor Care believes that Manor Care Realty and ManorCare
Health Services will benefit from a strategic relationship with each other as a
result of the Lease Agreements, the Development Agreement, the Assisted Living
Facility Management Agreement and the other related party agreements. As a
result of the strategic relationship between the two companies, each company's
revenues are dependent in part on the other company and thus Manor Care
believes that Manor Care Realty and ManorCare Health Services will have a
mutual interest in resolving any contract compliance disagreements. Manor Care
believes that there will be sufficient mutuality of interest between the two
companies to result in a mutually productive relationship. However, despite the
anticipated mutuality of interest, and the significant equity ownership
interest of the Bainum family, Manor Care Realty and ManorCare Health Services
will have separate management and public shareholder groups whose interests may
differ from one another.
ManorCare Health Services and Manor Care Realty will have two common
directors, Mr. Stewart Bainum, Jr. and Mr. Kennett L. Simmons. Messrs. Bainum,
Jr. and Simmons, as well as certain other officers and directors of ManorCare
Health Services and Manor Care Realty initially will also own shares (and/or
options or other rights to acquire shares) in both companies following the
Distribution. Appropriate policies and procedures will be adopted by the board
of directors of each company to address the involvement of the overlapping
directors (and if appropriate, relevant officers of such companies) in conflict
situations, including requiring them to abstain from voting as directors of
either ManorCare Health Services or Manor Care Realty in certain situations.
Such procedures will include requiring Messrs. Bainum, Jr. and Simmons (or such
other executive officers or directors having a significant ownership interest
in both companies) to abstain from voting as directors of either company, with
respect to matters that present a significant conflict of interest between the
companies. Whether or not a significant conflict of interest situation exists
will be determined on a case-by-case basis depending on such factors as the
dollar value of the matter, the degree of personal interest of Messrs. Bainum,
Jr. and Simmons (or such other executive officers and directors having a
significant ownership interest in both companies) in the matter, the respective
interests of the shareholders of ManorCare Health Services or Manor Care Realty
and the likelihood that resolution of the matter will have significant
strategic, operational or financial implications for the business of the
respective companies.
TRANSFER OF LEASES TO NEW OPERATORS
In the event ManorCare Health Services voluntarily or involuntarily defaults
under the terms of a Lease Agreement or Manor Care Realty exercises its rights
under a particular Lease Agreement to terminate such agreement or ManorCare
Health Services determines not to renew a particular Lease Agreement, Manor
Care Realty may be obliged to find another healthcare provider willing to lease
and operate the facility relating to the Lease Agreement and may have to
negotiate new lease terms, including rentals, which terms may be less favorable
to Manor Care Realty than those of the Manor Care Realty/ManorCare Health
Services Lease Agreement. In addition, Manor Care Realty and/or any substitute
lessee will be required to apply for and obtain appropriate licenses to operate
such facilities. Any such circumstances relating to several Lease Agreements at
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the same time could have a material adverse effect on Manor Care Realty. No
assurance can be given that a substitute lessee could be found without
reasonable delay.
PAYMENT BY THIRD-PARTY PAYORS AT THE SKILLED NURSING FACILITIES
As described above, Manor Care Realty's financial and operating performance
will depend primarily on the financial and operating performance of ManorCare
Health Services. A significant portion of Manor Care Realty's revenues derived
from the operation of the Skilled Nursing Facilities by ManorCare Health
Services will be dependent upon reimbursement from third-party payors,
including Medicare, state Medicaid programs and private insurers. Third party
payors also include private commercial insurers, managed care organizations,
health maintenance organizations and preferred provider organizations. Managed
care organizations and other third party payors have continued to consolidate
in order to enhance their ability to influence the delivery of healthcare
services. Consequently, the health care needs of a large percentage of the
United States population are increasingly served by a small number of managed
care organizations. These organizations generally enter into service agreements
with a limited number of providers for needed services. To the extent such
organizations terminate ManorCare Health Services as a preferred provider
and/or engage ManorCare Health Services' competitors as preferred or exclusive
providers, it could have a material adverse effect on Manor Care Realty. For
the fiscal year ended May 31, 1997, the Skilled Nursing Facilities to be
operated by ManorCare Health Services pursuant to the Lease Agreements derived
the majority of their patient service revenue from non-government sources. Both
governmental and private third-party payors have employed cost containment
measures designed to limit payments made to health care providers such as
ManorCare Health Services. Those measures include the adoption of initial and
continuing recipient eligibility criteria which may limit payment for services,
the adoption of coverage and duration criteria which limit the services which
will be reimbursed and the establishment of payment ceilings which set the
maximum reimbursement that a provider may receive for services. Furthermore,
government payment programs are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government funding
restrictions, all of which may materially increase or decrease the rate of
program payments to ManorCare Health Services for its services. There can be no
assurance that payments under governmental and private third-party payor
programs will remain at levels comparable to present levels or will, in the
future, be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. In addition, there can be no assurance
that Manor Care Realty's Skilled Nursing Facilities, or the provision of
services and supplies by ManorCare Health Services, now or in the future will
meet or continue to meet the requirements for participation in such programs.
ManorCare Health Services (and consequently Manor Care Realty) could be
adversely affected by the continuing efforts of governmental and private third-
party payors to contain the amount of reimbursement for health care services.
For example, pursuant to the Balanced Budget Act of 1997, between November 1998
and June 1999, the Medicare payment system for ManorCare Health Services will
become prospective rather than retrospective. Manor Care Realty cannot predict
the impact that this change will have on ManorCare Health Services and,
consequently on Manor Care Realty. Also, in certain states there has been
established or there are proposals for the establishment of a case mix
prospective payment system pursuant to which the payment to a facility for a
patient is based upon the patient's condition and need for services. Manor Care
Realty cannot at this time predict whether or where any of these proposals will
be adopted or, if adopted and implemented, what effect, if any, such proposals
will have on ManorCare Health Services' and, consequently on Manor Care Realty.
In addition, private payors, including managed care payors, increasingly are
demanding discounted fee structures or the assumption by health care providers
of all or a portion of the financial risk through prepaid capitation
arrangements. Efforts to impose reduced allowances, greater discounts and more
stringent cost controls by government and other payors are expected to
continue. Any of such changes could have a material adverse effect on Manor
Care Realty. See "Business Of Manor Care Realty After the Distribution--
Government Regulation."
ADEQUACY OF CERTAIN INSURANCE
Manor Care Realty and ManorCare Health Services maintain liability insurance
providing coverage which they believe to be adequate. In addition, Manor Care
Realty and ManorCare Health Services maintain property,
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business interruption, and workers' compensation insurance covering facilities
in amounts deemed adequate by Manor Care Realty and ManorCare Health Services.
There can be no assurance that any future claims will not exceed applicable
insurance coverage or that Manor Care Realty or ManorCare Health Services will
be able to continue its present insurance coverage on satisfactory terms, if
at all.
COMPETITION; NON-COMPETITION AGREEMENT WITH MANORCARE HEALTH SERVICES
Manor Care Realty generally competes with real estate investment trusts,
real estate partnerships, healthcare providers and others, including, but not
limited to, banks, insurance companies and other financial sources, in the
development and leasing of health care facilities. Manor Care Realty's
competitors in the health care real estate business are Alternative Living
Services, American Health Properties, Inc., American Retirement Corp., ARV
Assisted Living, Assisted Living Concepts, Inc., Atria Communities, Inc.,
Beverly Enterprises, Inc., Capstone Capital Corp., Carematrix Corp.,
Extendicare, Inc., Genesis Health Ventures, Inc., G & L Realty Corp.,
Greenbriar Corp., Harborside Healthcare Corp., Health Care Property Investors,
Inc., Healthcare Realty Trust Inc., Health Care REIT, Inc., Health Care &
Retirement Corp., Health and Retirement Property Trust, Integrated Health
Services, Integrated Living Communities, Kapson Senior Quarters, Inc.,
Karrington Health, Inc., LTC Properties, Inc., Mariner Health Group, Inc.,
Meditrust Corporation, National Healthcare L.P., National Health Investors,
Inc., Nationwide Health Properties, Inc., Newcare Health Corp., Omega
Healthcare Investors, Inc., Paragon Health Network, Inc., Regent Assisted
Living, Retirement Care Associates, Summit Care Corp., Sun Healthcare Group,
Inc., Sunrise Assisted Living, Inc., Unison Healthcare Corp., Universal Health
Realty Income Trust, and Vencor, Inc. ManorCare Health Services competes on a
local and regional basis with operators of facilities that provide comparable
services. Operators compete for patients based on quality of care, reputation,
physical appearance of facilities, services offered, family preferences,
physicians, staff and price. Furthermore, some of ManorCare Health Services'
competitors are significantly larger and have, or may obtain, greater
financial resources than ManorCare Health Services. ManorCare Health Services'
competitors in the skilled nursing industry are Advocat, Inc., Beverly
Enterprises, Inc., Extendicare, Inc., Genesis Health Ventures, Inc., Health
Care and Retirement Corporation, Integrated Health Services, Inc., Mariner
Health Group, Inc., National HealthCare L.P., Paragon Health Network, Inc.,
Sun Healthcare Group, Inc. and Vencor, Inc. See "Business Of Manor Care Realty
After the Distribution--Competition."
Following the Distribution, pursuant to the Non-Competition Agreement Manor
Care Realty will be subject to certain contractual restrictions in the
management of skilled nursing facilities, the development of assisted living
facilities and participation in the institutional pharmacy and home health
care businesses. See "Relationship Between Manor Care Realty and ManorCare
Health Services After the Distribution--Non-Competition Agreement." The Non-
Competition Agreement restricts Manor Care Realty's ability to pursue lines of
business that have historically contributed a significant portion of Manor
Care's net income.
CERTAIN INDEMNIFICATION OBLIGATIONS
Pursuant to the Distribution Agreement and the Tax Sharing and
Administration Agreement, Manor Care Realty will agree to indemnify ManorCare
Health Services with respect to certain losses, damages, claims and
liabilities, including liabilities which may arise from the operation of the
Skilled Nursing Facilities prior to the Effective Date and certain tax
liabilities. Pursuant to the Distribution Agreement, Manor Care Realty (and
not ManorCare Health Services) will remain liable for certain pre-Distribution
liabilities (other than certain tax liabilities). However, the assumption of
such liabilities will not release Manor Care Realty therefrom, if ManorCare
Health Services should fail, for any reason, to perform its obligations
pursuant to such assumed liabilities. See "Relationship between Manor Care
Realty and ManorCare Health Services after the Distribution." In addition, in
connection the distribution of its lodging operations in November 1996, Manor
Care agreed, subject to certain exceptions to indemnify Choice Hotels
International, Inc. ("Choice"), against any loss, liability or expense
incurred or suffered by Choice arising out of or related to the failure by
Manor Care to perform or otherwise discharge the liabilities retained by Manor
Care under the distribution agreement between Manor Care and Choice and
certain tax liabilities.
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CERTAIN TAX CONSIDERATIONS
Manor Care has received a private letter ruling (the "Ruling") from the IRS
which provides, among other things, that the Distribution will qualify as a
tax-free transaction under Section 355 of the Code and that neither the
stockholders of Manor Care nor Manor Care will recognize any income, gain or
loss as a result of the Distribution. The Ruling is based upon various factual
representations that were made to the IRS. If any such factual representations
are determined to be inaccurate, absent the receipt of a supplemental ruling
from the IRS, the Ruling generally cannot be relied upon by any party. There
can be no assurance that, in such an event, Manor Care Realty would be able to
obtain a supplemental ruling from the IRS. If Manor Care engages in the
Distribution and the Distribution is held to be taxable, both Manor Care Realty
and stockholders of Manor Care could recognize income or gain and thus become
liable for the payment of a material amount of income tax.
THE YEAR 2000 ISSUE
Manor Care 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 date
sensitive information relating to the year 2000 and beyond. Manor Care 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 its computer systems will be Year 2000 compliant. Manor Care
Realty does not expect to incur significant expenditures to address this issue.
The failure by third party payors, such as private issuers, 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 Issues could
adversely affect Manor Care Realty.
CERTAIN CONSIDERATIONS RELATING TO THE NEW MCHS SENIOR NOTES
DEBT RATING OF NEW MCHS SENIOR NOTES
The New MCHS Senior Notes will have a credit rating lower than the current
debt rating of the Old Senior Notes but greater than the credit rating of the
Old Senior Notes after the Distribution. The Old Senior Notes are currently
rated Baa2 by Moody's and BBB by Standard & Poors. The New MCHS Senior Notes
will be rated by Moody's and BB+ by Standard & Poors. Old Senior Notes that
do not accept the Exchange Offer and remain obligations of Manor Care Realty
following the Distribution will be rated by Moody's and BB by Standard &
Poors.
LIQUIDITY OF NEW MCHS SENIOR NOTES
Depending on the amount of New MCHS Senior Notes outstanding after the
Exchange Offer, the trading market for the New MCHS Senior Notes may be more
limited than the trading market for Old Senior Notes prior to the Exchange
Offer, which might adversely affect the liquidity and market price of such New
MCHS Senior Notes. ManorCare Health Services does not intend to list the New
MCHS Senior Notes on any national securities exchange. There is no assurance
that an active market in the New MCHS Senior Notes will develop and no
assurance as to the prices at which the New MCHS Senior Notes may be traded.
FORWARD-LOOKING INFORMATION
This Registration Statement contains various forward-looking statements and
information that are based on management's belief as well as assumptions made
by and information currently available to management. When used in this
document, the words "anticipate," "estimate," "project," "intends," "expect"
and similar expressions are intended to identify forward-looking statements.
Although ManorCare Health Services believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Such statements are subject
to certain risks, uncertainties and
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assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, projected or expected. Among the
key factors that may have a direct bearing on ManorCare Health Services'
operating results is ManorCare Health Services' ability to implement its plan
to acquire from Manor Care Realty approximately 170 Arden Courts and 38
Springhouse senior residences over the next five years. In addition, actual
future results and trends may differ materially depending on a variety of
factors discussed in this "Risk Factors" section and elsewhere in this
Registration Statement including, among others (i) Manor Care Realty's success
in implementing its business strategy, including its success in arranging
financing where required, (ii) the nature and extent of future competition and
(iii) the extent of future reform and regulation.
OPERATING HISTORY AND FUTURE PROSPECTS
ManorCare Health Services was formed for the purpose of effecting the
Distribution. ManorCare Health Services does not have an operating history as
an independent public company, but will own and conduct the operations of the
Assisted Living Business and the stock of Vitalink and In Home Health
previously owned and conducted by Manor Care and will operate and manage the
Skilled Nursing Facilities previously operated and managed by Manor Care. On an
historical basis, for the three fiscal years ended May 31, 1997, ManorCare
Health Services' businesses were profitable. There can be no assurance,
however, that ManorCare Health Services' operations will be profitable in 1998
or future years. See "ManorCare Health Services Selected Historical Financial
Data" and "Combined Financial Statements of ManorCare Health Services."
ManorCare Health Services' future success will depend on a number of factors,
including (i) the level of demand for its assisted living facilities and the
Skilled Nursing Facilities, (ii) the success of ManorCare Health Services'
planned expansion of its Assisted Living Business, (iii) ManorCare Health
Services' ability to manage and operate the Skilled Nursing Facilities, (iv)
the substantial competition encountered by ManorCare Health Services, see "--
Competition" and "Business of ManorCare Health Services after the
Distribution--Competition," (v) the presence of existing governmental
regulation and the potential for health care reform which might be adverse to
ManorCare Health Services, see "--Regulation," and "Business of ManorCare
Health Services after the Distribution--Government Regulation," (vi) ManorCare
Health Services' transition to an independent, public company and the costs
associated therewith and (vii) the future success of Vitalink and In Home
Health.
The success of the Company's acquisition and expansion strategy depends, in
significant part, upon the anticipated development of assisted living
facilities by Manor Care Realty and in turn upon Manor Care Realty's ability to
obtain necessary financing, locate desirable sites, acquire property, obtain
local regulatory approvals and construct the facilities on schedule and on
budget. At or prior to the Distribution, Manor Care will utilize part of the
proceeds from the sale of the Manor Care Notes and borrowings under the Credit
Facilities to make or cause to be made the cash portion of the Capital
Contribution. The Company's acquisition and expansion strategy also depends, in
significant part, upon receipt of the Capital Contribution and upon the
Company's entering into the MCHS Credit Facility.
DEPENDENCE BY MANORCARE HEALTH SERVICES ON RELATED PARTY AGREEMENTS
In connection with the Distribution, ManorCare Health Services will enter
into agreements with Manor Care, including the Development Agreement, the Lease
Agreements and the Assisted Living Facility Management Agreements. Pursuant to
the Development Agreement, Manor Care Realty will develop assisted living
facilities for sale to ManorCare Health Services. If at any time during the
two-year period measured from the time a particular facility opens occupancy
reaches 75% for a period of five days, ManorCare Health Services will be
obligated to purchase the facility. Such purchases shall be at fixed prices
based upon a stated premium to approved construction costs as determined under
the Development Agreement. If ManorCare Health Services does not acquire a
facility within the two-year stabilization period, Manor Care Realty will have
the right to sell the facility to a third party. Total approved development
costs include expenses incurred in connection with the development and
construction of the facilities, but do not include operating losses incurred
during the two-year
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stabilization period. The premium to total approved development costs is
intended to compensate Manor Care Realty for the increasing value of its
investment over time as well as for the risks it takes in connection with
developing assisted living facilities, including the risks inherent in
operating the facilities during the two-year stabilization period. Pursuant to
the Assisted Living Facility Management Agreement, ManorCare Health Services
will manage assisted living facilities for Manor Care Realty for a fixed
monthly fee during the two-year stabilization period under the Development
Agreement. See "Relationship Between Manor Care Realty and ManorCare Health
Services After the Distribution--Development Agreement." Accordingly, the
risks related to construction and the initial operation of the assisted living
facilities developed by Manor Care Realty will be borne by Manor Care Realty.
The financial terms of the Lease Agreements were structured by Manor Care's
management under the general direction of Manor Care's Board of Directors to
create a risk/reward sharing arrangement at each of the Skilled Nursing
Facilities pursuant to which each of the companies would be fairly and
reasonably compensated for the contributions it made and the risks it assumed.
Manor Care did not seek proposals from unaffiliated third parties. Such a
solicitation would not have been practical in view of the proposed
relationship and make-up of the two companies to be parties to the Lease
Agreements. However, after the terms of the Lease Agreements were finalized,
Manor Care's Board of Directors reviewed them in light of the objectives
listed above taking into account that alternative third party proposals were
not solicited. Based on that review, the Board concurred with management's
judgement that the terms of the Lease Agreements are no less favorable to
either party than would be available from an unaffiliated third party.
Similarly, the financial terms of the Development Agreement and the Assisted
Living Facility Management Agreements were structured to achieve the following
objectives: (i) Manor Care Realty should receive a fair return on its capital
invested in developing new assisted living facilities (ii) ManorCare Health
Services should be required to purchase a facility immediately upon its
achievement of a profitable occupancy level; and (iii) each party should
receive returns based on the magnitude and duration of risks assumed by that
party pursuant to the Development Agreement and the Assisted Living Facility
Management Agreement. After the terms of the Development Agreement and the
Assisted Living Facility Management Agreements were finalized, Manor Care's
Board of Directors reviewed them in light of the objectives listed above
taking into account that Manor Care Realty would be functioning substantially
as ManorCare Health Services' developer of assisted living facilities. Based
on that review, the Board concurred with management's judgement that the terms
of the Development Agreement and the Assisted Living Facility Management
Agreements are no less favorable to either party than would be available from
an unaffiliated third party.
DEPENDENCE ON MANOR CARE REALTY
ManorCare Health Services' core strategy contemplates the acquisition from
Manor Care Realty of 170 new Arden Courts facilities and 38 new Springhouse
facilities over the next five years. Under the Development Agreement, Manor
Care Realty will locate, develop and build these facilities for sale to
ManorCare Health Services and, pending their purchase by ManorCare Health
Services, will own them for an occupancy stabilization period of up to two
years. The success of ManorCare Health Services' strategy will thus depend in
very significant part upon Manor Care Realty's capacity to locate desirable
sites, acquire property, obtain local regulatory approvals and construct the
facilities on schedule and on budget. The estimated cost to complete these
facilities is approximately $1.4 billion. Manor Care Realty's ability to
achieve its development goals will depend upon a variety of factors, many of
which are beyond Manor Care Realty's control, including Manor Care Realty's
ability to obtain necessary financing. As a result of the Distribution, Manor
Care Realty will be highly leveraged, with indebtedness that is substantial in
relation to its stockholders' equity. On a pro forma basis after giving effect
to the offering of the Manor Care Notes and the use of proceeds thereof, the
Distribution and related borrowings and assuming that all holders of the
outstanding Old Senior Notes accept the Exchange Offer, on August 31, 1997,
Manor Care Realty's aggregate outstanding indebtedness would have been $805
million. This high degree of leverage may make it more difficult to secure
short-term construction financing for these facilities and which will make it
more immediately vulnerable to adverse changes in prevailing interest rates
and in general
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business conditions, as well as conditions in the real estate development
industry. The failure of Manor Care Realty to maintain substantial compliance
with its schedule for completing these new assisted living facilities or to
build them at a cost substantially as planned or to secure all necessary
financing for development and construction of the facilities on acceptable
terms could have a material adverse effect on ManorCare Health Services. In
addition, Manor Care Realty's high degree of leverage could adversely affect
Manor Care Realty's ability to pay principal and interest on or to redeem the
Realty Note and may adversely affect the ability of ManorCare Health Services
to sell the Realty Note. The terms of the Realty Note will not limit in any way
ManorCare Health Services' use of the proceeds thereof. ManorCare Health
Services intends to use the proceeds of the Realty Note for general corporate
purposes, which may include debt service, working capital or acquisition
financing. The failure of Manor Care Realty to pay principal and interest on
the Realty Note in a timely manner or the inability of ManorCare Health
Services to sell the Realty Note to a third party for its principal amount
could have a material adverse effect on ManorCare Health Services. See
"Relationship Between Manor Care Realty and ManorCare Health Services After the
Distribution."
CONFLICTS WITH MANOR CARE REALTY
Subsequent to the Distribution, the interests of ManorCare Health Services
and Manor Care Realty may potentially conflict due to the ongoing relationships
between the companies. Such sources of conflict include the fact that after the
Distribution, (i) ManorCare Health Services will lease, manage and operate
Manor Care Realty's skilled nursing facilities pursuant to the Lease
Agreements, (ii) Manor Care Realty will develop assisted living facilities for
ManorCare Health Services and ManorCare Health Services will manage each of
those facilities until certain sustained occupancy targets are achieved, at
which point ManorCare Health Services will be obligated to purchase the
facility pursuant to the Development Agreement, (iii) pending the possible
purchase of an assisted living facility by ManorCare Health Services pursuant
to the terms of the Development Agreement, ManorCare Health Services will
manage the facility for a fixed monthly fee to be agreed upon with Manor Care
Realty, (iv) Manor Care Realty will be indebted to ManorCare Health Services as
a result of the Realty Note, (v) ManorCare Health Services and Manor Care
Realty will enter into the Non- Competition Agreement that will limit the
competition between the companies and (vi) ManorCare Health Services may manage
assisted living facilities not developed by Manor Care Realty. See
"Relationship Between Manor Care Realty and ManorCare Health Services After the
Distribution." With respect to these matters, the potential exists for
disagreements as to the quality of the services provided by the parties and as
to contract compliance. However, Manor Care believes that each of Manor Care
Realty and ManorCare Health Services will benefit from a strategic relationship
with the other entity created by the Lease Agreements, the Development
Agreement, the Assisted Living Facility Management Agreement and the other
related party agreements. As a result of this relationship, each company's
revenues are dependent in part on the other company and thus Manor Care
believes that Manor Care Realty and ManorCare Health Services will have a
mutual interest in resolving any contract compliance disagreements. ManorCare
Health Services believes that there will be sufficient mutuality of interest
between the two companies to result in a mutually productive relationship.
However, despite the anticipated mutuality of interest, each of Manor Care
Realty and ManorCare Health Services will have unique shareholder groups whose
interests may differ from one another.
In addition, ManorCare Health Services and Manor Care Realty will have two
common directors, Mr. Stewart Bainum, Jr. and Mr. Kennett L. Simmons. Messrs.
Bainum, Jr. and Simmons, as well as certain other officers and directors of
ManorCare Health Services and Manor Care Realty will also own shares (and/or
options or other rights to acquire shares) in both companies following the
Distribution. Appropriate policies and procedures will be followed by the board
of directors of each company to limit the involvement of the overlapping
directors (and if appropriate, relevant officers of such companies) in conflict
situations, including requiring them to abstain from voting as directors of
either ManorCare Health Services or Manor Care Realty. Such procedures will
include requiring Messrs. Bainum, Jr. and Simmons (or such other executive
officers or directors having a significant ownership interest in both
companies) to abstain from voting as directors of either company, with respect
to matters that present a significant conflict of interest between the
companies. Whether or not a significant conflict of interest situation exists
will be determined on a case-by-case basis depending on
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such factors as the dollar value of the matter, the degree of personal interest
of Messrs. Bainum, Jr. and Simmons (or such other executive officers and
directors having a significant ownership interest in both companies) in the
matter, the respective interests of the shareholders of ManorCare Health
Services or Manor Care Realty and the likelihood that resolution of the matter
will have significant strategic, operational or financial implications for the
business of the respective companies.
FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
It is a condition to the consummation of the Distribution that the Board of
Directors of Manor Care shall have received a satisfactory opinion regarding
the solvency of Manor Care and ManorCare Health Services and the permissibility
of the Contribution of Assets, the Assumption of Liabilities, the Capital
Contribution and the Distribution under the requirements of Section 170 of the
DGCL. The solvency opinion will address certain factual matters relevant to an
assessment of the legality of the Distribution under Delaware law, but will not
constitute a legal opinion and will not be delivered by a firm qualified to
practice law in Delaware. Manor Care's Board of Directors does not intend to
consummate the Distribution unless it is satisfied regarding the solvency of
Manor Care and ManorCare Health Services and the permissibility of the
Contribution of Assets, the Capital Contribution and the Distribution under
Section 170 of the DGCL. There is no certainty, however, that a court would
reach the same conclusion.
If a court (for example, in a lawsuit by an unpaid creditor or
representatives of creditors such as a transfer in bankruptcy) were to find
that, at the time Manor Care effected the Distribution, Manor Care or ManorCare
Health Services, as the case may be, (i) (a) was insolvent, (b) was rendered
insolvent by reason of the Distribution, (c) was engaged in a business or
transaction for which its remaining assets, as the case may be, constituted
unreasonably small capital, or (d) intended to incur, or believed it would
incur, debts beyond its ability to pay as such debts matured and received less
than fair consideration or reasonably equivalent value or (ii) made the
Distribution with actual intent to hinder, delay or defraud existing or future
creditors of Manor Care, such court may be asked to void the Distribution (in
whole or in part) as a fraudulent conveyance and require that the stockholders
return the distribution (in whole or in part) to Manor Care, or require Manor
Care or ManorCare Health Services, as the case may be, to fund certain
liabilities of the other company for the benefit of creditors. The measure of
insolvency for purposes of the foregoing will vary depending upon the
jurisdiction whose law is being applied. Generally, however, Manor Care or
ManorCare Health Services, as the case may be, would be considered insolvent if
the fair value of their respective assets were less than the amount of their
respective liabilities or if they incurred debt beyond their ability to repay
such debt as it matures. In addition, under Section 170 of the DGCL (which is
applicable to Manor Care in the Distribution) a corporation generally may make
distributions to its stockholders only out of its surplus (net assets minus
capital) and not out of capital.
Manor Care's Board of Directors and management believe that, in accordance
with the solvency opinion rendered in connection with the Distribution, both
prior to and immediately following the consummation of the Distribution, (i)
Manor Care, Manor Care Realty and ManorCare Health Services each (a) will be
solvent (in accordance with the foregoing definitions), (b) will be able to
repay its debts as they mature, and (c) will have sufficient capital to carry
on its businesses and (ii) the Distribution will be made entirely out of Manor
Care's surplus, as required under Section 170 of the DGCL. Manor Care's Board
of Directors and management further believe that neither Manor Care nor
ManorCare Health Services is entering into the Distribution with any actual
intent to hinder, delay or defraud existing or future creditors of Manor Care
Realty or ManorCare Health Services.
COMPETITION
ManorCare Health Services operates in a highly competitive environment and
competes with a variety of other companies in providing assisted living
services, skilled nursing services, institutional pharmacy services and home
health care services, as well as numerous other companies providing similar
service and care alternatives, such as congregate care facilities and
retirement communities. In particular, given the relatively low barriers to
entry and continuing health care cost containment pressures in the assisted
living industry, ManorCare Health Services expects that the assisted living
industry will become increasingly competitive in the future. Some
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of ManorCare Health Services' present and potential competitors have, or may
have access to, greater financial resources than those of ManorCare Health
Services and may be more established in their respective communities than
ManorCare Health Services. Consequently, increased competition in the future
could limit ManorCare Health Services' ability to attract and retain residents,
to maintain or increase resident service fees or to expand its business. As a
result, any increased competition could have a material adverse effect on
ManorCare Health Services. See "Business of ManorCare Health Services after the
Distribution--Competition."
REGULATION
General. Health care is an area of extensive and frequent regulatory change.
The Federal government and all states in which ManorCare Health Services
operates regulate various aspects of ManorCare Health Services' business. In
particular, the operation of nursing centers and the provision of health care
services are subject to Federal, state and local laws relating to the delivery
and adequacy of medical care, distribution of pharmaceuticals, equipment,
personnel, operating policies, fire prevention, rate-setting and compliance
with building codes and environmental laws. Nursing centers are subject to
periodic inspection by governmental and other authorities to assure continued
compliance with various standards, their continued licensing under state law,
certification under the Medicare and Medicaid programs and continued
participation in the Veterans Administration program and the ability to
participate in other third party programs. ManorCare Health Services is also
subject to inspection regarding record keeping and inventory control. Failure
of the nursing centers to be in substantial compliance with licensure and
certification laws, rules and regulations could result in loss of certification
as a Medicare and Medicaid provider and/or a loss of licensure. ManorCare
Health Services' assisted living facilities are subject to varying degrees of
regulation and licensing by local and state health and social health and social
service agencies and other regulatory authorities specific to their location.
While regulations and licensing requirements often vary significantly from
state to state, they typically address, among other things: personnel
education, training and records; facility services, including administration of
medication, assistance with supervision of medication management and limited
nursing services; physical plant specifications; furnishing of resident units;
food and housekeeping services; emergency evacuation plans; and resident rights
and responsibilities. In most states, assisted living facilities also are
subject to state or local building codes, fire codes and food service licensure
or certification requirements. In addition, since the assisted living industry
is relatively new, the manner and extent to which it is regulated at the
Federal and state levels are evolving. Changes in the laws or new
interpretations of existing laws as applied to the Assisted Living Business may
have a significant impact on ManorCare Health Services' methods and costs of
doing business.
ManorCare Health Services' success will depend in part upon its ability to
satisfy applicable regulations and requirements and to procure and maintain
required licenses in rapidly changing regulatory environments. Any failure to
satisfy applicable regulations or to procure or maintain a required license
could have a material adverse effect on ManorCare Health Services. In addition,
certain regulatory developments such as revisions in the building code
requirements for assisted living or skilled nursing facilities, mandatory
increases in the scope and quality of care to be offered to residents and
revisions in licensing and certification standards could have a material
adverse effect on ManorCare Health Services. Furthermore, there have been
numerous initiatives on the Federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. Aspects of
certain of these health care proposals, such as reductions in funding of the
Medicare and Medicaid programs, potential changes in reimbursement regulations
by the Health Care Financing Administration ("HCFA"), enhanced pressure to
contain health care costs by Medicare, Medicaid and other payors and permitting
greater state flexibility in the administration of Medicaid could adversely
affect the Skilled Nursing Facilities operated and managed by ManorCare Heath
Services.
On August 5, 1997, Congress enacted the Budget Act which changes the manner
in which Medicare reimburses skilled nursing facilities for cost reporting
periods beginning July 1, 1998. Medicare is currently 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
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skilled nursing facilities will be reimbursed per diem for specific covered
services regardless of actual cost. Specifically, the Budget Act provides that,
over three reporting periods starting July 1, 1998, the Medicare program will
phase into this prospective payment system. During the first reporting period,
skilled nursing facilities will receive 75% of their reimbursement based on
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. Pursuant to the Budget Act, between November 1998 and June
1999, the Medicare payment system for ManorCare Health Services will become
prospective rather than retrospective. The Budget Act also gives states greater
flexibility in the administration of their Medicaid programs in that the Budget
Act repeals the requirement that payment be reasonable and adequate to cover
the costs of "efficiently and economically operated" skilled nursing
facilities. There can be no assurance that additional Federal, state or local
laws or regulations will not be imposed or expanded which would have a material
adverse effect on ManorCare Heath Services.
ManorCare Heath Services is also subject to Federal and state laws which
govern financial and other arrangements between health care providers. These
laws often prohibit certain direct and indirect payments or fee-splitting
arrangements between health care providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. These laws include the Federal
"Stark Legislations" which prohibit, with limited exceptions, the referral of
patients for certain services, including home health services, physical therapy
and occupational therapy, by a physician to an entity in which the physician
has an ownership interest and the Federal "anti-kickback law" which prohibits,
among other things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients or
the purchasing, leasing, ordering or arranging for any goods, facility services
or items for which payment can be made under Medicare and Medicaid. The Federal
government, private insurers and various state enforcement agencies have
increased their scrutiny of providers, business practices and claims in an
effort to identify and prosecute fraudulent and abusive practices. In addition,
the Federal government has issued recent fraud alerts concerning nursing
services, double billing, home health services and the provision of medical
supplies to nursing facilities; accordingly, these areas may come under closer
scrutiny by the government. Furthermore, some states restrict certain business
relationships between physicians and other providers of health care services.
Many states prohibit business corporations from providing, or holding
themselves out as a provider of, medical care. Possible sanctions for violation
of any of these restrictions or prohibitions include loss of licensure or
eligibility to participate in reimbursement programs and civil and criminal
penalties. These laws vary from state to state, are often vague and have seldom
been interpreted by the courts or regulatory agencies. There can be no
assurance that such laws will ultimately be interpreted in a manner consistent
with the practices of ManorCare Heath Services.
Certificate of Need Laws. Many states have adopted Certificate of Need or
similar laws which generally require that the appropriate state agency approve
certain acquisitions and determine that a need exists for certain bed
additions, new services and capital expenditures or other changes prior to beds
and/or new services being added or capital expenditures being undertaken. To
the extent that Certificates of Need or other similar approvals are required
for the expansion of ManorCare Health Services operations, either through
facility acquisitions or expansion or provision of new services or other
changes, such expansion could be adversely affected by the failure or inability
to obtain the necessary approvals, changes in the standards applicable to such
approvals and possible delays and expenses associated with obtaining such
approvals. Manor Care has extensive filing for CONs. During the period from
1987 to the present, Manor Care completed 64 new skilled nursing facilities,
most of which required CON applications. During the past four fiscal years,
Manor Care received CON approval for 13 skilled nursing facilities and 18
assisted living facilities. See "Business of ManorCare Health Services After
the Distribution--Government Regulation."
Medicaid Waiver Program. Certain states provide for Medicaid reimbursement
for assisted living services pursuant to Medicaid Waiver Programs permitted by
the Federal government. In the event ManorCare Heath Services elects to provide
services in states with a Medicaid Waiver Program, ManorCare Heath Services may
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then elect to become certified as a Medicaid provider in such states. As a
provider of services under the Medicaid Waiver Program, ManorCare Heath
Services will be subject to all of the requirements of such program, including
the fraud and abuse laws, violations of which may result in civil and criminal
penalties and exclusion from further participation in the Medicaid Waiver
Program. ManorCare Heath Services intends to comply with all applicable laws,
including the fraud and abuse laws; however, there can be no assurance that
administrative or judicial interpretation of existing laws or regulations will
not in the future have a material adverse impact on ManorCare Heath Services'
business, results of operations or financial condition. See "Business of
ManorCare Health Services After the Distribution--Government Regulation."
Related Party Rule. The Medicare related party rule applies to companies that
are associated or affiliated with or have control of, or are controlled by, a
Medicare provider. The Medicare program may consider Vitalink and In Home
Health to be related parties with ManorCare Health Services. Consequently,
unless there is a qualification for a waiver of the related party rule, the
Medicare program will only reimburse for the cost incurred by the related party
in providing products or services, rather than their charges. An organization
can qualify for an exception from the related party rule by meeting the
following criteria: 1) the entities are bona-fide separate organizations; 2) a
substantial part of the supplying organization's business activity is conducted
with non-related organizations and there is an open, competitive market for
such services or products; 3) the services or products are commonly obtained by
a provider from other organizations and are not a basic element of patient care
ordinarily furnished directly to patients by the provider; and 4) the charge to
the provider is in line with the charge for such services and products in the
open market and no more than the charge made under comparable circumstances to
others. The Medicare related party rule could materially affect the
relationship among ManorCare Health Services, Manor Care Realty, Vitalink and
In Home Health.
Home Health Care Moratorium. On September 15, 1997, President Clinton issued
a Medicare moratorium on new home health agencies. The moratorium is scheduled
to last for six months so that new regulations can be proposed to combat fraud.
Given the short duration of the moratorium and the fact that the moratorium
only pertains to new home health providers, ManorCare Health Services does not
believe that there will be any material adverse affect on either In Home Health
or on ManorCare Health Services as a result thereof.
STAFFING AND LABOR COSTS
ManorCare Heath Services competes with various health care providers,
including other assisted living and skilled nursing providers, with respect to
attracting and retaining qualified or skilled personnel. ManorCare Heath
Services also depends on the available labor pool of low-wage employees. A
shortage of nurses or other trained personnel or general inflationary pressures
may require ManorCare Health Services to enhance its wage and benefits package
in order to compete. There can be no assurance that ManorCare Health Services'
labor costs will not increase or, if they do, that such costs can be matched by
corresponding increases in revenues. Any significant failure by ManorCare
Health Services to attract and retain qualified employees, to control its labor
costs or to match increases in its labor expenses with corresponding increases
in revenues could have a material adverse effect on ManorCare Health Services'
business, operating results and financial condition. See "Business of ManorCare
Health Services after the Distribution--Employees."
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY
ManorCare Health Services currently, and for the foreseeable future, expects
to rely primarily on the ability of the residents of its assisted living
facilities to pay ManorCare Health Services' fees from their own or familial
financial resources. Generally only seniors with income or assets meeting or
exceeding the comparable median in the region where ManorCare Health Services'
assisted living facilities are located are expected to be able to afford
ManorCare Health Services' fees. Inflation or other circumstances that
adversely affect the ability of seniors to pay for ManorCare Health Services'
services could have an adverse effect on ManorCare Health Services. If
ManorCare Health Services encounters difficulty in attracting seniors with
adequate resources to pay for its services, its business, operating results and
financial condition would likely be adversely affected.
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<PAGE>
PAYMENT BY THIRD-PARTY PAYORS
A portion of ManorCare Health Services' revenues from the services it
provides for the Skilled Nursing Facilities will be dependent upon
reimbursement from third-party payors, including Medicare, state Medicaid
programs and private insurers. For the fiscal year ended May 31, 1997, the
Skilled Nursing Facilities to be operated by ManorCare Health Services
approximately derived 55% of their patient service revenue from private pay
sources, 19% from Medicare and 26% from various state Medicaid agencies in each
case as they were operated by Manor Care. As of May 31, 1997, all of the
patients at Manor Care's assisted living facilities were private pay. Both
governmental and private third-party payors have employed cost containment
measures designed to limit payments made to health care providers such as
ManorCare Health Services. Those measures include the adoption of initial and
continuing recipient eligibility criteria which may limit payment for services,
the adoption of coverage and duration criteria which limit the services which
will be reimbursed and establishment of payment ceilings which set the maximum
reimbursement that a provider may receive for services. Furthermore, government
payment programs are subject to statutory and regulatory changes, retroactive
rate adjustments, administrative rulings and government funding restrictions,
all of which may materially increase or decrease the rate of program payments
to ManorCare Health Services for its services. There can be no assurance that
payments under governmental and private third-party payor programs will remain
at levels comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients eligible for reimbursement pursuant to
such programs. In addition, there can be no assurance that the Skilled Nursing
Facilities, or the provision of services and supplies by ManorCare Health
Services, now or in the future will initially meet or continue to meet the
requirements for participation in such programs. ManorCare Health Services
could be adversely affected by the continuing efforts of governmental and
private third-party payors to contain the amount of reimbursement for health
care services. For example, the Budget Act will, over the next several years,
alter the manner in which Medicare reimburses skilled nursing facilities for
cost reporting periods from a retrospective to a prospective payment system.
See "--Regulation." In addition, in certain states there have been proposals to
establish or for establishment of a case mix prospective payment system
pursuant to which the payment to a facility for a patient is based upon the
patient's condition and need for services. ManorCare Health Services cannot at
this time predict whether any of these proposals will be adopted or, if adopted
and implemented, what effect, if any, such proposals will have on ManorCare
Health Services. In addition, private payors, including managed care payors,
increasingly are demanding discounted fee structures or the assumption by
health care providers of all or a portion of the financial risk through prepaid
capitation arrangements. Efforts to impose reduced allowances, greater
discounts and more stringent cost controls by government and other payors are
expected to continue.
ENVIRONMENTAL MATTERS
Certain federal and state laws govern the handling and disposal of medical,
infectious and hazardous waste. Failure to comply with such laws or the
regulations promulgated thereunder could subject an entity covered by these
laws to fines, criminal penalties and other enforcement actions. ManorCare
Health Services has developed policies with respect to the handling and
disposal of medical, infectious and hazardous waste to assure compliance by
each of its centers with those laws and regulations. ManorCare Health Services
believes that it is in material compliance with applicable laws and regulations
governing medical, infectious and hazardous waste. See "Business of ManorCare
Health Services after the Distribution--Government Regulation--Environmental
Regulation."
SIGNIFICANT BAINUM FAMILY INTEREST
Upon completion of the Distribution, Messrs. Stewart Bainum and Stewart
Bainum, Jr. are expected to own beneficially approximately 15.22% and 22.86%,
respectively, of the Common Stock of ManorCare Health Services, in each case
including shares with respect to which voting power is shared with each other
and other individuals or entities. Collectively, members of the Bainum family
are expected to own beneficially approximately 29.95% of the Common Stock. In
addition, Mr. Bainum, Jr. will be Chairman of the Board of ManorCare Health
Services. As a result, the Bainum family may be in a position to influence
significantly the affairs of ManorCare Health Services, including the election
of directors.
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THE YEAR 2000 ISSUE
ManorCare Health Services 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 date sensitive information relating to the year 2000 and
beyond. ManorCare Health Services 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 ManorCare
Health Services' computer systems will be Year 2000 compliant. ManorCare Health
Services is expected to incur expenditures of approximately $6 to $8 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 Issues could adversely affect ManorCare
Health Services.
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<PAGE>
MANORCARE HEALTH SERVICES PRO FORMA CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of
ManorCare Health Services at August 31, 1997. This data should be read in
conjunction with the pro forma balance sheet and the introduction to the pro
forma financial statements appearing elsewhere in this Registration Statement.
The pro forma capitalization table has been derived from the historical
financial statements and reflects certain pro forma adjustments as if the
Distribution had been consummated as of August 31, 1997. See "Pro Forma
Financial Data of ManorCare Health Services."
<TABLE>
<CAPTION>
AUGUST 31, 1997
-----------------------------------
HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- ---------
(IN THOUSANDS, EXCEPT SHARES)
(UNAUDITED)
<S> <C> <C> <C>
Long-term debt:
New MCHS Senior Notes..................... -- $ 149,500 (1) $149,500
Long-term debt............................ $193,308 (30,000)(3) 163,308
-------- --------- --------
Total long-term debt.................... 193,308 119,500 312,808
Equity:
Investments and advances from Manor Care.. 277,235 (277,235) --
Common stock, par value $.01, authorized
160.0 million shares, outstanding 63.7
million shares........................... -- 637 (2) 637
Additional paid-in capital................ -- 680,816 (2) 680,816
-------- --------- --------
Total capitalization........................ $470,543 $ 523,718 $994,261
======== ========= ========
</TABLE>
- --------
(1) Reflects the issuance by ManorCare Health Services of the New MCHS Senior
Notes pursuant to the Exchange Offer and assumes that all of the holders
of the Old Senior Notes accept the Exchange Offer. The consummation of the
Exchange Offer is conditioned on, among other things, acceptance of the
Exchange Offer by holders of at least a majority in principal amount of
the outstanding Old Senior Notes. Obligations with respect to Old Senior
Notes not exchanged will remain obligations of Manor Care Realty following
the Distribution. Manor Care may reduce the principal amount of the Realty
Note prior to issuance or reduce the amount of the cash portion of the
Capital Contribution to the extent Old Senior Notes remain outstanding
upon consummation of the Exchange Offer.
(2) Reflects the contribution of the net assets from Manor Care in connection
with the Distribution Agreement.
(3) Reflects the payment of ManorCare Health Services' allocated portion of
the amounts drawn on Manor Care's Existing Revolving Credit Facility
related to the Vitalink tender offer.
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<PAGE>
MANOR CARE REALTY PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of Manor Care Realty at
August 31, 1997 and as adjusted to give pro forma effect to the Distribution
and related borrowings, including the Credit Facilities and the Realty Note,
the consummation of the Exchange Offer and the consummation of the Offering
and the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
AUGUST 31, 1997
--------------------
ACTUAL PRO FORMA
---------- ---------
(DOLLARS IN
THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Long-Term Debt:
Old Senior Notes......................................... $ 149,500 $ --
Senior Subordinated Notes(1)............................. 140,100 --
Existing Revolving Credit Facility....................... 175,000 --
Promissory Note.......................................... 14,300 --
Revolving Credit Facility................................ -- 28,000
The Notes................................................ -- 350,000
Term Loan................................................ -- 150,000
Mortgage and Capital Leases.............................. 72,607 26,547
Realty Note(2)........................................... -- 250,000
---------- --------
Total Long-Term Debt................................... 551,507 804,547
Shareholders' Equity:
Total shareholders' equity............................. 710,677 14,224
---------- --------
Total Capitalization....................................... $1,262,184 $818,771
========== ========
</TABLE>
- --------
(1) The Senior Subordinated Notes were redeemed on November 17, 1997 at a
price of 103.56% with the proceeds of borrowings under the Existing
Revolving Credit Facility.
(2) Manor Care may determine to reduce the principal amount of the Realty Note
prior to issuance or to reduce the amount of the cash portion of the
Capital Contribution to the extent that Old Senior Notes remain
outstanding upon consummation of the Exchange Offer.
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<PAGE>
DESCRIPTION OF THE TRANSACTIONS
THE DISTRIBUTION
Pursuant to the Distribution Agreement, on or prior to the Effective Date,
Manor Care will convey or cause to be conveyed to ManorCare Health Services
all of the right, title and interest of Manor Care and its subsidiaries in:
(i) all of the business and assets of the Assisted Living Business; (ii) the
shares of Common Stock of Vitalink owned by Manor Care; (iii) the shares of
Common and Preferred Stock of In Home Health owned by Manor Care; (iv) the
shares of common stock of The Tidewater Healthcare Shared Services Group, Inc.
("Tidewater"); (v) the partnership interests (the "Joint Venture Interests")
owned by Manor Care in the partnerships owning the Sycamore Glen, Centerville
and Fitzgerald Mercy skilled nursing facilities; and (vi) certain of the
contracts entered into in connection with the November 1, 1996 spin-off of
Choice Hotels International, Inc. (the "Choice Spinoff") (the "Contribution of
Assets").
Pursuant to the Distribution Agreement, ManorCare Health Services will
assume, and indemnify and hold Manor Care Realty harmless against certain
liabilities (the "Assumed Liabilities"), including: (i) liabilities arising
after the Effective Date relating to (x) the ownership, operation and
management of the assisted living facilities and the five skilled nursing
facilities to be owned by ManorCare Health Services and (y) the operation and
management of the Skilled Nursing Facilities; (ii) liabilities arising out of
the ownership of the stock of Vitalink, In Home Health, Tidewater and the
Joint Venture Interests, whether arising before or after the Effective Date;
(iii) liabilities arising out of information contained in or omitted from the
Registration Statement on Form 10 (the "Form 10") filed by ManorCare Health
Services with the Commission in connection with the Distribution; (iv)
liabilities set forth or referenced in the ManorCare Health Services financial
statements or the notes thereto contained in the Form 10; (v) liabilities
arising out of information contained in or omitted from the information
contained in this Registration Statement; (vi) liabilities under
indemnification agreements in effect as of the Effective Date between Manor
Care and certain employees and directors with respect to services rendered by
any such employee or director to ManorCare Health Services or the Assisted
Living Business or in connection with Vitalink or In Home Health; (vii) third-
party claims relating to the operation and management of the assisted living
facilities prior to the Effective Date and the operation and management of the
Skilled Nursing Facilities prior to the Effective Date (in each case, only to
the extent such claims are not covered by insurance or self-insurance of Manor
Care in effect immediately prior to the Effective Date and are of the type set
forth on a schedule to the Distribution Agreement); (viii) environmental
liabilities arising out of or in connection with the Assisted Living
Facilities; (ix) environmental liabilities to the extent such liabilities
arose by reason of ManorCare Health Services' negligent operation or
management of an assisted living facility or Skilled Nursing facility; (x)
after ManorCare Health Services acquires an assisted living facility pursuant
to the terms of the Development Agreement, environmental liabilities arising
out of or in connection with such acquired assisted living facility; (xi)
liabilities arising out or in connection with the handling of biomedical waste
at the Assisted Living Facilities or the Skilled Nursing Facilities; (xii) all
accounts payable relating exclusively to the Skilled Nursing Facilities or the
Assisted Living Business; (xiii) the $30 million aggregate principal amount of
indebtedness incurred under the Existing Revolving Credit Facility in
connection with the acquisition of additional equity securities of Vitalink
(the "Vitalink Borrowings"); and (xiv) certain obligations of Manor Care
arising out of the contracts entered into in connection with the Choice Spin-
off.
After giving pro forma effect to the Distribution and related transactions
as if they occurred on August 31, 1997 (and assuming the holders of 100% of
the Old Senior Notes accept the Exchange Offer), ManorCare Health Services
would have assumed approximately (i) $195.1 million of Manor Care's
indebtedness, (ii) liabilities relating to benefits and workers' compensation
of approximately $49.8 million, (iii) current liabilities of the skilled
nursing facilities of approximately $55.5 million, and (iv) deferred tax
liabilities of approximately $38.4 million. In addition, ManorCare Health
Services will assume certain contingent liabilities of Manor Care pursuant to
the terms of the Distribution Agreement. However, the assumption of such
liabilities will not release Manor Care Realty therefrom if ManorCare Health
Services should fail, for any reason, to perform its obligations pursuant to
such assumed liabilities.
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Pursuant to the Distribution Agreement, Manor Care Realty will retain, and
indemnify and hold ManorCare Health Services harmless against, certain
liabilities (the "Retained Liabilities"), including: (i) any liabilities of
Manor Care for money borrowed (other than the Vitalink Borrowings); (ii) third-
party claims arising out of the operation and management of the assisted living
facilities prior to the Effective Date and the operation and management of the
Skilled Nursing Facilities prior to the Effective Date (in each case, only to
the extent such claims are covered by insurance or self-insurance of Manor Care
in effect immediately prior to the Effective Date and the operation and
management of the Skilled Nursing Facilities prior to the Effective Date and
are of the type set forth on a schedule to the Distribution Agreement); (iii)
(x) certain pending environmental claims, including a variety of actions
relating to waste disposal sites in which one or more subsidiaries of
affiliates of Manor Care have been identified as potentially responsible
parties arising out of activities of Cenco Incorporated and its subsidiary and
affiliated corporations (the "Actions"), as specified in a schedule to the
Distribution Agreement; (y) any and all currently unknown but potential
environmental and other claims arising out of the activities of Cenco
Incorporated, and its subsidiary and affiliated companies, and any and all of
Cenco Incorporated's predecessor corporations and affiliates ("Cenco"),
including new claims arising out of the sites identified in a schedule to the
Distribution Agreement, and (z) all other claims arising out of Cenco's
discontinued operations; (iv) all environmental liabilities arising out of the
Skilled Nursing Facilities, other than liabilities arising by reason of
ManorCare Health Services' negligent operation or management of a Skilled
Nursing Facility; (v) prior to the time ManorCare Health Services acquires an
assisted living facility pursuant to the terms of the Development Agreement,
environmental liabilities arising out of or in connection with such assisted
living facility other then any such liabilities arising by reason of ManorCare
Health Services' negligent operation or management of any such assisted living
facility, (vi) liabilities arising out of information contained in or omitted
from the Registration Statement on Form S-3 filed by Manor Care Real Estate
Corp.; and (vii) any Tax liabilities (which will be governed by the Tax Sharing
Agreement).
The potential liability exposure for currently pending environmental claims
and litigation, without regard to insurance coverage, cannot be quantified with
precision because of the inherent uncertainties of litigation in the Actions
and the fact that the ultimate cost of the remedial actions for some of the
waste disposal sites where Manor Care is alleged to be a potentially
responsible party has not yet been quantified. Manor Care 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 Distribution Agreement provides that all cash and cash balances in
depository accounts as of the Distribution Date will be remitted to Manor Care
Realty. All petty cash accounts of Manor Care will be allocated on the
Distribution Date to ManorCare Health Services. The Distribution Agreement also
provides that all other current assets and liabilities (the "Noncash Working
Capital") will be conveyed (or in the case of certain government receivables,
deemed to have been conveyed) to ManorCare Health Services. Promptly after the
Distribution Date, ManorCare Health Services and Manor Care Realty will
calculate the amount of the Noncash Working Capital so conveyed (or deemed to
have been conveyed) and ManorCare Health Services will pay to Manor Care Realty
an amount equal to 50% of the Noncash Working Capital up to $25 million (i.e.,
in no circumstances will such payment to Manor Care Realty exceed $12.5
million).
In addition, pursuant to the Distribution Agreement, on or prior to the
Effective Date, Manor Care will make or cause to be made the Capital
Contribution to ManorCare Health Services. See " --The Realty Note."
Manor Care Realty and ManorCare Health Services have agreed in the
Distribution Agreement to share on an equal basis all costs and expenses
incurred in connection with the Distribution and the related transactions,
except that any fees paid in connection with any financings entered into in
connection with the Distribution will be paid by the party undertaking such
financings.
Manor Care Realty has agreed to indemnify and hold harmless ManorCare Health
Services and ManorCare Health Services has agreed to indemnify and hold
harmless Manor Care Realty, against any loss, liability or expense incurred or
suffered by the indemnified party arising out of or relating to the failure by
the indemnifying
42
<PAGE>
party, as the case may be, to perform or otherwise discharge the Retained
Liabilities, in the case of Manor Care Realty and the Assumed Liabilities in
the case of ManorCare Health Services. The Distribution Agreement provides that
the indemnifying party may assume the defense of a claim or suit brought by a
third party (unless the claim involves both ManorCare Health Services and Manor
Care Realty as defendants and the parties reasonably believe that there is a
conflict of interest in which case an independent counsel will be selected). In
addition, the Distribution Agreement provides that the indemnifying party may
settle or compromise the claim without the prior consent of the indemnified
party; provided that the indemnified party may not agree to a settlement unless
as a condition to such settlement the indemnified party receives a written
release from any and all liability relating to such third party claim and such
settlement does not include any relief other than monetary damages.
To the extent that the Distribution Agreement provides for indemnification by
ManorCare Health Services of Manor Care Realty or by Manor Care of ManorCare
Health Services and by Manor Care Realty of ManorCare Health Services from
liabilities arising under the Securities Act of 1933 and the Securities
Exchange Act of 1934, Manor Care has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy and is, therefore, unenforceable.
The Distribution is conditioned upon, among other things, (i) the receipt of
all necessary regulatory approvals and consents of third parties; (ii) the
execution of the agreements relating to the financing necessary to consummate
the Distribution and the related transactions and the receipt of the requisite
funds pursuant to such financing agreements; and (iii) the receipt by the Board
of Directors of Manor Care of the Solvency Opinion.
THE REALTY NOTE
In connection with the Distribution and in order to fund ManorCare Health
Services' capital expenditures in connection with the expansion of the Assisted
Living Business, on or prior to the Effective Date, Manor Care will make or
cause to be made the Capital Contribution. In order to fund the cash portion of
the Capital Contribution, Manor Care Real Estate will utilize part of the
proceeds of its public offering of $350 million aggregate principal amount of
% senior notes due 2008 and borrowings under the Credit Facilities. As part
of the Capital Contribution, Manor Care will contribute or cause to be
contributed to ManorCare Health Services the Realty Note to be issued by Manor
Care Real Estate and guaranteed by Manor Care Realty. Manor Care may determine
to reduce the principal amount of the Realty Note prior to issuance or to
reduce the amount of the cash portion of the Capital Contribution to the extent
Old Senior Notes remain outstanding upon consummation of the Exchange Offer.
The Realty Note will have the same general terms (including interest rate and
maturity, and parent and subsidiary guarantees) as the Manor Care Notes except
that Manor Care Realty may redeem the Realty Note after three years at a
redemption price equal to 100% of the principal amount thereof plus accrued and
unpaid interest. In addition, ManorCare Health Services has agreed not to
transfer the Realty Note on or prior to the sixth month anniversary of the date
of issuance thereof. After such date, ManorCare Health Services may transfer
the Realty Note without restriction subject to Manor Care Realty's right to
redeem the Realty Note. ManorCare Health Services will have certain demand
registration rights with respect to all or any portion of the Realty Note. Upon
receipt of any such demand, Manor Care Realty is required to use reasonable
efforts to register the portion of the Realty Note reflected in the demand of
ManorCare Health Services.
On or after such third anniversary of the issuance of the Realty Note,
ManorCare Health Services may request that Manor Care Realty redeem the Realty
Note. Manor Care Realty may not have adequate funds to effect the redemption of
the Realty Note and in such case may seek to obtain such funds through
additional debt or equity financing. There can be no assurance that Manor Care
Realty would be able to obtain such funds. Moreover, the anticipated terms of
the Credit Facilities will not permit Manor Care Realty to refinance the Realty
Notes with the proceeds of borrowings thereunder. In the event that ManorCare
Health Services requests that Manor Care Realty redeem the Realty Note and
Manor Care Realty does not redeem the Realty Note, the interest rate on the
Realty Note will increase by 200 basis points; provided that such interest rate
will not be so increased unless, as of the time such request for redemption is
made, the aggregate amount of rent paid by ManorCare Health Services under the
Lease Agreements with respect to all properties subject to such Lease
Agreements
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<PAGE>
shall equal or exceed the aggregate Priority Sum for all such properties on a
cumulative basis from the Effective Date through the third anniversary thereof
(such aggregate amount of rent being herein referred to as the "Threshold
Rent"). Solely for purposes of calculating the Threshold Rent, (i) the
aggregate Priority Sum for the fiscal year ended May 31, 1999 shall be deemed
to be the aggregate Priority Sum calculated pursuant to the Lease Agreements
plus $5 million and (ii) the aggregate Priority Sum for the fiscal year ended
May 31, 2000 and thereafter shall be deemed to be the aggregate Priority Sum
calculated pursuant to the Lease Agreements plus $10 million.
Manor Care Realty's high degree of leverage could adversely affect Manor Care
Realty's ability to pay principal and interest on or to redeem the Realty Note
and may adversely affect the ability of ManorCare Health Services to sell the
Realty Note. Manor Care Realty may not have adequate funds to effect the
redemption of the Realty Note and in such case may seek to obtain such funds
through additional debt or equity financing. There can be no assurance that
Manor Care Realty would be able to obtain such funds.
The terms of the Realty Note will not limit in any way ManorCare Health
Services' use of the proceeds thereof. ManorCare Health Services intends to use
the proceeds of the Realty Note for general corporate purposes, which may
include debt service, working capital or acquisition financing. The failure of
Manor Care Realty to pay principal and interest on the Realty Note in a timely
manner or the inability of ManorCare Health Services to sell the Realty Note to
a third party for its principal amount could have a material adverse effect on
ManorCare Health Services.
MCHS CREDIT FACILITY
ManorCare Health Services is negotiating a commitment letter with Chase and
CSI relating to a five-year $100 million revolving credit facility (the "MCHS
Credit Facility"). ManorCare Health Services anticipates using the Capital
Contribution and borrowings under the revolving credit facility to fund its
capital expenditures in connection with the expansion of the Assisted Living
Business.
MANOR CARE NOTES
In connection with the Distribution, Manor Care Real Estate is offering $350
million aggregate principal amount of the Manor Care Notes. The Manor Care
Notes will be fully and unconditionally guaranteed by Manor Care Realty and
substantially all of Manor Care Real Estate's present and future subsidiaries,
other than certain unrestricted subsidiaries. The Manor Care Notes will rank
senior to subordinated indebtedness of Manor Care Real Estate and pari passu
with all other indebtedness of Manor Care Real Estate, including borrowings
under the Credit Facilities (as herein defined) and the Realty Note. Manor Care
will utilize part of the proceeds from the sale of the Manor Care Notes
together with borrowings under the Credit Facilities to fund the cash portion
of the Capital Contribution.
THE CREDIT FACILITIES
Manor Care, on behalf of Manor Care Real Estate, is negotiating a commitment
letter with The Chase Manhattan Bank ("Chase") and Chase Securities Inc.
("CSI") relating to an eight-year $150 million term loan facility, subject to
earlier maturity under certain circumstances, and a five-year $300 million
revolving credit facility (collectively, the "Credit Facilities"). Manor Care
anticipates that the Credit Facilities will be secured by a majority of the
assets of Manor Care Realty and Manor Care Real Estate and by a pledge of the
capital stock of Manor Care Real Estate and Manor Care Realty's other
subsidiaries and by an assignment of certain agreements with ManorCare Health
Services, including the Lease Agreements and the Development Agreement. In
addition, Manor Care anticipates that the Credit Facilities will be fully and
unconditionally guaranteed by Manor Care Realty and substantially all of Manor
Care Realty's present and future subsidiaries. Manor Care anticipates that the
Credit Facilities will be available, subject to the terms and conditions
thereof, for general corporate purposes and working capital purposes, including
funding development and operating costs and acquisitions. Borrowings under the
Credit Facilities will also be used together with part of the proceeds from the
sale of the Manor Care Notes to fund the cash portion of the Capital
Contribution.
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<PAGE>
THE EXCHANGE OFFER
INTRODUCTION
The Exchange Offer is being made in furtherance of, and in connection with,
the Distribution. Consummation of the Exchange Offer will occur
contemporaneously with the Distribution and will result in the effective
assumption by ManorCare Health Services of all or part of the obligations of
Manor Care under the Old Senior Notes as they existed prior to the
Distribution. Obligations with respect to Old Senior Notes not exchanged will
remain obligations of Manor Care Realty following the Distribution.
TERMS OF THE EXCHANGE OFFER
Subject to the terms and conditions set forth in this Prospectus and Consent
Solicitation and in the Letter of Transmittal, ManorCare Health Services is
offering to exchange $1,000 in principal amount of its 7 1/2% Senior Notes due
June 15, 2006 (i.e., the New MCHS Senior Notes) for each $1,000 in principal
amount of 7 1/2% Senior Notes due June 15, 2006 of Manor Care (i.e. the Old
Senior Notes) plus, accrued but unpaid interest on the Old Senior Notes
tendered up to, but not including, the Exchange Date. Interest on the New MCHS
Senior Notes will accrue at the applicable rate from and including the
Exchange Date. Holders of Old Senior Notes who tender into the Exchange Offer
will be required, as a condition to a valid tender, to consent to the Proposed
Amendments. The proper completion, execution and delivery of the Letter of
Transmittal will constitute the giving of a Consent to the Proposed
Amendments. Old Senior Notes accepted by ManorCare Health Services for
exchange pursuant to the Exchange Offer will be cancelled.
The terms of each series of New MCHS Senior Notes will be identical in all
material respects to each series of Old Senior Notes for which they are
exchanged prior to the implementation of the Proposed Amendments, except that
the New MCHS Senior Notes (i) will be issued by ManorCare Health Services and
(ii) will except from the Limitation on Affiliate Transactions covenant
certain additional transactions, including the Distribution and related
transactions as well as certain other transactions after the Distribution
between Manor Care Realty and ManorCare Health Services. See "Description of
New MCHS Senior Notes."
ManorCare Health Services expressly reserves the right, in its reasonable
discretion, subject to applicable law, to (i) extend or terminate the Exchange
Offer and not accept for exchange any Old Senior Notes and promptly return all
Old Senior Notes to the tendering holders thereof, upon the failure of any
conditions specified in "--Conditions to the Exchange Offer," (ii) waive any
condition to the Exchange Offer and accept all Old Senior Notes tendered
pursuant to the Exchange Offer, (iii) extend the Expiration Date of the
Exchange Offer and retain all Old Senior Notes tendered pursuant to the
Exchange Offer until the extended Expiration Date, subject, however, to the
withdrawal rights of holders, see "--Withdrawal Rights," (iv) amend the terms
of the Exchange Offer, or (v) modify the form of the consideration to be paid
pursuant to the Exchange Offer. Any amendment applicable to the Exchange Offer
will apply to all Old Senior Notes tendered pursuant thereto. If any condition
to the Exchange Offer is waived, including the Minimum Tender Condition, the
Offer will be extended so that at least five business days remain in the
Exchange Offer.
Subject to the instructions herein and in the Letter of Transmittal, holders
who tender their Old Senior Notes pursuant to the Exchange Offer will not be
obligated to pay transfer taxes, if any, on the exchange of their Old Senior
Notes for New MCHS Senior Notes. ManorCare Health Services will pay for all
charges and expenses (except as provided below and in the Letter of
Transmittal) in connection with the Exchange Offer.
ManorCare Health Services reserves the right, in its reasonable discretion,
to purchase or make offers for any Old Senior Notes that remain outstanding
subsequent to the Expiration Date. The terms of any such purchase or offers
could differ from the terms of the Exchange Offer. Any purchase or offer by
ManorCare Health Services will not be made except in accordance with
applicable law and will in no event be made prior to the expiration of ten
business days after the Expiration Date.
Holders of Old Senior Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law or the terms of the Old Indenture
in connection with the Exchange Offer.
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THE SOLICITATION
Concurrently with the Exchange Offer, Manor Care is soliciting Consents to
the Proposed Amendments to the Old Indenture. The Solicitation is being made
in order to obtain the Requisite Consents of holders of Old Senior Notes to
the Proposed Amendments that would, among other things, eliminate the
covenants in the Old Indenture that restrict (i) the creation, incurrence or
assumption of liens, (ii) sale leaseback transactions and (iii) transactions
with affiliates. See "The Proposed Amendments" and "--Procedures for Tendering
Securities and Giving Consents." All references herein to the Exchange Offer
shall be deemed to include the Solicitation unless otherwise specified.
The Proposed Amendments cannot become effective with respect to the Old
Senior Notes unless and until the holders of at least a majority in principal
amount of the Old Senior Notes of such series have given Consents (i.e., the
Requisite Consents) and the Exchange Offer for the Old Senior Notes has been
consummated. The proper tender of Old Senior Notes will constitute the giving
of a Consent with respect to such Old Senior Notes. Consummation of the
Exchange Offer is conditioned on, among other things, acceptance of the
Exchange Offer by holders of at least a majority in principal amount of the
outstanding Old Senior Notes (i.e., the Minimum Tender Condition), which may
be waived by Manor Care. If any condition to the Exchange Offer is waived,
including the Minimum Tender Condition, the Offer will be extended so that at
least five business days remain in the Exchange Offer. If the Exchange Offer
is consummated, then, unless the Requisite Consents have not been received,
the Proposed Amendments will become effective as to the Old Senior Notes and
each non-exchanging holder of such Old Senior Notes will be bound by the
Proposed Amendments even though such holder did not consent to the Proposed
Amendments.
Holders of Old Senior Notes who tender into the Exchange Offer will be
required, as a condition to a valid tender, to consent to the Proposed
Amendments. The proper completion, execution and delivery of the Letter of
Transmittal will constitute the giving of a Consent to the Proposed Amendments
with respect to such Old Senior Notes. Tenders of Old Senior Notes made
pursuant to the Exchange Offer may be withdrawn only if the Expiration Date is
after 12:01 a.m. on , 1998. Withdrawal of tendered Old Senior Notes will
be deemed a revocation of the Consent to which such tendered Old Senior Notes
relate.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 12:00 midnight, New York City time on
, 1998 (i.e., the Expiration Date), subject to extension by ManorCare
Health Services by notice to the Exchange Agent as herein provided. Manor Care
reserves the right, at any time or from time to time, to extend the Exchange
Offer at its discretion, in which event the term "Expiration Date" with
respect to such extended Exchange Offer shall mean the time and date on which
such Exchange Offer as so extended shall expire. ManorCare Health Services
shall notify the Exchange Agent of any extension by oral or written notice.
ManorCare Health Services also expressly reserves the right to (i) extend or
terminate the Exchange Offer and not accept for exchange any Old Senior Notes
if any of the conditions set forth below under "--Conditions to the Exchange
Offer" are not satisfied and are not waived by ManorCare Health Services by
giving oral or written notice of such extension or termination to the Dealer
Manager and (ii) subject to appropriate notice, to amend the Exchange Offer in
any respect and at any time or from time to time until the Old Senior Notes
are accepted for exchange. Any extension, termination, or amendment will be
followed as promptly as practicable by a public announcement thereof. In the
case of an extension, a public announcement will be issued prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date of the Exchange Offer. Without limiting the manner in which
ManorCare Health Services may choose to make any public announcement,
ManorCare Health Services shall have no obligation to publish, advertise or
otherwise communicate any such public announcement other than by making a
release to the Dow Jones News Service or otherwise as required by law. All Old
Senior Notes tendered pursuant to the Exchange Offer prior to any extensions
and not subsequently withdrawn, will remain subject to the Exchange Offer.
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If, prior to the Expiration Date, ManorCare Health Services shall offer
consideration to holders of Old Senior Notes, such consideration shall also be
paid to all holders whose Old Senior Notes have previously been tendered
pursuant to the Exchange Offer and if such consideration is increased, such
increased consideration shall also be paid to all holders whose Old Senior
Notes have previously been tendered pursuant to the Exchange Offer. If the
consideration is offered or any such consideration is increased pursuant to
the Exchange Offer, the Exchange Offer will remain open at least ten business
days from the date that ManorCare Health Services first gives notice, by
public announcement or otherwise, of such offer of consideration or increase
thereof. ManorCare Health Services does not presently intend to offer any
consideration.
EFFECT OF TENDER
Tenders of Old Senior Notes may be withdrawn only if the expiration date is
after 12:01 a.m. on , 1998. Tenders of Old Senior Notes pursuant to the
Exchange Offer described herein and in the Letter of Transmittal will
constitute a binding agreement between the tendering holder of Old Senior
Notes and ManorCare Health Services upon the terms and subject to the
conditions of the Exchange Offer. The acceptance of the Exchange Offer by a
tendering holder of Old Senior Notes will constitute the agreement by such
holder to deliver good and marketable title to the tendered Old Senior Notes
free and clear of all liens, charges, claims, encumbrances, interests and
restrictions of any kind.
Tendering holders of Old Senior Notes that are exchanged in the Exchange
Offer will not be obligated to pay transfer taxes with respect to the purchase
of their Old Senior Notes pursuant to the Exchange Offer. Tendering holders of
Old Senior Notes will not be required to pay any fee or commission to the
Dealer Managers. However, if the tendering holder handles the transaction
through its broker, dealer, commercial bank, trust company or other
institution, such holder may be required to pay brokerage fees or commissions.
Holders of Old Senior Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law or the Old Indenture in connection
with the Exchange Offer.
ACCEPTANCE OF OLD SENIOR NOTES TENDERED FOR EXCHANGE; DELIVERY OF NEW MCHS
SENIOR NOTES
Upon the terms and subject to the conditions of the Exchange Offer,
ManorCare Health Services will purchase Old Senior Notes by accepting them for
exchange and in consideration therefor, will deliver New MCHS Senior Notes,
and make payments for accrued interest on Old Senior Notes accepted for
exchange up to, but not including, the Exchange Date.
For purposes of the Exchange Offer, ManorCare Health Services shall be
deemed to have accepted for exchange (and thereby to have purchased) tendered
Old Senior Notes as, if and when ManorCare Health Services gives oral or
written notice to the Exchange Agent of ManorCare Health Services' acceptance
of such securities for exchange. Subject to the terms and conditions of the
Exchange Offer, payment for accrued interest and delivery of New MCHS Senior
Notes for Old Senior Notes so accepted will be made by the Exchange Agent as
soon as practicable after receipt of such notice. The Exchange Agent will act
as agent for the tendering holders for the purpose of receiving Old Senior
Notes and transmitting payments and/or New MCHS Senior Notes to such holders.
If any tendered Old Senior Notes are not accepted for exchange for any reason,
or if Old Senior Notes in a principal amount in excess of the principal amount
indicated as being tendered on the Letter of Transmittal are submitted, an Old
Senior Note in a principal amount equal to the principal amount not accepted
or tendered will be issued, without expense to the tendering holders of Old
Senior Notes, as promptly as practicable following the expiration or
termination of the Exchange Offer.
If any tendered Old Senior Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any such unaccepted Old Senior Notes will be returned, at ManorCare
Health Services' expense, to the tendering holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
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PROCEDURES FOR TENDERING OLD SENIOR NOTES AND GIVING CONSENTS
A holder of Old Senior Notes held with DTC must follow the following
instructions to tender Old Senior Notes in the Exchange Offer: (i) call such
holder's broker and inform such broker of such holder's interest in tendering
such holder's Old Senior Notes pursuant to the Exchange Offer, (ii) instruct
such broker to effect a book-entry transfer of all Old Senior Notes to be
tendered in the Exchange Offer by such holder into the Exchange Agent's account
at DTC, (iii) instruct such broker to complete and sign the Letter of
Transmittal in accordance with the instructions set forth therein, and (iv)
instruct such broker to deliver the properly completed and executed Letter of
Transmittal (or a facsimile thereof) to the Exchange Agent on or prior to 12:00
midnight, New York City time, on the Expiration Date. The proper completion,
execution and delivery of a Letter of Transmittal will constitute the giving of
a consent to the Proposed Amendments.
The Exchange Agent has established an account with respect to the Old Senior
Notes at DTC for purposes of the Exchange Offer. Any financial institution that
is a participant in DTC may make book-entry delivery of Senior Notes by causing
DTC to transfer Old Senior Notes into the Exchange Agent's account in
accordance with DTC's procedure for such transfer. However, although delivery
of Old Senior Notes may be effected through book-entry transfer at DTC, a
properly completed and executed Letter of Transmittal, with any required
signature guarantees, must, in any case, be transmitted to, and received by,
the Exchange Agent at its address set forth on the back cover page of this
Prospectus and Consent Solicitation on or prior to 12:00 midnight, New York
City time, on the Expiration Date. Old Senior Notes will not be deemed
surrendered until the Letter of Transmittal and any signature guarantees, if
necessary, are received by the Exchange Agent. Delivery of such documents to
DTC will not constitute valid delivery to the Exchange Agent.
In order for a tendering holder to be assured of participating in the
Exchange Offer, such holder must tender such Old Senior Notes in accordance
with the procedures set forth herein and in the Letter of Transmittal on or
prior to the Expiration Date.
LETTERS OF TRANSMITTAL MUST BE SENT ONLY TO THE EXCHANGE AGENT. DO NOT SEND
LETTERS OF TRANSMITTAL TO MANORCARE HEALTH SERVICES, THE OLD TRUSTEE, THE
INFORMATION AGENT OR THE DEALER MANAGERS.
Proper Execution and Delivery of Letters of Transmittal.
Except as otherwise provided below, all signatures on a Letter of Transmittal
or a notice of withdrawal, as the case may be, must be guaranteed by an
Eligible Institution provided, however, that signatures on the Letter of
Transmittal need not be guaranteed if (a) the Letter of Transmittal is signed
by a participant in DTC whose name appears on a security position listing as
the owner of Old Senior Notes tendered therewith and such holder(s) have not
completed the portion entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (b) such Old Senior
Notes are tendered for the account of an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Senior Notes will be resolved by
ManorCare Health Services, whose determination will be final and binding. Manor
Care Health Services reserves the absolute right to reject any or all tenders
that are not in proper form or the acceptance of which may, in the opinion of
counsel for ManorCare Health Services, be unlawful. ManorCare Health Services
also reserves the absolute right to waive the conditions of the Exchange Offer
as set forth under "Conditions to the Exchange Offer" or any irregularities or
conditions of tender as to particular Old Senior Notes. ManorCare Health
Services' interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding. Unless waived, any irregularities in connection with tenders must be
cured within such time as ManorCare Health Services shall determine. ManorCare
Health Services, the Exchange Agent, the Information Agent and the Dealer
Managers shall not be under any duty to give notification of defects in such
tenders and shall not incur liabilities for failure to give such notification.
Tenders of Old Senior Notes will not be deemed to have been made until such
irregularities
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have been cured or waived. Any Old Senior Notes received by the Exchange Agent
that are not properly tendered and as to which the irregularities have not
been cured or waived will be returned by the Exchange Agent to the tendering
holder, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
Transfer Taxes. ManorCare Health Services will pay all transfer taxes, if
any, applicable to the transfer and sale of Old Senior Notes to it pursuant to
the Exchange Offer. If, however, New MCHS Senior Notes and/or substitute Old
Senior Notes for amounts not tendered or not exchanged are to be delivered to,
or are to be registered or issued in the name of, any person other than the
registered holder of Old Senior Notes tendered, or if tendered Old Senior
Notes are registered in the name of any person other than the person signing
the Letter of Transmittal, or if a transfer tax is imposed for any reason
other than the transfer or sale of Old Senior Notes to ManorCare Health
Services pursuant to the Exchange Offer, the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any extension
of the Exchange Offer, ManorCare Health Services will not issue New MCHS
Senior Notes in respect of any properly tendered Old Senior Notes, and may
terminate the Exchange Offer by oral or written notice to the Exchange Agent
and the holders of the Old Senior Notes, or, at its option, modify or
otherwise amend such Exchange Offer with respect to such Old Senior Notes, if
any of the following conditions have not been satisfied, whether prior to or
simultaneously with the completion of the Exchange Offer:
(a) satisfaction of the Minimum Tender Condition;
(b) consummation of the Distribution;
(c) there shall not have been any action taken or threatened, or any
statute, rule, regulation, judgment, order, stay, decree or injunction
promulgated, enacted, entered, enforced or deemed applicable to the
Exchange Offer, the Proposed Amendments, the Distribution, or the exchange
of Old Senior Notes pursuant to the Exchange Offer (the "Exchange") by or
before any court or governmental regulatory or administrative agency or
authority or tribunal, domestic or foreign, which (i) challenges the making
of the Exchange Offer, the Proposed Amendments, the Distribution, or the
Exchange or otherwise and adversely affects in any material manner the
Exchange Offer, the Proposed Amendments, the Distribution, or the Exchange
or (ii) in the reasonable judgment of ManorCare Health Services, could
materially adversely affect the business, condition (financial or
otherwise), income, operations, properties, assets, liabilities or
prospects of Manor Care Realty or its subsidiaries, or ManorCare Health
Services or its subsidiaries, or materially impair the contemplated
benefits to Manor Care Realty or ManorCare Health Services of the Exchange
Offer, the Proposed Amendments, the Distribution, or the Exchange;
(d) there shall not have occurred or be likely to occur any event
affecting the business or financial affairs of ManorCare Health Services or
Manor Care Realty that, in the reasonable judgment of ManorCare Health
Services would or might prohibit, prevent, restrict or delay consummation
of the Exchange Offer, the Proposed Amendments, the Distribution, or the
Exchange or that will, or is reasonably likely to, materially impair the
contemplated benefits of the Exchange Offer, the Proposed Amendments, the
Distribution, or the Exchange to Manor Care Realty or ManorCare Health
Services or might be material to holders of Old Senior Notes in deciding
whether to accept such Exchange Offer;
(e) there shall not have occurred (i) any general suspension of or
limitation on trading in securities on the New York Stock Exchange or in
the over-the-counter market (whether or not mandatory), (ii) any
significant adverse change in the price of the Old Senior Notes or in the
United States securities or financial markets, (iii) a material impairment
in the trading market for debt securities, (iv) a declaration of a banking
moratorium or any suspension of payments in respect of banks by federal or
state authorities in the United
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States (whether or not mandatory), (v) a commencement of a war, armed
hostilities or other national or international crisis directly or
indirectly relating to the United States, (vi) any limitation (whether or
not mandatory) by any governmental authority on, or other event having a
reasonable likelihood of affecting, the extension of credit by banks or
other leading institutions in the United States, (vii) any significant
adverse changes in United States securities or financial markets generally
or in the case of any of the foregoing existing at the time of the
commencement of the Exchange Offer, a material acceleration or worsening
thereof; and
(f) the Old Trustee shall not have objected in any respect to, or taken
any action that could, in the sole judgement of Manor Care, adversely
affect the consummation of any of the Exchange Offer, the Distribution, or
the Exchange or Manor Care's ability to effect the Proposed Amendments, or
shall have taken any action that challenges the validity or effectiveness
of the procedures used by Manor Care in soliciting the Consents to the
Proposed Amendments (including the form thereof) or in making of the
Exchange Offer, the Distribution or the Exchange.
If any of the foregoing conditions is not satisfied ManorCare Health
Services may (i) terminate the Exchange Offer and return the Old Senior Notes
to the holders who tendered them; (ii) extend the Exchange Offer and retain
all tendered Old Senior Notes until the expiration of Exchange Offer, subject,
however, to the withdrawal rights of holders (see "--Withdrawal Rights"); or
(iii) waive the unsatisfied conditions with respect to the Exchange Offer and
accept all Old Senior Notes tendered therein. If any condition to the Exchange
Offer is waived, including the Minimum Tender Condition, the Offer will be
extended so that at least five business days remain in the Exchange Offer.
ManorCare Health Services may amend the Exchange Offer at any time prior to
12:00 midnight, New York City time, on the Expiration Date if any of the
conditions set forth above are not satisfied with respect to such Exchange
Offer. Moreover, regardless of whether any of such conditions has been
satisfied, Manor Care may amend the Exchange Offer in any manner that, in its
good faith judgment, is advantageous to the holders of the Old Senior Notes.
The foregoing conditions are for the sole benefit of Manor Care and may be
waived by Manor Care, in whole or in part, in its reasonable discretion. Any
determination made by Manor Care concerning an event, development or
circumstance described or referred to above will be final and binding on all
parties.
WITHDRAWAL RIGHTS
Tenders of Old Senior Notes made pursuant to the Exchange Offer may be
withdrawn only if the Expiration Date is after 12:01 a.m. on , 1998. For
a withdrawal to be effective, a holder of Old Senior Notes held with DTC must
(i) call such holder's broker and instruct such broker to withdraw such tender
of Old Senior Notes by debiting the Exchange Agent's account at DTC of all Old
Senior Notes to be withdrawn; and (ii) instruct such broker to provide a
written, telegraphic or facsimile transmission notice of withdrawal to the
Exchange Agent on or before the Expiration Date. Such notice of withdrawal
shall contain: (A) the name of the person who tendered the Old Senior Notes;
(B) a description of the Old Senior Notes to be withdrawn; (C) the aggregate
principal amount represented by such Old Senior Notes; and (D) if such Old
Senior Notes are held by a new beneficial owner, evidence satisfactory to
ManorCare Health Services that the person withdrawing the tender has succeeded
to the beneficial ownership of the Old Senior Notes. A purported notice of
withdrawal which lacks any of the required information will not be an
effective withdrawal of a tender previously made.
Any permitted withdrawals of tenders of Old Senior Notes may not be
rescinded, and any Old Senior Notes so withdrawn will thereafter be deemed not
validly tendered for purposes of the Offer; provided, however, withdrawn Old
Senior Notes may be retendered by following the procedures for tendering prior
to the Expiration Date.
The withdrawal of tendered Old Senior Notes will be deemed to be a
revocation of the Consents to which such tendered Old Senior Notes relate.
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All questions as to the validity (including time of receipt) of notices of
withdrawal will be determined by ManorCare Health Services, whose
determination will be final and binding. None of ManorCare Health Services,
the Exchange Agent or any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification.
EXCHANGE AGENT
The Wilmington Trust Company has been appointed as Exchange Agent for the
Exchange Offer. Letters of Transmittal and all correspondence in connection
with the Exchange Offer should be sent or delivered by each holder or such
holder's broker, dealer, commercial bank trust company or other nominee to the
Exchange Agent at the addresses and telephone numbers set forth on the back
cover page of this Prospectus and Consent Solicitation.
Any holder whose Old Senior Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the addresses and telephone
numbers indicated on the back cover page of this Prospectus and Consent
Solicitation for instructions.
DEALER MANAGERS
ManorCare Health Services has engaged Chase Securities Inc. and SBC Warburg
Dillon Read Inc. to act as Dealer Managers in connection with the Exchange
Offer and to provide certain financial advisory services to ManorCare Health
Services in connection therewith. Any holder who has questions concerning the
terms of the Exchange Offer may contact the Dealer Managers at the addresses
and telephone numbers set forth on the back cover page of this Prospectus and
Consent Solicitation.
ManorCare Health Services has agreed to pay the Dealer Managers pre-
determined compensation for the Dealer Managers' financial advisory services
and ManorCare Health Services has agreed to indemnify the Dealer Managers
against certain liabilities, including certain liabilities under the federal
securities laws.
The Dealer Managers are underwriters with respect to the Debt Offering.
Manor Care Real Estate, as issuer and Manor Care Realty, as parent guarantor,
have agreed to indemnify the Dealer Managers in their capacity as underwriter
of the Debt Offering, for certain liabilities, including liabilities under the
Securities Act in connection with the Debt Offering. Chase Securities Inc. is
an affiliate of The Chase Manhattan Bank, which is the agent bank and a lender
under the Existing Revolving Credit Facility. The Chase Manhattan Bank will
receive its proportionate share of any repayment by Manor Care Realty of
amounts outstanding under the Existing Revolving Credit Facility from the
proceeds of such Debt Offering. SBC Warburg Dillon Read Inc. has acted as
Manor Care's financial advisor in connection with the Distribution, for which
Manor Care has agreed to compensate SBC Warburg Dillon Read Inc. $3,000,000 in
advisory fees. The Dealer Managers have provided in the past and may continue
to provide other investment banking and financial advisory services to Manor
Care, Manor Care Realty and ManorCare Health Services and their respective
affiliates, including services in connection with the Distribution.
OTHER FEES AND EXPENSES
ManorCare Health Services will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its reasonable out-
of-pocket expenses in connection therewith. ManorCare Health Services will
also pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of
this Prospectus and related documents to the beneficial owners of Old Senior
Notes, and in handling or forwarding tenders for their customers. ManorCare
Health Services anticipates that it will incur approximately $ in fees
and expenses relating to the Exchange Offer. All such fees and expenses will
be shared equally by ManorCare Health Services and Manor Care Realty.
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THE PROPOSED AMENDMENTS
Manor Care is soliciting the consent of the holders of Old Senior Notes,
other than Manor Care or its affiliates, to the Proposed Amendments. The
summaries of provisions in the Old Indenture set forth below are qualified in
their entireties by reference to the full and complete terms contained in the
Old Indenture.
The Proposed Amendments to the Old Indenture are as follows:
Deletion of Restrictive Covenants. The Proposed Amendments would delete in
their entireties the following restrictive covenants and references thereto
from the Old Indenture:
Section 3.04 Limitation on Liens. Subject to certain exceptions set forth
in the Old Indenture, restricts Manor Care from creating, incurring or
assuming any Lien on any property or assets of Manor Care or its
Subsidiaries in order to secure any Debt of Manor Care or any of its
Subsidiaries without effectively providing that the Old Senior Notes shall
be secured equally and ratably with (or prior to) such Debt, so long as
such Debt shall be so secured.
Section 3.05 Limitation on Sale and Lease-Back Transactions. Subject to
certain exceptions set forth in the Old Indenture, restricts Manor Care and
its Subsidiaries from entering into any arrangement with any person
providing for the leasing by Manor Care or a Subsidiary of Manor Care of
any property or assets, which property or asset has been or is to be sold
or transferred by Manor Care or a Subsidiary of Manor Care to such person
(a "Sale and Lease-Back Transaction") unless (a) Manor Care or such
Subsidiary would, at the time of entering into a Sale and Lease-Back
Transaction, be entitled to incur Debt secured by a Lien on the property or
asset to be leased in an amount at least equal to the Attributable Debt in
respect to such transaction without equally and ratably securing the Old
Senior Notes pursuant to the Limitation on Liens covenant in the Old
Indenture or (b) the proceeds of the sale of the property or assets to be
leased are at least equal to their fair value and an amount in cash equal
to the net proceeds are applied within 12 months of the effective date of
such transaction to (i) acquire additional assets, (ii) retire Debt which
is pari passu with the Old Senior Notes or (iii) offer to purchase the Old
Senior Notes at 100% of the principal amount thereof, plus accrued
interest, if any, to the date of purchase.
Section 3.06 Limitation on Affiliate Transactions. Subject to certain
exceptions set forth in the Old Indenture, restricts Manor Care and its
Subsidiaries from selling, leasing, transferring or otherwise disposing of
any of its properties or assets to or purchasing any property or assets
from, or entering into any contract, agreement, understanding, loan,
advance or guaranty with, or for the benefit of, an Affiliate of Manor Care
(other than a Subsidiary of Manor Care ) (an "Affiliate Transaction")
having a value, or for consideration having a value, in excess of $20
million individually or in the aggregate unless the Board of Directors of
Manor Care shall determine that the terms of such Affiliate Transaction are
no less favorable to Manor Care or such Subsidiary than those which might
be obtained at the time of such Affiliate Transaction from persons who are
not Affiliates.
Deletion of Definitions. The Proposed Amendments would delete certain
definitions from the Old Indenture when references to such definitions would
be eliminated as a result of the foregoing.
The Proposed Amendments constitute a single proposal and an exchanging
and/or consenting Holder must consent to the Proposed Amendments as an
entirety and may not consent selectively with respect to certain of the
Proposed Amendments.
The Proposed Amendments cannot become effective unless and until the holders
of at least a majority in principal amount of the Old Senior Notes have given
Consents (i.e., the Requisite Consents) and the Exchange Offer has been
consummated. The proper tender of Old Senior Notes will constitute the giving
of a Consent with respect to such Old Senior Notes. Consummation of the
Exchange Offer is conditioned on, among other things, acceptance of the
Exchange Offer by holders of at least a majority in principal amount of Old
Senior Notes (i.e., the Minimum Tender Condition), which may be waived by
Manor Care. If the Exchange Offer is consummated, then, unless the Requisite
Consents have not been received, the Proposed Amendments will become effective
and each non-exchanging holder of such Old Senior Notes will be bound by the
Proposed Amendments even though such holder did not consent to the Proposed
Amendments. See "Risk Factors."
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DESCRIPTION OF NEW MCHS SENIOR NOTES
The New MCHS Senior Notes are to be issued under a New Indenture, dated as
of , 1998, as amended and supplemented from time to time (the "New
Indenture"), between ManorCare Health Services and The Wilmington Trust
Company, as Trustee (the "Trustee"). The following summaries of certain
provisions of the New Indenture do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all the provisions of
the New Indenture, including the definitions therein of certain terms. The
following sets forth certain general terms of the New MCHS Senior Notes
offered hereby.
GENERAL
The New MCHS Senior Notes will be limited to $150 million in aggregate
principal amount. The New MCHS Senior Notes will be issued only in fully
registered form, in denominations of $1,000 and integral multiples of $1,000.
The New MCHS Senior Notes will bear interest from the Issue Date at the rate
of 7 1/2% per annum and will mature on June 15, 2006. Interest will be payable
on June 15 and December 15, commencing , 1998, to the persons in whose
names the New MCHS Senior Notes are registered at the close of business on the
applicable record date, which is the June 1 or December 1 next preceding such
interest payment date.
Neither the New Indenture nor the New MCHS Senior Notes will contain
provisions which would afford holders of the New MCHS Senior Notes protection
in the event of a decline in the credit rating of ManorCare Health Services or
the New MCHS Senior Notes as the result of a takeover, recapitalization or
similar restructuring involving ManorCare Health Services that could adversely
affect such holders.
The New MCHS Senior Notes will be senior unsecured obligations of ManorCare
Health Services and will rank pari passu in right of payment with all senior
debt of ManorCare Health Services, whether outstanding on the date hereof or
hereafter created, incurred, assumed or guaranteed. However, the New MCHS
Senior Notes will be effectively subordinated to certain creditors of
ManorCare Health Services and its Subsidiaries, including secured lenders and
trade creditors. At August 31, 1997, the New MCHS Senior Notes would have been
effectively subordinated to approximately $163 million of other liabilities of
ManorCare Health Services and its Subsidiaries.
Principal of and interest on the New MCHS Senior Notes will be payable, and
the New MCHS Senior Notes will be exchangeable and transfers thereof will be
registrable, at the corporate trust office of the Trustee in New York, New
York; provided, however, that, at the option of ManorCare Health Services,
payment of interest may be made by check mailed to the address of the person
entitled thereto at such person's registered address.
The New MCHS Senior Notes will not be subject to any sinking fund.
OPTIONAL REDEMPTION BY THE COMPANY
The New MCHS Senior Notes will be redeemable, at the option of ManorCare
Health Services, in whole at any time or in part from time to time, on at
least 30 days but not more than 60 days prior notice mailed to the registered
address of each holder of New MCHS Senior Notes to be so redeemed, at a
redemption price equal to the greater of (i) 100% of their principal amount
and (ii) the sum of the present values of the remaining scheduled payments of
principal and interest thereon discounted, on a semiannual basis (assuming a
360-day year consisting of twelve 30-day months), at the Treasury Rate, plus
15 basis points, plus accrued interest thereon to the date of redemption.
As used herein,
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable
to the remaining term of the New MCHS Senior Notes to be redeemed that would
be utilized, at the time of selection and in accordance with customary
financial practice,
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in pricing new issues of corporate debt securities of comparable maturity to
the remaining term of such New MCHS Senior Notes. "Independent Investment
Banker" means the Reference Treasury Dealer appointed by the Trustee after
consultation with ManorCare Health Services.
"Treasury Rate" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed
as a percentage of its principal amount) equal to the Comparable Treasury
Price for such redemption date.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal
Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for
U.S. Government Securities" or (ii) if such release (or any successor release)
is not published or does not contain such prices on such business day, the
average of the Reference Treasury Dealer Quotations for such redemption date.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any redemption date, the average, as determined by the
Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the
third business day preceding such redemption date.
"Reference Treasury Dealer" means Lehman Brothers Inc. and its successors;
provided however, that if Lehman Brothers Inc. shall cease to be a primary
U.S. Government securities dealer in New York City (a "Primary Treasury
Dealer"), ManorCare Health Services shall substitute therefor another Primary
Treasury Dealer.
CERTAIN COVENANTS
Limitation on Liens
The New Indenture will provide that, except as provided below, ManorCare
Health Services will not, and will not permit any Subsidiary to, create, incur
or assume any Lien on any property or assets of ManorCare Health Services or
any Subsidiary in order to secure any Debt of ManorCare Health Services or any
Subsidiary, without effectively providing that the New MCHS Senior Notes
(together with, if ManorCare Health Services shall so determine, any other
Debt which is not subordinated to the New MCHS Senior Notes) will be secured
equally and ratably with (or prior to) such Debt, so long as such Debt will be
so secured; provided, however, that this covenant will not apply to (i) any
Lien if, after giving effect thereto, the aggregate amount of all Debt of
ManorCare Health Services and its Subsidiaries secured by Liens existing at
the time (excluding any Debt secured by Liens permitted to be incurred by
clauses (ii) through (xii) below) would not exceed the Applicable Percentage
of the Consolidated Net Assets of ManorCare Health Services; (ii) any Lien if
an amount of cash equal to the net proceeds of the Debt secured by such Lien
is used within 12 months of such creation, incurrence or assumption to (x)
acquire additional property or assets (or to make investments in persons who,
after giving effect to such investments, will become Subsidiaries), (y) retire
Debt which is pari passu with the New MCHS Senior Notes (provided that in
connection with any such retirement, any related loan commitment will be
reduced in an amount equal to the principal amount so retired) or (z) make an
offer to purchase the New MCHS Senior Notes at 100% of the principal amount
thereof plus accrued interest, if any, to the date of purchase; (iii) Existing
Liens and Liens created, incurred or assumed after the Issue Date on property
or assets of ManorCare Health Services or any Subsidiary that were subject to
an Existing Lien; (iv) Liens on property or assets of any person existing at
the time such person becomes a Subsidiary or merges into or consolidates with
ManorCare Health Services or a Subsidiary; (v) Liens on property or assets
existing at the time of acquisition thereof by ManorCare Health Services or
any Subsidiary; (vi) Liens to secure the financing of the acquisition,
construction, alteration or improvement of property or assets of ManorCare
Health Services or any Subsidiary (or of any person who,
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after giving effect to such financing, will become a Subsidiary), provided
that such Liens are created not later than 18 months after such acquisition
or, in the case of construction, alteration or improvement of property or
assets, the later of the completion thereof or commencement of commercial
operation of such property or assets; (vii) Liens in favor of ManorCare Health
Services or any Subsidiary; (viii) Liens in favor of or required by federal,
state or local governmental authorities, including any department or
instrumentality thereof; (ix) Liens on property or assets of, or on any shares
of stock or other equity interest in, a Foreign Subsidiary to secure Debt of a
Foreign Subsidiary or a Non-Recourse Subsidiary to secure Non-Recourse Debt;
(x) Liens to secure Debt of joint ventures in which ManorCare Health Services
or a Subsidiary has an interest, to the extent such Liens are on property or
assets of or equity interests in such joint ventures; (xi) Liens on current
assets to secure Debt incurred for working capital purposes, provided that
such Debt matures no later than 18 months from the date of incurrence; and
(xii) any extension, renewal or replacement as a whole or in part, of any Lien
referred to in the foregoing clauses (i) to (xi), provided, however, that (a)
such extension, renewal or replacement Lien will be limited to all or a part
of the same property or assets that secured the Lien being extended, renewed
or replaced and (b) the principal amount of the Debt (or, if such Debt
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, such lesser amount)
secured by such extended, renewed or replaced Lien does not exceed the
principal amount of Debt (or, if such Debt provides for an amount less than
the principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount) which was secured by the Lien being
extended, renewed or replaced.
Limitation on Sale and Lease-Back Transactions
The New Indenture will provide that ManorCare Health Services will not, and
will not permit any Subsidiary to, enter into any arrangement with any person
providing for the leasing by ManorCare Health Services or a Subsidiary of any
property or asset (other than any such arrangement involving (i) a lease for a
term, including renewal rights, of not more than 36 months, (ii) a lease of
property within 18 months from the acquisition or, in the case of the
construction, alteration or improvement of property, the later of the
completion of the construction, alteration or improvement of such property or
the commencement of commercial operation of the property, or (iii) leases
between ManorCare Health Services and a Subsidiary or between Subsidiaries),
which property or asset has been or is to be sold or transferred by ManorCare
Health Services or a Subsidiary to such person (a "Sale and Lease-Back
Transaction") unless (a) ManorCare Health Services or such Subsidiary would,
at the time of entering into a Sale and Lease-Back Transaction, be entitled to
incur Debt secured by a Lien on the property or asset to be leased in an
amount at least equal to the Attributable Debt in respect of such transaction
without equally and ratably securing the New MCHS Senior Notes pursuant to the
provisions described under "Limitations on Liens" above, or (b) the proceeds
of the sale of the property or assets to be leased are at least equal to their
fair value (the fair value of such proceeds, if other than in cash, to be
determined by the chief financial or accounting officer of ManorCare Health
Services) and an amount in cash equal to the net proceeds is applied, within
12 months of the effective date of such transaction, to (i) acquire additional
property or assets (or to make investments in entities which after giving
effect to such investment will become Subsidiaries), (ii) retire Debt which is
pari passu with the New MCHS Senior Notes (provided that in connection with
any such retirement, any related loan commitment or the like shall be reduced
in amount equal to the principal amount so retired) or (iii) offer to purchase
the New MCHS Senior Notes at 100% of the principal amount thereof, plus
accrued interest, if any, to the date of purchase.
Limitation on Affiliate Transactions
The New Indenture will provide that neither ManorCare Health Services nor
any of its Subsidiaries will sell, lease, transfer or otherwise dispose of any
of its properties or assets to or purchase any property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guaranty
with, or for the benefit of, an Affiliate of ManorCare Health Services (other
than a Subsidiary) (an "Affiliate Transaction") having a value, or for
consideration having a value, in excess of $20,000,000 individually or in the
aggregate unless the Board of Directors of ManorCare Health Services shall
determine that the terms of such Affiliate Transaction are no less favorable
to ManorCare Health Services or such Subsidiary than those which might be
obtained at the time
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of such Affiliate Transaction from persons who are not Affiliates. The
restrictions of this "Limitation on Affiliate Transactions" covenant are not
applicable to (i) the payment of reasonable and customary fees to directors of
ManorCare Health Services who are not employees, (ii) the payment of
compensation to officers of ManorCare Health Services, (iii) any transaction
between or among any of ManorCare Health Services and its subsidiaries, (iv)
transactions pursuant to the terms of any agreement as in existence on the
Issue Date, as the same may be amended from time to time in a manner not
materially adverse to the holders of the New MCHS Senior Notes; (v) the
Distribution and the related transactions occurring pursuant to the
Distribution Agreement and the related documents; (vi) any transaction in the
ordinary course of business or approved by a majority of the Independent
Directors, between ManorCare Health Services or its Subsidiaries and Manor
Care Realty or its subsidiaries; and (vii) any transaction contemplated by the
Lease Agreements, the Development Agreement, the Non-Competition Agreement,
the Assisted Living Facility Management Agreement, the Tax Sharing Agreement,
the Employee Benefits and Other Employment Matters Allocation Agreement, the
Office Lease Agreement, the Distribution Agreement, the Tax Administration
Agreement, the Corporate Services Agreement, the Trademark Agreement, the Cash
Management Agreement, the Risk Management Consulting Services Agreement and
the Realty Note.
Definitions
"Affiliate" of any specified person means any other person directly or
indirectly controlling, controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any specified person means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing; provided, however, that the existence of a management contract by
ManorCare Health Services or an Affiliate of ManorCare Health Services to
manage another entity shall not be deemed to be control.
"Applicable Percentage" means (i) 15%, if the aggregate principal amount of
New MCHS Senior Notes then outstanding exceeds $100,000,000, (ii) 20%, if the
aggregate principal amount of New MCHS Senior Notes then outstanding exceeds
$50,000,000 but is less than or equal to $100,000,000, or (iii) 25%, if the
aggregate principal amount of New MCHS Senior Notes outstanding is less than
or equal to $50,000,000.
"Assisted Living Facility Management Agreement" shall mean the Assisted
Living Facility Management Agreement dated as of , 1998 between Manor Care
Realty and ManorCare Health Services as in effect on the Issue Date and as
such Assisted Living Facility Management Agreement may be amended from time to
time in a manner not materially adverse to the holders of the New MCHS Senior
Notes.
"Attributable Debt" means, in connection with a Sale and Lease-Back
Transaction, at any date as of which the amount thereof is to be determined,
the lesser of (i) the fair value of the property subject to such Sale and
Lease-Back Transaction (as determined in good faith by the chief financial or
accounting officer of ManorCare Health Services) and (ii) the total net amount
of rent required to be paid by such person under the lease which is the
subject of such Sale and Lease-Back Transaction during the remaining term
thereof, discounted from the respective due dates thereof to such date at the
weighted average interest borne by the New MCHS Senior Notes compounded
annually. The net amount of rent required to be paid under any such lease for
any such period shall be the amount of the rent payable by the lessee with
respect to such period, after excluding amounts required to be paid on account
of maintenance and repairs, insurance, taxes, assessments, water rates and
similar charges. In the case of any lease which is terminable by the lessee
upon the payment of a penalty, such net amount shall also include the amount
of such penalty, but no rent shall be considered as required to be paid under
such lease subsequent to the first date upon which it may be so terminated.
"Consolidated Net Assets" means, with respect to any person as of any date
of determination, the total assets of such person and its subsidiaries on a
consolidated basis less current liabilities of such person and its
subsidiaries on a consolidated basis as of such date, all determined in
accordance with GAAP.
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"Debt" means, as to any person, all obligations of such person for borrowed
money.
"Development Agreement" shall mean the Development Agreement dated as of
, 1998 between Manor Care Realty and ManorCare Health Services as in effect
on the Issue Date and as such Development Agreement may be amended from time
to time in a manner not materially adverse to the holders of the New MCHS
Senior Notes.
"Employee Benefits Allocation Agreement" shall mean the Employee Benefits
and Other Employment Matters Allocation Agreement dated as of , 1998
between Manor Care Realty and ManorCare Health Services as in effect on the
Issue Date and as such Employee Benefits and Other Employment Matters
Allocation Agreement may be amended from time to time in a manner not
materially adverse to the holders of the New MCHS Senior Notes.
"Existing Liens" means liens on property or assets of ManorCare Health
Services or any Subsidiary existing on the Issue Date.
"Foreign Subsidiary" of ManorCare Health Services shall mean any Subsidiary
which is incorporated or organized in a jurisdiction outside the United States
and any Subsidiary of such a Subsidiary.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession as in effect from time to time.
"Independent Director" means a member or the Board of Directors of ManorCare
Health Services who does not have any material direct or indirect financial
interest in or with respect to any transaction or series of related
transactions.
"Issue Date" means the first date on which the New MCHS Senior Notes are
issued under the New Indenture.
"Lease Agreements" shall mean the Lease Agreements dated as of , 1998
between Manor Care Realty and ManorCare Health Services as in effect on the
Issue Date and as such Lease Agreements may be amended from time to time in a
manner not materially adverse to the holders of the New MCHS Senior Notes.
"Non-Competition Agreement" shall mean the Non-Competition Agreement dated
as of , 1998 between Manor Care Realty and ManorCare Health Services as
in effect on the Issue Date and as such Non-Competition Agreement may be
amended from time to time in a manner not materially adverse to the holders of
the New MCHS Senior Notes.
"Non-Recourse Debt" means Debt or that portion of Debt (i) as to which
neither ManorCare Health Services nor its Subsidiaries (other than a Non-
Recourse Subsidiary) (A) provide credit support (including any undertaking,
agreement or instrument which would constitute Debt), (B) is directly or
indirectly liable or (C) constitute the lender and (ii) in respect of which a
default (including any rights which the holders thereof may have to take
enforcement action against a Non-Recourse Subsidiary) would not permit (upon
notice, lapse of time or both) any holder of any other Debt of ManorCare
Health Services or its Subsidiaries (including any Non-Recourse Subsidiary) to
declare a default on such other Debt or cause a payment thereof to be
accelerated or payable prior to its Stated Maturity.
"Non-Recourse Subsidiary" means a Subsidiary which (i) has not acquired any
assets (other than cash) directly or indirectly from ManorCare Health Services
or any Subsidiary, (ii) only owns assets acquired after the Issue Date and on
or prior to the date such entity becomes a Subsidiary and (iii) has no Debt
other than Non-Recourse Debt.
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"Subsidiary" of ManorCare Health Services means (i) a corporation a majority
of whose capital stock with voting power, under ordinary circumstances, to
elect directors is at the time, directly or indirectly, owned by ManorCare
Health Services, by the Company and one or more Subsidiaries of ManorCare
Health Services or by one or more Subsidiaries of ManorCare Health Services or
(ii) any other person (other than a corporation) in which ManorCare Health
Services, one or more Subsidiaries of ManorCare Health Services or ManorCare
Health Services and one or more Subsidiaries of ManorCare Health Services,
directly or indirectly, at the date of determination thereof, has greater than
a 50% ownership interest.
"Tax Sharing Agreement" shall mean the Tax Sharing Agreement dated as of
, 1998 between Manor Care Realty and ManorCare Health Services as in effect
on the Issue Date and as such Tax Sharing Agreement may be amended from time
to time in a manner not materially adverse to the holders of the New MCHS
Senior Notes.
DEFAULTS AND REMEDIES
An Event of Default is: default for 30 days in payment of interest on the
New MCHS Senior Notes; default in payment of principal when due (upon
redemption or at maturity) on the New MCHS Senior Notes; failure by New MCHS
Senior Notes for 60 days after notice to it to comply with any of its other
agreements in the New Indenture or the New MCHS Senior Notes; acceleration of
in excess of an aggregate of $20,000,000 of indebtedness for borrowed money of
ManorCare Health Services or any Subsidiary (other than Non-Recourse Debt of a
Non-Recourse Subsidiary) under the terms of the instrument under which such
indebtedness is or may be outstanding if such acceleration is not rescinded or
annulled within 10 days after written notice from the Trustee or the holders
of at least 25% in principal amount of the New MCHS Senior Notes then
outstanding has been received a final judgment for the payment of $20,000,000
or more rendered against ManorCare Health Services or any Subsidiary in any
court of competent jurisdiction and not fully covered by insurance or not
discharged or stayed within 90 days after the date all rights to appeal have
been extinguished; and certain events of bankruptcy or insolvency involving
ManorCare Health Services. If an Event of Default occurs and is continuing,
the Trustee or the holders of at least 25% in principal amount of the New MCHS
Senior Notes then outstanding may declare 100% of the principal amount of the
New MCHS Senior Notes and interest accrued to the date of acceleration to be
due and payable immediately. Such declaration may be annulled and past
defaults (except, unless theretofore cured, a default in payment of principal
of or interest on the New MCHS Senior Notes) may be waived by the holders of a
majority in principal amount of outstanding New MCHS Senior Notes upon the
conditions provided in the New Indenture.
Securityholders may not enforce the New Indenture or the New MCHS Senior
Notes except as provided in the New Indenture. The Trustee may require
indemnity satisfactory to it before it enforces the Indenture or the New MCHS
Senior Notes. Subject to certain limitations, holders of a majority in
principal amount of the New MCHS Senior Notes outstanding may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Securityholders notice of any continuing default (except a default in payment
of principal or interest) if it determines that withholding notice is in their
best interest. ManorCare Health Services is required to file periodic reports
with the Trustee regarding compliance by ManorCare Health Services with the
terms of the New Indenture and specifying any defaults of which the signers
may have knowledge.
A director, officer, employee or stockholder, as such, of ManorCare Health
Services shall not have any liability for any obligations of ManorCare Health
Services under the New MCHS Senior Notes or the New Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Securityholder by accepting New MCHS Senior Notes waives and releases all
such liability.
TRANSFER AND EXCHANGE
A holder may transfer or exchange New MCHS Senior Notes in accordance with
the New Indenture. The Registrar may require a holder, among other things, to
furnish appropriate endorsements and transfer documents
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and to pay any tax or other governmental charge imposed in relation thereto.
The Registrar need not transfer or exchange any New MCHS Senior Notes selected
for redemption. Also, it need not transfer or exchange any New MCHS Senior
Notes for a period of 15 days before a selection of New MCHS Senior Notes to
be redeemed. The registered holder of New MCHS Senior Notes may be treated as
the owner of them for all purposes.
AMENDMENT, SUPPLEMENT, WAIVER
Subject to certain exceptions, the New Indenture or the New MCHS Senior
Notes may be amended or supplemented with the consent of the holders of at
least a majority in principal amount of the New MCHS Senior Notes outstanding,
and any past default or compliance with any provision may be waived with the
consent of the holders of a majority in principal amount of the New MCHS
Senior Notes outstanding, but no extension of the maturity of any New MCHS
Senior Notes, or reduction in the interest rate or extension of the time of
payment of interest, or any other modification in the terms of payment of the
principal of or interest on the New MCHS Senior Notes, or of the subordination
provisions of the New Indenture in a manner adverse to the Securityholders or
any reduction of the percentage required for modification will be effective
against any Securityholder without his consent. Without the consent of any
Securityholder, ManorCare Health Services may amend or supplement the New
Indenture or the New MCHS Senior Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated New MCHS Senior Notes in addition
to or in place of certificated New MCHS Senior Notes, to provide for a
separate Trustee, or to make any change that does not materially adversely
affect the rights of any Securityholder.
SUCCESSOR CORPORATION
ManorCare Health Services may not consolidate with or merge with or transfer
all or substantially all of its assets to another corporation unless, after
giving effect to such transaction, no event which constitutes a Default shall
have occurred and be continuing; and such corporation or the surviving
corporation (if other than ManorCare Health Services) shall be a corporation
organized and existing under the laws of the United States or a state thereof
and shall assume all of the obligations of the Company under the New MCHS
Senior Notes and the Indenture. Thereafter, all obligations of ManorCare
Health Services under the New Indenture shall terminate.
SATISFACTION AND DISCHARGE OF INDENTURE
ManorCare Health Services may terminate all of its obligations under the New
MCHS Senior Notes and the New Indenture either upon delivery for cancellation
to the Trustee of all the New MCHS Senior Notes or (a)(i) within one year of
maturity or redemption of the series or (ii) at any time if the Holders will
not recognize income, gain or loss for Federal income tax purposes, (b) upon
deposit with the Trustee of funds or U.S. Government Obligations (as defined
in the Indenture) sufficient for payment of principal of interest on, or
redemption of, the series and (c) upon delivery to the Trustee of an officers'
certificate and opinion of counsel stating that all conditions precedent to
discharge have been satisfied.
GLOBAL NOTES
The New MCHS Senior Notes will be issued in the form of one or more Global
Notes that will be deposited with, or on behalf of the Depositary. Unless and
until it is exchanged in whole or in part for New MCHS Senior Notes in
definitive form, a Global Note may not be transferred except as a whole to a
nominee of the Depositary for such Global Note, or by a nominee of the
Depositary to the Depositary or another nominee of the Depositary, or by the
Depositary or any such nominee to a successor Depositary or a nominee of such
successor Depositary.
BOOK-ENTRY SYSTEM
Initially, the New MCHS Senior Notes will be registered in the name of Cede
& Co., the nominee of the Depositary. Accordingly, beneficial interests in the
New MCHS Senior Notes will be shown on, and transfers thereof will be effected
only through, records maintained by the Depositary and its participants.
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The Depositary has advised ManorCare Health Services as follows: the
Depositary is a limited purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the United States Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
United States Securities Exchange Act of 1934, as amended. The Depositary
holds securities that its participants ("Direct Participants") deposit with
the Depositary. The Depositary also facilitates the settlement among Direct
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
such Direct Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct Participants include securities
brokers and dealers (including the Exchange Agent), banks, trust companies,
clearing corporations, and certain other organizations. The Depositary is
owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc. Access to the Depositary's book-entry system is
also available to others such as securities brokers and dealers, banks and
trust companies that clear through or maintain a custodial relationship with a
Direct Participant, either directly or indirectly ("Indirect Participants").
The rules applicable to the Depositary and its Direct and Indirect
Participants are on file with the United States Securities and Exchange
Commission.
The Depositary advises that its established procedures provide that (i) upon
issuance of the New MCHS Senior Notes of the Company, the Depositary will
credit the accounts of Participants designated by the Exchange Agent with the
principal amounts of the New MCHS Senior Notes purchased by Participants and
(ii) ownership of interests in the Global Notes will be shown on, and the
transfer of the ownership will be effected only through, records maintained by
the Depositary, registered in their names, will not receive or be entitled to
receive physical delivery of New MCHS Senior Notes in definitive form and will
not be considered the owners or holders thereof under the New Indenture.
Neither ManorCare Health Services, the Trustee, any paying agent nor the
registrar will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Notes, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
Principal and interest payments on the New MCHS Senior Notes registered in
the name of the Depositary's nominee will be made in immediately available
funds to the Depositary's nominee as the registered owner of the Global Notes.
Under the terms of the New MCHS Senior Notes, ManorCare Health Services and
the Trustee will treat the persons in whose names the New MCHS Senior Notes
are registered as the owners of such New MCHS Senior Notes for the purpose of
receiving payment of principal and interest on such New MCHS Senior Notes and
for all other purposes whatsoever. Therefore, neither ManorCare Health
Services, the Trustee nor any paying agent has any direct responsibility or
liability for the payment of principal or interest on the New MCHS Senior
Notes to owners of beneficial interest in the Global Notes. The Depositary has
advised ManorCare Health Services and the Trustee that its current practice
is, upon receipt of any payment of principal or interest, to credit Direct
Participants' accounts on the payment date in accordance with their respective
holdings of beneficial interests in the Global Notes as shown on the
Depositary's records, unless the Depositary has reason to believe that it will
not receive payment on the payment date. Payments by Direct and Indirect
Participants to owners of beneficial interests in the Global Notes will be
governed by standing instructions and customary practices, as in the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such Direct and Indirect
Participants and not of the Depositary, the Trustee, or ManorCare Health
Services, subject to any statutory requirements that may be in effect from
time to time. Payment of principal and interest to the Depositary is the
responsibility of ManorCare Health Services or the Trustee, and disbursement
of such payments to the owners of beneficial interests in the Global Notes
shall be the responsibility of the Depositary and Direct and Indirect
Participants.
New MCHS Senior Notes represented by a Global Note will be exchangeable for
New MCHS Senior Notes in definitive form of like tenor as such Global Note in
denominations of $1,000 and in any greater amount that is
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an integral multiple if the Depositary notifies ManorCare Health Services that
it is unwilling or unable to continue as Depositary for such Global Note or if
at any time the Depositary ceases to be a clearing agency registered under
applicable laws and a successor depositary is not appointed by ManorCare
Health Services within 90 days or ManorCare Health Services in its discretion
at any time determines not to require all of the New MCHS Senior Notes to be
represented by a Global Note and notifies the Trustee thereof. Any New MCHS
Senior Notes that are exchangeable pursuant to the preceding sentence are
exchangeable for New MCHS Senior Notes issuable in authorized denominations
and registered in such names as the Depositary shall direct. Subject to the
foregoing, a Global Note is not exchangeable, except for a Global Note or
Global Notes of the same aggregate denominations to be registered in the name
of the Depositary or its nominee.
SAME-DAY SETTLEMENT
The New MCHS Senior Notes will trade in the Depositary's Same-Day Funds
Settlement System, and secondary market trading activity in the New MCHS
Senior Notes will therefore be required by the Depositary to settle in
immediately available funds. No assurance can be given as to the effect, if
any, of settlement in immediately available funds on trading activity in the
New MCHS Senior Notes.
TRUSTEE
The Wilmington Trust Company will act as Trustee for New MCHS Senior Notes
issued under the New Indenture. The New Indenture will contain limitations on
the right of the Trustee, should it become a creditor of ManorCare Health
Services, to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or
otherwise. The Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest (as defined) it must
eliminate such conflict or resign.
The holders of a majority in principal amount of all outstanding New MCHS
Senior Notes will have the right to direct the time, method and place of
conducting any proceeding or exercising any remedy available to the Trustee.
The New Indenture will provide that in case an Event of Default shall occur
(which shall not be cured), the Trustee will be required to use the degree of
care of a prudent person in the conduct of its own affairs in the exercise of
its power. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the New Indenture at the request
of any of the Securityholders unless they have offered to the Trustee security
and indemnity satisfactory to it.
In the ordinary course of its business, the Company has engaged, and may
engage in the future, The Wilmington Trust Company to perform certain
financial services.
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BUSINESS OF MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION
OVERVIEW
ManorCare Health Services believes that is a leading provider of a full
range of senior support health care services. ManorCare Health Services
provides an array of services that includes skilled nursing, assisted living,
institutional pharmacy and home health care and additional support services
for the frail elderly living at home. ManorCare Health Services is striving to
become the nation's foremost provider of high-quality senior support health
care services within the private pay segment. In order to achieve this goal,
ManorCare Health Services is planning to focus on the rapid acquisition of
assisted living facilities in cluster markets pursuant to the Development
Agreement with Manor Care Realty. Under the Development Agreement, ManorCare
Health Services intends to acquire from Manor Care Realty approximately 170
Arden Courts and 38 Springhouse senior residences to be newly developed by
Manor Care Realty during the next five years. See "Relationship Between
ManorCare Realty and ManorCare Health Services after the Distribution--
Development Agreement." Its strategy for achieving this objective entails
aggressive implementation of the following key initiatives:
. grow through acquisition of proprietary assisted living facilities
developed by Manor Care Realty
. expand on current market leadership position in the private pay segment
. extend leadership position as provider of the most innovative Alzheimer's
services in the industry
. maintain focus on high-quality personalized care and services
. market distinctive products nationally under the ManorCare Health
Services brand name
. build on existing senior support services platform
. focus on development of cluster markets
ManorCare Health Services leases, operates and manages 168 skilled nursing
facilities owned by Manor Care Realty, owns joint venture interests in,
operates and manages three additional skilled nursing facilities. The skilled
nursing facilities are located in 28 states and contain approximately 24,079
beds. These facilities provide skilled nursing services principally for
residents over the age of 65. Within its skilled nursing facilities, ManorCare
Health Services operates 143 Arcadia special-care units which provide care to
individuals in the middle to late stages of Alzheimer's disease and 21
MedBridge high acuity units which focus on short-term, post-hospital care for
medically complex residents and those in need of aggressive physical
rehabilitation. ManorCare Health Services owns and operates 35 assisted living
facilities in 12 states containing 3,757 units. These facilities include 14
Arden Courts, serving persons with early to middle-stage Alzheimer's disease
or related memory impairment, and 21 Springhouse senior residences, serving
the general assisted living population. ManorCare Health Services also has
majority control of Vitalink, one of the largest public institutional pharmacy
companies and In Home Health, a national home health care services company.
Vitalink operates 57 institutional pharmacies in 36 states, serving
approximately 172,000 beds. In Home Health provides home health services in 14
states.
On October 15, 1997, Manor Care announced that it is exploring strategic
alternatives with respect to its 51% ownership interest in Vitalink. Options
under consideration include strategic mergers, joint ventures or other
business combinations that could enhance Vitalink's strategic position in its
markets, better enable it to serve its customers and increase Vitalink's
shareholder value. Vitalink has retained SBC Warburg Dillon Read Inc. to act
as financial advisor in connection with the exploration of strategic
alternatives with respect to Manor Care's interest in Vitalink. Manor Care has
no present commitments or agreements with respect to any such transaction and
there can be no assurance that Manor Care (or ManorCare Health Services after
the Distribution) will decide to enter into any such transaction or that,
should it decide to do so, be able to reach an agreement with respect to any
such transaction on terms acceptable to it.
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INDUSTRY TRENDS
There are several trends affecting the long-term care industry. First, the
competitive landscape is changing. The industry is consolidating as smaller,
local operators are being acquired by larger operators. In addition, several
large multi-unit operators have merged to form even larger chains. By 1995,
54% of the skilled nursing homes in the country were part of a chain, up from
28% in 1977. Finally, some long term care providers have recognized the need
to diversify by expanding into assisted living, home health care, and
ancillary services.
Second, many hospitals have developed their own post-acute care capabilities
in response to cost containment pressures. These integrated delivery systems
place a premium on keeping patients within their systems. The development of
post-acute care capabilities by hospitals impacts providers of long-term care,
as these providers have historically received a large number of referrals from
clinical networks, including hospitals, physicians and managed care
organizations. However, shifts away from cost-based reimbursement to
prospective pay systems may cause hospitals to rethink their strategy and
create new opportunities for partnerships with home care and skilled nursing
providers.
Third, the number of elderly in America is expanding faster than the overall
population. As the senior population continues to expand, the demand for
health related services targeted specifically at serving their needs is
increasing. The number of people aged 75 and older, the primary consumer of
senior support health care services, is growing more quickly than the overall
population. According to the U.S. Bureau of the Census, the number of seniors
75 and older is estimated to increase by approximately 37% from 13 million in
1990 to an estimated 17.8 million in 2005. The U.S. Bureau of the Census data
predicts that total U.S. population will only increase by approximately 15%
during the same period.
Other market trends contributing to change in the long-term care industry
include:
. a continued increase in the number of frail, elderly individuals living
alone who require assistance with their activities of daily living
("ADLs") such as dressing, bathing, eating, and medication management;
. the increase in the net worths of older people, which enables a greater
number of individuals to privately pay for support services, home health
care, assisted living and skilled nursing care; and
. the growth in the number of dual-career families who may find it more
difficult to care for their elderly relatives in their homes and who may
also have greater financial resources to better support their elderly
relatives outside the home.
The attractive demographics and future growth opportunities have encouraged
existing market participants to increase their product offerings and have
encouraged new entrants such as real estate developers to offer continuing
care retirement communities and assisted living facilities which are focused
on the frail elderly care market. In addition, more options geared towards
maximizing the individual's ability to live independently in their homes are
becoming available. These industry participants are expanding the set of
senior support health care options for the elderly. The level of care selected
by the elderly and their families depends on the needs of the individual. The
range of health services available for the elderly includes:
. Home health care--the provision of health care service to the elderly in
their homes, including nursing, infusion therapy, hospice,
rehabilitation, personal care, companion care and home making;
. Senior support services--emerging new services geared towards the
elderly, including geriatric care management, financial management and
planning, transportation services and other services that support the
elderly living at home;
. Physician services--geriatric centers and physicians who specialize in
geriatric care and outpatient disease management;
. Short-term care--adult day care and respite care;
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. Residential care--congregate care facilities, continuing care retirement
communities, assisted living facilities and skilled nursing facilities;
. Alzheimer's disease care--facilities focused on individuals with
Alzheimer's disease or related memory impairment; and
. Acute care--medical treatment in hospital facilities as well as sub-acute
care in hospitals and skilled nursing facilities.
BUSINESS STRATEGY
ManorCare Health Services' goal is to become the nation's foremost provider
of high-quality senior support health care services within the private pay
segment. ManorCare Health Services intends to aggressively expand its unit
capacity in assisted living while at the same time broadening the range of
products and services for private pay customers still living at home. Its
strategy for achieving this objective entails the following key initiatives:
. Grow through Acquisition of Proprietary Assisted Living Facilities
Developed by Manor Care Realty. ManorCare Health Services believes the
anticipated increased market demand for assisted living facilities
presents ManorCare Health Services with significant opportunities for
growth. ManorCare Health Services will work with Manor Care Realty to
identify target markets for expansion and will acquire from Manor Care
Realty approximately 170 Arden Courts and 38 Springhouse senior
residences over the next five years. Pursuant to the Development
Agreement, Manor Care Realty will develop assisted living facilities for
sale to ManorCare Health Services. ManorCare Health Services will have a
two year option (measured from the time a particular facility opens) to
purchase such facilities; provided that ManorCare Health Services will be
obligated to purchase each such facility if occupancy reaches 75% for a
period of five days during the two-year period measured from the time a
particular facility opens. In addition, ManorCare Health Services will
make acquisitions of other assisted living properties on an opportunistic
basis. The Non-Competition Agreement limits ManorCare Health Services'
ability to develop or enter into management agreements with respect to
assisted living facilities located near assisted living facilities being
developed by Manor Care Realty; however, it does not restrict ManorCare
Health Services' ability to acquire new assisted living facilities.
ManorCare Health Services believes that its experience in delivering
assisted living services and targeting its facilities to private pay
individuals in existing and new cluster markets will enable it to
experience significant growth and higher margins. In addition, ManorCare
Health Services believes it can leverage its experience in Alzheimer's
care to provide the most innovative and highest quality Alzheimer's
services available through its Arden Courts assisted living facilities.
To date, Manor Care Realty has 25 facilities under construction and 64
additional facilities under contract and in development.
. Expand on Current Market Leadership Position in the Private Pay
Segment. In its skilled nursing management business, ManorCare Health
Services believes that continuing to focus on private pay patients
enables it to reduce its exposure to anticipated changes in government
reimbursement practices and enables ManorCare Health Services to achieve
more attractive profit margins. Private pay patients accounted for
approximately 60% of ManorCare Health Services' skilled nursing and
assisted living revenues in fiscal 1997 compared to a 1996 industry
average of approximately 30% for for-profit nursing care providers.
ManorCare Health Services believes that its high-end specialty products
such as Williamsburg (luxurious accommodations including upgraded
furnishings and decor, concierge services and a private dining area with
a gourmet menu), Heritage (luxurious accommodations including upgraded
furnishings and decor, a private lounge and other amenities) and Arcadia
(a secure, self-contained unit designed specifically for Alzheimer's and
other related memory disorder patients) will enable ManorCare Health
Services to continue to attract upper income, service sensitive residents
who pay directly for services without the benefit of any government
assistance program. ManorCare Health Services has set a goal of
dedicating a significant portion of its skilled nursing beds to specialty
products. ManorCare Health Services believes that this drive and
ManorCare Health Services' aggressive expansion into the assisted
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living industry will further enhance its leadership position in the
private pay segment. ManorCare Health Services believes that its
substantial investment in direct marketing through advertising, direct
mail, advanced telemarketing and community outreach will allow it to
maintain its market leadership in this segment.
. Extend Leadership Position as Provider of the Most Innovative Alzheimer's
Services in the Industry. ManorCare Health Services believes that it is
the industry leader in Alzheimer's disease management, with almost 15
years of experience and more than 17% of its total beds devoted to
Alzheimer's care. ManorCare Health Services' Arcadia special-care units
in its skilled nursing facilities meet the needs of individuals in the
middle to late stages of Alzheimer's disease. ManorCare Health Services
plans to continue to develop Arcadia special-care units throughout its
existing markets. ManorCare Health Services' Arden Courts assisted living
facilities serve individuals in the earlier stages of the disease
process. ManorCare Health Services plans to open approximately 170 Arden
Courts in the next five years. ManorCare Health Services also serves
individuals suffering from Alzheimer's and other forms of dementia
through its Springhouse facilities which offer specialized programs for
this population. ManorCare Health Services believes that its proprietary
Alzheimer's care protocols are integral to the high quality of care it
provides to its Alzheimer's residents. ManorCare Health Services'
integrated continuum of care allows ManorCare Health Services to meet the
needs of its Alzheimer's customers from diagnosis to home-based care
through assisted living to high acuity facility-based care. For example,
for an individual moving through the stages of Alzheimer's disease, this
continuum of care would begin with a memory assessment program followed
by home health care. The individual would then reside in an Arden Courts
assisted living facility for the early to middle stages of the disease
and would ultimately, during the middle to late stages of the disease,
move into an Arcadia special-care unit.
. Maintain Focus on High Quality Personalized Care and Services. ManorCare
Health Services is dedicated to delivering the highest level of service
quality and patient satisfaction, striving to provide its residents with
personalized care and services. ManorCare Health Services believes that
delivering the highest product integrity standards will enable it to
achieve ManorCare Health Services' goal of delivering "best in class"
services to its residents--services which are considered superior by
ManorCare Health Services' customers, as well as industry experts, to
those services offered by ManorCare Health Services' competitors.
ManorCare Health Services believes that providing "best in class"
services will reinforce its reputation as the leading provider of high
quality, personalized senior support health care services. ManorCare
Health Services relies on its product management organization to develop
Company-wide care protocols, standards of operation and training
programs, which ensure that ManorCare Health Services delivers superior
and consistent care in all of its facilities. In addition to providing
high quality and consistent services on a Company-wide basis, ManorCare
Health Services personalizes the service package to meet the needs of
each particular resident. The facility staff develops a care plan for
each resident based on professional assessments and family consultations.
The care plan is updated regularly based on the individual needs of the
resident by the facility's health care and social services staff in
conjunction with the resident and his/her family. ManorCare Health
Services also strives to understand its residents' needs by conducting
over 13,000 resident and family member interviews annually. Resident
satisfaction scores from these interviews are a major component of
incentive compensation for all field and corporate managers. A quality
assurance program is administered with the objective of exceeding the
expectations of all residents and their families.
. Market Distinctive Products Nationally under the ManorCare Health
Services Brand Name. ManorCare Health Services believes that its
competitive position will be materially enhanced by continuing to develop
the premier national brand name in the senior support health care
industry. In September 1996, ManorCare Health Services created a unified
national brand name for all the elements in its continuum of care:
"ManorCare Health Services." ManorCare Health Services believes that a
stronger brand identity for its services will make it easier for
ManorCare Health Services to build national awareness and facilitate
customer confidence in the services it provides. In addition, ManorCare
Health Services believes that its aggressive plan to acquire assisted
living facilities will enable it to achieve the critical mass
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necessary to establish further its senior support health care services
nationally. ManorCare Health Services is leveraging its premier brand name
through partnership arrangements with complementary elder health care
providers. ManorCare Health Services' strategy includes developing a brand
name image synonymous with "best in class" in every element of its
business.
. Build on Existing Senior Support Services Platform. ManorCare Health
Services believes that its success depends upon creating a seamless
continuum of care allowing residents to "age in place." ManorCare Health
Services' current continuum of care includes: home health care, assisted
living facilities, skilled nursing facilities and pharmacy services. In
addition to substantially increasing its assisted living offerings,
ManorCare Health Services plans to expand its continuum of care by
providing senior support services to the frail elderly still living at
home. ManorCare Health Services believes that targeting such senior
support services to the middle class to affluent senior population will
enable it both to gather information about the frail elderly who still
reside at home, indicating their possible needs for other ManorCare
Health Services health care or facility-based services, and to cultivate
relationships with these individuals and their families. ManorCare Health
Services is pursuing a strategy to develop information systems technology
to efficiently track its customers and create superior cost-effective
clinical protocols. ManorCare Health Services believes that the
information gathered about these customers coupled with the relationship
formed with them and their families will increase their awareness of and
confidence in the quality of services provided by ManorCare Health
Services.
. Focus on Development of Cluster Markets. ManorCare Health Services has
focused its skilled nursing development on cluster markets in order to
achieve critical mass and improve its competitive advantage with respect
to its regional suppliers and payors. By adding assisted living
facilities to this existing base, ManorCare Health Services believes it
can leverage its cost structure and build on its brand image. In
addition, ManorCare Health Services is centralizing certain corporate
functions, including accounting, billing and other non-care related
functions at the cluster level. ManorCare Health Services has implemented
a major reengineering effort as a way to foster continuous improvement
within its core processes. To support the cluster market structure from
an organizational standpoint, ManorCare Health Services has created a
market management structure in which all products and services within a
cluster market are united under a single market management team. Under a
market management structure, the regional management has responsibility
for the entire continuum of services offered in the specific regional
clusters. ManorCare Health Services also believes that by marketing its
continuum of care in its cluster markets, it can spread its marketing
costs over more facilities and thus outspend its competitors. The market
management structure provides management with greater flexibility to
better respond to market trends and competitive changes in local markets.
SKILLED NURSING SERVICES
ManorCare Health Services believes it is the premier operator of skilled
nursing facilities in the United States. Through a cohesive framework of
proprietary care protocols ManorCare Health Services' skilled nursing
facilities provide (i) long-term care for chronically ill and frail elderly
individuals who need 24-hour skilled nursing and physical, occupational and
speech therapies; (ii) high acuity, short-term, post-hospital care for
medically complex patients and persons in need of aggressive rehabilitation;
and (iii) long-term care for individuals with middle to late-stage Alzheimer's
or related memory impairment. In all cases these services include appropriate
nursing care, room and board, special diets, occupational, speech, physical
and recreational therapy and other services designed to improve the well-being
of the resident. ManorCare Health Services maintains a Quality Assurance
Program to ensure that high standards of care are consistently observed in
each facility. The Quality Assurance Program sets corporate standards for
delivery of care, designed to ensure the provision of "best in class"
services, and provides consulting and training support to the facilities.
ManorCare Health Services will lease, operate and manage Manor Care Realty's
168 skilled nursing facilities in 28 states pursuant to Lease Agreements under
which ManorCare Health Services will pay monthly fees to Manor Care Realty.
ManorCare Health Services also owns the joint venture interests in, operates
and
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manages three additional skilled nursing facilities. Many of these facilities
are less than ten years old and target affluent to middle income seniors in
need of skilled nursing care. ManorCare Health Services differentiates itself
from its competitors by offering unique specialty products designed to meet
the needs of specific customer segments. A significant portion of the beds at
skilled nursing facilities managed by ManorCare Health Services are dedicated
to specialty services, which are attractive because they generate higher per
patient day revenues and profits than standard long-term care. For example,
the Heritage and Williamsburg wings in ManorCare Health Services' skilled
nursing facilities provide residents with upgraded decor, a private lounge,
and special programs and, in the case of the Williamsburg wings, concierge
services and a private dining area with a gourmet menu. ManorCare Health
Services believes that the Heritage and Williamsburg design concepts support
the ManorCare Health Services' reputation as the premier provider of skilled
nursing care and contributes to ManorCare Health Services' high percentage of
private pay residents as compared to the rest of the industry. Within its
skilled nursing facilities, ManorCare Health Services operates 143 Arcadia
special-care units providing services to individuals in the middle to late
stages of Alzheimer's disease or afflicted with related memory impairment.
ManorCare Health Services also operates 21 dedicated MedBridge high acuity
units featuring high staff-to-patient ratios, sophisticated clinical
capabilities and state-of-the-art rehabilitation departments. In addition,
ManorCare Health Services' facilities offer specially designed wound care
programs, oncology and orthopedic rehabilitation programs. See "Relationship
Between Manor Care Realty and ManorCare Health Services After the
Distribution--Lease Agreements."
ManorCare Health Services believes these high-end specialty products will
facilitate marketing efforts to attract longer stay (1-3 years) private pay
residents. ManorCare Health Services-managed skilled nursing and
rehabilitation facilities range in bed capacity from 53 to 265 beds and had an
aggregate bed capacity of 24,079 beds during the 1997 fiscal year. ManorCare
Health Services' nursing facilities are located in the following 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.
ASSISTED LIVING SERVICES
ManorCare Health Services is pursuing an aggressive acquisition strategy in
the assisted living industry in an effort to build upon its current market
position and enhance ManorCare Health Services' competitive position in the
private pay segment. ManorCare Health Services has an acquisition plan
pursuant to which it intends to acquire from Manor Care Realty approximately
170 Arden Courts and 38 Springhouse senior residences during the next five
years. Pursuant to the Development Agreement, Manor Care Realty will develop
assisted living facilities for sale to ManorCare Health Services. ManorCare
Health Services will be obligated to purchase each such facility if occupancy
reaches 75% for a period of five days during the two-year stabilization
period. The purchase price for each facility will be at a premium to Manor
Care Realty's total development costs, such premium ranging from 15% to 34%,
based on the number of months elapsed since the opening of the relevant
facility. Total approved development costs include expenses incurred in
connection with the development and construction of the facilities, but do not
include operating losses incurred during the two-year stabilization period.
The premium to total approved development costs is intended to compensate
Manor Care Realty for the increasing value of its investment over time as well
as for the risks it takes in connection with developing assisted living
facilities, including the risks inherent in operating the facilities during
the two-year stabilization period. This premium will be amortized over a 20 to
30-year period and represents a much smaller annual dilution to earnings than
would have been the case had ManorCare Health Services absorbed the initial
start-up costs associated with each Arden Courts or Springhouse facility. If
ManorCare Health Services does not acquire a facility within such two-year
stabilization period, Manor Care Realty may sell the facility to a third
party. During the two year stabilization period (or such lesser time if
stabilized occupancy is achieved and ManorCare Health Services purchases the
facility) ManorCare Health Services will manage the assisted living facilities
for Manor Care Realty for a fixed monthly fee. ManorCare Health Services
believes that upon completion of this development and acquisition plan it will
be the nation's largest operator of Alzheimer's assisted living facilities.
See "Relationship Between Manor Care Realty and ManorCare Health Services
After the Distribution--Development Agreement."
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In a strategy similar to that employed in ManorCare Health Services' skilled
nursing facilities, ManorCare Health Services' assisted living facilities
target affluent to middle income seniors in need of a full range of assisted
living services to optimize their quality of life. These services are
available 24 hours a day and generally include meal service, housekeeping,
personal care, nursing and health related services, social and recreational
services, transportation and special services (such as banking and shopping).
Personal services include bathing, dressing, personal hygiene, grooming,
ambulating and dining assistance. Health-related services, which are tailored
to individual patient needs and applicable state regulatory requirements, may
include assistance with medication management, skin care and injections, as
well as health care monitoring. ManorCare Health Services also believes that
it offers more security to its customers by including these health-related
services as part of its care delivery. ManorCare Health Services believes that
by providing programs with a range of service options responsive to the full
range of the residents' changing needs, ManorCare Health Services affords
greater continuity of care and thereby permits residents to "age in place."
ManorCare Health Services' Arden Courts assisted living facilities are a
distinct product and service segment focused exclusively on individuals
suffering from the early to middle stages of Alzheimer's disease or related
memory impairment. These special purpose assisted living facilities offer a
proprietary, specially designed physical plant with security systems,
structured activities and related resident services and support systems. These
facilities are typically divided into four color-coded houses comprising a
total of 56 units with access to communal living rooms, kitchens, dining rooms
and protected gardens. All aspects of the facilities' operations are managed
by an Executive Director, specially trained in the care of Alzheimer's
patients. Arden Courts assisted living facilities are designed to allow
residents the freedom to move about independently while keeping them safely
contained within a secured area with security systems. ManorCare Health
Services' specially designed social activities provide Arden Courts residents
with a minimum of 8 hours of meaningful interactive activity per day. In
addition, ManorCare Health Services utilizes special nutritional programs to
help assure that caloric intake is maintained in its residents. ManorCare
Health Services' Arden Courts assisted living facilities also offer education,
counseling and support to the residents' families.
ManorCare Health Services' Springhouse senior residences are freestanding,
residential-style facilities designed to meet the needs of the general
assisted living population. ManorCare Health Services' assisted living
facilities are functionally arranged to provide a home-like atmosphere. The
architectural and interior design concepts incorporate the ManorCare Health
Services operating philosophy of delivering superior quality care, protecting
resident privacy, enabling freedom of choice, encouraging independence and
fostering individuality in a home-like setting. Each facility is operated with
certain protocols designed to maintain the health of the residents and to
provide a measure of security and support for those individuals. Each facility
includes common areas designed to promote social interaction among residents,
such as a common dining area, a laundry room, a library, a wellness center,
barber and beauty shop, crafts room, spa and a snack room or ice cream parlor.
In addition, Springhouse residents have access to medication management
services, therapy and other ancillary services as well as dementia programs
and dedicated dementia units in some locations.
ManorCare Health Services provides a wide variety of health care services at
its assisted living facilities, including medication management, monitoring
the resident's general health status and assisting residents in the
performance of their ADLs. In order to determine the individual care needs and
lifestyle preferences of its residents, ManorCare Health Services' facility-
based staff assesses each resident upon admission to determine his/her health
status, including functional abilities, need for personal care services and
assistance with ADLs as well as personal preferences. In addition, ManorCare
Health Services utilizes a current physician's report to ascertain the health
status and needs of the resident. ManorCare Health Services develops a plan of
care for each of its residents and utilizes licensed nurses, certified or
trained staff and third party providers to meet their health care needs. In
order to ensure that the plan of care continues to be tailored to a resident's
current needs, each resident is periodically reassessed. ManorCare Health
Services utilizes the plan of care as the basis for determining the monthly
charges for each resident's care and services. In addition, ManorCare Health
Services fosters resident wellness through health screening such as blood
pressure checks, periodic special services such as influenza inoculations,
chronic disease management such as blood glucose monitoring for diabetics,
dietary
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and nutritional programs, regular exercise and fitness classes and special
classes given by health care professionals. To the extent permitted by state
regulations, ManorCare Health Services also makes available third-party
specialized health care services to patients when necessary.
ManorCare Health Services' facilities accept residents for respite care
(short term placement for several days to several months) to accommodate
short-term exigencies. ManorCare Health Services believes that respite care
services serve as an introduction to the continuum of services it offers as
many residents are frequent returnees and often become permanent residents at
a Company facility.
INSTITUTIONAL PHARMACY SERVICES
ManorCare Health Services owns 51% of Vitalink, a publicly traded company
that provides institutional pharmacy services to nursing facilities, assisted
living facilities and other institutions. ManorCare Health Services believes
it will benefit from increased revenues generated through Vitalink's growth
strategy, including (i) expansion of market share through selective industry
acquisitions which should permit Vitalink to leverage its critical mass,
access new customers and realize operational efficiencies through
consolidation of the combined entities' infrastructure; (ii) continued
penetration of existing markets through targeting of non-ManorCare Health
Services institutional facilities to maximize pharmaceutical facility output;
(iii) further growth from meeting the pharmacy requirements of new or acquired
ManorCare Health Services skilled nursing and assisted living facilities;
(iv) geographically targeting dominant infusion service home care companies to
drive sales of infusion products; (v) development of proprietary information
and database systems to provide state of the art patient care and disease
management capabilities; and (vi) development of new services to provide
support to the elderly while they still reside in their homes, such as disease
management or patient education and compliance programs. Vitalink's recent
acquisition of GranCare's institutional pharmacy business, TeamCare, and the
resultant expansion of the scope of its business to include the provision of
pharmacy services to institutional clients with 172,000 related institutional
beds is indicative of the implementation of Vitalink's growth strategy.
Vitalink, which is the second largest publicly traded institutional pharmacy
in the country, is a high quality, value-added partner with health care
providers and payors and provides four 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 the administration of a product
(nutrient, antibiotic, chemotherapy or other drugs or fluids) by tube,
catheter or intravenously. Vitalink prepares and delivers the product
which is administered by the nursing center staff.
. Integrated data systems such as VitalCONSULT, an integrated consultant
software package that allows pharmacists and nurses to record outcome
events, laboratory data, and patient status updates and administer
disease management programs and formularies more efficiently, and OPTIMA
(Optimizing Patient Theory in Medication Administration), a state-of-the-
art patient care management system designed to identify individuals who
are at high risk for certain diseases, which focuses on treatment
protocols and incorporates a disease-specific drug formulary. These
innovative systems increase efficiency, enhance clinical support and
result in superior outcomes.
Vitalink operates 57 institutional pharmacies located in 36 states and four
regional infusion pharmacies, which specialize in pharmaceutical dispensing of
individual medications, pharmacy consulting and infusion therapy products. In
the 1997 fiscal year, approximately 13% of the beds serviced by Vitalink were
Manor Care-affiliated. Net revenue from Manor Care and its patients (including
revenues received from government reimbursement programs) accounted for
approximately 29%, 48% and 49% of total net revenues in fiscal years 1997,
1996 and 1995, respectively. The balance came from unrelated third parties. On
October 15, 1997, Manor
69
<PAGE>
Care announced that it is exploring strategic alternatives with respect to its
51% ownership interest in Vitalink. Options under consideration include
strategic mergers, joint ventures or other business combinations that could
enhance Vitalink's strategic position in its markets, better enable it to serve
its customers and increase Vitalink's shareholder value. Manor Care does not
believe that any of the strategic alternatives that it is exploring will have a
material effect on the operations of the skilled nursing business or the
assisted living business. Vitalink has retained SBC Warburg Dillon Read Inc. to
act as financial advisor in connection with the exploration of strategic
alternatives with respect to Manor Care's interest in Vitalink. Manor Care has
no present commitments or agreements with respect to any such transaction and
there can be no assurance that Manor Care (or ManorCare Health Services after
the Distribution) will decide to enter into any such transaction or, should it
decide to do so, be able to reach an agreement with respect to any such
transaction on terms acceptable to it.
HOME HEALTH CARE SERVICES
ManorCare Health Services provides home health care services through its
majority owned subsidiary, In Home Health. In those markets in which In Home
Health does not participate, ManorCare Health Services is expanding its
relationships with other regional home health care service providers. Through
In Home Health, ManorCare Health Services offers its clients a broad range of
professional and support services to meet medical and personal needs at home.
These services provide an entry for clients in ManorCare Health Services'
cluster markets into ManorCare Health Services' integrated continuum of care.
In addition, ManorCare Health Services believes that its home health care
businesses profit from referrals from its assisted living and skilled nursing
facilities. In ManorCare's 1997 fiscal year, In Home Health indirectly derived
approximately $6.8 million in revenues (less than 10% of In Home Health's
fiscal 1997 revenues) from referrals from Manor Care facilities. On September
15, 1997, President Clinton issued a Medicare moratorium on new home health
agencies. The moratorium is scheduled to last for six months so that new
regulations can be proposed to combat fraud. Given the short duration of the
moratorium and the fact that the moratorium only pertains to new home health
providers, the Company does not believe that there will be any material adverse
affect on either In Home Health or on the Company as a result thereof.
The home health care and support services that ManorCare Health Services
provides through In Home Health include skilled nursing, infusion therapy,
hospice, rehabilitation, personal and companion care and homemaking. Hospice
services are an important new area of growth, and In Home Health operates 15
Medicare certified hospices in its 19 markets. In Home Health plans to become
certified in the four remaining geographic markets as soon as it can meet the
requirement of obtaining a Certificate of Need, either through acquisition of
an existing home health agency which has a CON or upon completion and approval
of application for a new CON. This process could take one to three years
because of the current moratorium on home health agency applications and the
long process of receiving approval for a CON. ManorCare Health Services also
expects to broaden the range of home health care options it offers by providing
its home-based Alzheimer's customers with specially trained companions who can
provide daily service ranging from short visits to all day care.
ManorCare Health Services owns approximately 64% of the voting power of In
Home Health, a publicly traded company which provides home health care services
in 14 states. Each of In Home Health's branches has two divisions: a Visit
Division and an Extended Care Division. The Visit Division provides clients
with round-the-clock care on a short-term basis. The Extended Care Division
provides clients with care up to 24 hours a day on a long-term basis. In Home
Health operates infusion pharmacies which distribute pharmaceutical drugs,
fluids and supplies.
EMPLOYEES
As of the Effective Date, ManorCare Health Services will have approximately
29,500 employees. From time to time, some of the Company-managed skilled
nursing facilities experience shortages of professional nursing help which may
require ManorCare Health Services to seek temporary employees through
employment agencies at an increased cost.
70
<PAGE>
A vast majority of ManorCare Health Services' employees are paid on an
hourly basis and are covered by the federal minimum wage laws. A few employees
are represented by labor unions and attempts have been made to unionize
employees of certain other facilities. ManorCare Health Services believes that
it enjoys a good relationship with its employees.
PROPERTIES
ManorCare Health Services's signature Arden Courts and Springhouse model
facilities, first designed in 1993 and 1994 respectively, are freestanding,
residential-style facilities. Each Arden Courts facility ranges in size from
25,000 to 28,000 square feet, is built to target a site ranging between three
and four acres and has a capacity of 52 to 56 residents. Each Springhouse
facility ranges in size from 65,000 to 70,000 square feet, is built to target
a site ranging between five and six acres and has a capacity of 105 to 110
residents. Approximately 30-40% of each facility is devoted to common areas
and amenities, including reading rooms, family or living rooms and other areas
designed to promote interaction among residents. The ground level typically
contains a kitchen and common dining area, administrative offices, a laundry
room, a library or living room, a wellness center, barber shop, crafts room,
spa and a snack room. ManorCare Health Services' assisted living facilities
are usually one to three stories and are functionally arranged to provide a
home-like atmosphere. The architectural and interior design concepts
incorporate the ManorCare Health Services operating philosophy of delivering
superior quality care, protecting resident privacy, enabling freedom of
choice, encouraging independence and fostering individuality in a home-like
setting.
The skilled nursing facilities operated by ManorCare Health Services range
in bed capacity from 53 to 265 beds and have an aggregate bed capacity of
24,079 beds. Most of the skilled nursing facilities have been designed to
permit private and semi-private patient room accommodations. Most facilities
have individually controlled heating and air-conditioning units. Each skilled
nursing facility contains a fully equipped kitchen, day room areas,
administrative offices and in most cases a physical therapy room.
Manor Care has occupied its current headquarters since August 1996. The main
building is approximately 335,000 square feet and is 90% occupied at November
30, 1997. There is another building on the property which is not used by the
company (200,000 square feet of which 180,000 square feet is storage and
20,000 square feet is office) and of which 80,000 square feet is subleased to
an unrelated party. The buildings and the approximately 100 acres of land on
which they are situated are controlled through a lease. The property is zoned
for another 1,000,000 square feet of commercial space. Manor Care believes
that the main building will be adequate for expansion at the current pace at
least through the year 2000. For a description of the arrangements with
respect to the headquarters facility after the Distribution, see "Relationship
Between Manor Care Realty and ManorCare Health Services after the
Distribution--Office Lease Agreement."
71
<PAGE>
The table below summarizes certain information regarding ManorCare Health
Services' facilities as of August 31, 1997 after giving pro forma effect to
the Distribution:
ASSISTED LIVING SERVICES--SPRINGHOUSE
<TABLE>
<CAPTION>
FACILITY LOCATION STATE UNITS
----------------- ----- -----
<S> <C> <C>
Tucson........................................................ AZ 107(1)
Brea.......................................................... CA 92
Laguna Hills.................................................. CA 288(3)
Whittier...................................................... CA 73
Boynton Beach................................................. FL 127
Boynton Beach--Village........................................ FL 104(1)
Dunedin....................................................... FL 110(1)
Naples........................................................ FL 307(3)
Port Charlotte................................................ FL 84
Sarasota...................................................... FL 106(1)
Peoria........................................................ IL 301(3)
Carmel........................................................ IN 262(3)
Bethesda...................................................... MD 92
Bethesda--Westwood............................................ MD 62(2)
Kensington.................................................... MD 201(4)
Silver Spring................................................. MD 118
Southfield.................................................... MI 101
Fairfield..................................................... OH 257(3)
Westlake...................................................... OH 97
Pottstown Residential......................................... PA 55(1)
West Reading Residential...................................... PA 57
Total Springhouse Facilities.................................. 21
-----
Total Springhouse Units....................................... 3,001
=====
ASSISTED LIVING SERVICES--ARDEN COURTS
<CAPTION>
FACILITY LOCATION STATE UNITS
----------------- ----- -----
<S> <C> <C>
Farmington.................................................... CT 55
West Palm Beach............................................... FL 56(1)
Elk Grove..................................................... IL 55(1)
South Holland................................................. IL 56(1)
Potomac....................................................... MD 48(1)
Silver Spring................................................. MD 49(1)
Sterling Heights.............................................. MI 54
Cherry Hill................................................... NJ 53
Westlake...................................................... OH 56
Allentown..................................................... PA 56
King of Prussia............................................... PA 54(1)
North Hills................................................... PA 56(1)
Yardley....................................................... PA 52(1)
Fair Oaks..................................................... VA 56(1)
Total Arden Courts Facilities................................. 14
-----
Total Arden Courts Units...................................... 756
=====
</TABLE>
- --------
(1) Each parcel of land on which each of these facilities is located is
covered by a 99 year ground lease between Manor Care Realty, as landlord,
and ManorCare Health Services, as tenant. ManorCare Health Services owns
the buildings and improvements located thereon and the furniture, fixtures
and equipment located therein.
(2) This facility is leased by ManorCare Health Services from an unrelated
third party.
(3) These facilities also contain skilled nursing beds in the following
numbers: Naples (97), Laguna Hills (98), Peoria (52), Carmel (57) and
Fairfield (57).
(4) This facility is owned by an unrelated third party and managed by
ManorCare Health Services pursuant to a management agreement.
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<PAGE>
SKILLED NURSING SERVICES
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
ARIZONA
Tucson.................. 117
-----
Total................... 117
=====
CALIFORNIA
Citrus Heights.......... 147
Encinitas............... 106
Fountain Valley......... 147
Hemet................... 175
Palm Desert............. 178
Rancho Bernardo......... 94
Rossmoor................ 119
Sunnyvale............... 139
Walnut Creek............ 154
-----
Total................... 1,259
=====
COLORADO
Boulder................. 149
Denver.................. 152
-----
Total................... 301
=====
DELAWARE
Pike Creek.............. 151
Wilmington.............. 138
-----
Total................... 289
=====
FLORIDA
Boca Raton.............. 178
Boynton Beach........... 179
Carrollwood............. 117
Dunedin................. 119
Jacksonville............ 114
Naples.................. 116
Palm Harbor............. 179
Plantation.............. 118
Sarasota................ 177
Venice.................. 128
West Palm Beach......... 120
Winter Park............. 133
-----
Total................... 1,678
=====
GEORGIA
Decatur................. 131
Marietta................ 116
-----
Total................... 247
=====
<CAPTION>
ILLINOIS
<S> <C>
Arlington Heights....... 151
Champaign............... 98
Decatur................. 95
Elgin................... 80
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
Elk Grove............... 179
Hinsdale................ 190
Kankakee................ 104
Libertyville............ 149
Naperville.............. 112
Normal.................. 95
Oak Lawn................ 179
Oak Lawn Americana...... 142
Orchard Manor........... 53
Palos Heights........... 179
Palos Heights West...... 120
Peoria.................. 120
Rolling Meadows......... 154
South Holland........... 188
Urbana.................. 98
Westmont................ 115
Wilmette................ 76
-----
Total................... 2,677
=====
INDIANA
Anderson................ 225
Indianapolis North...... 185
Indianapolis South...... 119
Kokomo.................. 100
-----
Total................... 629
=====
IOWA
Cedar Rapids............ 102
Davenport............... 102
Dubuque................. 94
Waterloo................ 95
-----
Total................... 393
=====
KANSAS
Overland Park........... 173
Topeka.................. 120
Wichita................. 117
-----
Total................... 410
=====
MARYLAND
Bethesda................ 87
Chevy Chase............. 157
Largo................... 128
Potomac................. 136
Roland Park............. 74
Rossville............... 178
Ruxton.................. 221
Silver Spring........... 119
Towson.................. 126
Wheaton................. 98
-----
Total................... 1,324
=====
</TABLE>
73
<PAGE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
MISSOURI
Florissant.............. 97
Fremont................. 220
-----
Total................... 317
=====
MICHIGAN
Kingsford............... 105
Windemere............... 189
-----
Total................... 294
=====
NEVADA
Reno.................... 149
-----
Total................... 149
=====
NEW JERSEY
Cherry Hill............. 107
Mountainside............ 148
West Deptford........... 135
-----
Total................... 390
=====
NEW MEXICO
Camino Vista............ 133
Northeast Heights....... 138
Sandia.................. 177
-----
Total................... 448
=====
NORTH CAROLINA
Pinehurst............... 112
-----
Total................... 112
=====
NORTH DAKOTA
Fargo................... 107
Minot................... 105
-----
Total................... 212
=====
OHIO
Akron................... 99
Barberton............... 118
Belden Village.......... 144
Centreville............. 139
Cincinnati.............. 149
Lake Shore.............. 198
Mayfield Heights........ 148
North Olmstead.......... 177
Oregon.................. 108
Rocky River............. 208
Sycamore Glen........... 97
Westerville............. 179
Willoughby.............. 154
Woodside................ 143
-----
Total................... 2,061
=====
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
OKLAHOMA
Midwest City.............. 108
Norman.................... 102
Northwest Oklahoma City... 115
Southwest Oklahoma City... 110
Tulsa..................... 107
Warr Acres................ 100
Windsor Hills............. 102
-----
Total..................... 744
=====
PENNSYLVANIA
Allentown................. 165
Bethel Park............... 160
Bethlehem-I............... 224
Bethlehem-II.............. 225
Camp Hill................. 119
Carlisle.................. 151
Chambersburg.............. 212
Dallastown................ 202
Devon Manor............... 265
Easton.................... 225
Elizabethtown............. 97
Fitzgerald Mercy.......... 119
Harrisburg................ 233
Huntingdon Valley......... 120
Jersey Shore.............. 121
King of Prussia........... 147
Kingston Court............ 125
Kingston East............. 177
Lansdale.................. 171
Laureldale................ 198
Lebanon................... 159
McMurray.................. 141
Monroeville............... 119
North Hill................ 199
Pittsburgh................ 149
Pottstown Nursing......... 158
Pottsville................ 178
Sinking Spring............ 214
Sunbury................... 124
West Reading.............. 176
Whitehall................. 171
Williamsport North........ 152
Williamsport South........ 127
Yardley................... 140
Yeadon.................... 199
York North................ 162
York South................ 123
-----
Total..................... 6,147
=====
</TABLE>
74
<PAGE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
SOUTH CAROLINA
Charleston.............. 117
Columbia................ 130
Lexington............... 118
-----
Total................... 365
=====
SOUTH DAKOTA
Aberdeen................ 98
-----
Total................... 98
=====
TEXAS
Dallas.................. 201
Fort Worth.............. 158
Forth Worth NW.......... 103
San Antonio-Babcock..... 210
San Antonio-North....... 89
San Antonio-Northwest... 145
San Antonio-Windcrest... 186
Sharpview............... 126
Temple.................. 102
Temple Care............. 140
Webster................. 111
-----
Total................... 1,571
=====
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- ----
UTAH
Ogden................... 133
----
Total................... 133
====
VIRGINIA
Arlington............... 191
Fair Oaks............... 118
Imperial................ 127
Stratford Hall.......... 233
----
Total................... 669
====
WASHINGTON
Gig Harbor.............. 119
Lynwood................. 112
Meadow Park............. 125
Spokane................. 124
----
Total................... 480
====
WISCONSIN
Appleton................ 101
Fond du Lac............. 107
Green Bay-East.......... 78
Green Bay-West.......... 105
Madison................. 174
----
<CAPTION>
565
Total................... ====
</TABLE>
TOTAL SKILLED NURSING FACILITIES: 171
TOTAL SKILLED NURSING BEDS: 24,079
All of the facilities listed in the above table are owned or leased by Manor
Care Realty and leased by ManorCare Health Services except for five facilities
owned directly by ManorCare Health Services, certain facilities in which Manor
Care Realty has an ownership interest pursuant to joint venture agreements and
certain facilities in which ManorCare Health Services has an ownership
interest pursuant to joint venture agreements. Manor Care Realty owns 35% of
the Winter Park, Florida facility and 94% of the Decatur, Georgia facility.
Pursuant to management agreements with the owner/operator of the facilities,
ManorCare Health Services will manage the facilities. Each management
agreement is for a two-year term with automatic, two-year renewal periods.
ManorCare Health Services owns 50% of each of the Centreville, Ohio facility,
the Sycamore Glen, Ohio facility and the Fitzgerald Mercy, Pennsylvania
facility. Pursuant to the joint venture agreements, ManorCare Health Services
will manage the facilities on a long-term basis.
Set forth below is a chart which illustrates occupancy rates for Manor
Care's skilled nursing facilities and assisted living facilities. These
occupancy rates include facilities that have been operated by ManorCare Health
Services for less than two years.
OCCUPANCY RATES
<TABLE>
<CAPTION>
12 MONTHS ENDED
5/31/97
---------------
<S> <C>
Skilled Nursing.............................................. 88.4%
Assisted Living--Arden Courts................................ 66.4%
Assisted Living--Springhouse................................. 83.9%
</TABLE>
75
<PAGE>
COMPETITION
ManorCare Health Services' principal competitors in the skilled nursing
business are Advocat, Inc., Beverly Enterprises, Inc., Extendicare, Inc.,
Genesis Health Ventures, Inc., Health Care and Retirement Corporation,
Integrated Health Services, Inc., Mariner Health Group, Inc., National
HealthCare L.P., Paragon Health Network, Inc., Sun Healthcare Group, Inc. and
Vencor, Inc. ManorCare Health Services' principal competitors in the assisted
living business are Alternative Living Services, Inc., ARV Assisted Living,
Inc., CareMatrix Corporation, Emeritus Corporation, Kapson Senior Quarters
Corp., Karrington Health, Inc., Marriott International, Inc. and Sunrise
Assisted Living, Inc. ManorCare Health Services' principal competitors in the
institutional pharmacy business are NCS Healthcare, Inc., Omnicare, Inc. and
PharMerica, Inc. ManorCare Health Services' principal competitors in the home
health business are HealthCor Holdings, Inc., Home Health Corporation of
America, Inc., Housecall Medical Resources, Inc., National Home HealthCare
Corp., Olsten Corporation and Option Care, Inc.
The senior housing and health care industries are highly competitive and
ManorCare Health Services expects that the assisted living business in
particular will become more competitive in the future. ManorCare Health
Services' assisted living and skilled nursing facilities compete on a local
and regional basis with other senior support health care providers, some of
which have greater financial resources or operate on a nonprofit basis.
ManorCare Health Services' competes with other providers on the basis of
breadth and quality of services, reputation, location and physical appearance
of the facilities, family preferences, relationship with key referral sources
and, in the case of private patients, pricing. Accordingly, ManorCare Health
Services seeks to meet competition in each locality by establishing a
reputation within the local medical communities for high quality services and
trained, caring staff.
In general, regulatory and other barriers to competitive entry in the
assisted living industry are not substantial. Some of ManorCare Health
Services' present and potential competitors operate on a not-for-profit basis
or as charitable organizations, while others have, or may obtain, greater
financial resources than those of ManorCare Health Services. Consequently,
there can be no assurance that ManorCare Health Services will not encounter
increased competition that could limit its ability to attract residents or
expand its business. Moreover, if the development of new assisted living
facilities outpaces demand for those facilities in certain markets, such
markets may become saturated. Such an oversupply of facilities could cause
ManorCare Health Services to experience decreased occupancy, depressed margins
and lower operating results.
Vitalink competes with national institutional pharmacies as well as numerous
local and regional retail pharmacies, as well as with the pharmacy operations
owned by long-term care providers other than ManorCare Health Services. These
competitors provide product and service offerings similar to those provided by
Vitalink and may be larger or have greater financial resources than ManorCare
Health Services.
The home health care business is highly competitive and many such companies
have experienced declines in performance. In Home Health competes with: (i)
hospitals and public health agencies that provide short term, intermittent
care, (ii) national specialized home care providers and (iii) other
independent home care companies. The primary competitive factors in the home
health care business are the price of the services and quality considerations
such as responsiveness, the technical ability of the professional staff and
the ability to provide comprehensive services.
GOVERNMENT FUNDING
Assisted Living. As a result of limited government funding for the assisted
living business, ManorCare Health Services relies and expects to rely in the
future on the ability of its residents to pay the cost of care from their own
financial resources. Depending on the nature of an individual's health
insurance program or long-term care insurance policy, the individual may
receive reimbursement for costs of care under an "alternative care benefit."
Some state or local governments offer limited funding in the form of housing
subsidies for rent or housing-related services for low income seniors. Others
may provide subsidies in the form of additional payment
76
<PAGE>
for those who receive Supplemental Security Income. However, the federal
government does not currently provide any reimbursement for ManorCare Health
Services' assisted living facilities.
Medicaid provides benefits for certain financially or medically needy
persons, regardless of age, and is funded jointly by federal, state and local
governments. Medicaid reimbursement varies from state to state. In 1981, the
federal government approved a Medicaid waiver program called Home and
Community-Based Care which was designed to permit states to develop programs
specific to the health care and housing needs of the low-income elderly
eligible for nursing home placement (a "Medicaid Waiver Program"). Under a
Medicaid Waiver Program, states apply to the Health Care Financing
Administration for a waiver to use Medicaid funds to support community-based
options for low-income elderly who need long-term care. These waivers permit
states to reallocate a portion of Medicaid funding for nursing facility care
to other forms of care such as assisted living. In 1994, the federal
government implemented new regulations which empowered states to further
expand their Medicaid Waiver Programs and eliminated restrictions on the
amount of Medicaid funding states could allocate to community-based care, such
as assisted living. A limited number of states currently have such programs
operating that allow them to pay for assisted living care. Without a Medicaid
Waiver Program, states can only use federal Medicaid funds for long-term care
in nursing facilities.
Skilled Nursing. Patients seeking the service of ManorCare Health Services'
skilled nursing facilities come from a variety of sources, and are principally
referred by hospitals and physicians. ManorCare Health Services targets upper
income, service sensitive patients who pay for services without benefit of any
government assistance program for its skilled nursing facilities. Manor Care
Realty locates its nursing facilities in geographies that are attractive to
private pay patients because ManorCare Health Services believes that focusing
on private pay patients helps reduce its exposure to potential changes in
government reimbursement practice and enables ManorCare Health Services to
achieve relatively attractive profit margins.
ManorCare Health Services expects that state Medicaid and federal Medicare
reimbursement programs will constitute an additional source of future revenues
for its managed skilled nursing facilities. Both initial and continuing
qualification of a skilled nursing care facility to participate in such
programs depend upon many factors including, among other things,
accommodations, equipment, services, patient care, safety, personnel, physical
environment, and adequate policies, procedures and controls. Medicaid programs
typically provide for fixed rate payment to health care providers who must
accept reimbursement from Medicaid as payment in full for all covered services
rendered to Medicaid patients. With respect to skilled nursing, Medicare is 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. As a result of the Budget Act, the Medicare payment
system will become prospective such that skilled nursing facilities will be
reimbursed per diem for specific covered services regardless of actual cost.
See "Risk Factors--Regulation." There can be no assurance that either Medicaid
or Medicare will pay rates that recognize all of ManorCare Health Services'
costs of providing services to residents covered by those programs.
Private Pay Patients. As a general rule, the profit margin is higher with
private pay patients than with patients to whom services are rendered with
government assistance programs.
The following table sets forth for the periods specified, the percentage of
private patients, Medicare patients and Medicaid patients in Manor Care's
skilled nursing facilities.
<TABLE>
<CAPTION>
SKILLED NURSING
FACILITIES
LATEST TWELVE
MONTHS AS OF
5/31/97
------------------
% OF % OF
OCCUPANCY REVENUES
--------- --------
<S> <C> <C>
Private Patients......................................... 51% 55%
Medicare Patients........................................ 11% 19%
Medicaid Patients........................................ 38% 26%
--- ---
Total.................................................. 100% 100%
</TABLE>
77
<PAGE>
As of May 31, 1997, all of the residents at Manor Care's assisted living
facilities were private pay.
GOVERNMENT REGULATION
ManorCare Health Services' skilled nursing facilities and assisted living
facilities are subject to extensive federal, state and local statutes and
regulations. In addition, the facilities are subject to various local building
codes and other ordinances. ManorCare Health Services 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. Changes in applicable laws and regulations or new
interpretations of existing laws and regulations could have a material adverse
effect on licensure of ManorCare Health Services facilities, eligibility for
participation in federal and state programs, permissible activities, costs of
doing business, or the levels of reimbursement from governmental, private and
other sources. In addition to extensive existing health care statutes and
regulations and the Budget Act, there are numerous initiatives on the federal
and state levels for comprehensive reforms. ManorCare Health Services cannot
predict the ultimate timing, the content, or the impact of future legislation
and regulations affecting ManorCare Health Services and the health care
industry in general. See "Risk Factors--Regulation."
Certificate of Need. Many of the states in which ManorCare Health Services
will operate have adopted Certificate of Need ("CON") statutes applicable to
the assisted living and skilled nursing services provided by ManorCare Health
Services. CON or similar laws generally require that approval must be obtained
from the designated state health planning agency for certain acquisitions and
capital expenditures, and determine that a need exists prior to the expansion
of existing facilities, construction of new facilities, addition of beds,
acquisition of major items of equipment or introduction of new services.
Failure to obtain the necessary state approval can result in (i) the inability
to provide services, to operate a facility, or to complete an acquisition,
addition or other change; (ii) the imposition of sanctions; (iii) adverse
action on the facility's license; and/or (iv) adverse reimbursement action.
CONs or other approvals may be required in connection with ManorCare Health
Services' future acquisitions and/or expansions. There can be no assurance
that ManorCare Health Services will be able to obtain the CONs or other
approvals necessary for any or all such projects. There can be no assurance
that states with CON laws may not abolish such laws or that states without
such laws will enact such CON laws. Manor Care has extensive experience filing
for CONs. During the period from 1987 to the present, Manor Care completed 64
new skilled nursing facilities, most of which required CON applications.
During the past four fiscal years, Manor Care received CON approval for 13
skilled nursing facilities and 18 assisted living facilities.
Anti-remuneration Laws. ManorCare Health Services is subject to federal and
state anti-remuneration laws, such as the Medicare/Medicaid anti-kickback
laws, which govern certain financial arrangements among health care providers
and others who may be in a position to refer or recommend patients to such
providers. These laws prohibit, among other things, direct and indirect
payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommending of, a particular provider of
health care items or services. The Medicare/Medicaid anti-kickback law has
been broadly interpreted to apply to certain contractual relationships between
health care providers and sources of patient referral. State laws vary from
state to state, are sometimes vague and seldom have been interpreted by courts
or regulatory agencies. Violation of these laws can result in loss of
licensure, civil and criminal penalties, and exclusion of health care
providers or suppliers from participation in (i.e., furnishing covered items
or services to beneficiaries of) the Medicare and Medicaid programs. ManorCare
Health Services plans to continue to treat Vitalink and In Home as separate
entities, and will also treat Manor Care Realty as a separate entity. Thus,
ManorCare Health Services not believe that there will be any material adverse
effect to ManorCare Health Services as a result of the anti-remuneration laws.
Billing Regulation. Certain provisions in the Social Security Act authorize
penalties, including exclusion from participation in Medicare and Medicaid,
for various billing-related offenses. The Department of Health and Human
Services can also initiate permissive exclusion actions for improper billing
practices such as submitting claims "substantially in excess" of the
provider's usual costs or charges, failure to disclose ownership and officers,
or failure to disclose subcontractors and suppliers.
78
<PAGE>
Federal and State Assistance Programs. Substantially all of the Skilled
Nursing Facilities which ManorCare Health Services operates are currently
certified to receive benefits under Medicare and Medicaid. Both initial and
continuing qualification of a nursing center or hospital to participate in
such programs depends on many factors including accommodations, equipment,
services, patient care, safety, personnel, physical environment and adequate
policies, procedures and controls.
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. ManorCare Health Services 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.
There have been numerous initiatives on the Federal and state levels for
comprehensive reforms affecting payment for and availability of health care
services. On August 5, 1997, Congress enacted the Balanced Budget Act of 1997
(the "Budget Act") which changes the manner in which Medicare reimburses
skilled nursing facilities for cost reporting periods beginning July 1, 1998.
Medicare is currently 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 per diem for specific covered services
regardless of actual cost. Specifically, the Budget Act provides that, over
three reporting periods starting July 1, 1998, the Medicare program will phase
into this prospective payment system. During the first reporting period,
skilled nursing facilities will receive 75% of their reimbursement based on
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. Pursuant to the Balanced Budget Act of 1997,
between November 1998 and June 1999, the Medicare payment system for ManorCare
Health Services will become prospective rather than retrospective. The Budget
Act also gives states greater flexibility in the administration of their
Medicaid programs in that the Budget Act repeals the requirement that payment
be reasonable and adequate to cover the costs of "efficiently and economically
operated" skilled nursing facilities. ManorCare Health Services cannot predict
the impact that this change will have on ManorCare Health Services. ManorCare
Health Services cannot predict whether any other proposals will be adopted at
the Federal or state level or, if adopted and implemented, what effect, if
any, such proposals will have on ManorCare Health Services. ManorCare Health
Services believes, however, that government and private efforts to contain or
reduce health care costs will continue and that these trends are likely to
lead to reduced or slower growth in reimbursement for certain services it
provides. A significant change in coverage, reduction in payment rates by
third-party payors or the decline in availability of funding could have a
material adverse effect on the business and financial condition of ManorCare
Health Services.
False Claim Regulation. False claims are prohibited pursuant to criminal and
civil statutes. Criminal provisions at 42 U.S.C. Section 1320a-7b prohibit
filing false claims or making false statements to receive payment or
certification under Medicare or Medicaid, or failing to refund overpayments or
improper payments; offenses for violation are felonies punishable by up to
five years imprisonment, and/or $25,000 fines. Civil provisions at 31 U.S.C.
Section 3729 prohibit the knowing filing of a false claim or the knowing uses
of false statements to obtain payment; penalties for violations are fines of
not less than $5,000 nor more than $10,000, plus treble damages, for each
claim filed.
OSHA. Federal regulations promulgated by the Occupational Safety and Health
Administration impose additional requirements on ManorCare Health Services
with regard to protecting employees from hazards in the workplace, including
exposure to blood-borne pathogens. ManorCare Health Services believes that it
is in compliance with such regulatory requirements.
79
<PAGE>
Related Party Rule. The Medicare related party rule applies to companies that
are associated or affiliated with or have control of, or are controlled by a
Medicare provider. The Medicare program may consider Vitalink and In Home
Health to be related parties with ManorCare Health Services. Consequently,
unless there is a qualification for a waiver of the related party rule, the
Medicare program will only reimburse for the cost incurred by the related party
in providing products or services, rather than their charges. An organization
can qualify for an exception from the related party rule by meeting the
following criteria: (i) the entities are bona-fide separate organizations; (ii)
a substantial part of the supplying organization's business activity is
conducted with non-related organizations and there is an open, competitive
market for such services or products; (iii) the services or products are
commonly obtained by a provider from other organizations and are not a basic
element of patient care ordinarily furnished directly to patients by the
provider; and (iv) the charge to the provider is in line with the charge for
such services and products in the open market and no more than the charge made
under comparable circumstances to others. The Medicare related party rule and
anti-remuneration laws could materially affect the relationship among ManorCare
Health Services, Manor Care Realty, Vitalink and In Home Health. The ManorCare
Health Services plans to continue to treat Vitalink and In Home Health as
related parties, and will also treat Manor Care Realty as a related party. Thus
there will be no material adverse effect to ManorCare Health Services as a
result of the Medicare related party rule. As to the anti-remuneration laws,
ManorCare Health Services plans to continue to treat Vitalink and In Home as
separate entities, and will also treat Manor Care Realty as a separate company.
Thus, Manor Care does not believe that there will be a material adverse effect
on ManorCare Health Services as a result of the anti-remuneration laws.
Home Health Care Moratorium. On September 15, 1997, President Clinton issued
a Medicare moratorium on new home health agencies. The moratorium is scheduled
to last for six months so that new regulations can be proposed to combat fraud.
Given the short duration of the moratorium and the fact that the moratorium
only pertains to new home health providers, ManorCare Health Services does not
believe that there will be any material adverse affect on either In Home Health
or on ManorCare Health Services as a result thereof.
Environmental Regulation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property or an entity that arranges for the disposal or
treatment of hazardous or toxic substances at a disposal site may be held
jointly and severally liable for the cost of removal or remediation of certain
hazardous or toxic substances, that could be located on, in or under such
property. Such laws and regulation often impose liability whether or not the
owner, operator or otherwise responsible party knew of, or caused, the presence
of the hazardous of toxic substances. The costs of any required remediation or
removal of these substances can be substantial and the liability of a
responsible party as to any property is generally not limited under such laws
and regulation and could exceed the property's value and the aggregate assets
of the liable party. The presence of these substances or failure to remediate
such substances properly may also adversely affect the owner's ability to sell
or rent the property, or to borrow using the property as collateral. In
connection with the ownership and leasing to third-parties of its properties,
Manor Care Realty could be liable for these costs, as well as certain other
costs, including governmental fines and injuries to persons or properties.
INSURANCE
Health care companies are subject to medical malpractice, personal injury and
other liability claims which are customary risks inherent in the operation of
health facilities and are generally covered by insurance. ManorCare Health
Services maintains property, liability and professional malpractice insurance
policies in amounts and with such coverage and deductibles which are deemed
appropriate by management, based upon historical claims, industry standards and
the nature and risks of its business. In addition, ManorCare Health Services
self insures, either directly or indirectly through insurance arrangements
requiring it to reimburse insurance carriers, some of its liability risks other
than catastrophic exposures.
There can be no assurance that claims will not arise which are in excess of
ManorCare Health Services' insurance coverage or are not covered by ManorCare
Health Services' insurance coverage. A successful claim
80
<PAGE>
against ManorCare Health Services not covered by, or in excess of, ManorCare
Health Services' insurance could have a material adverse effect on ManorCare
Health Services' financial condition and results of operations. Claims against
ManorCare Health Services, regardless of their merit or eventual outcome, may
also have a material adverse effect on ManorCare Health Services' ability to
attract residents or expand its business and would require management to
devote time to matters unrelated to the operation of ManorCare Health
Services' business. In addition, ManorCare Health Services' insurance policies
must be renewed annually and there can be no assurance that ManorCare Health
Services will be able to continue to obtain liability insurance coverage in
the future or, if available, that such coverage will be available on
acceptable terms.
LEGAL PROCEEDINGS
ManorCare Health Services is subject to regulatory and legal actions,
investigations or claims for damages that arise from time to time in the
ordinary course of business. Although it is impossible to predict the outcome
of any legal proceeding and ManorCare Health Services cannot estimate the
range of the ultimate liability, if any, relating to these proceedings,
ManorCare Health Services believes that the outcome of such proceedings should
not, individually or in the aggregate, have a material adverse effect on the
results of operations or financial condition of ManorCare Health Services.
81
<PAGE>
MANORCARE HEALTH SERVICES PRO FORMA FINANCIAL DATA
ManorCare Health Services was formed by Manor Care for the purpose of
effecting the Distribution and has no operating history as a separate,
independent company. The historical combined financial statements of ManorCare
Health Services reflect periods during which ManorCare Health Services did not
operate as a separate, independent company, and certain assumptions were made
in preparing such financial statements. The historical combined financial
statements of ManorCare Health Services may not necessarily reflect the
consolidated results of operations or financial position of ManorCare Health
Services or what the results of operations would have been if ManorCare Health
Services had been a separate, independent company during such periods.
The unaudited pro forma combined condensed statements of income for the
fiscal year ended May 31, 1997 and the three month period ended August 31,
1997 give effect to the Distribution and related transactions (including the
Exchange Offer, the Lease Agreements, and the Assisted Living Facility
Management Agreement) as if such transactions occurred on June 1, 1996 and
June 1, 1997, respectively and the Vitalink merger ("TeamCare Merger") with
and into TeamCare, Inc. ("TeamCare") as if it had occurred on June 1, 1996.
The unaudited pro forma combined condensed statements of income for the fiscal
year ended May 31, 1997 and the three month period ended August 31, 1997 have
been prepared by adjusting the historical combined statements of income to
reflect the Distribution and related transactions as if they had been effected
on June 1, 1996 and June 1, 1997, respectively.
The unaudited pro forma combined condensed balance sheet at August 31, 1997
gives effect to the Distribution and related transactions (including the
Exchange Offer and the Lease Agreements) as if such transactions had occurred
at that date. Such balance sheet has been prepared by adjusting the historical
combined balance sheet to reflect the Distribution and related transactions as
if they had been effected on August 31, 1997.
The unaudited pro forma financial statements should be read in conjunction
with the financial data presented elsewhere in this Registration Statement.
The pro forma financial data are presented for informational purposes only and
may not reflect the future results of operations or financial position of
ManorCare Health Services or what the results of operations or financial
position would have been had ManorCare Health Services operated as a separate,
independent company during such periods.
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<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED MAY 31, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------
TEAM LEASE MANAGEMENT PRO
HISTORICAL CARE SUBTOTAL DISTRIBUTION AGREEMENTS AGREEMENT FORMA
---------- -------- -------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $471,152 $192,364 (h) $663,516 $ (1,603)(a) $1,017,570(c) $2,483(e) $1,681,966
Expenses:
Operating expenses..... 413,762 170,681 (h) 584,443 (2,081)(a) 733,362(c) 2,081(e) 1,494,809
177,004(d)
Depreciation and
amortization.......... 20,135 8,027 (h) 28,162 (365)(a) 27,797
General corporate and
other................. 8,385 -- 8,385 (77)(a) 59,774(b) 70,592
2,510 (b)
-------- -------- -------- -------- ---------- ------ ----------
Total expenses......... 442,282 178,708 620,990 (13) 970,140 2,081 1,593,198
-------- -------- -------- -------- ---------- ------ ----------
Income before other
income and (expenses)
and income taxes....... 28,870 13,656 (h) 42,526 (1,590) 47,430 402 88,768
Other income and
(expenses):
Gain on issuance of
Vitalink stock........ 50,271 -- 50,271 50,271
Minority interest
expense............... (3,881) (4,068)(h) (7,949) (7,949)
Interest expense....... (17,317) (7,737)(h) (25,054) (11,250)(f) (25,113)
11,191 (a)
Interest income and
other................. 2,162 127 (h) 2,289 21,875 (g) 24,164
-------- -------- -------- -------- ---------- ------ ----------
Income before income
taxes.................. 60,105 1,978 62,083 20,226 47,430 402 130,141
Provision for income
taxes.................. 23,917 4,175 (h) 28,092 8,090 (i) 18,684(i) 208(i) 55,074
-------- -------- -------- -------- ---------- ------ ----------
Net income (loss)....... $ 36,188 $ (2,197) $ 33,991 $ 12,136 $ 28,746 $ 194 $ 75,067
======== ======== ======== ======== ========== ====== ==========
Outstanding shares of
common stock........... 63,257
Earnings per share...... $ 1.19
==========
</TABLE>
The accompanying notes are an integral part of this pro forma combined
condensed income statement.
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<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 31, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------
LEASE MANAGEMENT PRO
HISTORICAL DISTRIBUTION AGREEMENTS AGREEMENT FORMA
---------- ------------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues................ $158,696 ($1,035)(a) $278,102 (c) $1,169(e) $436,932
Expenses:
Operating expenses..... 153,619 (1,099)(a) 205,385 (c) 1,099(e) 403,446
44,442 (d)
Depreciation and
amortization........... 7,199 (260)(a) 6,939
General corporate and
other.................. 3,292 (73)(a) 9,895 (b) 13,921
807 (b)
-------- ------- -------- ------ --------
Total expenses......... 164,110 (625) 259,722 1,099 424,306
-------- ------- -------- ------ --------
Income before other
income and (expenses)
and income taxes....... (5,414) (410) 18,380 70 12,626
Minority interest
expense................ 7,301 7,301
Interest expense........ (4,527) 3,112 (a) (4,228)
(2,813)(f)
Interest income and
other.................. 426 5,469 (g) 5,895
-------- ------- -------- ------ --------
Income before income
taxes.................. (2,214) 5,358 18,380 70 21,594
Provision for income
taxes.................. 750 2,143 (i) 6,920 (i) 28(i) 9,841
-------- ------- -------- ------ --------
Net income (loss)....... $ (2,964) $ 3,215 $ 11,460 $ 42 $ 11,753
======== ======= ======== ====== ========
Outstanding shares of
common stock........... 63,708
Earnings per share...... $ 0.18
========
</TABLE>
The accompanying notes are an integral part of this pro forma combined
condensed income statement.
84
<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AUGUST 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- -------------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents........... $ 23,631 $ 250,000 (a) $ 222,126
(9,005)(b)
(30,000)(a)
(12,500)(d)
Other current assets................ 132,617 119,586 (d) 277,939
25,901 (e)
(165)(b)
-------- -------------- ----------
Total current assets................ 156,248 343,817 500,065
Property and Equipment................ 222,772 14,605 (a) 218,829
(18,548)(b)
Goodwill, net......................... 351,668 -- 351,668
Realty Note........................... -- 250,000 (a) 250,000
Other assets.......................... 52,079 28,516 (a) 91,830
(759)(b)
11,994 (e)
-------- -------------- ----------
Total assets.......................... $782,767 $ 629,625 $1,412,392
======== ============== ==========
LIABILITIES AND EQUITY
Current liabilities................... $ 62,845 $ (509)(b) $ 158,351
55,496 (d)
24,326 (e)
16,193 (f)
Long-term debt........................ 117,748 149,500 (c) 267,248
Due to ManorCare...................... 75,560 (45,560)(c) --
(30,000)(a)
Mortgage Notes........................ -- 45,560 (c) 45,560
Other noncurrent liabilities.......... 71,951 25,500 (e) 82,352
(14,440)(f)
(659)(b)
Minority interest..................... 177,428 -- 177,428
-------- -------------- ----------
Total liabilities..................... 505,532 225,407 730,939
Total equity.......................... 277,235 543,121 (a) 681,453
(27,309)(b)
(149,500)(c)
51,590 (d)
(11,931)(e)
(1,753)(f)
-------- -------------- ----------
Total liabilities and equity.......... $782,767 $ 629,625 $1,412,392
======== ============== ==========
</TABLE>
The accompanying notes are an integral part of this pro forma combined
condensed balance sheet.
85
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(a) Reflects the elimination of revenues, income and expenses associated with
facilities which opened during fiscal year 1997 (the "Developed
Properties") and the reversal of intercompany interest allocated to
ManorCare Health Services. These facilities would not have been purchased
by ManorCare Health Services under the terms of the Development Agreement
until such facilities achieved 75% occupancy.
(b) Reflects net additional annual costs of $2.5 million, or $0.8 million per
quarter, associated with staffing of human resources, finance, legal,
information technology, cash management and accounting personnel;
directors costs and the transfer of expenses to ManorCare Health Services.
Transferred expenses of $59.8 million for the fiscal year ended May 31,
1997 and $9.9 million for the three months ended August 31, 1997 are
related to functions which will be transferred to ManorCare Health
Services. These functions include finance and accounting, information
resources, legal, human resources, community and program development,
product management, and acquisitions. Costs are transferred based on the
historical costs incurred for these functions by Manor Care, Inc.
(c) Reflects revenues and operating expenses of skilled nursing facilities
owned by Manor Care Realty and leased by ManorCare Health Services under
the terms of the Lease Agreements.
(d) Reflects lease payments to Manor Care Realty for skilled nursing
facilities under the terms of the Lease Agreements.
(e) Reflects revenues and expenses associated with management of the Developed
Properties under the terms of the Assisted Living Facility Management
Agreement. The income from operations of the Developed Properties totaled
a loss of $0.9 million for fiscal year 1997. Income from operations of the
Developed Properties equals revenues ($1.6 million) less operating
expenses ($2.1 million), general corporate and other expenses ($0.1
million) and depreciation and amortization ($0.4 million). If the
Distribution had taken place on June 1, 1996, the income from operations
of the Developed Properties would have been equal to the management fee
income of $0.4 million; operating expenses of $2.1 million would have been
unchanged; and general corporate and other expenses and depreciation and
amortization would have been booked by the developer, Manor Care Realty.
Accordingly, if the Distribution had taken place on June 1, 1996, revenues
would have been equal to $2.5 million, the sum of the management fee
income of $0.4 million plus reimbursement of the operating expenses of
$2.1 million. The income from operations of the Developed Properties
totaled a loss of $0.4 million for the three months ended August 31, 1997.
Income from operations is equal to historical revenues ($1.0 million) less
operating expenses (1.1 million), general corporate and other expenses
($0.1 million) and depreciation and amortization ($0.3 million). If the
Distribution had taken place on June 1, 1997, the income from operations
of the Developed Properties would have been equal to the management fee
income of $0.1 million; operating expenses of $1.1 million would have been
unchanged; and general corporate and other expenses and depreciation and
amortization would have been booked by the developer, Manor Care Realty.
Accordingly, if the Distribution had taken place on June 1, 1997, revenues
would have been equal to $1.2 million, the sum of the management fee
income of $0.1 million plus reimbursement of the operating expenses of
$1.1 million.
(f) Reflects interest expense associated with the issuance of $149.5 million
of New MCHS Senior Notes.
(g) Reflects interest income earned at an estimated 8.75% on the Realty Note
contributed to ManorCare Health Services on the Effective Date. The final
rate will be fixed and will be the same as that on the $350 million of
Manor Care Notes. The effect of a 1/8% change in rate is $0.3 million.
(h) Reflects TeamCare operations from June 1, 1996 to January 31, 1997, the
portion of the fiscal year prior to the TeamCare Merger.
(i) Reflects tax effect of adjustments made pursuant to notes (a) through (h).
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<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
(a) Reflects additional cash of $250.0 million, the Realty Note and certain
other assets contributed to ManorCare Health Services at the Effective
Date, as well as the repayment of ManorCare Health Services' portion of
the revolver related to the Vitalink tender offer.
(b) Reflects the elimination of assets and liabilities attributable to the
Developed Properties and payment of transaction fees totaling $9.0
million.
(c) Reflects the issuance of $149.5 million of New MCHS Senior Notes and of
mortgages associated with certain ManorCare Health Services properties.
(d) Reflects the non-cash working capital of the skilled nursing facilities to
be transferred to ManorCare Health Services pursuant to the terms of the
Distribution Agreement. The working capital will be transferred to
ManorCare Health Services, as lessee, operator and manager of these
facilities pursuant to the Lease Agreements. Accordingly, the functions of
cash collections and payments will be assumed by ManorCare Health Services
after the Distribution. Manor Care Realty will dividend the working
capital to ManorCare Health Services at the date of Distribution;
ManorCare Health Services will reimburse Manor Care Realty for up to $12.5
million of this amount.
(e) Reflects the assumption of benefits and workers' compensation liabilities
by ManorCare Health Services pursuant to the Employee Benefits Allocation
Agreement.
(f) Reflects the allocation of deferred tax liabilities to ManorCare Health
Services pursuant to the Tax Allocation Agreement.
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<PAGE>
MANORCARE HEALTH SERVICES SELECTED HISTORICAL FINANCIAL DATA
The statements of income data for the fiscal years ended May 31, 1997, 1996
and 1995 and the balance sheet data as of fiscal years ended May 31, 1997 and
1996 are derived from the audited combined financial statements of ManorCare
Health Services. The statements of income data for the fiscal years ended May
31, 1994 and May 31, 1993 and the balance sheet data at May 31, 1995, May 31,
1994 and May 31, 1993 are derived from unaudited combined financial statements
of ManorCare Health Services that, in the opinion of ManorCare Health
Services, reflect all adjustments consisting of normal recurring adjustments
necessary to present fairly the information set forth below. The statements of
income data for the three month periods ended August 31, 1997 and 1996 and the
balance sheet data as of August 31, 1997 are derived from the unaudited
combined financial statements of ManorCare Health Services. The following
selected historical financial data of ManorCare Health Services should be read
in conjunction with the historical combined financial statements and notes
thereto included elsewhere in this Registration Statement. The historical
combined financial statements of ManorCare Health Services may not necessarily
reflect the results of operations or financial position that would have been
obtained had ManorCare Health Services been a separate, independent company.
See "Management's Discussion and Analysis of ManorCare Health Services Results
of Operations and Financial Condition." Earnings per share data are presented
elsewhere in this Registration and on a pro forma basis only. See "ManorCare
Health Services Pro Forma Financial Data."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31, FISCAL YEARS ENDED MAY 31,
-------------------- ---------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- -------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Revenues................ $ 158,696 $ 86,253 $471,152 $263,047 $125,987 $106,374 $73,444
Expenses:
Operating expenses.... 153,619 74,533 413,762 227,410 99,011 85,598 57,663
Depreciation and
amortization......... 7,199 3,718 20,135 11,583 6,090 4,339 2,738
General corporate and
other................ 3,292 1,814 8,385 9,195 2,957 837 894
Provision for asset
impairment........... -- -- -- 1,200 -- -- --
--------- -------- -------- -------- -------- -------- -------
Total expenses...... 164,110 80,065 442,282 249,388 108,058 90,774 61,295
--------- -------- -------- -------- -------- -------- -------
Income before other
income and (expenses)
and income taxes....... (5,414) 6,188 28,870 13,659 17,929 15,600 12,149
Other income and
(expenses):
Gain on issuance of
Vitalink stock....... -- -- 50,271 -- -- -- --
Interest expense...... (4,527) (3,840) (17,317) (11,387) (3,898) (1,698) (1,684)
Other income
(expenses), net...... 7,727 150 (1,719) 276 (1,152) (934) (446)
--------- -------- -------- -------- -------- -------- -------
Income before income
taxes.................. (2,214) 2,498 60,105 2,548 12,879 12,968 10,019
Income taxes............ 750 1,273 23,917 1,437 6,055 6,271 4,488
--------- -------- -------- -------- -------- -------- -------
Net income.............. $ (2,964) $ 1,225 $ 36,188 $ 1,111 $ 6,824 $ 6,697 $ 5,531
========= ======== ======== ======== ======== ======== =======
<CAPTION>
AS OF AUGUST 31, AS OF MAY 31,
-------------------- ---------------------------------------------------
1997 1997 1996 1995 1994 1993
-------------------- -------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $782,767 $787,377 $334,880 $134,502 $ 80,850 $64,380
Long-term debt.......... 193,308 180,843 51,387 1,837 106 134
Investments and advances
from Manor Care........ 277,235 277,066 193,807 90,020 43,345 31,343
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31, FISCAL YEARS ENDED MAY 31,
-------------------- -------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- --------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(1)............... $ 1,785 $ 9,906 $ 49,005 $ 26,442 $ 24,019 $ 19,939 $ 14,887
EBITDA margin........... 1.12% 11.48% 10.40% 10.05% 19.06% 18.74% 20.27%
Ratio of EBITDA to
interest expense....... 0.39x 2.58x 2.83x 2.32x 6.16x 11.74x 8.84x
Ratio of earnings to
fixed charges(2)....... 0.57x N/A 3.77x 1.15x 3.53x 6.88x 6.22x
Cash provided (used) by
operating activities... (11,015) 8,793 4,401 8,043 16,701 n/a n/a
Cash provided by (used
in) investing
activities............. 6,938 (20,083) (185,602) (86,603) (59,183) n/a n/a
Cash provided by
financing activities... 13,222 8,663 172,097 101,908 42,072 n/a n/a
Investment in property
and equipment.......... 4,246 9,527 39,974 32,001 25,020 n/a n/a
</TABLE>
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- --------
(1) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and certain other special charges, including the addition of
$1.2 million in fiscal year 1996 relating to the impairment of assets.
EBITDA is presented to assist in understanding ManorCare Health Services'
operating results. Additionally, certain covenants in the MCHS Credit
Facility are expected to be calculated based on EBITDA. EBITDA is not
intended to represent cash flows for the period, is not presented as an
alternative to operating income as an indicator of operating performance,
may not be comparable to other similarly titled measures of other
companies and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. The items excluded from the calculation of EBITDA
are significant components in understanding and assessing the financial
performance of ManorCare Health Services. EBITDA is included herein to
provide additional information with respect to the ability of ManorCare
Health Services to meet future debt service, capital expenditures and
working capital requirements. See ManorCare Health Services' consolidated
financial statements and the notes thereto appearing elsewhere in this
Information Statement.
(2) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income from continuing operations before provision for
income taxes including dividends from less than 50% owned companies and
ManorCare Health Services' share of pre-tax income of 50%-owned companies
carried at equity, before fixed charges net of capitalized interest. Fixed
charges comprise interest on long-term and short-term debt, including
capitalized interest, the portion of rentals representative of an interest
factor and ManorCare Health Services' share of fixed charges of 50%-owned
companies carried at equity.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF MANORCARE HEALTH SERVICES'
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
A number of significant factors, which are discussed below, affected the
combined results of operations, financial condition and liquidity of ManorCare
Health Services during the three fiscal years ended May 31, 1997, May 31, 1996
and May 31, 1995 and the three months ended August 31, 1997. This discussion
should be read in conjunction with the Combined Financial Statements and notes
thereto for such fiscal years included elsewhere in this Registration
Statement. ManorCare Health Services' results of operations, liquidity and
capital resources are derived from the combined financial statements of
ManorCare Health Services, Inc. The combined financial statements include the
results of operations of Vitalink Pharmacy Services, Inc. ("Vitalink"), In
Home Health, Inc. ("In Home Health") and ManorCare Health Services' assisted
living operations as they were operated by Manor Care. However, since
ManorCare Health Services was operated as part of Manor Care during the
periods presented, these financial statements may not necessarily reflect the
consolidated results of operations or financial position of the Company or
what the results of operations would have been if ManorCare Health Services
had been an independent, public company during those periods.
The health care industry is highly regulated by federal, state and local
law. See "Risk Factors--Regulation" and "Business of ManorCare Health Services
After the Distribution--Government Regulation." Certain of these regulations
apply to the relationship between ManorCare Health Services and Manor Care
Realty, 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 rules limit the amount the Medicare program will
reimburse for products and services provided by a related party. See "Business
of ManorCare Health Services After the Distribution--Government Regulation--
Related Party Rule." Manor Care has treated Vitalink and In Home Health as
related parties in compliance with these rules. ManorCare Health Services
intends to continue to treat Vitalink and In Home Health as related parties
and also plans to treat Manor Care Realty as a related party. Accordingly,
ManorCare Health Services 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. See "Business of ManorCare Health Services After the
Distribution--Government Regulation--Anti-remuneration laws." Manor Care has
treated Vitalink and In Home Health as separate entities for purpose of the
anti-remuneration laws. ManorCare Health Services intends to continue to treat
Vitalink and In Home Health as separate entities and also plans to treat Manor
Care Realty as a separate entity. Accordingly, ManorCare Health Services does
not expect that the anti-remuneration laws will have a material effect on the
conduct of its business.
OVERVIEW AND OUTLOOK
ManorCare Health Services owns and operates assisted living facilities
serving primarily the private pay elderly market. ManorCare Health Services'
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 regular 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.
ManorCare Health Services also owns approximately 51% of Vitalink and 64% of
the voting stock of In Home Health. Vitalink is a publicly traded
institutional pharmacy company which provides medications, consulting,
infusion and other ancillary services to approximately 172,000 institutional
beds as well as to home infusion patients through 57 pharmacies. 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.
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ManorCare Health Services' sources of revenues consist of assisted living
revenues, pharmacy revenues generated through the ownership and operations of
institutional pharmacies, and home health revenues generated through nursing,
infusion therapy, hospice, rehabilitation, personal care and homemaking.
ManorCare Health Services' operating expenses consist of operating and payroll
expenses relating to the assisted living facilities and all of the costs of
the pharmacy and home health operations.
Manor Care has increased skilled nursing capacity by approximately 2.5%
annually over the last five fiscal years. Overall occupancy has remained
relatively stable during this period. Occupancy for mature facilities--those
facilities owned by Manor Care for a full two-year period--decreased from
90.3% to 89.8%, between fiscal year 1996 and fiscal year 1997. This decline in
occupancy has resulted in an annual decrease in revenues of approximately $5
million. During the five-year period from fiscal year 1993 to fiscal year
1997, the Company has increased assisted living capacity substantially, from 3
facilities with 321 beds to 31 facilities with 3,173 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.
RESULTS OF OPERATIONS
Revenues recorded under Federal and state medical assistance programs are
subject to adjustment upon audit by appropriate government agencies (see
"Revenue Recognition" footnote disclosure). For fiscal years 1997, 1996 and
1995, these revenues amounted to $188.0 million, $108.5 million and $39.9
million, respectively. In the opinion of management, any difference between
revenues recorded and final determination will not be significant. The
increase in revenues subject to audit adjustment is due, in large part, to
acquisitions made by Vitalink and, in fiscal year 1996, to the investment in
In Home Health. ManorCare Health Services 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. If the regulations do have a material effect on ManorCare Health
Services, ManorCare Health Services will disclose any such material effect as
may be required.
Comparison of Three Months Ended August 31, 1997 vs. Three Months Ended
August 31, 1996
PHARMACY. Pharmacy revenues increased $78.9 million or 200% for the three
month period ended August 31, 1997, primarily due to the contribution from
TeamCare, which was acquired in February, 1997. Excluding TeamCare revenues,
net revenues for the three months ended August 31, 1997 increased $8.6 million
or 21.9% over the earlier period. The increase is due to revenues contributed
by the acquisition of Medisco effective July 31, 1996, an increase in beds
obtained through marketing and sales efforts and increased revenues per bed.
Gross profit for the three months ended August 31, 1997 was $56.9 million,
an increase of $37.5 million or 193.8% over the same period last year. The
gross profit margin was 48.1% for the three months ended August 31, 1997,
compared to 49.2% for the same period last year. The reduction in gross margin
percentage was due to a variety of pricing related factors, including certain
third party reimbursement reductions and changes in customer base.
Operating expenses (excluding costs of goods sold) increased $34.4 million
or 256% for the three month period ended August 31, 1997. Included in
operating expense is an unusual item representing a non-recurring charge of
$2.7 million relating to costs associated with the August 1997 resignation of
Vitalink's Chief Executive Officer and $0.4 million for the consolidation of
all corporate functions in Naperville, IL. Excluding the unusual item,
operating expenses increased $31.3 million to $44.7 million or 37.8% of net
revenues in first quarter of 1998 compared to $13.4 million or 34.0% of net
revenues in the year ending period. The increase is primarily attributable to
the inclusion of TeamCare results effective February 1, 1997. The increase in
operating costs as a percentage of net revenue is attributable to a variety of
factors, including TeamCare's higher payroll costs as a
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percentage of revenues, TeamCare's higher selling, general and administration
costs and the amortization of goodwill and pharmacy contracts arising from the
TeamCare Merger ($1.7 million).
ASSISTED LIVING BUSINESS. Assisted living revenues increased by $3.6 million
or 21% from $17.1 million to $20.7 million for the three month period ended
August 31, 1997 due to capacity ($3.3 million) and rate ($0.3 million)
increases.
Operating expenses increased by $3.2 million or 24% to $16.5 million for the
three month period ended August 31, 1997 compared to $13.3 million for the
three month period ended August 31, 1996, as a result of increases in capacity
and inflation.
HOME HEALTH. Home health revenues decreased $10.1 million, primarily due to
the adjustment to Medicare receivables reserved in connection with recently
received Medicare reimbursement decisions related to the allowableness of
community liaison costs and required documentation to support allowable costs.
Revenues recorded under the Medicare programs are subject to adjustment upon
audit by government intermediaries. As a result of these decisions, In Home
also increased recorded reserves for other, unresolved costs disputes by
approximately $14 million.
Operating expenses increased $3.1 million or 10.4% for the three month
period ended August 31, 1997 primarily due to a restructuring charge of $2.0
million related to lease costs and related equipment write-offs associated
with vacated office sites and to severance agreements with involuntarily
terminated employees. This charge was a result of a plan to restructure In
Home Health's field operations and reduce its cost structure.
Comparison of Fiscal Year Results
PHARMACY. Pharmacy revenues and income from operations increased 94% for
fiscal year 1997 or $132.6 million and 48% or $10.8 million, respectively,
primarily as a result of the TeamCare Merger, ($94.6 million), Vitalink's
acquisition of a pharmacy ($12.4 million), and capacity and rate changes at
existing pharmacies ($25.6 million). Pharmacy revenues and income from
operations increased $28.6 million or 26% and $3.5 million or 19% in fiscal
1996 due to capacity increases ($17.4 million) and Vitalink's acquisition of a
pharmacy and infusion business ($5.1 million).
Operating expenses increased $52.8 million to $100.5 million or 36.8% of net
revenues in fiscal 1997 compared to $47.7 million or 33.9% of net revenues in
fiscal 1996. The increase was principally attributable to the inclusion of
TeamCare results effective February 1, 1997. The increase in operating costs
as a percentage of revenues is attributable to a variety of factors, including
TeamCare's higher payroll cost as a percentage of net revenues (25.3% for
TeamCare v. 20.9% for Vitalink), TeamCare's higher selling, general and
administration costs (10.7% v. 8.4%) and the amortization of goodwill and
pharmacy contracts arising from the TeamCare Merger ($3 million).
Gross profit for fiscal 1997 was $133.6 million, an increase of 64.6 million
or 90.9% over fiscal 1996. The increase was largely attributable to the
TeamCare Merger. The gross profit margin declined to 48.9% from 49.7%
principally resulting from comparably less profitable new accounts and
reimbursement reductions from certain state Medicaid programs.
Gross profit for fiscal 1996 was $70.0 million, an increase of $14.0
million, or 25.0% over fiscal 1995. The gross profit margin decreased slightly
to 49.7% in fiscal 1996 compared to 49.9% in fiscal 1995.
Operating expenses (excluding cost of goods sold) increased $10.4 million to
$47.7 million or 33.9% of net revenues in fiscal 1996 compared to $37.3
million or 33.2% of net revenues in fiscal 1995. Both payroll and selling,
general and administrative expenses increased to support the growth in beds
serviced. Payroll as a percentage of net revenues increased to 20.7% from
19.7%, primarily resulting from investments in staff for information systems
and selling efforts. The increase in depreciation and amortization is the
result of the amortization of pharmacy contracts, goodwill and noncompete
agreements obtained in connection with acquired businesses as well as
depreciation on capital expenditures from existing pharmacies.
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ASSISTED LIVING. Assisted living revenues increased for fiscal year 1997 by
52.5% or $25.3 million due to increases in rates at existing facilities ($1.9
million), capacity increases ($20.2 million) and occupancy increases ($3.2
million). Assisted living revenues increased $34.3 million or 250% in 1996 due
to capacity growth and rate increases. The Company acquired six assisted
living facilities and opened five Arden Courts in fiscal year 1996.
Operating expenses increased $19.1 million to $59.1 million or 80.6% of net
revenues in fiscal year 1997 compared to $40.1 million or 83.2% of net
revenues in fiscal 1996 as a result of increases in capacity and inflation.
Operating expenses increased $30.2 million to $40.1 million or 83.2% of net
revenues in fiscal year 1996 compared to $9.9 million or 71.4% of net revenues
in fiscal 1995, as a result of increases in capacity and inflation. The
increase in operating expenses as a percentage of revenue is due to a
significant level of new assisted living development.
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. ManorCare
Health Services' entry into the home health business with the acquisition of
In Home Health in October 1995 contributed $74.2 million of revenue or 28% of
total fiscal 1996 revenue and represents revenue earned from October 1995 to
May 1996.
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 1996. The increase from 1996 to 1997 represents a full year
of expenses in fiscal year 1997 versus eight months of expenses for the fiscal
year 1996.
There were no home health revenue or operating expenses in fiscal year 1995,
as the Company entered into the Home Health business as a result of the
acquisition of In Home Health on October 24, 1995.
SKILLED NURSING OPERATIONS
Subsequent to the Distribution, ManorCare Health Services will lease and
operate the Skilled Nursing Facilities owned by Manor Care Realty.
Three Months ended August 31, 1997 compared to August 31, 1996
Revenues increased from $250.2 million to $274.1 million ($23.8 million or
9.5%) in the three months ended August 31, 1997 as compared to the three
months ended August 31, 1996. The increase in revenue is partially
attributable to increases in rates of 5.8% ($14.5 million) and a 3.2% net
increase in bed capacity. The increase in 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 2 nursing facilities (279 beds), openings of
newly constructed facilities (497 beds) and is net of the sale of four
facilities (498 beds) in the second quarter of 1997.
Operating expenses increased from $191.5 million to $208.2 million ($16.7
million, or 8.7%). The increase in operating expenses is attributable to
additional capacity ($4.4 million) and increased staffing, necessitated by
higher patient acuity and more complex product and service offerings. This
increase is net of a reduction in operating expenses associated with the sale
of the skilled nursing facilities, discussed above. As a result, the gross
profit associated with the operation of the skilled nursing facilities
increased to $65.8 million from $58.7 million in the previous period. Gross
margin as a percentage of sales increased from 23.5% to 24.0%.
Depreciation and amortization increased from $14.6 million to $16.0 million
($1.4 million or 9.6%) for the three month period ended August 31, 1997 from
the same period last year as a result of acquisitions, new construction and
increases in property and equipment resulting from the additions and
renovations to existing facilities during the past twelve months.
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General corporate and other expense decreased from $14.2 million to $11.3
million ($2.9 million or 20.5%) for the three months ended August 31, 1997
when compared to the same period last year. This decrease was primarily
because of downsizing due to reengineering efforts in both organizational and
financial systems. General corporate and other expenses represented 4.1% of
revenues during the three months ended August 31, 1997 compared to 5.7% for
the same period last year. General corporate and other expense includes risk
management, information systems, treasury, accounting, legal, human resources
and other administrative support functions.
Interest income from advances to the discontinued lodging operations
decreased from $5.1 million to $2.6 million ($2.5 million or 48.7%) for the
three months ended August 31, 1997 when compared to the same period last year.
This reduction was attributable to the prepayment of approximately $110.0
million of indebtedness due from discontinued lodging operations in the fourth
quarter of 1997. Interest income and other increased to $2.6 million from $1.7
million in the prior year.
Interest expense increased from $5.3 million to $6.8 million ($1.5 million
or 28.8%) for the three months ended August 31, 1997 when compared to the same
period last year. The increase was attributable to the increase in the average
outstanding balance of the Existing Revolving Credit Facility during the
current period when compared to the same period last year. Interest
capitalized in conjunction with construction programs amounted to $0.8 million
and $1.1 million in the three months ended August 31, 1997 and 1996,
respectively.
The effective income tax rate of 38.2% in the quarter ended August 31, 1997
is consistent with 39.3% effective tax rate in the comparable period in the
prior year.
Income from continuing operations was $22.8 million ($0.36 per share)
compared to $19.0 million ($0.30 per share) in the prior period.
Fiscal 1997 compared to Fiscal 1996
Revenues increased from $985.2 million to $1.1 billion ($71.0 million or 7%)
in fiscal 1997 compared to the prior year. The increase in revenues is
attributable to an increase in average daily rates of approximately 6% ($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 $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.
Operating expenses increased from $735.7 million in 1996 to $789.1 million
in 1997 ($53.4 million or 7%). Additional capacity accounts for $20.5 million
of this increase. The remainder of the increase is caused by increased
staffing, necessitated by higher patient acuity and more complex product and
service offerings. Gross margin as a percentage of sales was flat at 25.3% in
fiscal years 1997 and 1996.
Depreciation and amortization increased from $56.5 million to $60.2 million
($3.7 million or 6.6%) in fiscal year 1997. The increase was attributable to
investments in property and equipment.
General corporate and other expenses represent 5.7% of revenue in fiscal
year 1997 compared to 6.4% of revenue in fiscal 1996. This represents a
decrease of approximately $2.9 million from fiscal year 1996 to fiscal year
1997. 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 income from advances to the discontinued lodging operations
increased to $21.2 million from $19.7 million in the same period last year.
This increase was attributable to the prepayment penalty of $1.9 million in
connection with the prepayment by the discontinued lodging operations of
approximately $110.0 million of the indebtedness in the fourth quarter of
1997. Interest income and other increased from $3 million in 1996 to $6
million in 1997.
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Interest expense increased by $6 million to $25 million from $19 million. The
increase was primarily attributable to the June 1996 issuance of the $150
million 7 1/2% Senior Notes. This increase was offset by the use of a portion
of those proceeds to reduce borrowings under the revolver.
The effective income tax rate of 40.6% is consistent with the prior year
effective income tax rate of 40.9%.
Income from continuing operations was $88.9 million ($1.40 per share)
compared to $64.4 million ($1.03 per share).
Fiscal 1996 compared to fiscal 1995
Revenues increased from $893.5 million to $985.2 million in fiscal year 1996
($91.7 million or 10.3%). The increase in revenues is attributable to an
increase in average daily rates of approximately 6% ($59 million) and an
increase in bed capacity of approximately 4.7%. The increase in rates includes
the incremental impact of settlements with government agencies related to prior
period cost reports of approximately $7 million. The growth in bed capacity is
attributable to the purchase of four nursing facilities (569 beds), openings of
newly constructed facilities (360 beds) and additional bed development at
existing centers (35 beds).
Operating expenses increased from $671.0 million in 1995 to $735.7 million in
1996 ($64.7 million or 9.6%). The increase in operating expenses was
attributable to additional capacity of $8.3 million as well as increased
staffing, necessitated by higher patient acuity and more complex product and
service offerings. Gross margin as a percentage of sales increased slightly
from 24.9% to 25.3% from fiscal year 1995 to 1996.
Depreciation and amortization increased from $48.3 million to $56.5 million
($8.2 million or 17.0%). The increase was attributable to investments in
property and equipment.
General corporate and other expenses represent 6.4% of revenue in fiscal year
1996 compared to 6.7% of revenue in fiscal 1995. General corporate expense
includes all indirect operating expenses as well as risk management,
information systems, treasury, accounting, legal and other administrative
support for the Company and its various subsidiaries.
Interest income from advances to the discontinued lodging operations
increased to $19.7 million in fiscal 1996 from $15.5 million in the previous
year. This increase was attributable to the increase in balance of Advances to
the Discontinued Lodging Segment during fiscal year 1996. Interest income and
other decreased from $6.4 million in 1995 to $3.5 million in 1996.
Interest expense remained level at $18.9 million for fiscal years 1996 and
1995.
The effective income tax rate of 40.9% is consistent with the prior year
effective income tax rate of 39.4%.
Income from continuing operations was $64.4 million for fiscal year 1996
compared to $70.9 million for fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Distribution, ManorCare Health Services' will receive
cash of approximately $250 million and the Realty Note in an aggregate
principal amount of up to $250.0 million. ManorCare Health Services has agreed
not to transfer the Realty Note on or prior to the sixth month anniversary of
the date of issuance thereof. In addition, on or after the third anniversary of
the issuance of the Realty Note, ManorCare Health Services may request that
Manor Care Realty redeem the Realty Note. Manor Care Realty may not have
adequate funds to effect such redemption and in such case may seek to obtain
funds therefor through additional debt or equity financing. There can be no
assurance that Manor Care Realty would be able to obtain such
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financing. In addition, the terms of Manor Care Realty's outstanding
indebtedness may prohibit such redemption. In the event that ManorCare Health
Services requests that Manor Care Realty redeem the Realty Note and Manor Care
Realty does not redeem the Realty Note, the interest rate on the Realty Note
will increase by 200 basis points; provided that such interest rate will not
be so increased unless, as of the time such request for redemption is made,
the aggregate amount of rent paid by ManorCare Health Services under the Lease
Agreements with respect to all properties subject to such Lease Agreements
shall be equal to or exceed the aggregate Priority Sum for all such properties
on a cumulative basis from the Effective Date through the third anniversary
thereof (such aggregate amount of rent being herein referred to as the
"Threshold Rent"). Solely for purposes of calculating the Threshold Rent, (i)
the aggregate Priority Sum for the fiscal year ended May 31, 1999 shall be
deemed to be the aggregate Priority Sum calculated pursuant to the Lease
Agreements plus $5 million and (ii) the aggregate Priority Sum for the fiscal
year ended May 31, 2000 and thereafter shall be deemed to be the aggregate
Priority Sum calculated pursuant to the Lease Agreements plus $10 million.
Manor Care Realty's high degree of leverage could adversely affect Manor Care
Realty's ability to pay principal and interest on or to redeem the Realty Note
and may adversely effect the ability of ManorCare Health Services to sell the
Realty Note. The failure of Manor Care Realty to pay principal and interest on
the Realty Note in a timely manner or the inability of ManorCare Health
Services to sell the Realty Note to a third party for its principal amount
could have a material adverse effect on ManorCare Health Services and could
require ManorCare Health Services to seek alternate sources of liquidity for
its operations. There can be no assurances that such alternate sources of
liquidity will be available. For a description of the Realty Note, see
"Relationship Between Manor Care Realty and ManorCare Health Services After
the Distribution--The Realty Note."
Historically, all cash received by the assisted living facilities and
pharmacy operations has been deposited in or combined with Manor Care's
corporate funds as part of Manor Care's cash management system. Following the
Distribution, ManorCare Health Services will maintain its own cash balances
and will implement an internal cash management system. In addition, ManorCare
Health Services is negotiating a commitment letter with respect to the MCHS
Credit Facility. See "Description of Certain Indebtedness of ManorCare Health
Services" for a description of the anticipated terms of the MCHS Credit
Facility.
ManorCare Health Services' working capital ratio at May 31, 1997 and at May
31, 1996, was 2 to 1. ManorCare Health Services attempts to minimize its
investment in net current assets.
Total long term debt totaled $180.8 million at May 31, 1997, and $51.4
million at May 31, 1996. These amounts are comprised of bank debt associated
with Vitalink's merger with TeamCare, amounts due to Manor Care relating to
mortgages on certain assisted living properties, bank debt associated with
Manor Care's tender offer for Vitalink stock, and obligations under
capitalized leases. The current portion of debt at May 31, 1997 amounted to
$5.8 million. ManorCare Health Services' long-term debt totaled $193.3 million
as of August 31, 1997. The long-term debt as of August 31, 1997, is comprised
of $111.0 million of bank debt associated with Vitalink's merger with
TeamCare, $45.6 million due to Manor Care relating to mortgages on assisted
living properties, $30.0 million of bank debt associated with Manor Care's
tender offer for Vitalink stock, and $6.7 million of other debt, including
obligations under capitalized leases. Following the Distribution, all of such
indebtedness (other than $30.0 million of bank debt) will remain outstanding.
ManorCare Health Services believes that cash flows from operations, together
with the proceeds from the Capital Contribution and available borrowings under
the MCHS Credit Facility, will provide it with sufficient resources to meet
its working capital needs, to finance projected capital expenditures and to
meet its liquidity requirements through fiscal year 2001.
PROPERTY AND ACQUISITIONS
On February 12, 1997, Vitalink completed a merger with TeamCare, the
pharmacy subsidiary of GranCare, Inc. ("GranCare"). Vitalink issued 11.4
million shares in exchange for all of the outstanding shares of GranCare. In
addition, Vitalink funded the redemption of $98.2 million of GranCare's 9 3/8%
Senior Subordinated Notes and assumed approximately $100 million of additional
GranCare indebtedness. The net $1.8 million of
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<PAGE>
untendered GranCare 9 3/8% senior subordinated notes are due September 15,
2005. The notes require semi-annual interest payments. A premium of $600,000
has been recorded to reflect the fair market value of the notes at the date of
the TeamCare merger. Also assumed in the TeamCare merger were various notes
payable totaling $5.2 million issued in connection with previously acquired
pharmacy businesses. The weighted average interest rate on the notes is 7.03%
and their annual maturities over the next five fiscal years are as follows:
$1.8 million, $1.9 million, $0.9 million, $0.2 million and $0.2 million. On May
21, 1997, ManorCare Health Services successfully completed its tender offer to
purchase 1.5 million shares of Vitalink common stock. As a result of the tender
offer, ManorCare Health Services' interest in Vitalink was increased to
approximately 51%. The net pretax gain resulting from these transactions in
Vitalink stock was $50.3 million. Vitalink also purchased a pharmacy for $5.3
million.
Investment in property and equipment includes routine capital expenditures
and specialty product conversion. During the first quarter of fiscal years 1997
and 1996, investment in property and equipment amounted to $4.2 million and
$9.5 million, respectively. During fiscal years 1997 and 1996, investment in
property and equipment amounted to $40.0 million and $31.6 million,
respectively. Additionally, during fiscal year 1996, $74.3 million was spent to
acquire six assisted living centers with five attached skilled nursing units
and $6.3 million was spent by Vitalink to purchase two pharmacies. In October
1995, ManorCare Health Services 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 and for warrants to purchase
an additional 6.0 million shares of common stock. The In Home Health redeemable
preferred stock may be redeemed in cash at the option of the Company or In Home
Health 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 $20,000,000 as of the
redemption date. The In Home Health warrants purchased by ManorCare Health
Services have an exercise price of $3.75 per share and expire in October 1998.
ManorCare Health Services' five-year strategic plan includes the acquisition
of 170 Arden Courts and 61 Springhouse facilities. ManorCare Health Services
expects that the majority of these acquisitions will be newly developed
facilities open less than two years. The aggregate capital required to complete
these acquisitions is estimated at $1.7 billion. Principal capital sources
planned to fund the acquisitions include $500 million of cash and notes
received in connection with the Distribution and cash provided from operations.
ManorCare Health Services' plans call for the acquisition of 24 Arden Courts
and eight Springhouse facilities during the period from the date of
Distribution to May 31, 1999. Total expenditures for these acquisitions are
projected to be approximately $10.0 million and $200.0 million in fiscal years
1998 and 1999, respectively. Additionally, ManorCare Health Services expects to
incur minor expenditures for routine renovation and maintenance of existing
properties.
PROVISION FOR ASSET IMPAIRMENT AND RESTRUCTURING
ManorCare Health Services 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. In fiscal year 1996, ManorCare Health Services
incurred costs in excess of the original amount expected to be incurred for the
development of Arden Courts billing and receivables systems. Intensive testing
during a six month pilot identified over 100 major system problems, which led
to the determination that the newly developed system was not functional and
that a major system re-write was needed. Therefore, ManorCare Health Services
compared the estimated net realizable value of the systems, based on the fair
value of similar assets, to the carrying amount of these costs and determined
that the carrying amount was in excess of the fair value. Accordingly,
ManorCare Health Services recorded a provision of $1.2 million.
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FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements included in this Information Statement including the
words "plans," "anticipates," "intends," "expects" and similar expressions are
intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. ManorCare Health Services undertakes no obligation to republish
revised forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
which is effective for fiscal years ending after December 15, 1997, including
interim periods. Earlier adoption is not permitted. However, an entity is
permitted to disclose pro forma earnings per share amounts computed under SFAS
128 in the notes to the financial statements in periods prior to adoption. The
statement requires restatement of all prior-period earnings per share data
presented after the effective date. ManorCare Health Services' plans to adopt
SFAS 128 in fiscal year 1998 and does not expect the impact to be significant.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. ManorCare Health Services' plans to
adopt SFAS 130 in fiscal year 1999 and has not determined the impact of
adoption.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for
fiscal years beginning after December 15, 1997. ManorCare Health Services'
plans to adopt SFAS 131 in fiscal year 1999 and has not determined the impact
of adoption.
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DESCRIPTION OF CERTAIN INDEBTEDNESS OF MANORCARE HEALTH SERVICES
THE MCHS CREDIT FACILITY
ManorCare Health Services is negotiating a commitment letter (the
"Commitment Letter") with Chase and CSI pursuant to which Chase will agree to
act as administrative agent for a syndicate of financial institutions for the
MCHS Credit Facility described below and CSI will agree to act as arranger for
such credit facilities. The following summary of the anticipated provisions of
the Commitment Letter does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, the Commitment Letter.
It is anticipated that the Commitment Letter will provide for a five-year
$100,000,000 revolving credit facility, a portion of which may be used for the
issuance of letters of credit.
It is anticipated that the loans under the MCHS Credit Facility (the
"Revolving Loans") will bear interest, at ManorCare Health Services' option,
at LIBOR or Chase's adjusted base rate, in each case plus a variable margin
which will be adjusted depending on ManorCare Health Services' senior,
unsecured long-term debt rating by Standard & Poor's Corporation and Moody's
Investor's Service. It is anticipated that ManorCare Health Services will pay
a variable quarterly facility fee on the full amount of the MCHS Credit
Facility, irrespective of usage.
ManorCare Health Services expects that the MCHS Credit Facility will be used
by ManorCare Health Services for general corporate purposes, including working
capital, capital expenditures and acquisitions.
ManorCare Health Services expects that the Credit Agreement will contain
covenants customary for transactions of this type, including, without
limitation, restrictions on indebtedness; liens and sale-leaseback
transactions; investments, loans and advances; mergers and consolidations;
asset sales; transactions with affiliates; business of ManorCare Health
Services and subsidiaries; and agreements restricting dividends, intercompany
loans and advances by subsidiaries. The Credit Agreement will also contain
financial covenants including ratio of consolidated EBITDA to consolidated
interest and rent expenses and ratio of total debt to consolidated EBITDA.
It is anticipated that events of default under the MCHS Credit Facility will
include, without limitation, and subject to certain cure periods and
exceptions: (i) the nonpayment of principal, interest, fees and other amounts
payable when due; (ii) the failure to observe or perform any covenant or
undertaking contained in the documentation for the MCHS Credit Facility; (iii)
any representation or warranty shall prove to have been incorrect in any
material respect when made; (iv) a change of control of ManorCare Health
Services; (v) the existence of defaults with respect to any material
indebtedness of ManorCare Health Services; (vi) the occurrence of certain
material adverse events with respect to ERISA plans; (vii) the imposition of
certain judgment defaults on ManorCare Health Services or the commencement of
a voluntary or involuntary bankruptcy of ManorCare Health Services or any of
its subsidiaries; and (viii) material default by ManorCare Health Services
under material agreements with Manor Care Realty. In the event that the
commitment letter is executed, Chase and CSI will commit to purchase a portion
of such facility and will use their commercially reasonable efforts to arrange
the balance of such facility with other lenders.
NEW MCHS SENIOR NOTES
For a description of the New MCHS Senior Notes, see "Description of New MCHS
Senior Notes."
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<PAGE>
MANAGEMENT OF MANORCARE HEALTH SERVICES
EXECUTIVE OFFICERS OF MANORCARE HEALTH SERVICES
The name, age, proposed title upon consummation of the Distribution and
business background of each of the persons who are expected to become on the
Effective Date the executive officers of ManorCare Health Services are set
forth below. The business address of each of the prospective executive
officers is 11555 Darnestown Road, Gaithersburg, Maryland, 20878, unless
otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr. .... 51 Chairman of the Board
Donald C. Tomasso....... 52 President and Chief Executive Officer
Scott J. Van Hove....... 40 Executive Vice President, Operations
James H. Rempe.......... 67 Senior Vice President, General Counsel and Secretary
Carole Y. Prest......... 46 Senior Vice President, Strategy and Marketing
H. David Lundgren....... 46 Senior Vice President, Human Resources
Wolfgang von Maack...... 57 President and Chief Executive Officer of In Home Health
</TABLE>
Stewart Bainum, Jr. Mr. Bainum, Jr. will resign as Chief Executive Officer
of Manor Care on the Effective Date. Following the Distribution, Mr. Bainum,
Jr. will also act as Chairman of the Board of Manor Care Realty. Mr. Bainum,
Jr. has also acted as Chairman of the Board of Choice Hotels since October
1997, and of Sunburst (formerly named Choice Hotels International, Inc.) since
November 1996. It is expected that Mr. Bainum, Jr. will devote 12.5% of his
time to Choice Hotels, 12.5% of his time to Sunburst, 37.5% of his time to
ManorCare Health Services and 37.5% of his time to Manor Care Realty. Chairman
of the Board of Manor Care and ManorCare Health Services, Inc. (a subsidiary
of Manor Care which prior to the Distribution owned and operated Manor Care's
assisted living and skilled nursing facilities) ("Old ManorCare Health
Services") 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; Vice Chairman of the Board of Vitalink from February 1995 to
February 1997; Vice Chairman of the Board of Manor Care and subsidiaries from
June 1982 to March 1987; Director of Manor Care since August 1981, of Vitalink
since September 1991, of Old ManorCare Health Services since 1976 and of
Choice and its predecessors since 1977; Chief Executive Officer of Old
ManorCare Health Services since June 1989 and President from May 1990 to May
1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991; Chairman of the Board of Choice from March 1987
to June 1990.
Donald C. Tomasso. Executive Vice President of Manor Care and President of
Old ManorCare Health Services since September 1996; President, Long-Term Care
Division of Old ManorCare Health Services from February 1995 to August 1996
and a Director of Old ManorCare Health Services since June 1991; President and
Chief Operating Officer of Old ManorCare Health Services 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;
previously employed by Marriott Corporation for more than five years,
including as Executive Vice President/General Manager of the Roy Rogers
Division; Director of In Home Health since October 1995.
Scott J. Van Hove. Senior Vice President and Chief Administrative Officer of
Manor Care since December 1995; Executive Vice President, Operations of Old
ManorCare Health Services since February 1997; Senior Vice President of Old
ManorCare Health Services from December 1995 to January 1997; Vice President
of Operations, of Manor Care from March 1990 to December 1995.
James H. Rempe. 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 Old ManorCare Health Services since December
1980; Secretary of Vitalink from January 1993 to January 1997 and a Director
since
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September 1994; Senior Vice President and a Director of Vitalink from January
1983 to September 1991; Director of In Home Health since October 1995.
Carole Y. Prest. Vice President, Corporate Strategic Planning of Manor Care
from September, 1995 to September, 1997; previously employed by GenRad, Inc.
for nine years, including Vice President and General Manager of Concord
Products Division; Chairman of Board and President of Manor Care Foundation;
Director of Sunburst Hospitality Corporation.
H. David Lundgren. Vice President, Organizational Strategy and Development
of Aetna, Inc. from 1996 to April 1997; Vice President, Human Resources of
Aetna Inc. from 1992 to 1996.
Wolfgang von Maack. President and Chief Executive Officer of In Home Health
since May 1997; Senior Vice President, Healthcare Services of Old ManorCare
Health Services since June 1990; Vice President, Operations of Old ManorCare
Health Services from March 1988 to June 1990.
The following individuals, who are currently officers or directors of Manor
Care, will be directors and/or executive officers of Manor Care Realty after
the Distribution: (i) Stewart Bainum, Jr. as Chairman of the Board and
Director, (ii) Joseph R. Buckley as Chief Executive Officer and Director,
(iii) Leigh C. Comas as Senior Vice President and Chief Financial Officer,
(iv) Larry Godla as Senior Vice President, Construction and Development, and
(v) Margarita Schoendorfer as Vice President and Controller.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information concerning the annual and
long-term compensation of those persons who, following the Distribution, will
serve as the chairman of the board and the four other most highly compensated
executive officers of ManorCare Health Services (the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- --------------------------------------
FISCAL STOCK STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARDS SHARES (#)(1) COMPENSATION(2)
- --------------------------- ------ -------- -------- ----- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(3)... 1997 $568,062 $340,837 (4) -- 60,000 $35,074
Chairman of the Board 1996 625,102 337,555 (4) -- 60,000 33,543
1995 572,308 343,385 (4) -- -- 9,000
Donald C. Tomasso........ 1997 428,002 235,401 (4) -- 35,000 18,760
President 1996 400,005 145,602 (4) -- 50,000 5,750
Chief Executive Officer 1995 345,737 190,155 (4) -- -- 2,250
James H. Rempe........... 1997 281,507 140,754 (4) $271,250 15,000 16,727
Senior Vice President, 1996 269,048 121,072 (4) -- 15,000 15,969
General Counsel and 1995 267,349 133,675 (4) -- -- 9,000
Secretary
Scott J. Van Hove........ 1997 240,192 116,753 (4) -- 50,000 14,542
Executive Vice
President, 1996 210,310 89,754 (4) -- 40,000 8,690
Operations 1995 183,393 68,311 (4) -- -- 6,750
Wolfgang von Maack(5).... 1997 238,992 81,182 (4) -- 14,000 10,588
President and 1996 227,677 76,727 (4) -- 10,000 10,245
Chief Executive Officer, 1995 225,219 66,665 (4) -- -- 6,750
In Home Health, Inc.
</TABLE>
- --------
(1) Represents options to purchase shares of Manor Care Common Stock. The
options shown above represent the number of options held prior to the
Choice Spin-off. In connection with the Choice Spin-off, these options
were converted, in some cases, into options to purchase Manor Care common
stock and options to
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purchase Choice common stock. These conversions are reflected in the
following table of "Stock Option Grants in Fiscal 1997." For a discussion
of the treatment of options in connection with the Distribution, see
"Relationship Between Manor Care Realty and ManorCare Health Services After
the Distribution--Employee Benefits and Other Employment Matters Allocation
Agreement."
(2) Represents amounts contributed by Manor Care for fiscal 1997, 1996 and
1995 under the 401(k) Plan and the Nonqualified Savings Plan, which
provide retirement and other benefits to eligible employees, including the
Named Officers. Amounts contributed in cash or stock by Manor Care during
fiscal 1997 under the 401(k) Plan for the Named Officers were as follows:
Mr. Bainum, Jr., $9,000; Mr. Tomasso, $6,253; Mr. Rempe, $5,591; Mr. Van
Hove, $4,655 and Mr. von Maack, $3,540. Amounts contributed in cash or
stock by Manor Care during fiscal 1997 under the Nonqualified Savings Plan
for the Named Officers were as follows: Mr. Bainum, Jr., $26,074; Mr.
Tomasso, $12,507; Mr. Rempe, $11,137; Mr. Van Hove, $9,887 and Mr. von
Maack, $7,047.
(3) Mr. Bainum, Jr. will resign as Chief Executive Officer of ManorCare Health
Services effective on the Effective Date. Following the Distribution, Mr.
Bainum, Jr. will be the Chairman of the Board of the Company and the
Chairman of the Board of Manor Care Realty. On November 1, 1996, Manor
Care distributed to its shareholders (the "Choice Spin-off") all of the
shares of its wholly owned subsidiary, Choice Hotels International, Inc.
("Choice"). Mr. Bainum, Jr. is the Chairman of the Board of Choice. In
fiscal 1997, Mr. Bainum, Jr. devoted approximately 75% of his time to
Manor Care and approximately 25% of his time to Choice. The compensation
reflected here is total compensation received for services rendered to
Manor Care and Choice prior to November 1, 1996 and the 75% of Mr. Bainum,
Jr.'s compensation received from Manor Care from November 1, 1996 through
the end of the 1997 fiscal year. Choice has separated its franchising
business and its lodging business through a special dividend to its
shareholders (the "Sunburst Spin-off"). As of the Sunburst Spin-off,
Choice's franchising business is conducted by a separate public company
named Choice Hotels International, Inc. ("Choice Hotels") and Choice's
lodging business is conducted by a separate public company named Sunburst
Hospitality Corporation ("Sunburst"). It is expected that Mr. Bainum, Jr.
will devote 12.5% of his time to Choice Hotels, 12.5% of his time to
Sunburst, 37.5% of his time to ManorCare Health Services and 37.5% of his
time to Manor Care Realty.
(4) 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.
(5) As of the Effective Date, pursuant to an Employee Time Sharing Agreement
by and among Wolfgang von Maack, the Company, In Home Health and Mesquite
Community Hospital, L.P. ("Mesquite"), Mr. von Maack, who will be employed
by ManorCare Health Services, will devote 75% of his professional time to
the affairs of In Home Health and 25% of his professional time to the
affairs of Mesquite. The Employee Time Sharing Agreement provides that In
Home Health and Mesquite will provide ManorCare Health Services with 75%
and 25%, respectively, of Mr. von Maack's annual budgeted expenses and
will be reimbursed or will reimburse ManorCare Health Services in the
event that Mr. von Maack's actual costs are lower than or exceed such
annual budget.
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The following tables set forth certain information at May 31, 1997 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 Distribution, existing Manor Care stock options will be
subject to certain adjustments or to conversion into options to purchase
ManorCare Health Services Common Stock. See "Relationship Between Manor Care
Realty and ManorCare Health Services After the Distribution--Employee Benefits
and other Employment Matters Allocation Agreement."
STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATE OF
PERCENTAGE OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
NUMBER OF GRANTED TO ALL EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME COMPANY GRANTED(1) FISCAL YEAR 1997 PER SHARE DATE 5%(3) 10%(4)
---- ------- ---------- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(5).. MNR 60,000 6.3% $25.0505 7/1/06 $ 945,246 $2,395,440
CHI 60,000 (6) $14.5095 7/1/06 547,494 1,387,474
------- ---------- ----------
Total 120,000 $1,492,750 $3,783,904
Donald C. Tomasso(5).... MNR 55,272 3.7%(7) $25.0505 7/1/06 $ 870,760 $2,206,679
CHI 0 -- -- -- --
------- ---------- ----------
Total 55,272 $ 870,760 $2,206,679
James H. Rempe(5)....... MNR 20,430 1.6%(7) $25.0505 7/1/06 $ 321,856 $ 815,647
CHI 5,625 (6) $14.5095 7/1/06 52,327 130,075
------- ---------- ----------
Total 26,055 $ 373,183 $ 945,722
Scott J. Van Hove(5).... MNR 39,480 2.6%(7) $25.0505 7/1/06 $ 621,972 $1,576,199
MNR 25,000(1) 2.6% $27.0000 1/15/07 424,500 1,075,750
CHI 0 -- --
------- ---------- ----------
Total 64,480 $1,046,472 $2,651,949
Wolfgang von Maack(5)... MNR 22,108 1.47%(7) $25.0505 7/1/06 $ 348,285 $ 882,623
CHI 0 -- -- -- -- --
------- ---------- ----------
Total 22,108 $ 348,385 $ 882,623
</TABLE>
- --------
* References to "MNR" are to Manor Care and "CHI" are to Choice.
(1) All of the options shown, except for Mr. Van Hove's 25,000 MNR options,
were granted prior to the Choice Spin-off. In connection with the Choice
Spin-off, the existing options were converted, in some cases, into options
to purchase Manor Care Common Stock and options to purchase Choice common
stock. In all cases, the exercise prices were adjusted to maintain the
same financial value to the option holder before and after the Choice
Spin-off. The number of options set forth in the above table present the
number and exercise prices of the options after the Choice Spin-off.
(2) 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 Manor Care'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.
(3) A 5% per year appreciation in stock price from $25.0505 per share yields
$40.8046, from $14.5095 per share yields $23.6344, from $13.8933 per share
yields $22.6344 and from $27.00 per share yields $43.98.
(4) A 10% per year appreciation in stock price from $25.0505 per share yields
$64.9745, from $14.5095 per share yields $37.6339, from $13.8933 per share
yields $36.0356 and from $27.00 per share yields $70.03.
(5) 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.
(6) Information is not available for the total number of Choice options
granted during the fiscal year 1997.
(7) This percentage relates to the number of options granted to the officers
prior to the conversion of such options in the Choice Spin-off. The
converted number of options is listed in this table.
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<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT MAY 31, 1997 AT MAY 31, 1997
ACQUIRED VALUE ------------------------- -------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
COMPANY # $ # # EXERCISABLE UNEXERCISABLE
------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. .... MNR 329,791 $2,318,180 174,000 221,000 $3,633,404 $2,749,771
CHI 465,000 3,105,452 239,000 221,000 2,758,324 1,334,863
Donald C. Tomasso....... MNR -- -- 109,138 278,734 1,178,161 3,491,641
CHI -- -- 66,500 0 612,534 --
James H. Rempe.......... MNR 30,587 543,625 22,835 82,881 352,453 1,086,277
CHI -- -- 57,374 28,000 600,600 205,906
Scott J. Van Hove....... MNR -- -- 61,894 212,142 1,159,075 2,415,701
CHI -- -- 45,000 0 457,268 --
Wolfgang von Maack...... MNR -- -- 73,353 102,888 1,578,129 1,497,752
CHI -- -- 71,300 0 840,092 --
</TABLE>
- --------
* References to "MNR" are to Manor Care and "CHI" are to Choice.
(1) The closing price of Manor Care's common stock and for Choice common stock
as reported by the New York Stock Exchange on May 30, 1997, was $28.625
and $15.75, respectively. The value 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.
RETIREMENT PLANS
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the Supplemental Executive Retirement Plan (the "SERP").
Participants will be selected by the Board or any designated committee and
will be at the level of Senior Vice President or above.
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, subject to
Board approval. All of the Named Officers who will be participants are age 55
or younger, so that none of their compensation reported above would be
included in the final average salary calculation.
Assuming that the following officers continue to be employed by ManorCare
Health Services until they reach age 65, their credited years of service would
be as follows:
<TABLE>
<CAPTION>
CURRENT YEARS YEARS OF SERVICE
NAME OF INDIVIDUAL OF SERVICE AT AGE 65
------------------ ------------- ----------------
<S> <C> <C>
Stewart Bainum, Jr. ........................ 23.5 38
Donald C. Tomasso........................... 6 19
Scott J. Van Hove........................... 10 35
</TABLE>
Mr. Rempe has twenty-seven current years of service and had twenty-five years
of service at age sixty-five.
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<PAGE>
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
<TABLE>
<CAPTION>
25 OR
REMUNERATION 15/15% 20/22.5% MORE/30%
------------ ------- -------- --------
<S> <C> <C> <C>
$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
</TABLE>
Prior to the Distribution, it is expected that the existing Manor Care
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, will be amended to cover
both Manor Care Realty and ManorCare Health Services. The 401(k) Plan will be
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and will include a cash or deferred arrangement under
Section 401(k) of the Code. All employees age 21 or over who have worked for
ManorCare Health Services (or Manor Care) for a twelve-month period during
which such employee completed at least 1,000 hours will be eligible to
participate. Subject to certain non-discrimination requirements, each employee
will be able to 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 $9,500. ManorCare Health Services will match contributions made by its
employees subject to certain limitations. 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 ManorCare Health Services for the year and the number
of years of service of the participant.
Prior to the Distribution, it is expected that the existing Manor Care
Nonqualified Retirement Savings and Investment Plan (the "Nonqualified Savings
Plan") will be amended to cover both Manor Care Realty and ManorCare Health
Services. Certain select highly compensated members of management of ManorCare
Health Services will be eligible to participate in the Plan. The Nonqualified
Savings Plan will mirror the provisions of the 401(k) Plan, to the extent
feasible, and will be structured so as 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.
ManorCare Health Services match under the 401(k) Plan and the Nonqualified
Savings Plan will be limited to a maximum aggregate of 6% of the annual salary
of a participant. Likewise, participant contributions under the two plans will
not exceed the aggregate of 15% of the annual salary of a participant.
OPTION AND STOCK PURCHASE PLANS
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the ManorCare Health Services Employee Stock Purchase Plan (the
"Stock Purchase Plan"). Under the Stock Purchase Plan, all employees who have
completed one year of service are eligible to participate. Eligible employees
may purchase stock of ManorCare Health Services in an amount of no less than
2% nor more than 10% of compensation (as defined in the Stock Purchase Plan),
subject to an overall maximum purchase per employee per calendar year of
$25,000. At the end of each quarterly offering period, ManorCare Health
Services will contribute cash equal to 10% of the purchase price of the common
stock so purchased. ManorCare Health Services will pay the administrative
costs for the purchase of ManorCare Health Services common stock.
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<PAGE>
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the ManorCare Health Services 1997 Long-Term Incentive Plan (the
"Incentive Plan"), pursuant to which key employees of the Company and its
subsidiaries are eligible to be granted awards under the Incentive Plan. The
types of awards that may be granted under the Incentive Plan are restricted
shares, incentive stock options, nonqualified stock options, stock
appreciation rights and performance shares. A total of up to 7.1 million
shares of common stock will be reserved for issuance pursuant to the Incentive
Plan.
EMPLOYMENT AGREEMENTS
ManorCare Health Services expects to enter into an employment agreement,
effective upon the Effective Date, with Stewart Bainum, Jr. (the "Employment
Agreement"), providing for Mr. Bainum, Jr.'s employment as Chairman of the
Board of ManorCare Health Services. The Employment Agreement will have a term
of three years and either ManorCare Health Services or Mr. Bainum may
terminate the Employment Agreement upon 30 days' prior written notice on the
first and second anniversary dates of the Employment Agreement. The Employment
Agreement will provide that Mr. Bainum, Jr. will devote 12.5% of his
professional time to the affairs of Sunburst, 12.5% of his professional time
to the affairs of Choice Hotels, 37.5% of his professional time to the affairs
of Manor Care Realty and the remaining 37.5% of his professional time to the
affairs of ManorCare Health Services. The Employment Agreement provides for a
base salary of approximately $258,000 per annum for services to ManorCare
Health Services and a maximum bonus of 60% of Mr. Bainum, Jr.'s base
compensation based upon the performance of ManorCare Health Services.
ManorCare Health Services has entered into an employment agreement, dated
July 14, 1997, with Scott Jacob Van Hove (the "Van Hove Employment
Agreement"), providing for Mr. Van Hove's employment as Executive Vice
President, Operations of ManorCare Health Services. The Van Hove Employment
Agreement will expire on July 14, 2000, after which the parties may extend the
term if they mutually desire to do so. The Van Hove Employment Agreement
provides for a base salary of approximately $263,000 per annum and a maximum
bonus of 50% of Mr. Van Hove's base compensation based upon the performance of
ManorCare Health Services.
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THE BOARD OF DIRECTORS OF MANORCARE HEALTH SERVICES
DIRECTORS OF MANORCARE HEALTH SERVICES
ManorCare Health Services' Board of Directors will be classified into three
classes, designated Class I, Class II and Class III, each class to be as
nearly equal in number of directors as possible. The term of the initial Class
I directors will terminate on the date of the 1998 annual meeting of ManorCare
Health Services' stockholders; the term of the initial Class II directors will
terminate on the date of the 1999 annual meeting of ManorCare Health Services'
stockholders; and the term of the initial Class III directors will terminate
on the date of the 2000 annual meeting of ManorCare Health Services'
stockholders. At each annual meeting of ManorCare Health Services'
stockholders, successors to the class of directors whose term expires at that
annual meeting will be elected for a three-year term. Newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation,
retirement, disqualification, removal or other cause will be filled solely by
the affirmative vote of a majority of the remaining directors then in office.
Increases or decreases in the number of directors will be apportioned among
the classes as nearly equal as possible, and any additional director of any
class elected to fill a vacancy resulting from an increase in such class will
hold office for a term that will coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director.
The name, age, proposed class of directorship upon consummation of the
Distribution and business background (other than executive officers who are
directors) of each of the persons who are expected to become on the Effective
Date the directors of ManorCare Health Services are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr. ................ 51 Chairman of the Board; Class I Director
Regina E. Herzlinger................ 53 Class II Director
William H. Longfield................ 59 Class III Director
Frederic V. Malek................... 60 Class II Director
Jerry E. Robertson, Ph.D. .......... 64 Class III Director
Kennett L. Simmons.................. 55 Class III Director
Donald C. Tomasso................... 52 Class I Director
</TABLE>
Stewart Bainum, Jr. Mr. Bainum, Jr. will resign as Chief Executive Officer
of Manor Care on the Effective Date. Following the Distribution, Mr. Bainum,
Jr. will also act as Chairman of the Board of Manor Care Realty. Mr. Bainum,
Jr. has also acted as Chairman of the Board of Choice Hotels since October,
1997, and of Sunburst (formerly named Choice Hotels International, Inc.) since
November 1996. It is expected that Mr. Bainum, Jr. will devote 12.5% of his
time to Choice Hotels, 12.5% of his time to Sunburst, 37.5% of his time to
ManorCare Health Services and 37.5% of his time to Manor Care Realty. Chairman
of the Board of Manor Care and Old ManorCare Health Services 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; Vice
Chairman of the Board of Vitalink from February 1995 to February 1997; Vice
Chairman of the Board of Manor Care and subsidiaries from June 1982 to March
1987; Director of Manor Care since August 1981, of Vitalink since September
1991, of Old ManorCare Health Services since 1976 and of Choice and its
predecessors since 1977; Chief Executive Officer of Old ManorCare Health
Services since June 1989 and President from May 1990 to May 1991; Chairman of
the Board and Chief Executive Officer of Vitalink from September 1991 to
February 1995 and President and Chief Executive Officer from March 1987 to
September 1991; Chairman of the Board of Choice from March 1987 to June 1990.
Regina E. Herzlinger. Nancy R. McPherson Professor of Business
Administration, Harvard Business School, since 1971. Director: C.R. Bard,
Inc., Deere & Company, Cardinal Health Care, Inc., Schering-Plough Corporation
and Total Renal Care Inc.
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<PAGE>
William H. Longfield. 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 Mental Health Management,
Inc., United Dental Care, Inc., The West Company and Atlantic Health Systems.
Frederic V. Malek. Chairman, Thayer Capital Partners since March 1993; Co-
chairman of CB Commercial Real Estate Group, Inc. from April 1989 to October
1996; 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 Commercial Real Estate Group, Inc., Choice, FPL Group, Inc., Northwest
Airlines, Inc. and various Paine Webber mutual funds.
Jerry E. Robertson, Ph.D. 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 Inc.,
Choice Hotels International, Inc., Coherent, Inc., Haemonetics Corporation,
Medwave, Inc., Project Hope and Stris Corporation.
Kennett L. Simmons. 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. Director: United
Healthcare Corporation and Virginia Health Care Foundation.
Donald C. Tomasso. Executive Vice President of Manor Care and President of
Old ManorCare Health Services since September 1996; President, Long-Term Care
Division of Old ManorCare Health Services from February 1995 to August 1996
and a Director of Old ManorCare Health Services since June 1991; President and
Chief Operating Officer of Old ManorCare Health Services 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;
previously employed by Marriott Corporation for more than five years,
including as Executive Vice President/General Manager of the Roy Rogers
Division; Director of In Home Health since October 1995.
Prior to the Effective Date, the directors of ManorCare Health Services are
Stewart Bainum, Jr., James H. Rempe, Senior Vice President, General Counsel
and Secretary of Manor Care, and Leigh C. Comas, Vice President, Finance and
Treasurer of Manor Care, and the executive officers of ManorCare Health
Services are Stewart Bainum, Jr., Donald C. Tomasso, James H. Rempe, Leigh C.
Comas and Margarita A. Schoendorfer. Following the Distribution, Stewart
Bainum, Jr. will be Chairman of the Board of the Company and Chairman of the
Board of Manor Care Realty. Mr. Bainum, Jr. is also the Chairman of the Board
of Choice. It is expected that he will devote 12.5% of his time to Choice
Hotels, 12.5% of his time to Sunburst, 37.5% of his time to the Company and
37.5% of his time to Manor Care Realty. After the Distribution, Kennett L.
Simmons will also be a director of Manor Care Realty.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon consummation of the Distribution, the Board of Directors is expected to
consist of eight members. Following the Distribution Date, additional non-
employee directors may be elected to the Board of Directors. The additional
non-employee directors have not yet been determined. It is expected that the
Board of Directors will hold five meetings during the fiscal year and that the
standing committees of the Board will include the Audit Committee, the Finance
Committee, the Compensation/Key Executive Stock Option Plan Committee and the
Nominating/Governance Committee. The members of the committees have not yet
been determined.
The Compensation/Key Executive Stock Option Plan Committee will administer
the Company's stock option plans and grant options thereunder, will review
compensation of officers and key management employees, will recommend
development programs for employees such as training, bonus and incentive
plans, pensions and retirement, and will review other employee fringe benefit
programs.
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<PAGE>
The Compensation/Key Executive Stock Option Committee No. 2, will be formed
to comply with certain provisions of the Omnibus Budget Reconciliation Act of
1993 and Rule 16b-3 under the Exchange Act. The Committee will administer the
Company's stock option plans, grant stock options thereunder and review the
compensation of the CEO and the four most highly compensated officers (and
others potentially in that classification) for each fiscal year.
The Quality Assurance Committee will review the operations of ManorCare
Health Services and facilities to determine if acceptance standards of quality
are being maintained.
The Audit Committee will review the scope and results of the annual audit,
will review and approve the services and related fees of ManorCare Health
Services' independent public accountants, will review ManorCare Health
Services' internal accounting controls and will review ManorCare Health
Services' Internal Audit Department and its activities.
The Nominating/Governance Committee will recommend to the Board of Directors
the members to serve on the Board of Directors during the ensuing year and
will deal with corporate governance issues. The Committee will not consider
nominees recommended by stockholders.
NON-EMPLOYEE DIRECTOR PLAN
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the ManorCare Health Services Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock Purchase Plan (the "Non-Employee
Director Plan"). Part A of the Non-Employee Director Plan provides that
eligible non-employee directors will be granted options to purchase 5,000
shares of Common Stock on their date of election and will be granted options
to purchase 1,000 shares on their date of election in subsequent calendar
years; provided, however that current directors of Manor Care will not receive
5,000 shares upon election to the ManorCare Health Services Board. Part B of
the Non-Employee Director Plan provides that 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 will be credited to an Interest Deferred Account,
which will be interest bearing. Stock which is so purchased will be deposited
in a Stock Deferred Account pending distribution in accordance with the Non-
Employee Director Plan.
Directors who will be employees of the Company will receive no separate
remuneration for their services as directors. Prior to the Distribution, it is
expected that ManorCare Health Services will adopt the ManorCare Health
Services, Inc. Non-Employee Director Stock Compensation Plan, pursuant to
which eligible non-employee directors will receive annually, in lieu of cash,
restricted stock of ManorCare Health Services, the fair market value of which
at the time of grant will be equal to $30,000, which will represent the Board
retainer and meeting fees. In addition, all non-employee directors will
receive $1,610 per diem for Committee meetings attending, except where the
Committee meeting is on the same day as a Board meeting, and will be
reimbursed for travel expenses and other out-of-pocket costs incurred in
attending meetings.
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<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Following the Distribution, Manor Care Realty will have a continuing
relationship with ManorCare Health Services as a result of the agreements
being entered into in connection with the Distribution, including the Lease
Agreements, the Development Agreement, the Non-Competition Agreement, the
Assisted Living Facility Management Agreement, the Distribution Agreement, the
Tax Sharing Agreement, the Tax Administration Agreement, the Employee Benefits
and Other Employment Matters Allocation Agreement, the Employee Benefits
Administration Agreement, the Office Lease Agreement, the Corporate Services
Agreement, the Trademark Agreement, the License Agreement, the Cash Management
Agreement, the Design Services Agreement, and the Risk Management Consulting
Services Agreement. See "Relationship Between Manor Care Realty and ManorCare
Health Services After the Distribution."
Upon consummation of the Distribution, certain management employees of Manor
Care Realty will hold options to purchase shares of ManorCare Health Services
Common Stock. Management employees of Manor Care Realty will have certain
elections with respect to the conversion of their Manor Care options into
options of Manor Care Realty or ManorCare Health Services. See "Relationship
Between Manor Care Realty and ManorCare Health Services After The
Distribution--Employee Benefits and Other Employment Matters Allocation
Agreement."
110
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Based on information which has been obtained from Manor Care's records and a
review of statements filed with the Securities and Exchange Commission (the
"Commission") pursuant to Section 13(g) of the Exchange Act with respect to
Manor Care common stock and received by Manor Care prior to August 5, 1997, no
person known to Manor Care will be the beneficial owner of more than 5% of the
Common Stock of ManorCare Health Services upon completion of the Distribution
other than as set forth below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON PERCENT OF CLASS
STOCK AS OF THE AS OF THE
NAME AND ADDRESS EFFECTIVE DATE EFFECTIVE DATE(2)
---------------- ---------------- -----------------
<S> <C> <C>
Stewart Bainum(1)(3)...................... 10,156,643 15.22%
Stewart Bainum, Jr.(1)(4)................. 15,269,851 22.86%
Barbara Bainum(1)(5)...................... 5,485,815 8.22%
Bruce Bainum(1)(6)........................ 5,482,302 8.21%
Ronald Baron(7)........................... 7,976,459 11.96%
</TABLE>
- --------
(1) Stewart Bainum, Jr., Bruce Bainum and Barbara Bainum are children of
Stewart Bainum. The total beneficial ownership of the Bainum family (set
forth in the table above in the names of Stewart Bainum, Stewart Bainum,
Jr., Barbara Bainum and Bruce Bainum) is 19,978,307 shares (which excludes
overlapping interests). Such collective interest represents 29.95% of the
outstanding Common Stock of Manor Care.
(2) Percentages are based on 66,709,912 shares outstanding on August 5, 1997
plus shares which would be issued assuming that the person exercises all
options which are exercisable within 60 days thereafter.
(3) Includes 3,765,478 shares held directly or indirectly by the Stewart
Bainum Declaration of Trust, the sole trustee of which is Mr. Bainum; his
joint interest in 895,466 shares owned by Bainum Associates Limited
Partnership ("Bainum Associates"), and 1,082,857 shares owned by MC
Investments Limited Partnership ("MC Investments"), each of which is a
limited partnership in which Mr. Bainum has joint ownership with his wife
as 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 their
limited partnership interest; 3,567,869 shares held directly 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; 40,305 shares held by the Commonweal Foundation of which Mr.
Bainum is Chairman of the Board of Directors and has shared voting
authority; and 500 shares held by Mid-Pines Associates, L.P. ("Mid-Pines")
in which Mr. Bainum has shared voting authority. Also includes 792 shares
of restricted stock granted pursuant to the Manor Care, Inc. Non-Employee
Director Stock Compensation Plan. Also includes 798,711 shares held by the
Jane L. Bainum Declaration of Trust, the sole trustee of which is Mr.
Bainum's wife. Also includes 3,665 shares which Mr. Bainum has the right
to acquire pursuant to stock options which are presently exercisable or
which become exercisable within 60 days after August 5, 1997. Does not
include shares owned beneficially by Stewart Bainum, Jr, Mr. Bainum's son,
whose interests are stated in the above table, except shares owned by
Bainum Associates, MC Investments, Realty Investment and Mid-Pines in
which Mr. Bainum has a beneficial interest.
(4) Includes 5,417,761 shares owned by Bainum Associates and 4,415,250 shares
owned by MC Investments, in both of which Mr. Bainum, Jr. 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, in which Mr.
Bainum, Jr. is a managing general partner and has shared voting authority;
3,567,869 shares held by Realty Investment in which Mr. Bainum, Jr. has
shared voting authority. Also includes 88,000 shares which Mr. Bainum, Jr.
has the right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997, and 350 shares and 993 shares, respectively, which Mr. Bainum, Jr.
has the right to receive upon termination of his employment with the
Company pursuant to the terms of the Manor Care, Inc. Retirement Savings
and Investment Plan (the "401(k) Plan") and the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan (the "Nonqualified
Savings Plan") (based upon a report of each plan's trustee for June 1997).
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<PAGE>
(5) Includes 98,013 shares held directly by Ms. Bainum; 3,567,869 shares held
by Realty Investment, and 1,779,628 shares held by Mid-Pines, in both of
which Ms. Bainum has shared voting authority. Also includes 40,305 shares
held by the Commonweal Foundation in which Ms. Bainum has shared voting
authority.
(6) Includes 94,500 shares held directly by Mr. Bainum; 3,567,869 shares held
by Realty Investment, 1,779,628 shares held by Mid-Pines and 40,305 shares
held by the Commonweal Foundation, in all of which Mr. Bainum has shared
voting authority.
(7) Includes 163,620 shares owned directly by Mr. Baron. Also includes 705,000
shares owned by Baron Capital Partners, L.P. and Baron Investment
Partners, L.P., investment partnerships of which Mr. Baron is General
Partner; 5,950,000 shares owned by two investment companies registered
under the Investment Company Act of 1940, Baron Asset Fund and Baron
Growth & Income Fund, which are advised by BAMCO, Inc., a registered
investment adviser which is controlled by Mr. Baron; 1,157,839 shares held
for the accounts of investment advisory clients of Baron Capital
Management, Inc., a registered investment adviser controlled by Mr. Baron.
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<PAGE>
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the shares of
Common Stock which are expected to be beneficially owned by each director and
Named Executive Officer of ManorCare Health Services and by all directors and
executive officers of ManorCare Health Services as a group as of the Effective
Date based upon their respective holdings of Manor Care common stock as of
August 5, 1997. See "Management of ManorCare Health Services--Compensation of
Executive Officers."
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP PERCENTAGE(1)
---- -------------------- -------------
<S> <C> <C>
Stewart Bainum, Jr.(2).................. 15,269,851 22.86%
Regina E. Herzlinger(3)................. 7,731 *
William H. Longfield(4)................. 9,207 *
Frederic V. Malek(5).................... 5,457 *
Jerry E. Robertson, Ph.D.(6)............ 19,125 *
Kennett L. Simmons...................... 792 *
Donald C. Tomasso(7).................... 143,424 *
James H. Rempe(8)....................... 61,162 *
Scott J. Van Hove(9).................... 83,181 *
All directors and executive officers of
the Company as a group
(12 persons)(10)....................... 15,599,930 22.86%
</TABLE>
- --------
* Less than 1%.
(1) Percentages are based on 66,709,912 shares outstanding on August 5, 1997
plus shares which would be issued assuming that the person exercises all
options which are exercisable within 60 days thereafter.
(2) Includes 5,417,761 shares owned by Bainum Associates Limited Partnership
and 4,415,250 shares owned by MC Investments Limited Partnership, limited
partnerships in both of which Mr. Bainum, Jr. 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, in which Mr. Bainum,
Jr. is a managing general partner and has shared voting authority;
3,567,869 shares held by Realty Investment Company, Inc., a real estate
investment and management company in which Mr. Bainum, Jr. has shared
voting authority. Also includes 88,000 shares which Mr. Bainum, Jr. has
the right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997, and 350 shares and 993 shares, respectively, which Mr. Bainum, Jr.
has the right to receive upon termination of his employment with the
Company pursuant to the terms of the ManorCare Health Services Retirement
Savings and Investment Plan (the "401(k) Plan") and the ManorCare Health
Services Nonqualified Retirement Savings and Investment Plan (the
"Nonqualified Savings Plan").
(3) Includes 3,159 shares which Professor Herzlinger has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997. Also includes 200 shares
held by spouse as custodian for a minor. Beneficial ownership of such
shares is disclaimed.
(4) Includes 5,791 shares which Mr. Longfield has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997.
(5) Includes 3,665 shares which Mr. Malek has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997.
(6) 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 3,665 shares which Mr. Robertson has the
right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997.
(7) Includes 40 shares held by adult children of Mr. Tomasso who share the
same household. Beneficial ownership of such shares is disclaimed. Also
includes 135,984 shares which Mr. Tomasso has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997, and 326 shares and 574
shares, respectively, which Mr. Tomasso has the right
113
<PAGE>
to receive upon termination of his employment with ManorCare Health
Services pursuant to the terms of the 401(k) Plan and the Nonqualified
Savings Plan.
(8) Includes 3,552 shares which Mr. Rempe has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997, and 780 shares and 424
shares, respectively, which Mr. Rempe has the right to receive upon
termination of his employment with ManorCare Health Services pursuant to
the terms of the 401(k) Plan and Nonqualified Savings Plan.
(9) Includes 81,823 shares which Mr. Van Hove has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997, and 337 shares and 376
shares, respectively, which Mr. Van Hove has the right to receive upon
termination of his employment with ManorCare Health Services pursuant to
the terms of the 401(k) Plan and Nonqualified Savings Plan.
(10) Includes a total of 410,173 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are presently exercisable or which become exercisable within 60
days after August 5, 1997, and a total of 2,592 shares and 3,220 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with ManorCare Health Services
pursuant to the terms of the 401(k) Plan and the Nonqualified Savings
Plan.
114
<PAGE>
BUSINESS OF MANOR CARE REALTY AFTER THE DISTRIBUTION
Manor Care Realty will own 168 skilled nursing facilities in 28 states and
believes it will be a leading health care real estate company focused on the
ownership, construction, development and acquisition of health care
properties, including skilled nursing and assisted living facilities. Manor
Care Realty will also own and operate Mesquite Community Hospital, a 172
licensed bed medical/surgical acute care hospital located in Mesquite, Texas.
At or prior to the Distribution, Manor Care Realty will enter into a series of
agreements with ManorCare Health Services pursuant to which ManorCare Health
Services will lease and operate all of Manor Care Realty's 168 Skilled Nursing
Facilities and Manor Care Realty will develop assisted living facilities for
sale to ManorCare Health Services. See "Relationship Between Manor Care Realty
and ManorCare Health Services After the Distribution." Manor Care and its
predecessor companies have been engaged in the development, construction and
acquisition of health care properties since 1959.
Over the next five years, Manor Care Realty plans to focus principally on
the development of over 200 assisted living facilities for sale to ManorCare
Health Services, including approximately 170 Arden Courts and 38 Springhouse
senior residences. Following the Distribution, Manor Care Realty's principal
sources of revenue will arise from payments pursuant to the lease of the
Skilled Nursing Facilities to ManorCare Health Services, the proceeds of the
sale to ManorCare Health Services of assisted living facilities developed by
Manor Care Realty and revenues derived from Mesquite Hospital. Manor Care
Realty's principal expenditures will include the costs incurred in developing
the assisted living facilities for ManorCare Health Services, the costs of
operating the assisted living facilities prior to their sale to ManorCare
Health Services and financing costs, including interest expense.
Manor Care Realty's geographically diversified portfolio of properties will
include:
. 168 Skilled Nursing Facilities in 28 states, which facilities contain
approximately 23,725 beds.
. 25 assisted living facilities under construction in 12 states.
. 64 sites for assisted living facilities under contract and in
development, including 48 Arden Court sites and 16 Springhouse sites.
. Two skilled nursing facilities under construction with 268 beds and
three skilled nursing sites under contract and in development.
. Mesquite Community Hospital, a 172 licensed-bed hospital located in
Mesquite, Texas, a Dallas suburb.
Since fiscal year 1993, Manor Care has completed 72 development projects,
including ten skilled nursing facilities, 15 assisted living facilities and 47
significant additions to its existing skilled nursing facilities.
Manor Care Realty will have an experienced management team, with specific
expertise in market feasibility, regulatory issues, site selection, design,
and project management as well as in the acquisition of health care
facilities. The five senior members of Manor Care Realty's development team
have worked with Manor Care for an average of 16.5 years. These individuals
have in-depth knowledge of the health care market with particular expertise in
the state regulatory environment for both skilled nursing and assisted living
facilities. See "Management Of Manor Care Realty After The Distribution."
Manor Care Realty believes that its experienced management and high quality,
geographically diversified portfolio of long term care properties will ensure
that it continues to be one of the nation's leading health care real estate
developers and owners.
After the Distribution, ManorCare Health Services believes it will be a
leading provider of a full-range of senior support health care services,
including skilled nursing, assisted living, institutional pharmacy and home
health care and additional support services for the frail elderly living at
home. ManorCare Health Services will strive to become the nation's foremost
provider of high-quality senior support health care services within the
private pay segment. Private pay patients accounted for a majority of Manor
Care's skilled nursing revenues in
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fiscal 1997 compared to a 1996 industry average of approximately 30% for for-
profit nursing care providers. Application has been made to list the common
stock of ManorCare Health Services on the New York Stock Exchange.
BUSINESS STRATEGY
Manor Care Realty plans to maintain its status as a leading developer and
owner of senior support health care service facilities and to enhance its
growth and profitability through the following key initiatives:
. Generate Consistent Cash Flows From High Quality Portfolio of
Properties. Upon consummation of the Distribution, Manor Care Realty
believes that it will have one of the highest quality portfolios of
skilled nursing facilities in the industry. The majority of the Skilled
Nursing Facilities were purpose-built (that is, designed and built as
skilled nursing facilities as opposed to having been converted from
some other use). Manor Care Realty believes these facilities are among
the industry leaders in terms of percentage of beds dedicated to
specialty products and quality payor mix. A significant portion of the
beds in Manor Care Realty's Skilled Nursing Facilities are dedicated to
specialty products, including Arcadia (Alzheimer's special care unit),
Heritage and Williamsburg (high-end lifestyle products), and Medbridge
(high acuity unit). For fiscal years 1997 and 1996, Manor Care's
occupancy rates for skilled nursing facilities that had been operated
by Manor Care for at least two years were 89.8% and 90.3%,
respectively.
. Maintain Geographically Diverse Portfolio of Properties. Manor Care
Realty's portfolio of properties will include 168 facilities in 28
states. Manor Care Realty believes the geographic diversity of the
Skilled Nursing Facilities makes the portfolio less susceptible to
adverse changes in state regulation and regional economic downturns.
. Benefit From Strategic Relationship with ManorCare Health
Services. Manor Care Realty believes it will benefit from a strategic
relationship with ManorCare Health Services, one of the nation's
leading providers of high-quality senior support health care services
within the private pay segment. Under the terms of the Lease Agreements
(as defined herein), ManorCare Health Services will operate Manor Care
Realty's 168 Skilled Nursing Facilities. Manor Care Realty believes
that the operation of the Skilled Nursing Facilities by ManorCare
Health Services will allow Manor Care Realty to benefit from the strong
brand name recognition, well established treatment protocols and
reputation for high quality, personalized care standards of ManorCare
Health Services. The Lease Agreements provide Manor Care Realty with
lease payments equal to the greater of 10% of the value of each
facility (as agreed to by Manor Care Realty and ManorCare Health
Services) or 77% of the Net Operating Profit (as defined herein) of
each facility, Manor Care Realty believes this structure will provide a
base level of rent along with the opportunity to participate in any
improvements in operating performance of the Skilled Nursing
Facilities. In addition, by serving as a developer of assisted living
facilities for ManorCare Health Services, Manor Care Realty believes it
will be well positioned to profit from the anticipated growth in the
demand for assisted living care. Pursuant to the Development Agreement,
Manor Care Realty will develop assisted living facilities for sale to
ManorCare Health Services. If at any time during the two-year period
following the time a particular facility opens occupancy reaches 75%
for a period of five days, ManorCare Health Services will be obligated
to purchase the facility. The purchase price for each facility will be
at a 15-34% premium to total approved development costs of Manor Care
Realty, based on the number of months elapsed since the opening of the
facility. Total approved development costs include expenses incurred in
connection with the development and construction of the facilities, but
do not include operating losses incurred during the two-year
stabilization period. The premium to total approved development costs
is intended to compensate Manor Care Realty for the increasing value of
its investment over time as well as for the risks it takes in
connection with developing assisted living facilities, including the
risks inherent in operating the facilities during the two year
stabilization period. Prior to purchase by ManorCare Health Services,
ManorCare Health Services will operate Manor Care Realty's assisted
living facilities for a fixed monthly fee pursuant to
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the Assisted Living Facility Management Agreement. See "Relationship
Between Manor Care Realty and ManorCare Health Services After the
Distribution."
. Capitalize On Growth in Demand for Assisted Living Services. Manor Care
Realty believes the anticipated increased market demand for assisted
living facilities presents Manor Care Realty with opportunities for
growth. Manor Care Realty believes it can successfully capitalize on its
ability to efficiently develop purpose-built assisted living projects
through the planned development of approximately 200 assisted living
facilities for sale to ManorCare Health Services over the next five
years, including approximately 170 Arden Courts and 38 Springhouse
senior residences. In addition to developing assisted living facilities
for ManorCare Health Services and leasing the Skilled Nursing Facilities
to ManorCare Health Services, Manor Care Realty and ManorCare Health
Services plan to work closely together to develop new assisted living
products aimed at segments of the assisted living business not currently
served by the Springhouse and Arden Courts concepts.
. Establish Relations with Other Leading Health Care Providers. While
Manor Care Realty expects that over the next five years the vast
majority of its revenues will be derived from ManorCare Health Services,
subject to contractual restrictions and capital constraints, Manor Care
Realty may diversify its operator base, establish relationships with
other leading health care providers to develop and lease health care
properties and pursue selective acquisition opportunities.
INDUSTRY OVERVIEW
Manor Care Realty will focus on the ownership, development, construction and
acquisition of health care properties, principally in the long-term care
segment of the health care industry. The long-term care industry encompasses a
broad range of accommodations and health care services that are provided
primarily to seniors. For example, seniors requiring limited services can use
home health care or adult day care. Retirement homes, congregate housing, and
continuing care retirement communities are options for those seniors seeking
community housing. As an individual's need for assistance increases, assisted
living facilities offer residents assistance with ADLs, such as dressing,
bathing, eating and medication management, in a residential environment.
Finally, seniors requiring around-the-clock nursing care can be placed in
skilled nursing facilities. The long-term care industry is experiencing
significant growth due to several factors:
. Favorable demographic trends. According to the U.S. Bureau of the
Census, the number of seniors 85 years and older is estimated to
increase by approximately 32% from 3.7 million seniors in 1996 to 4.9
million seniors by 2005. According to industry sources, approximately
57% of the population over age 85 currently require assistance with
ADLs, and more than 50% suffer from Alzheimer's disease or other
cognitive disorders. Manor Care Realty believes that the growth of an
increasingly frail population will drive demand for long-term care
products and services tailored to meet the unique needs of this elderly
population, including skilled nursing facilities, assisted living
facilities, and Alzheimer's care facilities. In addition, Manor Care
Realty believes that the increasing affluence of the elderly will enable
them to afford high quality care. According to the U.S. Bureau of the
Census, the median net worth of householders age 75 and older has
increased from $61,491 in 1988 to $76,541 in 1991.
. Supply/demand imbalance. The long term care industry is benefitting from
a favorable supply and demand relationship in the U.S. According to a
1997 report by the National Investment Conference and Price Waterhouse,
the demand for seniors housing exceeds the supply of available beds. The
Health Insurance Association of America estimates that approximately
seven million elderly will need long-term care in 1997, rising to nine
million by 2005 and to 12 million by 2020. Manor Care Realty believes
this imbalance will continue into the next century and drive the growth
of the long-term care industry. Despite increased demand, growth in the
supply of beds has been minimal.
. Increasing awareness of the range of options available to seniors. Manor
Care Realty believes that consumers are increasingly aware of the wide
range of long-term care options, from home health to adult day care to
assisted living facilities, that are available to meet their housing and
health care needs.
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The availability of information and referral sources such as the National
Council on Aging and the Alzheimer's Association, the growth of
nationally branded long-term care operators such as Manor Care and the
emerging assisted living companies, and increased press coverage of the
needs of the aging baby boomer population, have raised the general
consumer's awareness of options available to seniors in the long-term
care industry.
. Changing family dynamics. Due to the growing number of dual income
families and the geographic dispersion of families, many children are
unable to care for their elderly parents in their own homes.
Historically, unpaid women, primarily daughters or daughters-in-law,
represented a large portion of the caregivers of the non-institutional
elderly. In addition, the greater affluence of these dual income families
enables them to better provide financial support to their parents. Manor
Care Realty believes that, as a result, adult children are increasingly
seeking high quality facilities which will provide their parents with the
care and support that they require.
Manor Care Realty believes that it is one of the premier owners and
developers in the long-term care industry, and is therefore well positioned to
capitalize on the growth of the long-term care industry for several reasons:
. Increasing use of outside development companies by health care
operators. Health care operators are increasingly looking to experienced
health care developers, such as Manor Care Realty, to provide them with
design, construction management and zoning and regulatory assistance as
well as to reduce their investment costs and associated risks.
. Need for capital to finance the aggressive development plans of the
seniors housing industry. Health care operators are looking for new
sources of financing to fuel their growth. The equity markets and,
increasingly, health care real estate investment trust (REITs), have
provided a source of capital for many of these companies. Manor Care
Realty believes it can capitalize on the inability of traditional sources
of capital to meet the projected growth of the seniors housing markets.
. Complex regulatory environment. The long-term care industry is governed
by a wide variety of regulations at the local and state levels. Manor
Care Realty believes that its experience in the regulatory arena and its
in-house health planning department provide it with a significant
advantage in managing the complex regulatory process at the local and
state levels. Thirty-eight states require certificates of need ("CONs")
to build skilled nursing facilities and at least eight states require
CONs for assisted living facilities. A number of states are considering
adding regulations for assisted living development. In addition, many
states have imposed moratoriums on skilled nursing beds which further
complicates the process of securing approval to develop new or renovate
existing skilled nursing facilities. Finally, the construction of new
skilled nursing and assisted living facilities typically requires local
zoning and land use approvals, permits and certificates of occupancy.
BUSINESS
Skilled Nursing Facilities
Manor Care Realty believes it will be the premier owner of skilled nursing
facilities in the United States. Through a cohesive framework of proprietary
care protocols, Manor Care Realty's Skilled Nursing Facilities provide (i)
long-term care for chronically ill and frail elderly individuals who need 24-
hour skilled nursing and physical, occupational and speech therapies; (ii) high
acuity, short-term, post-hospital care for medically complex patients and
persons in need of aggressive rehabilitation; and (iii) long-term, care for
individuals with middle to late-stage Alzheimer's disease or related memory
impairment. In all cases, these services include appropriate nursing care, room
and board, special diets, occupational, speech, physical and recreational
therapy and other services designed to improve the well-being of the resident.
ManorCare Health Services will lease, operate and manage Manor Care Realty's
Skilled Nursing Facilities pursuant to Lease Agreements under which ManorCare
Health Services will pay monthly fees to Manor Care
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Realty. See "Relationship Between Manor Care Realty and Manor Care Health
Services After the Distribution--Lease Agreements Relating to Skilled Nursing
Facilities."
Manor Care Realty's Skilled Nursing Facilities target affluent to middle
income seniors in need of skilled nursing care. Manor Care Realty believes its
facilities enjoy a more attractive quality mix compared to other long-term
care operators. Manor Care's private pay residents accounted for a majority of
revenues in fiscal year 1997. Manor Care Realty believes it will benefit from
its strong portfolio by participating in the operating profit generated by
these facilities in accordance with the terms of the Lease Agreements.
Manor Care Realty's Skilled Nursing Facilities differentiate themselves from
their competitors by offering, through ManorCare Health Services, unique
specialty products designed to meet the needs of specific customer segments. A
significant portion of the beds at Manor Care Realty's Skilled Nursing
Facilities are dedicated to specialty services, which are attractive because
they generate higher per patient day revenues and profits than standard long-
term care beds. For example, the Heritage and Williamsburg wings in 107 of
Manor Care Realty's Skilled Nursing Facilities provide residents with upgraded
decor, a private lounge and special programs and, in the case of the
Williamsburg wings, concierge services and a private dining area with a
gourmet menu. Manor Care Realty believes that the Heritage and Williamsburg
design concepts contribute to Manor Care's high percentage of private pay
residents compared to the rest of the industry. Within Manor Care Realty's
Skilled Nursing Facilities, ManorCare Health Services also will continue to
operate 143 Arcadia special-care units providing services to individuals in
the middle to late stages of Alzheimer's disease or afflicted with related
memory impairment. Finally, ManorCare Health Services will continue to operate
within the Skilled Nursing Facilities 21 dedicated MedBridge high acuity units
featuring high staff-to-patient ratios, sophisticated clinical capabilities
and state-of-the-art rehabilitation departments. Manor Care Realty believes
these high-end specialty products will facilitate marketing efforts to attract
longer stay (1-3 years) private pay residents.
Manor Care is currently constructing two skilled nursing facilities and has
three nursing sites under contract and in development. A typical skilled
nursing facility built by Manor Care has 120 beds, costs approximately $8.5
million to build (including the cost of the land) and takes approximately
twelve to thirteen months to construct.
Assisted Living Facilities
Assisted living facilities serve elderly persons who require assistance with
activities of daily living but who do not require the constant nursing
supervision that skilled nursing facilities provide. Manor Care Realty
currently has 25 assisted living facilities under construction and 64 sites
for new assisted living facilities under contract and in development. These
facilities will be managed by and if the requisite occupancy levels are
achieved within two years, purchased by ManorCare Health Services pursuant to
the terms of the Assisted Living Facility Management Agreement and the
Development Agreement. Also, pursuant to the Development Agreement, Manor Care
Realty plans to develop approximately 200 assisted living facilities for sale
to ManorCare Health Services over the next five years, including approximately
170 Arden Courts and 38 Springhouse senior residences. See "Relationship
Between Manor Care Realty and Manor Care Health Services After the
Distribution--Development Agreement Relating to Assisted Living Facilities."
Manor Care Realty believes that upon completion of this development plan
ManorCare Health Services will be the nation's largest operator of Alzheimer's
assisted living facilities. Manor Care Realty's assisted living units are
generally rented to occupants pursuant to 30-day or one-year leases, subject
to Manor Care's right to terminate the lease if the occupant becomes too frail
for the facility.
In a strategy similar to that employed in connection with the Skilled
Nursing Facilities, the assisted living facilities to be developed by Manor
Care Realty will target affluent to middle income seniors in need of a full
range of assisted living services to optimize their quality of life. These
services will be available 24 hours a day and generally include meal service,
housekeeping, personal care, nursing and health related services, social and
recreational services, transportation and special services (such as banking
and shopping). Personal services will include bathing, dressing, personal
hygiene, grooming, ambulating and dining assistance. Health-related services,
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which are tailored to individual patient needs and applicable state regulatory
requirements, may also include assistance with medication management, skin
care and injections, as well as health care monitoring.
The Arden Courts assisted living facilities to be developed by Manor Care
Realty are a distinct product and service segment focused exclusively on
individuals suffering from the early to middle stages of Alzheimer's disease
or related memory impairment. These special purpose assisted living facilities
offer a proprietary, specially designed physical plant with security systems,
structured activities and related resident services and support systems. These
facilities are typically divided into four color-coded houses comprising a
total of 56 units with access to communal living rooms, kitchens, dining rooms
and protected gardens. All aspects of the facilities' operations are managed
by an Executive Director specially trained in the care of Alzheimer's
patients. Arden Courts assisted living facilities are designed to allow
residents the freedom to move about independently while keeping them safely
contained within a secured area. A typical Arden Courts facility has 56 units,
costs approximately $4.5 million to build (including the cost of the land) and
takes approximately ten months to construct.
The Springhouse senior residences to be developed by Manor Care Realty are
freestanding, residential-style facilities designed to meet the needs of the
general assisted living population. These facilities are functionally arranged
to provide a home-like atmosphere. The architectural and interior design
concepts incorporate the Manor Care operating philosophy of delivering
superior quality care, protecting resident privacy, enabling freedom of
choice, encouraging independence and fostering individuality in a home-like
setting. Each facility is operated with certain protocols designed to maintain
the health of the residents and to provide a measure of security and support
for those individuals. Each facility includes common areas designed to promote
social interaction among residents, such as a dining area, a laundry room, a
library, a wellness center, barber and beauty shop, crafts room, spa and a
snack room or ice cream parlor. In addition, Springhouse residents have access
to medication management services, therapy and other ancillary services, as
well as dementia programs and dedicated dementia units in some locations. A
typical Springhouse senior residence has 105 beds, costs approximately $9.5
million to build and takes approximately twelve to thirteen months to
construct.
Real Estate Development and Acquisition Activities
Pursuant to the Development Agreement, Manor Care Realty plans to develop
approximately 200 assisted living facilities for sale to ManorCare Health
Services over the next five years. In this regard, Manor Care Realty will
continue to employ its integrated internal development process pursuant to
which Manor Care Realty's market feasibility, health planning, interior
design, architecture, development, and construction personnel will develop and
open these facilities. Manor Care Realty's development process is divided into
three discrete phases.
The first phase of the development process involves market feasibility and
site selection. Manor Care Realty's in-house market feasibility team will be
responsible for identifying and prioritizing the top metropolitan statistical
areas for development on a national basis, based on (i) the demographics of
each market, (ii) fit with ManorCare Health Services' existing cluster
markets, and (iii) the competitive environment in each market. Following
market selection, regionally focused development teams will be responsible for
identifying potential sites, creating site schematics, executing purchase
agreements, selecting external civil engineers and consultants, preparing an
initial budget, and obtaining land use approval. At the same time, Manor Care
Realty's health planning department will perform CON analyses and, if needed,
file for any required CONs and obtain CON approval for each approved site.
Manor Care Realty will conduct full market feasibility studies, including
demographic analyses, evaluations of existing and planned competitors, and
rate assessments. The market feasibility and site selection phase takes
approximately nine to twelve months.
The second phase of the process consists of project planning and design.
During this stage, Manor Care Realty's development team will determine the
project schedule and select external fee architects responsible for adopting
prototype designs to local building requirements. Manor Care Realty's
architectural and construction departments will conduct regular review of
progress by the fee architect to ensure that Manor Care Realty's standards are
being met. In addition, Manor Care Realty's centralized construction
purchasing and interior design
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departments will create finish schedules and preliminary lists of furniture,
fixtures, and equipment (FF&E) for the facility. The architecture and interior
design teams maintain a running log of design issues during this phase of the
process which will be used to refine Manor Care Realty's prototypes. The final
steps of the planning and design phase involve creating the final project
budget, finalizing the financial pro formas, and securing the relevant
permits. The planning and design phase takes approximately three to six
months.
The last phase of Manor Care Realty's development process is the
construction and licensure of the facility. Regionally focused construction
teams will be responsible for selecting the general contractor, obtaining
final permits and conducting biweekly reviews of progress. These biweekly
meetings involve construction management, the general contractor, the fee
architect, and ManorCare Health Services' district operations team. The
construction teams are also responsible for coordinating with all state and
local jurisdictions and health departments to obtain certificates of occupancy
and licensure of facilities. The construction and licensure phase takes
approximately ten months for an Arden Courts facility and twelve to thirteen
months for a Springhouse or skilled nursing facility.
In addition to its development efforts, subject to the terms of the Non-
Competition Agreement, Manor Care Realty may selectively acquire assisted
living and skilled nursing operations. Manor Care Realty expects that
acquisition opportunities will be identified through Manor Care Realty's
senior management, industry contacts, leads from real estate brokers and
consultants, and a proactive acquisition review process by Manor Care Realty's
acquisitions group. In reviewing acquisition opportunities, Manor Care Realty
considers, among other factors, the competitive climate, the current
reputation of the facility, the quality of the management team and staff, the
need to reposition the facility in the marketplace and associated costs, and
the construction quality and need for renovations.
Mesquite Community Hospital
Manor Care Realty will own and operate Mesquite Community Hospital
("Mesquite Hospital"), a 172 licensed-bed hospital located in Mesquite, Texas,
a Dallas suburb. Mesquite Hospital, 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 offered by
Mesquite Hospital include obstetrics, emergency services, coronary/intensive
care, day surgery nursing, and geriatric psychiatry. In addition, Mesquite
Hospital's 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, admits and
refers patients into Mesquite from their private office practices. Patient
services are reimbursed from traditional insurance programs, managed care (HMO
and PPO), Medicare and Medicaid. Renovation of 14,400 square feet of existing
hospital space was completed in October 1996. According to a December 1995
industry survey, Mesquite Hospital was among the top 100 hospitals in the
nation based on a performance analysis evaluating key measures related to
clinical practices, operations, and financial management.
COMPETITION
Manor Care Realty competes for land, property acquisitions and development
opportunities with health care providers, real estate developers, health care
real estate investment trusts, real estate partnerships, and other investors.
ManorCare Health Services, the operator of the Skilled Nursing Facilities and
the assisted living facilities to be developed by Manor Care Realty, is
subject to competition from the operators of comparable facilities, including
skilled nursing, assisted living, and hospital providers. These competitors
include independent operators as well as regional and national companies that
manage multiple facilities. Manor Care Realty's competitors in the health care
real estate business are Alternative Living Services, American Health
Properties, Inc., American Retirement Corp., ARV Assisted Living, Assisted
Living Concepts, Inc., Atria Communities, Inc., Beverly Enterprises, Inc.,
Capstone Capital Corp., Carematrix Corp., Extendicare, Inc., Genesis Health
Ventures, Inc., G & L Realty Corp., Greenbriar Corp., Harborside Healthcare
Corp., Health Care Property Investors, Inc., Healthcare Realty Trust Inc.,
Health Care REIT, Inc., Health Care & Retirement Corp., Health and Retirement
Property Trust, Integrated Health Services, Integrated Living Communities,
Kapson
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Senior Quarters, Inc. Karrington Health, Inc., LTC Properties, Inc., Mariner
Health Group, Inc., Meditrust Corporation, National Healthcare L.P., National
Health Investors, Inc., Nationwide Health Properties, Inc., Newcare Health
Corp., Omega Healthcare Investors, Inc., Paragon Health Network, Inc., Regent
Assisted Living, Retirement Care Associates, Summit Care Corp., Sun Healthcare
Group, Inc., Sunrise Assisted Living, Inc., Unison Healthcare Corp., Universal
Health Realty Income Trust, and Vencor, Inc. ManorCare Realty's competitors in
the skilled nursing business are Advocat, Inc., Beverly Enterprises, Inc.,
Extendicare, Inc., Genesis Health Ventures, Inc., Health Care and Retirement
Corporation, Integrated Health Services, Inc., Mariner Health Group, Inc.,
National HealthCare L.P., Paragon Health Network, Inc., Sun Healthcare Group,
Inc. and Vencor, Inc. Certain operators have capital resources substantially
in excess of ManorCare Health Services. Operators compete on the basis of
breadth and quality of services, reputation, location and physical appearance
of the facilities, family preferences, strength of the operator's referral
stream and pricing. Mesquite Hospital encounters competition in the Mesquite,
Texas area where it competes with other hospitals for community and physician
acceptance.
In general, regulatory and other barriers to competitive entry in the
assisted living industry are not substantial. Some of the present and
potential competitors of ManorCare Health Services operate on a not-for-profit
basis or as charitable organizations, while others have, or may obtain,
greater financial resources than those of ManorCare Health Services.
Consequently, there can be no assurance that ManorCare Health Services will
not encounter increased competition that could limit its ability to attract
residents or expand its business. Moreover, if the development of new assisted
living facilities outpaces demand for those facilities in certain markets,
such markets may become saturated. Such an oversupply of facilities could
cause ManorCare Health Services to experience decreased occupancy, depressed
margins and lower operating results which may in turn have an adverse effect
on Manor Care Realty's results of operations.
GOVERNMENT REGULATION
The facilities which Manor Care Realty owns and develops and Mesquite
Hospital are subject to comprehensive and intricate federal, state and local
regulatory guidelines. The facilities themselves, as well as their respective
purposes and activities, are also subject to various local building codes and
other ordinances. In most cases compliance with the applicable statutes and
regulations will be the responsibility of ManorCare Health Services. Manor
Care Realty's success will depend in part upon the ability of ManorCare Health
Services to satisfy applicable regulations and requirements and to procure and
maintain required licenses in rapidly changing regulatory environments. The
failure of ManorCare Health Services or Mesquite Hospital to satisfy
applicable regulations or to procure or maintain a required license could have
a material adverse effect on Manor Care Realty. Moreover, certain regulatory
developments such as revisions in the building code requirements for assisted
living or skilled nursing facilities, mandatory increases in the scope and
quality of care to be offered to residents and revisions in licensing and
certification standards could also have a material adverse effect on Manor
Care Realty.
Changes in applicable laws and regulations or new interpretations of
existing laws and regulations could have a material adverse effect on
licensure of Manor Care Realty facilities, eligibility for participation in
federal and state programs, permissible activities, costs of doing business or
the levels of reimbursement from governmental, private and other sources. Any
one of these potential developments could have an immediate and very
significant effect on the revenues and profitability of the Skilled Nursing
Facilities or Mesquite Hospital. Apart from extensive existing health care
statutes and regulations, there are numerous initiatives on the federal and
state levels for comprehensive reforms. Manor Care Realty cannot predict the
ultimate timing, content or possible impact of future legislation and
regulations affecting the Skilled Nursing Facilities or Mesquite Hospital and
the health care industry in general. See "Risk Factors--Regulation."
Both ManorCare Health Services, as the operator of the Skilled Nursing
Facilities, and Mesquite Hospital are subject to Federal and state laws which
govern financial and other arrangements between health care providers. These
laws often prohibit certain direct and indirect payments or fee-splitting
arrangements between
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health care providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. These laws include the Federal "Stark Legislation"
which prohibits, with limited exceptions, the referral of patients for certain
services, including home health services, physical therapy and occupational
therapy, by a physician to an entity in which the physician has an ownership
interest and the Federal "anti-kickback law" which prohibits, among other
things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients or
the purchasing, leasing, ordering or arranging for any goods, facility
services or items for which payment can be made under Medicare and Medicaid.
The Federal government, private insurers and various state enforcement
agencies have increased their scrutiny of providers, business practices and
claims in an effort to identify and prosecute fraudulent and abusive
practices. The Federal government has issued recent fraud alerts concerning
nursing services, double billing, home health services and the provision of
medical supplies to nursing facilities; accordingly, these areas may come
under closer scrutiny by the government. Some states restrict certain business
relationships between physicians and other providers of health care services
and many states prohibit business corporations from providing, or holding
themselves out as a provider of, medical care. Possible sanctions for
violation of any of these restrictions or prohibitions include loss of
licensure or eligibility to participate in reimbursement programs, as well as
civil and criminal penalties. These laws vary from state to state, are often
vague and have seldom been interpreted by the courts or regulatory agencies.
There can be no assurance that such laws will ultimately be interpreted in a
manner consistent with the practices of ManorCare Health Services, as the
operator of the Skilled Nursing Facilities, or Mesquite Hospital.
Certificate of Need
Many of the states in which Manor Care Realty's facilities are leased and
operated have adopted Certificate of Need ("CON") statutes applicable to the
assisted living and skilled nursing facilities. CONs are required to build
skilled nursing facilities in 38 states and in at least eight states to build
assisted living facilities. CON or similar laws generally require that
approval must be obtained from the designated state health planning agency for
certain acquisitions and capital expenditures, and determine that a need
exists prior to the expansion of existing facilities, construction of new
facilities, addition of beds, acquisition of major items of equipment or
introduction of new services. CON laws typically do not affect the operations
of facilities that already are operating. CON laws are in effect in the
following states where Manor Care currently operates and where ManorCare
Health Services may continue to expand: Florida, Illinois, New Jersey, Ohio,
New York, Connecticut and Kentucky. In addition, many states currently have a
moratorium on the construction of new skilled nursing facilities. Failure to
obtain the necessary state approval may result in (i) the inability to provide
services, to operate a facility or to complete an acquisition, addition or
other change; (ii) the imposition of sanctions; (iii) adverse action on the
facility's license; and (iv) adverse reimbursement action. CONs or other
approvals may be required in connection with Manor Care Realty's future
developments and acquisitions. There can be no assurance that Manor Care
Realty or ManorCare Health Services will be able to obtain the CONs or other
approvals necessary for any or all such projects. There can be no assurance
that states with CON laws may not abolish such laws or that states without
such laws will not enact such CON laws. Manor Care has extensive experience
filing for CONs. During the period from 1987 to the present, Manor Care
completed 64 new skilled nursing facilities, most of which required CON
applications. During the past four fiscal years, Manor Care received CON
approval for 13 skilled nursing facilities and 18 assisted living facilities.
Federal and State Assistance Programs
Substantially all of Manor Care Realty's Skilled Nursing Facilities and
Mesquite Hospital are currently certified to receive benefits under Medicare
and Medicaid. Both initial and continuing qualification of a nursing center or
hospital to participate in such programs depends on many factors including
accommodations, equipment, services, patient care, safety, personnel, physical
environment and adequate policies, procedures and controls.
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 Realty
123
<PAGE>
can give no assurance that payments to ManorCare Health Services 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.
There have been numerous initiatives on the Federal and state levels for
comprehensive reforms affecting payment for and availability of health care
services. On August 5, 1997, Congress enacted the Balanced Budget Act of 1997
(the "Budget Act") which changes the manner in which Medicare reimburses
skilled nursing facilities for cost reporting periods beginning July 1, 1998.
For ManorCare Health Services, the Budget Act will be phased-in for cost report
years starting in November, 1998. Medicare is currently 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 per diem for specific
covered services regardless of actual cost. Specifically, the Budget Act
provides that, over three reporting periods starting July 1, 1998, the Medicare
program will phase into this prospective payment system. During the first
reporting period, skilled nursing facilities will receive 75% of their
reimbursement based on 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. Pursuant to the Balanced Budget Act of
1997, between November 1998 and June 1999, the Medicare payment system for
ManorCare Health Services will become prospective rather than retrospective.
The Budget Act also gives states greater flexibility in the administration of
their Medicaid programs in that the Budget Act repeals the requirement that
payment be reasonable and adequate to cover the costs of "efficiently and
economically operated" skilled nursing facilities. Manor Care Realty cannot
predict the impact that this change will have on ManorCare Health Services and,
indirectly, on Manor Care Realty. Manor Care Realty cannot predict whether any
other proposals will be adopted at the Federal or state level or, if adopted
and implemented, what effect, if any, such proposals will have on ManorCare
Health Services and, indirectly, Manor Care Realty. Manor Care Realty believes,
however, that government and private efforts to contain or reduce health care
costs will continue and that these trends are likely to lead to reduced or
slower growth in reimbursement for certain services provided by ManorCare
Health Services, which in turn will affect the revenue derived by Manor Care
Realty from ManorCare Health Services. A significant change in coverage,
reduction in payment rates by third-party payors or the decline in availability
of funding could have a material adverse effect on the business and financial
condition of ManorCare Health Services and, indirectly, Manor Care Realty's
results of operations and financial condition.
Home Health Care Moratorium. On September 15, 1997, President Clinton issued
a Medicare moratorium on new home health agencies. The moratorium is scheduled
to last for six months so that new regulations can be proposed to combat fraud.
Given the short duration of the moratorium and the fact that the moratorium
only pertains to new home health providers, Manor Care does not believe that
there will be any material adverse affect on either In Home Health or on
ManorCare Health Services as a result thereof.
Environmental Regulation
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property or an
entity that arranges for the disposal or treatment of hazardous or toxic
substances at a disposal site may be held jointly and severally liable for the
cost of removal or remediation of certain hazardous or toxic substances, that
could be located on, in or under such property. Such laws and regulation often
impose liability whether or not the owner, operator or otherwise responsible
party knew of, or caused, the presence of the hazardous of toxic substances.
The costs of any required remediation or removal of these substances can be
substantial and the liability of a responsible party as to any property is
generally not limited under such laws and regulation and could exceed the
property's value and the aggregate assets of the liable party. The presence of
these substances or failure to remediate such substances properly may also
adversely affect the owner's ability to sell or rent the property, or to borrow
using the property as collateral. In connection with the ownership and leasing
to third-parties of its properties, Manor Care Realty could be liable for these
costs, as well as certain other costs, including governmental fines and
injuries to persons or properties. See "--Legal Proceedings" and "Risk
Factors--Environmental Matters."
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<PAGE>
LEGAL PROCEEDINGS
Environmental. 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 waste clean-up. The
Actions arise out of the alleged activities of Cenco Incorporated and its
subsidiary and affiliated companies ("Cenco"). Cenco was acquired in 1981 by a
wholly owned subsidiary of Manor Care. The Actions allege that Cenco
transported and/or generated hazardous substances that came to be located at
the sites in question. The Company believes 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 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. Manor Care is engaged in
litigation with its insurers as to the extent of coverage available in
connection with the Actions. While it cannot be guaranteed, Manor Care Realty
believes it will ultimately be successful in the pending litigation with its
insurers.
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 Kramer landfill, located in Mantua, New
Jersey, where subsidiaries of Cenco allegedly transported waste. 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 also defendant in that suit. Based
upon a final allocation plan, and also in view of its insurance coverage
(assuming Manor Care prevails in its litigation with such insurers), Manor
Care Realty believes that the Kramer Action will not have a material adverse
effect on its financial condition or results of operations. This final
allocation plan is not binding. If the matter is not resolved by settlement, a
court would have to allocate responsibility and Manor Care Realty's allocation
could change. In addition, should Manor Care Realty fail to favorably resolve
the litigation with its insurers, some Actions individually and the Actions in
the aggregate could have an adverse effect on its financial condition or
results of operations.
After the Distribution, Manor Care Realty will retain liability for the
Actions and pursuant to the Distribution Agreement will indemnify ManorCare
Health Services against any liabilities and losses arising out of the Actions.
Although Manor Care, together with its insurers, is vigorously contesting its
liability in the Actions, it is not possible at the present time to accurately
estimate the ultimate legal and financial liability of Manor Care Realty in
respect to the Actions. Manor Care Realty believes, however, that any such
liability will not be material. Furthermore, Manor Care cannot guarantee that
additional environmental claims of this nature, for which Manor Care may incur
liability, will not arise in the future. See "Description of the Transactions
- -- The Distribution."
The potential liability exposure for currently pending environmental claims
and litigation, without regard to insurance coverage, cannot be quantified
with precision because of the inherent uncertainties of litigation in the
Actions and the fact that the ultimate cost of the remedial actions for some
of the waste disposal sites where Manor Care is alleged to be a potentially
responsible party has not yet been quantified. Manor Care believes that the
potentially 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.
Other. Manor Care Realty will also retain liability for certain regulatory
and legal actions, investigations or claims for damages that have arisen in
the ordinary course of business. Although it is impossible to predict
125
<PAGE>
the outcome of any legal proceeding and Manor Care Realty cannot estimate the
range of the ultimate liability, if any, relating to these proceedings, Manor
Care Realty believes that the outcome of such proceedings should not,
individually or in the aggregate, have a material adverse effect on the
results of operations or financial condition of Manor Care Realty.
EMPLOYEES
After consummation of the Distribution, Manor Care Realty will have
approximately 160 full and part-time employees, 100 of whom will be employed
in development operations and the remainder in Manor Care Realty's
Headquarters. In addition, Mesquite Hospital will have approximately 600 full
and part-time employees.
PROPERTIES
The real estate portfolio of Manor Care Realty consists of 168 skilled
nursing facilities, two skilled nursing and 25 assisted living facilities
under construction, three skilled nursing and 64 assisted living facilities
under contract and in development, and one acute care hospital.
The skilled nursing facilities owned by Manor Care Realty and operated by
ManorCare Health Services range in bed capacity from 53 to 265 beds and have
an aggregate bed capacity of 23,724 beds. Most of the skilled nursing
facilities have been designed to permit private and semi-private patient room
accommodations. Most facilities have individually controlled heating and air-
conditioning units. Each skilled nursing facility contains a fully equipped
kitchen, day room areas, administrative offices and in most cases a physical
therapy room.
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<PAGE>
MANOR CARE REALTY PRO FORMA FINANCIAL DATA
The unaudited pro forma consolidated condensed statements of income of Manor
Care Realty for the fiscal year ended May 31, 1997 and the three month period
ended August 31, 1997 give effect to the Distribution and related
transactions, including the Credit Facilities and the Realty Note, the Lease
Agreements, the Assisted Living Facility Management Agreements, net additional
costs associated with general corporate functions, the consummation of the
Exchange Offer, the Debt Offering and the use of proceeds therefrom as if such
transactions occurred on June 1, 1996 and June 1, 1997, respectively. The
unaudited pro forma consolidated condensed statements of income for the fiscal
year ended May 31, 1997 and the three month period ended August 31, 1997 have
been prepared by adjusting the historical consolidated statements of income to
reflect the Distribution and related transactions as if they had been effected
on June 1, 1996 and June 1, 1997, respectively. The unaudited pro forma
consolidated condensed balance sheet of Manor Care Realty at August 31, 1997
gives effect to such transactions as if such transactions had occurred at that
date. Such balance sheet has been prepared by adjusting the historical
consolidated balance sheet to reflect the Distribution and related
transactions as if they had been effected on August 31, 1997. The unaudited
pro forma financial statements should be read in conjunction with the
financial data presented elsewhere or incorporated herein. The pro forma
financial data are presented for informational purposes only and may not
reflect the future results of operations or financial position of Manor Care
Realty.
127
<PAGE>
MANOR CARE REALTY
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MAY 31,
-----------------------------------------------------------------
PRO FORMA ADJUSTMENTS
------------------------------------------
PRO
HISTORICAL LEASE MANAGEMENT FORMA
1997 DISTRIBUTION AGREEMENTS AGREEMENT 1997
---------- ------------ ----------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................. $1,056,095 $ 1,603 (a) $(1,017,570)(c) $217,132
177,004 (d)
EXPENSES
Operating expenses...... 849,251 2,081 (a) (733,362)(c) $ 402 (e) 59,013(j)
77 (a) (59,774)(b)
338 (b)
Depreciation and
amortization........... 60,243 365 (a) 60,608
---------- --------- ----------- ------ --------
Total expenses.......... 909,494 2,861 (793,136) 402 119,621
---------- --------- ----------- ------ --------
INCOME FROM CONTINUING
OPERATIONS BEFORE OTHER
INCOME AND EXPENSES AND
INCOME TAXES............ 146,601 (1,258) (47,430) (402) 97,511
---------- --------- ----------- ------ --------
OTHER INCOME AND
(EXPENSES)
Interest income from
advances to
discontinued lodging
segment................ 21,221 21,221
Interest income and
other.................. 6,400 6,400
Interest expense........ (24,514) (28,709)(f) (64,414)
(11,191)(g)
---------- --------- ----------- ------ --------
Total other income and 3,107 (39,900) -- -- (36,793)
(expenses), net........ ---------- --------- ----------- ------ --------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES................... 149,708 (41,158) (47,430) (402) 60,718
INCOME TAXES............. 60,783 (16,278)(h) (18,759)(h) (159)(h) 25,587
---------- --------- ----------- ------ --------
INCOME FROM CONTINUING
OPERATIONS.............. 88,925 (24,880) (28,671) (243) 35,131
DISCONTINUED ASSISTED
LIVING, PHARMACY AND
HOME HEALTH OPERATIONS
Income from discontinued
assisted living,
pharmacy and home
health operations (net
of income taxes of
$23,917)................. 36,188 (36,188)(i) --
DISCONTINUED LODGING
OPERATIONS..............
Income from discontinued
lodging operations (net
of income taxes of
$8,734).................. 11,829 11,829
---------- --------- ----------- ------ -------- ---
NET INCOME............... $ 136,942 $ (61,068) $ (28,671) $ (243) $ 46,960
---------- --------- ----------- ------ -------- ---
WEIGHTED AVERAGE SHARES
OF COMMON STOCK......... 63,257 63,257
---------- -------- ---
INCOME PER SHARE OF
COMMON STOCK
Income from continuing
operations.............. $ 1.40 $ 0.55
Income from discontinued
assisted living,
pharmacy and home
health operations...... 0.57 --
Income from discontinued
lodging operations..... 0.19 0.19
---------- --------
Net income per share of
common stock........... $ 2.16 $ 0.74
========== ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed statement of income.
128
<PAGE>
MANOR CARE REALTY
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED AUGUST 31, 1997
-----------------------------------------------------------------
PRO FORMA ADJUSTMENTS
---------------------------------------
LEASE MANAGEMENT
HISTORICAL DISTRIBUTION AGREEMENT AGREEMENT PRO FORMA
---------- ------------ --------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................. $274,054 $ 1,035 (a) $(278,102)(c) $ 41,429
44,442 (d)
EXPENSES
Operating expenses...... 219,512 1,099 (a) (205,385)(c) $ 70 (e) 5,559 (j)
73 (a)
85 (b) (9,895)(b)
Depreciation and
amortization........... 15,985 260 (a) 16,245
-------- -------- --------- ---- --------
Total expenses.......... 235,497 1,517 (215,280) 70 21,804
-------- -------- --------- ---- --------
INCOME BEFORE OTHER
INCOME AND (EXPENSES)
AND INCOME TAXES........ 38,557 (482) (18,380) (70) 19,625
OTHER INCOME AND
(EXPENSES)
Interest income from
advances to
discontinued lodging
segment................ 2,604 2,604
Interest income and
other.................. 2,592 2,592
Interest expense........ (6,829) (7,177)(f) (17,118)
(3,112)(g)
-------- -------- --------- ---- --------
INCOME BEFORE INCOME
TAXES................... 36,924 (10,771) (18,380) (70) 7,703
INCOME TAXES............. 14,100 (4,260)(h) (6,920)(h) (28)(h) 2,892
Income from discontinued
assisted living,
pharmacy and home
health operations (net
of income taxes of
$750).................. (2,964) 2,964 (i) --
-------- -------- --------- ---- --------
NET INCOME............... $ 19,860 $ (3,547) $ (11,460) $(42) $ 4,811
======== ======== ========= ==== ========
WEIGHTED AVERAGE SHARES
OF COMMON STOCK......... 63,708 63,708
-------- --------
INCOME PER SHARE OF
COMMON STOCK
Income from continuing
operations............. $ 0.36 $ 0.08
Income from discontinued
assisted living,
pharmacy and home
health operations...... (0.05) --
-------- --------
Net income per share of
common stock........... $ 0.31 $ 0.08
======== ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed statement of income.
129
<PAGE>
MANOR CARE REALTY PRO FORMA CONSOLIDATED CONDENSED BALANC E SHEET AS OF
AUGUST 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
AUGUST 31, 1997 ADJUSTMENTS PRO FORMA
--------------- ---------------------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equiva-
lents.................. $ 30,063 $ 500,000 (e) $ 168
(250,000)(a)
12,500 (d)
30,000 (b)
(329,900)(e)
(20,495)(f)
28,000 (e)
Advances to discontinued
lodging segment........ 115,723 -- 115,723(j)
Other current assets.... 224,612 (2,625)(b) 183,295
(12,956)(d)
(25,901)(g)
165 (i)
---------- --------- ----------
Total current assets.... 370,398 (71,212) 299,186
Property and equipment,
net.................... 830,457 (14,605)(a) 834,400
18,548 (i)
Due from discontinued
assisted living, phar-
macy and home health
segments............... 75,560 (75,560)(b) --
Net investment in dis-
continued assisted liv-
ing, pharmacy and home
health segments........ 277,235 (277,235)(a) --
Other assets............ 84,642 (28,516)(a) 59,391
14,500 (f)
(11,994)(g)
759 (i)
---------- --------- ----------
Total assets............ $1,638,292 $(445,315) $1,192,977
========== ========= ==========
Total current liabili-
ties................... $ 169,585 $ (2,625)(b) $ 175,185
51,134 (d)
(24,326)(g)
(19,092)(h)
509 (i)
Long-term debt.......... 551,507 (149,500)(c) 554,547
(45,560)(b)
198,100 (e)
Realty Note............. -- 250,000 (a) 250,000
Other long-term liabili-
ties................... 206,523 (25,500)(g) 199,021
17,339 (h)
659 (i)
---------- --------- ----------
Total liabilities....... 927,615 251,138 1,178,753
Total shareholders' eq-
uity................... 710,677 (820,356)(a) 14,224
1,753 (h)
149,500 (c)
(51,590)(d)
(5,995)(f)
11,931 (g)
18,304 (i)
---------- --------- ----------
Total liabilities and $1,638,292 $(445,315) $1,192,977
shareholders' equity... ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed balance sheet.
130
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
a) Reflects the revenues, income and expenses associated with facilities which
opened during fiscal year 1997 (the "Developed Properties"). These
facilities would not have been purchased by ManorCare Health Services under
the terms of the Development Agreement until such facilities achieved 75%
occupancy. All revenues and expenses associated with the operations of
assisted living facilities during the stabilization period of operations
will be reported in the income statement of Manor Care Realty. When an
assisted living facility is sold to ManorCare Health Services, all
subsequent operations of that facility will be recorded on ManorCare Health
Services' income statement.
b) Reflects net additional costs annually of $0.3 million, or $0.1 million per
quarter, associated with staffing of human resources, finance, legal,
information technology, cash management and accounting personnel, directors
costs and the transfer of expenses to ManorCare Health Services.
Transferred expenses of $59.8 million for the fiscal year ended May 31,
1997 and $9.9 million for the three months ended August 31, 1997 are
related to functions which will be transferred to ManorCare Health
Services. These functions include finance and accounting, information
resources, legal, human resources, community and program development,
product management, and acquisitions. Costs are transferred based on the
historical costs incurred for these functions by Manor Care, Inc.
c) Reflects revenues and operating expenses of skilled nursing facilities
owned by Manor Care Realty and leased by ManorCare Health Services under
the terms of the Lease Agreements.
d) Reflects lease payments from ManorCare Health Services for skilled nursing
facilities under the terms of the Lease Agreements.
e) Reflects management fees associated with management of the Developed
Properties under the terms of the Assisted Living Facility Management
Agreements. See Note (a).
f) Reflects additional interest expense associated with the indebtedness under
the Credit Facilities at an estimated interest rate of 8.25% ($12.4 million
for the fiscal year ended May 31, 1997 and $3.1 million for the three
months ended August 31, 1997), the issuance of $350 million aggregate
principal amount of notes offered hereby at an estimated rate of 8.75%
($30.6 million and $7.6 million, respectively), the issuance of the $250
million Realty Note ($21.9 million and $5.5 million, respectively), the
redemption of the Senior Subordinated Notes ($13.3 million and $3.3 million
of interest savings, respectively), the repayment of the Existing Revolving
Credit Facility and the Promissory Note ($9.4 million and $2.4 million of
interest savings, respectively), additional borrowings of $28 million under
the New Credit Facilities ($1.8 million and $.5 million, respectively),
capitalized interest related to development of Arden Courts and Springhouse
facilities of ($4.0 million and $1.0 million, respectively), and interest
savings due to the Exchange Offer ($11.2 million and $2.8 million,
respectively). Exchange Offer interest savings are calculated assuming that
the holders of 100% of the Old Senior Notes accept the Exchange Offer.
Consummation of the Exchange Offer is conditioned on the minimum tender
condition. To the extent that Old Senior Notes remain outstanding upon
consummation of the Exchange Offer, the principal amount of the Realty Note
or the amount of the cash portion of the Capital Contribution to ManorCare
Health Services may be reduced.
g) Reflects reversal of intercompany interest allocated to ManorCare Health
Services.
h) Reflects tax effect of adjustments made pursuant to notes (a) through (g).
i) Reflects the elimination of income from discontinued assisted living,
pharmacy and home health operations as if the transaction had been effected
on June 1, 1996 for the pro forma combined condensed statement of income
for the fiscal year ended May 31, 1997 and on June 1, 1997 for the pro
forma combined condensed statement of income for the three months ended
August 31, 1997.
j) Pro forma operating expenses consist of Mesquite Hospital operating
expenses, property taxes on the facilities, management fees associated with
the management by ManorCare Health Services of the Developed Properties
under the terms of the Assisted Living Facility Management Agreements and
general corporate expenses.
131
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
a) Reflects cash of $250.0 million, the Realty Note and other net assets
contributed to the discontinued assisted living, pharmacy and home health
operations at the Effective Date.
b) Reflects the transfer of the assisted living facility mortgages of $48.2
million to ManorCare Health Services on the Effective Date, and the
repayment by ManorCare Health Services of its allocated portion of the
Existing Revolving Credit Facility ($30.0 million).
c) Reflects consummation of the Exchange Offer (net of discount), assuming
that the holders of 100% of the Old Senior Notes accept the Exchange Offer.
Consummation of the Exchange Offer is conditioned on the Minimum Tender
Condition. To the extent that Old Senior Notes remain outstanding upon
consummation of the Exchange Offer, the principal amount of the Realty Note
or the amount of the cash portion of the Capital Contribution to ManorCare
Health Services may be reduced. Also reflects the redemption of the Senior
Subordinated Notes.
d) Reflects the non-cash working capital of the skilled nursing facilities to
be transferred to ManorCare Health Services pursuant to the terms of the
Distribution Agreement. The working capital will be transferred to
ManorCare Health Services as lessee, operator and manager of these
facilities pursuant to the Lease Agreements. Accordingly, the functions of
cash collections and payments will be assumed by ManorCare Health Services
after the Distribution. ManorCare Realty will dividend the working capital
to ManorCare Health Services at the date of Distribution; ManorCare Health
Services will reimburse Manor Care Realty for up to $12.5 million of this
amount.
e) Reflects the additional $150 million of Term Loan indebtedness and $350
million of Manor Care Notes offered hereby as well as the redemption of
$140 million of Senior Subordinated Notes, the repayment of the amount
outstanding under the Existing Revolving Credit Facility and the Promissory
Note, the repayment of certain mortgages of skilled nursing facilities of
$0.5 million, and $28 million drawn from the Credit Facilities.
f) Reflects capitalized deferred financing fees of $14.5 million and payment
of transaction fees of $6.0 million.
g) Reflects the transfer of benefits and workers' compensation liabilities to
ManorCare Health Services pursuant to the Employee Benefits Allocation
Agreement.
h) Reflects the allocation of deferred tax liabilities to ManorCare Health
Services pursuant to the Tax Sharing Agreement.
(i) Reflects the assets and liabilities attributable to the Developed
Properties.
(j) The advances to discontinued lodging segment were repaid on October 15,
1997.
132
<PAGE>
MANAGEMENT OF MANOR CARE REALTY AFTER THE DISTRIBUTION
DIRECTORS AND EXECUTIVE OFFICERS OF MANOR CARE REALTY
The name, age, proposed title upon consummation of the Distribution and
business background of certain of the persons who are expected to become on
the Effective Date the directors and executive officers of Manor Care Realty
are set forth below. At or prior to the Effective Date, certain additional
individuals may be appointed as directors or executive officers. The business
address of each of the prospective executive officers is 11555 Darnestown
Road, Gaithersburg, Maryland, 20878, unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Stewart Bainum, Jr. 51 Chairman of the Board and Director
Joseph R. Buckley 49 Chief Executive Officer and Director
Senior Vice President and Chief Financial
Leigh C. Comas 32 Officer
Senior Vice President, Construction and
Larry R. Godla 40 Development
Senior Vice President, General Counsel and
Edward A. Kubis 38 Secretary
Margarita A. Schoendorfer 48 Vice President and Controller
Donald M. Feltman 42 Vice President, Development
Kennett L. Simmons 55 Director
Ann Torre Grant 38 Director
William L. Jews 45 Director
</TABLE>
Stewart Bainum, Jr. Mr. Bainum, Jr. will resign as Chief Executive Officer
of Manor Care on the Effective Date. Following the Distribution, Mr. Bainum,
Jr. will also act as Chairman of the Board of Manor Care Realty. Mr. Bainum,
Jr. has also acted as Chairman of the Board of Choice Hotels since October
1997, and of Sunburst (formerly named Choice Hotels International, Inc.) since
November 1996. It is expected that Mr. Bainum, Jr. will devote 12.5% of his
time to Choice Hotels, 12.5% of his time to Sunburst, 37.5% of his time to
ManorCare Health Services and 37.5% of his time to Manor Care Realty. Chairman
of the Board of Manor Care and Chairman of the Board of the principal
operating subsidiary of Manor Care, which prior to the Distribution owned and
operated Manor Care's assisted living and skilled nursing facilities ("Old
ManorCare Health Services") 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; Vice Chairman of the Board of Vitalink from
February 1995 to February 1997; Vice Chairman of the Board of Manor Care and
subsidiaries from June 1982 to March 1987; Director of Manor Care since August
1981, of Vitalink since September 1991, of Old ManorCare Health Services since
1976 and of Choice and its predecessors since 1977; Chief Executive Officer of
Old ManorCare Health Services since June 1989 and President from May 1990 to
May 1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991; Chairman of the Board of Choice from March 1987
to June 1990.
Joseph R. Buckley. Executive Vice President of Manor Care and Old ManorCare
Health Services since March 1996; Director of Vitalink since July 1996;
President, Assisted Living Division of Old ManorCare Health Services from
February 1995 to March 1996; Senior Vice President-Information Resources and
Development of Manor Care from June 1990 to February 1995; Vice President-
Information Resources and Development of Manor Care from July 1989 to June
1990; Vice President-Real Estate from September 1983 to July 1989; Director of
Vitalink since July 1996; Chairman of the Board of In Home Health since June
1997 and Director since October 1995.
Leigh C. Comas. Vice President, Finance and Treasurer of Manor Care and Old
ManorCare Health Services since September 1996; Vice President, Finance and
Assistant Treasurer of Manor Care from September 1995 to September 1996;
Assistant Treasurer of Manor Care and Old ManorCare Health Services from
September 1993 to September 1995.
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Larry R. Godla. Vice President of Development and Construction, Manor Care
Inc. since March 1996; Vice President of Construction of Manor Care, Inc. from
March 1993 to March 1996; Director of Construction of Manor Care, Inc. from
January 1990 to March 1993; Vice President of Construction at Spaulding and
Slye Company from January 1984 to January 1990; Project Manager at Omni
Construction from August 1981 to December 1983.
Edward A. Kubis. Senior Vice President and General Counsel of Choice
Management and Realty Services a division of Choice, since June 1997; Senior
Vice President, General Counsel and Secretary of Choice from November 1996 to
June 1997; Assistant General Counsel and Assistant Secretary, Manor Care from
December 1993 to November 1996; Senior Attorney, Real Estate, from December
1990 to December 1993; Staff Attorney, Real Estate from June 1987 to December
1990.
Margarita A. Schoendorfer. Vice President and Controller of Manor Care since
November 1990.
Donald M. Feltman. Vice President of Development at Manor Care, Inc. since
March 1993; Director of Development at Marriott Senior Living Services from
July 1988 to March 1993; Director of Development and various other development
positions at Manor Care, Inc. from March 1977 to July 1988.
Kennett L. Simmons. 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; Director of United
Healthcare and Virginia Health Care Foundation.
Ann Torre Grant. Executive Vice President, Chief Financial Officer and
Treasurer of NHP Incorporated since February 1995; Vice President and
Treasurer of USAir, Inc. and USAir Group, Inc. from 1991 to January 1995;
Director of Franklin Mutual Series Funds and SLM Holding Corp.
William L. Jews. President and Chief Executive Officer, Blue Cross and Blue
Shield of Maryland since April 1993; President and Chief Executive Officer,
Dimensions Health Corporation from March 1990 through March 1993; Director of
Crown Central Petroleum Corp., Municipal Mortgage and Equity, L.L.C.,
NationsBank, N.A. and The Ryland Group, Inc.
EMPLOYMENT AGREEMENTS.
Manor Care Realty expects to enter into an employment agreement effective
upon the Effective Date, with Joseph R. Buckley (the "Employment Agreement"),
providing for Mr. Buckley's employment as Chief Executive Officer of Manor
Care Realty. The Employment Agreement will have a term of five years. The
Employment Agreement provides for a base salary of $350,000 per annum for
services to Manor Care Realty and a maximum bonus of 60% of Mr. Buckley's base
compensation based upon performance of Manor Care Realty.
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DESCRIPTION OF CERTAIN INDEBTEDNESS OF MANOR CARE REALTY
THE REALTY NOTE
On or prior to the Effective Date, Manor Care will make or cause to be made
a capital contribution to ManorCare Health Services of (i) approximately $250
million in cash and (ii) the Realty Note of Manor Care Real Estate in an
aggregate amount of up to $250 million. See "Description of the Transactions--
The Realty Note."
THE CREDIT FACILITIES
Manor Care, on behalf of Manor Care Real Estate, is negotiating a Commitment
Letter with Chase and CSI pursuant to which Chase is expected to agree to act
as administrative agent for a syndicate of financial institutions for the
Credit Facilities and CSI is expected to agree to act as arranger for the
Credit Facilities. The following summary of the anticipated provisions of the
Commitment Letter does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Commitment Letter.
Manor Care expects that the Commitment Letter will provide for an eight-year
$150 million term loan facility, subject to earlier maturity under certain
circumstances, (the "Term Facility") and a five-year $300 million revolving
credit facility (the "Revolving Facility" and, together with the Term
Facility, the "Credit Facilities"). A portion of the Revolving Facility may be
used for the issuance of letters of credit. Unless leases representing a
percentage to be agreed upon of the revenues represented by the Lease
Agreements have been terminated (a "Lease Termination"), borrowings under the
Term Facility will amortize quarterly for eight years after the closing as
follows:
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION
YEAR AMOUNT
- ---- ------------
<S> <C>
1998............................................................... $1,000,000
1999............................................................... $1,000,000
2000............................................................... $1,000,000
2001............................................................... $1,000,000
2002............................................................... $1,000,000
2003............................................................... $1,000,000
2004............................................................... $72,000,000
2005............................................................... $72,000,000
</TABLE>
Manor Care Real Estate will be required to notify Chase of an anticipated
Lease Termination at least twelve months in advance of such occurrence; the
date of the Lease Termination shall be the new Term Facility maturity date and
the amortization schedule set forth above will automatically be adjusted so
that outstanding loans under the Term Facility will amortize in equal
quarterly installments over the last four amortization dates prior to the new
maturity date.
Manor Care expects that loans under the Revolving Facility will bear
interest, at Manor Care Real Estate's option, at adjusted LIBOR or Chase's
adjusted base rate ("ABR"), in each case, plus a variable margin which will be
adjusted depending on Manor Care Real Estate's ratio of total debt to EBITDA.
The LIBOR margin and ABR margin applicable to loans under the Term Facility
will be % and %, respectively. The Company will pay a quarterly commitment
fee based on the ratio of Manor Care Real Estate's debt to EBITDA.
Manor Care expects that proceeds of loans under the Credit Facilities
together with part of the proceeds from the sale of the Manor Care Notes will
be used to repay amounts outstanding under Manor Care's Existing Revolving
Credit Facility, to provide funds for the cash portion of the Capital
Contribution and for general corporate purposes, including but not limited to,
working capital, capital expenditures, certain acquisitions, real estate
development costs and to pay related transaction expenses. Proceeds of the
loans under the Credit Facilities will not be used to repurchase or refinance
the Realty Note.
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Manor Care expects that the Credit Facilities will be subject to mandatory
prepayment with 50% of the net proceeds of certain equity issuances by Manor
Care Realty; 100% of the net proceeds of certain debt issuances and asset
sales by Manor Care Realty and its subsidiaries; and 75% of Manor Care Real
Estate's excess cash flow.
It is anticipated that the obligations of Manor Care Real Estate under the
Credit Facilities will be unconditionally guaranteed by Manor Care Realty and
each of Manor Care Realty's significant subsidiaries. In addition, it is
anticipated that the obligations of Manor Care Real Estate under the Credit
Facilities will be secured by (i) a first priority pledge of the capital stock
held by Manor Care Realty or its subsidiaries in Manor Care Real Estate or in
significant subsidiaries of Manor Care Realty; (ii) an assignment of Manor
Care Realty's rights under certain agreements with ManorCare Health Services,
including the Lease Agreements and the Development Agreement; and (iii)
security interests in substantially all the assets of Manor Care Realty or
Manor Care Real Estate and by a pledge of the capital stock of Manor Care Real
Estate and Manor Care Realty's other subsidiaries. The terms of the Credit
Facilities will require the release of a Subsidiary Guarantor's Guarantee
under the Indenture in the event such Subsidiary Guarantor is not an obligor
under the Credit Facilities.
It is anticipated that the Credit Facilities will contain covenants
customary for transactions of this type, including, without limitation,
restrictions on indebtedness, line of business, sale of receivables, mergers
and consolidations, asset sales, liens and sale-leaseback transactions, loans,
investments, transactions with affiliates, changes in fiscal year and
accounting practices, termination or amendment of material agreements;
amendment, prepayment or redemption of other indebtedness, and dividends and
stock repurchases and a prohibition on the grant of negative pledges. It is
anticipated that the Credit Facilities will also contain financial covenants
including ratio of consolidated EBITDA to consolidated interest expense, ratio
of total debt to consolidated EBITDA and limitations on capital expenditures.
It is anticipated that events of default under the Credit Facilities will
include, without limitation, and subject to certain cure periods and
exceptions: (i) nonpayment of principal, interest, fees and other amounts
payable when due; (ii) violation of covenants; (iii) material incorrectness of
representations and warranties; (iv) change of control of Manor Care Realty;
(v) cross defaults or cross acceleration with respect to any material
indebtedness; (vi) the occurrence of certain material adverse events with
respect to ERISA plans; (vii) the imposition of material judgment against
Manor Care Realty or the commencement of a voluntary or involuntary bankruptcy
of Manor Care Realty or its subsidiaries; and (viii) material default by Manor
Care Realty under material agreements with ManorCare Health Services. In the
event that the commitment letter is executed, Chase and CSI will commit to
purchase a portion of such facility and will use their commercially reasonable
efforts to arrange the balance of such facility with other lenders.
THE MANOR CARE NOTES
The Manor Care Notes will be unsecured general obligations of Manor Care
Real Estate ranking senior to all subordinated indebtedness of Manor Care Real
Estate and pari passu in right of payment with all other indebtedness of Manor
Care Real Estate, including borrowings under the Credit Facilities and the
Realty Note. Manor Care Real Estate's obligations under the Manor Care Notes
will be fully and unconditionally and jointly and severally guaranteed on a
senior unsecured basis (the "Guarantees") by Manor Care Realty (the "Parent
Guarantor") and substantially all of the Parent Guarantor's present and future
subsidiaries, other certain inactive restricted subsidiaries with no material
assets (the "Subsidiary Guarantors" and, together with the Parent Guarantor,
the "Guarantors"). The Guarantees will be general unsecured obligations of the
Guarantors ranking senior to all subordinated indebtedness of the Guarantors,
including the Old Senior Notes, and pari passu in right of payment with all
other indebtedness of the Guarantors, including guarantees of the Credit
Facilities and the Realty Note. The Manor Care Notes will be issued pursuant
to an Indenture among Manor Care Real Estate, the Guarantors and , as
Trustee (the "Indenture").
The aggregate principal amount of the Manor Care Notes will be $350 million
and the Manor Care Notes will mature on , 2008. Interest on the Manor Care
Notes will accrue at % per annum and will be payable semi-annually in
arrears.
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The Manor Care Notes will be redeemable at the option of Manor Care Real
Estate, in whole or in part, at any time on or after , 2003, initially at
% and at decreasing prices thereafter to and including , 2008 together
with accrued and unpaid interest. In addition, at any time and from time to
time on or prior to , 2001, Manor Care Real Estate may redeem up to 35% of
the aggregate principal amount of the Manor Care Notes with the net cash
proceeds of one or more Public Equity Offerings by the Parent Guarantor or
Manor Care Real Estate, at a redemption price equal to % of the principal
amount to be redeemed, together with accrued and unpaid interest, provided
that at least 65% aggregate principal amount of the Manor Care Notes
originally issued remains outstanding after each such redemption.
The indenture under which the Manor Care Notes will be issued (the
"Indenture") will limit, among other things, (i) the incurrence of additional
indebtedness by Manor Care Realty and its Restricted Subsidiaries, (ii) the
payment of dividends on, and redemption of, capital stock of Manor Care Realty
and its Restricted Subsidiaries, (iii) investments by Manor Care Realty and
its restricted subsidiaries, (iv) sales of assets by Manor Care Realty and its
restricted subsidiaries and Restricted Subsidiary stock, (v) transactions with
affiliates, (vi) the creation of liens by Manor Care Realty and its restricted
subsidiaries and (vii) consolidations, mergers and transfers of all or
substantially all of the assets of Manor Care Real Estate or Manor Care
Realty. The Indenture will also contain certain restrictions on distributions
from Restricted Subsidiaries. However, all of these limitations and
prohibitions are subject to a number of important qualifications and
exceptions. Certain of such covenants will not apply and will have no force
and effect from and after such time as unsecured indebtedness of Manor Care
Realty shall have been rated (i) at least BBB- (or the equivalent successor
rating) by S&P and (ii) at least Baa3 (or the equivalent successor rating) by
Moody's.
This Registration Statement shall not constitute an offer to sell or the
solicitation of an offer to buy the Manor Care Notes.
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RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES
AFTER THE DISTRIBUTION
For purposes of governing certain of the ongoing relationships between Manor
Care Realty and ManorCare Health Services after the Distribution and to
provide for an orderly transition on the Effective Date to the status of two
separate, independent companies, Manor Care and ManorCare Health Services are
entering into various agreements described below. The discussion below is a
summary of the principal provisions of the Lease Agreements, the Development
Agreement, the Non-Competition Agreement, the Assisted Living Facility
Management Agreement, the Employee Benefits and Other Employment Matters
Allocation Agreement, the Employee Benefits Administration Agreement, the
Office Lease Agreement, the Distribution Agreement, the Tax Sharing Agreement,
the Tax Administration Agreement, the Corporate Services Agreement, the
Trademark Agreement, the Cash Management Agreement, the Risk Management
Consulting Services Agreement, and the Realty Note. This summary does not
purport to be complete. Reference is made to the complete provisions of, and
such summary is qualified in its entirety by reference to, such agreements,
copies of which are filed as exhibits to the Registration Statement of which
this Registration Statement forms a part. See "Risk Factors--Potential
Conflicts With Manor Care Realty."
LEASE AGREEMENTS RELATING TO SKILLED NURSING FACILITIES
Manor Care Realty and ManorCare Health Services will enter into Lease
Agreements (each a "Lease Agreement," and collectively the "Lease
Agreements"), pursuant to which Manor Care Realty will lease to ManorCare
Health Services all the Skilled Nursing Facilities owned by Manor Care, and
Manor Care Realty will grant to ManorCare Health Services, the right to
operate and manage, pursuant to the Lease Agreements, all of Manor Care
Realty's current skilled nursing facilities and, by separate agreement, its
future skilled nursing facilities. Under each Lease Agreement, ManorCare
Health Services' use of the subject facility will be limited to operating a
skilled nursing facility together with such other ancillary uses as exist on
the Effective Date at such facility. Manor Care Realty and ManorCare Health
Services will also enter into Lease Agreements or similar arrangements
pursuant to which ManorCare Health Services will also lease and operate two
skilled nursing facilities in which Manor Care Realty is a substantial equity
investor by joint venture, common ownership or otherwise.
Under the Lease Agreements, ManorCare Health Services will operate and
manage the facilities and will collect all revenues from the facilities. Under
the Lease Agreement for each facility, ManorCare Health Services will be
obligated to pay Manor Care Realty annual rent ("Premises Rent") equal to the
greater of (i) 77% of Net Operating Profit and (ii) a value of the subject
facility agreed upon by ManorCare Health Services and Manor Care Realty (the
"Priority Basis") multiplied by 10%; provided that the Premises Rent for a
specific Lease Year may be reduced below these two amounts as a result of the
deferral mechanism described below. Manor Care Realty and ManorCare Health
Services have determined that Premises Rent for the fiscal year ended May 31,
1998 will be paid on an aggregate portfolio basis, not on a facility by
facility basis. The Premises Rent on a facility is payable in installments
(each "Monthly Premises Rent"), as follows: (i) on the first day of each
calendar month of each Lease Year, commencing with the first day of the month
following the month in which the commencement date of the Lease Agreement
occurs, ManorCare Health Services shall pay to Manor Care Realty an amount
equal to one-twelfth of 10% of the Priority Basis (the "Monthly Priority
Sum"); and (ii) on or before the fifteenth day of each calendar month of each
Lease Year, commencing with the fifteenth day of the month following the month
in which the commencement date of the Lease Agreement occurs, if 77% of the
Net Operating Profit for the Lease Year to date is greater than 10% of the
Priority Basis (the "Priority Sum") multiplied by a fraction the numerator of
which is the number of days that have passed in the applicable Lease Year and
the denominator of which is 365, ManorCare Health Services shall pay to Manor
Care Realty an amount equal to such excess and (iii) on or before the
fifteenth day of each calendar month of each Lease Year, commencing with the
fifteenth day of the month following the month in which the commencement date
of the Lease Agreement occurs, if the Net Operating Profit for the Lease Year
to date is less than the Priority Sum allocable to the Lease Year to date,
Manor Care Realty shall repay to ManorCare Health Services an amount
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equal to such deficiency. Amount paid by Manor Care Realty to ManorCare Health
Services are referred to as "Deferred Premises Rent." The Priority Basis for
each skilled nursing facility will be a predetermined dollar value for each
facility agreed upon by ManorCare Health Services and Manor Care Realty and
will not be subject to increase based upon increases in the cost of living or
inflation. In determining the Priority Basis for each facility, the parties
reviewed, among other things, historical and projected cash flows, costs of
recent capital improvements, the location of the facility and relevant market
conditions. The computation of Net Operating Profit includes as a Project
Expense an amount equal to 6% of Project Revenues ("Tenant's Base Fee"), which
is in effect a base fee out of Project Revenues which ManorCare Health
Services is entitled to retain without reduction. Project Revenues generally
include all revenues and income derived by ManorCare Health Services from the
facilities. Project Expenses generally include all expenses incurred by
ManorCare Health Services to comply with its obligations under the Lease
Agreements including Tenant's Base Fee; provided however that Project Expenses
do not include Premises Rent.
Deferred Premises Rent may be deferred until such time as Net Operating
Profit is available to pay it; provided that as of the first day of each new
Lease Year all Deferred Premises Rent for the prior Lease Year which has not
become due and payable shall be deemed cancelled and extinguished and shall
not thereafter be due and payable. To the extent that Net Operating Profit
supports less than all Monthly Premises Rent and Deferred Premises Rent then
due, payments made with respect thereto shall be deemed to be made first to
Deferred Premises Rent (from longest to shortest outstanding) and then to
Monthly Premises Rent. The total amount of fiscal 1997 rent which could have
been deferred and ultimately canceled is approximately $10.3 million relating
to 23 facilities. Approximately $6.6 million of this amount relates to 12
recently acquired, renovated or developed facilities which are anticipated to
pay rent at least equal to Priority Sum within the next two fiscal years.
Each facility will be operated pursuant to an Operating Budget (as defined
in the Lease Agreements). The Operating Budget for the period ending May 31,
1998 will be attached to each of the Lease Agreements as an exhibit. The
Operating Budget for each facility for the period from June 1, 1998 through
May 31, 1999 will be agreed upon by Manor Care Realty and ManorCare Health
Services. Thereafter, each Operating Budget will not be subject to Manor Care
Realty's approval unless (i) the Net Operating Profit for the Lease Year (as
defined in the Lease Agreements) immediately prior to the Lease Year with
respect to which the Operating Budget in question is being prepared was less
than the greater of (a) the Priority Sum and (b) 90% of budgeted Net Operating
Profit for such Lease Year or (ii) budgeted Net Operating Profit for the
current Lease Year is less than the greater of (a) the Priority Sum for the
current Lease Year and (b) 90% of budgeted Net Operating Profit for the prior
Lease Year. ManorCare Health Services will have the right to use 2.75% of
aggregate Project Revenues (aggregated across all facilities under all Lease
Agreements) for capital expenditures at the facilities. Manor Care Realty
shall reimburse ManorCare Health Services for all such maintenance capital
expenditures. In addition, each year, ManorCare Health Services must prepare
and submit to Manor Care Realty for approval a budget setting forth ManorCare
Health Services' estimate of the cost of performing proposed revenue
generating alterations, additions and improvements of the facilities. Manor
Care Realty may withhold its approval in its absolute discretion. Manor Care
Realty will reimburse ManorCare Health Services for all approved expenditures.
If Manor Care Realty withholds its approval and ManorCare Health Services
believes that the proposed revenue generating items are reasonably necessary
to the maintenance of the facility as a competitive, efficient and economical
operation, ManorCare Health Services may elect to terminate the subject Lease
Agreement effective as of the first anniversary of the date of ManorCare
Health Services' election. If Manor Care Realty disputes ManorCare Health
Services' belief, the dispute shall be resolved by arbitration. In the event
the arbitrator decides in favor of Manor Care Realty, ManorCare Health
Services' notice of termination will be deemed void ab initio.
The Lease Agreements provide that ManorCare Health Services, on behalf of
the underlying property, will have the right to enter into service agreements
with its affiliates, provided, among other conditions, that such services are
competitively priced. In addition, Manor Care Realty will have the right to
mortgage all or any part of its interest in each facility if such financing is
a financing secured by more than [ ] facilities. If such financing is secured
by less than [ ] facilities, Manor Care Realty will have the right to
mortgage its interest
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in each facility to the extent of 90% of the Priority Basis with respect to
each facility. The foregoing limitations will not apply to any indebtedness to
the extent secured by certain properties held directly by Manor Care Real
Estate Corp. in Pennsylvania. Any such mortgage will be superior to the Lease
Agreements; provided that the holder of any such mortgage will deliver to
ManorCare Health Services a non-disturbance agreement. Each Lease Agreement
will have an initial term of five years with up to thirty-four one year
renewals at the option of ManorCare Health Services; provided that in certain
states total lease terms will not exceed the maximum term permitted by statute
such that such Lease Agreement will not be deemed a change of ownership for
real estate transfer tax purposes.
Manor Care Realty will have the right to terminate a Lease Agreement in the
event that (i) either (a) actual Net Operating Profit is less than 90% of
budgeted Net Operating Profit for two consecutive twelve month Lease Years or
(b) actual Net Operating Profit fails to exceed the Priority Sum for two
consecutive twelve month Lease Years, subject to ManorCare Health Services'
right to cure with respect to one year only by making a cash payment to Manor
Care Realty of such deficiency plus 5% of 90% budgeted Net Operating Profit or
5% of the Priority Sum, as applicable, (ii) the facility is decertified as a
skilled nursing facility, is disqualified from participation in Medicare or
Medicaid or ManorCare Health Services loses its license to operate the subject
facility as a skilled nursing facility or (iii) any one of certain additional
defaults occurs, such as monetary default, breach of covenant and bankruptcy
defaults. All termination rights will be subject to "right to cure"
provisions, except that ManorCare Health Services will have no right to cure
if the subject facility is disqualified from Medicare or Medicaid or
decertified or if ManorCare Health Services loses its license to operate a
skilled nursing facility. Finally, ManorCare Health Services will have the
right to terminate a Lease Agreement in the event a facility is damaged and
either (i) the insurance proceeds are insufficient to cover the restoration
costs or (ii) the restoration could not reasonably be completed within 12
months following the damage. A Lease Agreement will automatically terminate
upon the condemnation of so much of a facility that, in ManorCare Health
Services' reasonable judgment, the conduct of its business would be
substantially prevented or impaired.
In the event that Manor Care Realty terminates a Lease Agreement based upon
actual Net Operating Profit being less than 90% of budgeted Net Operating
Profit for two consecutive Lease Years, Manor Care Realty will be obligated to
pay to ManorCare Health Services a termination fee, which fee will be based on
the performance of the subject facility, in accordance with the formula
therefor set forth in the Lease Agreements. Unless ManorCare Health Services
consents to the sale, Manor Care Realty will also be obligated to pay to
ManorCare Health Services a termination fee upon the sale of a facility. The
termination fee is formula-based and intended to approximate ManorCare Health
Services' future income from the operation of that facility.
ManorCare Health Services is prohibited from assigning a Lease Agreement or
subletting any facility without Manor Care Realty's approval, which it may
withhold in its sole discretion, except that Manor Care Realty's consent is
not required for assignments or sublettings (i) in connection with ManorCare
Health Services' sale of its business operations as a going concern or with
its merger or consolidation into or with another company or (ii) to an
affiliate succeeding to ManorCare Health Services' business operations.
The Lease Agreements provide that ManorCare Health Services is obligated to
comply with all applicable laws and must obtain and keep in full force and
effect all licenses and permits necessary to operate the facilities. Pursuant
to the Lease Agreements, with respect to ManorCare Health Services' use,
occupancy and operation of the Skilled Nursing Facilities, Manor Care Realty
will not be liable, and ManorCare Health Services will, whether or not
available insurance proceeds are sufficient therefor, indemnity, defend and
hold Manor Care Realty harmless from and against any and all loss, cost,
expense, liability and claims of liability for damage or injury to person or
property on or about the facilities, or otherwise, arising from ManorCare
Health Services' negligence or willful misconduct. Other than such
indemnification obligation, ManorCare Health Services will not have any
liability, personal or otherwise, in connection with any of its obligations
under the Lease Agreements except to the extent of (i) Project Revenues, (ii)
proceeds of insurance and awards for condemnation applicable to the skilled
nursing facilities and actually received by ManorCare Health Services and
(iii) ManorCare Health Services' interest, if any, in the improvements on the
skilled nursing facilities and leasehold estate created under the Lease
Agreements.
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The payments from ManorCare Health Services to Manor Care Realty under the
Lease Agreements will not have any effect on the revenues of ManorCare Health
Services. The lease payments will be reflected as operating expenses of
ManorCare Health Services and revenues of Manor Care Realty.
DEVELOPMENT AGREEMENT RELATING TO ASSISTED LIVING FACILITIES
Manor Care Realty and ManorCare Health Services will enter into a Master
Development Agreement (the "Development Agreement") pursuant to which Manor
Care Realty will develop assisted living facilities for ManorCare Health
Services. Neither Manor Care Realty nor ManorCare Health Services is obligated
to proceed under development of a facility unless and until ManorCare Health
Services has approved the project budget. Each facility will be built by Manor
Care Realty based upon ManorCare Health Services' then existing prototype
designs. Under the Development Agreement, if stabilized occupancy of 75% or
more is achieved for a period of five days within two years of commencing
operations, ManorCare Health Services will be obligated to purchase the
facility. The purchase price for each facility will be equal to (i) the actual
project costs (but in no event in excess of an amount equal to the amount of
the project budget approved by ManorCare Health Services plus 5%) plus (ii)
such actual project costs multiplied by the applicable premium percentage plus
(iii) Manor Care Realty's portion of shared cost savings, if any, plus (iv) an
agreed amount for inventory items. Manor Care Realty's portion of shared cost
savings is an amount equal to 50% of the excess of the amount of the approved
project budget over the amount of the actual project costs. Total approved
development costs include expenses incurred in connection with the development
and construction of the facilities, but do not include operating losses
incurred during the two-year stabilization period. The premium to total
approved development costs is intended to compensate Manor Care Realty for the
increasing value of its investment over time as well as for the risks it takes
in connection with developing assisted living facilities, including the risks
inherent in operating the facilities during the two-year stabilization period.
The premium percentage is the percentage set forth below opposite the month
during which notice of the purchase of the facility occurs is given by
ManorCare Health Services to Manor Care Realty:
<TABLE>
<CAPTION>
MONTH PREMIUM
- ----- -------
<S> <C>
Opening Date Month and first full calendar month through the eighth
full calendar month thereafter........................................ 15.0%
Ninth calendar month................................................... 16.6%
Tenth calendar month................................................... 18.2%
Eleventh calendar month................................................ 19.7%
Twelfth calendar month................................................. 21.3%
Thirteenth calendar month.............................................. 22.5%
Fourteenth calendar month.............................................. 23.6%
Fifteenth calendar month............................................... 24.9%
Sixteenth calendar month............................................... 25.9%
Seventeenth calendar month............................................. 27.0%
Eighteenth calendar month.............................................. 28.0%
Nineteenth calendar month.............................................. 29.1%
Twentieth calendar month............................................... 30.0%
Twenty-first calendar month............................................ 31.3%
Twenty-second calendar month........................................... 32.2%
Twenty-third calendar month............................................ 33.2%
Twenty-fourth calendar month........................................... 34.3%
</TABLE>
The purchase price for each facility is formula-based and may or may not
approximate the fair market value of a particular facility. Given that
pursuant to the Development Agreement, Manor Care Realty's primary activity
will be developing assisted living facilities for ManorCare Health Services,
which facilities ManorCare Health Services will be obligated to buy if certain
conditions are met, Manor Care believes that over time the aggregate purchase
prices for the facilities should approximate the aggregate purchase prices
that would be available from a similarly situated unaffiliated third party.
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The Development Agreement provides that prior to presentation to any other
party and prior to proceeding by itself for its own account, ManorCare Health
Services shall present to Manor Care Realty for evaluation any assisted living
facility development opportunity that ManorCare Health Services desires to
have pursued. Within thirty (30) days after Manor Care Realty has received
such reports and studies as Manor Care Realty deems necessary in order to
evaluate such opportunity, Manor Care Realty shall elect whether or not to
proceed with the opportunity. In the event that Manor Care Realty elects (or
is deemed to have elected) not to proceed with the opportunity, ManorCare
Health Services shall be free, subject to any applicable restrictions set
forth in the Non-Competition Agreement, to pursue such assisted living
facility development opportunity with others.
Pursuant to the Assisted Living Facility Management Agreement, during the
two-year stabilization period, ManorCare Health Services will manage the
facility for Manor Care Realty for a fixed monthly fee. See "--Assisted Living
Facility Management Agreement." If ManorCare Health Services does not acquire
a facility developed by Manor Care Realty during the two-year stabilization
period, Manor Care Realty will have the right to sell the facility to a third
party. ManorCare Health Services will, however, retain the rights to the Arden
Courts or Springhouse brand name in the event of a third-party sale. The
Development Agreement will have a term of seven years and may be terminated
for cause by either Manor Care Realty or ManorCare Health Services under
certain circumstances.
ASSISTED LIVING FACILITY MANAGEMENT AGREEMENT
Prior to the commencement of the development of an assisted living facility,
Manor Care Realty and ManorCare Health Services will execute and deliver an
Assisted Living Facility Management Agreement (the "Assisted Living Facility
Management Agreement") pursuant to which ManorCare Health Services will manage
the assisted living facility for the period from the first day of the calendar
month in which the subject facility is opened to the earlier of (a) the date
of the sale of the subject facility by Manor Care Realty to ManorCare Health
Services or (b) the second anniversary of the date on which the subject
facility opened for business. ManorCare Health Services will manage each
facility for Manor Care Realty for a fixed monthly fee. The monthly management
fee for each Arden Court facility will be $5,000 and the monthly management
fee for each Springhouse facility will be $8,500. The fixed monthly fee
payable to ManorCare Health Services represents an approximation of ManorCare
Health Services' general and administrative costs for managing the facilities.
All operating costs relating to the managed facilities will be borne by Manor
Care Realty as the owner of the facilities.
If stabilized occupancy of 75% or more is not achieved within two years of
commencing operations, upon request by Manor Care Realty made no later than
thirty (30) days prior to the second anniversary of the commencement of
operations. ManorCare Health Services will continue to manage the facility for
a period ending no later than the third anniversary of the commencement of
operations. During any such extended term, Manor Care Realty will be obligated
to pay to ManorCare Health Services a management fee equal to 6% of gross
revenues on a monthly basis and Manor Care Realty will have the right to
terminate the Assisted Living Facility Management Agreements as of the last
calendar day of any month upon not less than thirty (30) days prior written
notice.
NON-COMPETITION AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Non-
Competition Agreement (the "Non-Competition Agreement"), which will impose
certain non-competition restrictions on each of Manor Care Realty and
ManorCare Health Services. The Non-Competition Agreement will terminate on the
date the Development Agreement expires or is terminated; provided that if
Manor Care Realty is actively developing assisted living facilities pursuant
to the Development Agreement, the restrictions set forth below relating to
Manor Care Realty's ability to acquire assisted living facilities and
ManorCare Health Services' ability to develop or manage assisted living
facilities will continue until the earlier of (i) the second anniversary of
the expiration of the term of the Development Agreement or (ii) the date on
which ManorCare Health Services acquires the last of such facilities.
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Agreements with Respect to the Skilled Nursing Business. The Non-Competition
Agreement provides that Manor Care Realty will be a health care real estate
company focused on the ownership, construction, development and acquisition of
health care properties. The Non-Competition Agreement provides that in the
event that ManorCare Health Services identifies a skilled nursing facility
development opportunity or a skilled nursing facility acquisition opportunity,
ManorCare Health Services will notify Manor Care Realty of such opportunity
and if Manor Care Realty does not respond within a specified time or rejects
the opportunity to acquire or develop such facility, ManorCare Health Services
will have the right to present such development or skilled nursing facility
acquisition opportunity to a non-affiliated third-party; provided that
ManorCare Health Services will not, without the prior consent of Manor Care
Realty (which consent may be given or withheld in the sole discretion of Manor
Care Realty), present such development or skilled nursing facility acquisition
opportunity to such non-affiliated third party if such development or
acquisition would result in the acquisition or development of a skilled
nursing facility that is within a five mile radius of a Manor Care Realty
owned skilled nursing facility that is leased or managed by ManorCare Health
Services.
In the event that Manor Care Realty determines to proceed with the
development of a skilled nursing facility or a skilled nursing facility
acquisition, Manor Care Realty will notify ManorCare Health Services of such
determination indicating the material terms on which Manor Care Realty is
prepared to permit ManorCare Health Services to manage and lease such skilled
nursing facility (or facilities) and ManorCare Health Services will have a
specified time after the receipt of such notice to notify Manor Care Realty of
its interest in entering into a management and lease agreement with Manor Care
Realty with respect to such skilled nursing facility (or facilities). In the
event that ManorCare Health Services so notifies Manor Care Realty, ManorCare
Health Services and Manor Care Realty will negotiate in good faith for a
specified time period to enter into a management agreement and lease with
respect to such skilled nursing facility (or facilities), but if (i) ManorCare
Health Services does not respond to such notice within such specified time
period or rejects the opportunity to negotiate with Manor Care Realty with
respect to such skilled nursing facility (or facilities) or (ii) ManorCare
Health Services negotiates with Manor Care Realty but the parties are unable
to reach an agreement during such specified time period, Manor Care Realty
will have the right to enter into a management agreement and/or a lease
agreement relating to such skilled nursing facility (or facilities) with a
non-affiliated third party on terms no more favorable in the aggregate to such
third party than those offered to ManorCare Health Services or manage such
facility itself for a period not to exceed 18 months following commencement of
operations of a Manor Care Realty developed skilled nursing facility or
consummation of the skilled nursing facility acquisition, as the case may be.
In the event Manor Care Realty elects to manage such skilled nursing facility
(or facilities), Manor Care Realty will enter into a management agreement
and/or lease agreement with respect to such skilled nursing facility (or
facilities) with an non-affiliated third party following the expiration of
such 18 month period. The terms of such management agreement and/or a lease
agreement will be no more favorable in the aggregate to such third party than
those offered to ManorCare Health Services. In the event that ManorCare Health
Services desires to acquire a business which also includes one or more skilled
nursing facilities, the ownership or possession of which by ManorCare Health
Services would otherwise be prohibited by the Non-Competition Agreement,
ManorCare Health Services must offer Manor Care Realty the right to purchase
such skilled nursing facilities at a price to be agreed upon by the parties;
provided, however that if the parties are unable to agree on such purchase
price, the parties shall submit the issue to binding arbitration. In the event
Manor Care Realty elects not to purchase such skilled nursing facilities at
such purchase price or the parties have been unable to agree on the purchase
price and have submitted the dispute to arbitration, ManorCare Health Services
nonetheless may complete such acquisition but will use its commercially
reasonable efforts to divest itself of such skilled nursing facilities within
one year of the closing of such acquisition. In the event that ManorCare
Health Services determines to sell the skilled nursing facilities for a price
less than the purchase price agreed to by the parties or by the arbitrator, as
the case may be, ManorCare Health Services will notify Manor Care Realty and
Manor Care Realty will have the irrevocable and exclusive option, to buy on
the terms set forth in such notice and the Non-Competition Agreement, such
skilled nursing facilities. If Manor Care Realty does not notify ManorCare
Health Services within a specified time period of its intention to purchase
such facilities, Manor Care Realty will be deemed to have declined to purchase
such skilled nursing facilities and ManorCare Health Services will be free to
sell such skilled nursing facilities at a price equal to or exceeding the
price and on the terms specified in such notice.
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In addition, the Non-Competition Agreement provides that ManorCare Health
Services will not, without the prior consent of Manor Care Realty (which
consent will not be unreasonably withheld), engage in the lease, operation or
management of any skilled nursing facility owned by a third party that is
within a five-mile radius of a Manor Care Realty owned skilled nursing
facility that is leased or managed by ManorCare Health Services and, subject
to certain exceptions, ManorCare Health Services will not own a skilled
nursing facility.
The Non-Competition Agreement also provides that Manor Care Realty will not
engage, either directly or indirectly, in the management of skilled nursing
facilities, except as set forth above and except as may be permitted with
respect to a particular skilled nursing facility by the Lease Agreement or
other agreement between Manor Care Realty and ManorCare Health Services
pursuant to which ManorCare Health Services manages such skilled nursing
facility.
Agreements with Respect to the Assisted Living Business. Except as provided
below and except pursuant to the terms of the Development Agreement, the Non-
Competition Agreement provides that Manor Care Realty will not acquire any
assisted living facility; provided, that Manor Care Realty will not be deemed
to have acquired an assisted living facility by reason of the acquisition of a
mixed use facility in which not more than the greater of 20% of the units in
the facility or 30 units are designated for assisted living.
In the event that Manor Care Realty identifies an assisted living facility
acquisition opportunity, Manor Care Realty will notify ManorCare Health
Services of such opportunity and ManorCare Health Services will have a
specified time to notify Manor Care Realty of its interest in pursuing such
opportunity. In the event that ManorCare Health Services does not respond
within such time period or rejects the opportunity to acquire such facility,
Manor Care Realty will have the right to make such assisted living facility
acquisition; provided, however, that if any such assisted living facility is
within a five mile radius of any Manor Care Realty developed assisted living
facility that is owned or managed by ManorCare Health Services, Manor Care
Realty will not be permitted to proceed with such acquisition without the
prior written consent of ManorCare Health Services (which consent will not to
be unreasonably withheld or delayed).
The Non-Competition Agreement provides that in the event that Manor Care
Realty desires to acquire a business which also includes one or more assisted
living facilities, the ownership or possession of which by Manor Care Realty
would otherwise be prohibited by the Non-Competition Agreement, Manor Care
Realty must offer ManorCare Health Services the right to purchase such
assisted living facilities at a price to be agreed to by the parties; provided
that if the parties are unable to agree on such purchase price, the parties
will submit the dispute to binding arbitration. In the event ManorCare Health
Services elects not to purchase such assisted living facilities at such
purchase price or the parties have been unable to agree on the purchase price
and have submitted the dispute to arbitration, Manor Care Realty nonetheless
may complete such acquisition but will use its commercially reasonable efforts
to divest itself of such assisted living facilities within one year of the
closing such acquisition.
In the event that Manor Care Realty determines to sell the assisted living
facilities for a price less than the purchase price offered to ManorCare
Health Services or determined by the arbitrator, as the case may be, Manor
Care Realty will notify ManorCare Health Services and ManorCare Health
Services will have the irrevocable and exclusive option, to buy such assisted
living facilities on the terms set forth in such notice. If ManorCare Health
Services does not notify Manor Care Realty within a specified time period,
ManorCare Health Services will be deemed to have declined to purchase such
assisted living facilities and Manor Care Realty shall be free to sell such
assisted living facilities at a price equal to or exceeding the price and on
the terms specified in such notice. In the event Manor Care Realty acquires an
assisted living facility (or facilities) in such a transaction, Manor Care
Realty will offer ManorCare Health Services the opportunity to manage and
lease such assisted living facility (or facilities) and ManorCare Health
Services and Manor Care Realty will negotiate in good faith to enter into a
management agreement with respect to such assisted living facility (or
facilities). In the event that ManorCare Health Services does not respond to
such offer within a specified time period or rejects the opportunity to
negotiate with Manor Care Realty with respect to such assisted living facility
(or facilities) or ManorCare Health Services negotiates with Manor Care Realty
but the parties are unable to reach an agreement
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after such time period, Manor Care Realty will have the right to enter into a
management agreement relating to such assisted living facility (or facilities)
with a non-affiliated third party on terms no more favorable in the aggregate
to such third party than those offered to ManorCare Health Services or manage
such facility itself for a period not to exceed 18 months following
consummation of the acquisition of such assisted living facility (or
facilities). In the event Manor Care Realty elects to manage such assisted
living facility (or facilities), Manor Care Realty will enter into a
management agreement with a non-affiliated third party following the
expiration of such 18 month period. The terms of such management agreement
shall be no more favorable in the aggregate to such third party than those
offered to ManorCare Health Services.
The Non-Competition Agreement also provides that except as provided therein,
Manor Care Realty will not engage, either directly or indirectly, in the
management of assisted living facilities.
The Non-Competition Agreement also provides that ManorCare Health Services
will not be permitted to enter into a management agreement with a non-
affiliated third party in connection with an Assisted Living Facility that is
located within a five-mile radius of an assisted living facility (i) developed
by Manor Care Realty pursuant to the terms of the Development Agreement and
still owned by Manor Care Realty or (ii) under development by Manor Care
Realty pursuant to the Development Agreement or (iii) still covered by the
terms of the Development Agreement, unless Manor Care Realty specifically
consents thereto (which consent will not be unreasonably withheld). The Non-
Competition Agreement also provides that ManorCare Health Services will not
develop assisted living facilities except as may be permitted pursuant to the
terms of the Development Agreement.
Agreements with Respect to the Other Businesses. The Non-Competition
Agreement provides that Manor Care Realty will not, either directly or
indirectly, (i) own, manage, operate, finance or participate in the ownership,
management, operation or financing of any entity engaged in the institutional
pharmacy business, the home health care business or otherwise in the continuum
of care (other than the hospital management business) (the "Manor Care Realty
Restricted Business") or (ii) engage in any other manner or make any
investment in any entity engaged in the Manor Care Realty Restricted Business;
provided, however, that Manor Care Realty will be entitled to acquire a
business that includes a Manor Care Realty Restricted Business so long as
Manor Care Realty provides ManorCare Health Services with same notices and
rights concerning the Manor Care Realty Restricted Business as contemplated by
the Non-Competition Agreement with respect to the acquisition by Manor Care
Realty of a business that includes certain assisted living facilities. The
Non-Competition Agreement provides that the provisions of the agreement
relating to the institutional pharmacy business will terminate when ManorCare
Health Services no longer owns, directly or indirectly, 20% or more of the
fully diluted equity of Vitalink Pharmacy Services, Inc. (including any
successor thereto by merger, consolidation, stock purchase or sale of all or
substantially all of the assets) and the provisions of the agreement relating
to the home health business will terminate when ManorCare Health Services no
longer owns, directly or indirectly, 20% or more of the fully diluted equity
of In Home Health, Inc. (including any successor thereto by merger,
consolidation, stock purchase or sale of all or substantially all of the
assets).
The Non-Competition Agreement also provides that ManorCare Health Services
will not, either directly or indirectly, (i) own, manage, operate, finance or
participate in the ownership, management, operation or financing of any entity
engaged in the hospital management business (the "ManorCare Health Services
Restricted Business") or (ii) engage in any other manner or make any
investment in any entity engaged in the hospital management business;
provided, however that such restrictions will not apply to Skilled Nursing
Facilities or assisted living facilities or units thereof that are located
within or are adjacent to hospitals; provided, further, however, that
ManorCare Health Services will be entitled to acquire a business that includes
a ManorCare Health Services Restricted Business so long as ManorCare Health
Services provides Manor Care Realty with the same notices and rights
concerning the ManorCare Health Services Restricted Business as contemplated
by the Non-Competition Agreement with respect to the acquisition by ManorCare
Health Services of a business that includes certain skilled nursing
facilities. The Non-Competition Agreement provides that the provisions of the
agreement relating to the hospital management business will terminate when
Manor Care Realty no longer owns, directly or
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indirectly, 20% or more of the fully diluted equity of Community Hospital of
Mesquite, Inc. (including any successor thereto by merger, consolidation,
stock purchase or sale of all or substantially all of the assets). In
addition, the Non-Competition Agreement provides that if ManorCare Health
Services enters into a new line of business involving the ownership of real
estate, ManorCare Health Services must offer for sale such real estate to
Manor Care Realty with the same notices and rights concerning such real estate
as contemplated by this Non-Competition Agreement with respect to the
acquisition by ManorCare Health Services of a business that includes certain
skilled nursing facilities.
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into an Employee
Benefits and Other Employment Matters Allocation Agreement (the "Employee
Benefits Allocation Agreement"), pursuant to which the employee benefits with
respect to employees who remain employed by Manor Care Realty or its
subsidiaries immediately after the Distribution ("Manor Care Realty
Employees") and the employee benefits of employees who are employed by
ManorCare Health Services immediately after the Distribution ("ManorCare
Health Services Employees") will be allocated.
The Employee Benefits Allocation Agreement provides that all of the vested
and non-vested Incentive Stock Options ("ISOs") of employees of Manor Care who
will be employed by ManorCare Health Services will be converted into ISOs of
ManorCare Health Services. The ISOs of employees who remain employed by Manor
Care Realty will be converted into ISOs of Manor Care Realty. In addition,
both employees who will be employed by ManorCare Health Services and employees
who remain employed by Manor Care Realty will have the right to elect to
convert their vested Manor Care Non-Qualified Stock Options ("NQSOs") into any
percentage combination of Manor Care Realty NQSOs and ManorCare Health
Services NQSOs. The Employee Benefits Allocation Agreement also provides that
one-half of the non-vested NQSOs of any employee who will be employed by
ManorCare Health Services will be converted into NQSOs of ManorCare Health
Services, and one-half of the non-vested NQSOs of any employee who remains
employed by Manor Care Realty will be converted into NQSOs of Manor Care
Realty. The remaining non-vested NQSOs will be converted into any percentage
combination of ManorCare Health Services NQSOs and Manor Care Realty NQSOs at
the election of the employee. Notwithstanding the foregoing, the NQSOs of one
executive officer will be converted on a pro rata basis to ManorCare Health
Services NQSOs and Manor Care Realty NQSOs based on their relative stock
values. Another executive officer will have the option to convert NQSOs to
ManorCare Health Services NQSOs and Manor Care Realty NQSOs such that such
officer's overall option holdings are converted on a pro rata basis to
ManorCare Health Services options and Manor Care Realty options based on their
relative stock values.
The Employee Benefits Allocation Agreement also provides that employees of
Choice Hotels International, Inc. ("Choice Hotels") and Sunburst Hospitality
Corporation ("Sunburst") can elect to convert their Manor Care NQSOs into any
percentage combination of ManorCare Health Services NQSOs and Manor Care
Realty NQSOs.
The Employee Benefits Allocation Agreement also addresses the treatment of
Manor Care NQSOs owned by non-employee directors of Manor Care. The NQSOs of
non-employee directors who become directors of both Manor Care Realty and
ManorCare Health Services will be converted on a pro rata basis to ManorCare
Health Services NQSOs and Manor Care Realty NQSOs based on their relative
stock values. The Employee Benefits Allocation Agreement also provides that
all NQSOs of non-employee directors who remain with Manor Care Realty or who
become directors of ManorCare Health Services will be converted to NQSOs of
Manor Care Realty or ManorCare Health Services, respectively.
The Employee Benefits Allocation Agreement will provide that the adjustment
in stock options will be based upon a predetermined formula related to (i)
stock prices on the first day the shares in the companies are independently
traded and (ii) the election of the optionees. In all cases, however, the
exercise price and the number of the options will be adjusted to maintain the
same financial value to the option holder before and after the Distribution.
The ratio of the exercise price per option to the market value per share will
not be reduced, and the vesting provisions and option period of the original
grant will remain the same.
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EMPLOYEE BENEFITS ADMINISTRATION AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a Employee
Benefits Administration Agreement (the "Employee Benefits Administration
Agreement"), pursuant to which ManorCare Health Services will administer the
employee benefits plans and programs of Manor Care Realty following the
Distribution. ManorCare Health Services shall provide such services for a fee
which shall include any or a combination of the following: (i) activity-based
charges; (ii) fixed-fee based charges; (iii) usage-based charges; and (iv)
time and materials charges, as specified in the Corporate Services Agreement.
The Employee Benefits Administration Agreement will remain in effect for one
year from the Effective Date, after which it will renew automatically for one-
year periods unless terminated pursuant to the terms of the Employee Benefits
Administration Agreement.
OFFICE LEASE AGREEMENT
Manor Care leases the building complex in Gaithersburg, Maryland (the
"Complex") from Gaithersburg Realty Trust at which the principal executive
offices of ManorCare Health Services and Manor Care Realty are located.
ManorCare Health Services, as Tenant, and Manor Care Realty, as Landlord, will
enter into a sublease agreement with respect to the Complex (the "Office Lease
Agreement"). The Complex consists of an office building (the "Office
Building") containing approximately 377,126 gross square feet of space, a
warehouse and distribution building (the "Warehouse Building") containing
approximately 200,000 gross square feet of space, and approximately 98.7974
acres of land.
Manor Care Realty will lease to ManorCare Health Services approximately
202,458 rentable square feet in the Office Building, for a lease term expiring
on August 30, 2002, with an option to renew for an additional ten years at
fair market rental determined by appraisal. As Basic Rent for each Lease Year,
ManorCare Health Services will pay Tenant's Pro Rata Share of all Operating
Expenses for such Lease Year. "Tenant's Pro Rata Share" means the ratio of (i)
the number of rentable square feet in the Office Building occupied by
ManorCare Health Services as of the commencement of such Lease Year, to (ii)
the total number of rentable square feet in the Office Building occupied by
Manor Care Realty and ManorCare Health Services as of the commencement of such
Lease Year. "Operating Expenses" means all expenses incurred by Manor Care
Realty (net of rental income paid by third parties and net of the after-tax
value of depreciation taken by Manor Care Realty on the buildings in the
Complex) in connection with the operation and maintenance of the Complex
(including vacant space and common areas), including real estate taxes,
insurance, utilities, structural and non-structural repairs, capital
expenditures, property management, and debt service. Manor Care Realty will be
responsible for "Landlord's Pro Rata Share" of Operating Expenses for each
Lease Year, meaning the ratio of (i) the number of rentable square feet in the
Office Building occupied by Manor Care Realty as of the commencement of such
Lease Year, to (ii) the total number of rentable square feet in the Office
Building occupied by Manor Care Realty and ManorCare Health Services as of the
commencement of such Lease Year. It is expected that Manor Care Realty will
occupy approximately 58,714 rentable square feet in the Office Building as of
the commencement of the Lease. Accordingly, based on a total of 261,172
rentable square feet in the Office Building occupied by Manor Care Realty and
ManorCare Health Services, ManorCare Health Services' Pro Rata Share would be
78% and Manor Care Realty's Pro Rata Share would be 22%.
ManorCare Health Services' right to exercise its renewal option is
conditioned upon Manor Care Realty's continuing control over the Complex
through an extension of the existing lease with Gaithersburg Realty Trust or
otherwise. Any income derived from the Complex will be shared by ManorCare
Health Services and Manor Care Realty in proportion to their respective Pro
Rata Shares.
The Office Lease Agreement will also cover approximately 5,000 square feet
to be leased to ManorCare Health Services in the Warehouse Building. Space
leased to ManorCare Health Services in the Warehouse Building will not be
included in the calculation of Tenant's Pro Rata Share. ManorCare Health
Services will pay a market rate for warehouse space and such rental payments
will be treated as third party rental income for purposes of calculating
Operating Expenses.
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DISTRIBUTION AGREEMENT
Manor Care and ManorCare Health Services will enter into a Distribution
Agreement (the "Distribution Agreement") which will provide for, among other
things, the principal corporate transactions required to effect the
Distribution, including the Assumption of Liabilities, the Contribution of
Assets and the Capital Contribution. The Distribution Agreement also provides
for the allocation between ManorCare Health Services and Manor Care of certain
other liabilities and the execution and delivery of the agreements to be
entered into between Manor Care Realty and ManorCare Health Services in
connection with the Distribution. See "Description of the Transactions--The
Distribution."
TAX SHARING AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Tax
Sharing Agreement (the "Tax Sharing Agreement") which will provide for, among
other things, the allocation of federal, state and local income tax
liabilities between Manor Care Realty and its subsidiaries, on the one hand,
and ManorCare Health Services and its subsidiaries, on the other hand. In
general, under the Tax Sharing Agreement, Manor Care Realty will be
responsible for paying all income taxes shown to be due on any Manor Care
Realty consolidated federal income tax return (including the consolidated
federal income tax return for the fiscal year ended May 31, 1998), and any
other tax return filed with respect to Manor Care Realty or any of its
subsidiaries for any taxable period. ManorCare Health Services will be
responsible for paying all income taxes shown to be due on any tax return
filed with respect to ManorCare Health Services or any of its subsidiaries for
any taxable period beginning on or after the Effective Date.
ManorCare Health Services will indemnify Manor Care Realty from and against
any additional income tax liability of Manor Care or any of its subsidiaries,
resulting from any tax audit or any judicial or administrative proceeding or
otherwise for any taxable period (including any taxable period ending on or
before the Effective Date), relating to the businesses that will be conducted
by ManorCare Health Services following the Distribution. Conversely, Manor
Care Realty will indemnify ManorCare Health Services from and against any
additional income tax liability of ManorCare Health Services or any of its
subsidiaries, resulting from any tax audit or any judicial or administrative
proceeding or otherwise for any taxable period (including any taxable period
ending on or before the Effective Date), relating to the businesses that will
be conducted by Manor Care Realty following the Distribution. In addition,
Manor Care Realty, on the one hand, and ManorCare Health Services, on the
other hand, will each be entitled to any income tax refund received from any
taxing authority to the extent that such refund relates to the businesses
conducted by that party following the Distribution.
The Tax Sharing Agreement also provides that if the Distribution (including
certain related transactions) fails to qualify as a tax-free transaction under
Sections 355 and 368 of the Code as a result of either party taking or failing
to take certain specified actions, then that party will be liable for and will
indemnify the other party from and against all taxes and other damages
resulting from such failure to qualify. If the failure to qualify as a tax-
free transaction results from both parties taking or failing to taking certain
specified actions, then the first party taking or failing to take any of such
actions shall be liable for and will indemnify the other party from and
against all taxes and other damages resulting from such failure to qualify.
TAX ADMINISTRATION AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Tax
Administration Agreement (the "Tax Administration Agreement"). The Tax
Administration Agreement sets forth the terms and conditions pursuant to which
ManorCare Health Services will provide certain tax-related administrative
services to Manor Care Realty following the Distribution. Such services will
include audit and compliance work related to income, real estate, personal
property and sales and use taxes. The Tax Administration Agreement will remain
in effect for one year from the Effective Date, after which it will renew
automatically for one-year periods unless terminated pursuant to the terms of
the Tax Administration Agreement.
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CORPORATE SERVICES AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Corporate
Services Agreement (the "Corporate Services Agreement") pursuant to which,
following the Distribution, ManorCare Health Services will provide certain
corporate services to Manor Care Realty including administrative, payroll and
accounting systems. ManorCare Health Services shall provide such services for
a fee which shall include any or a combination of the following: (i) activity-
based charges; (ii) fixed-fee based charges; (iii) usage-based charges; and
(iv) time and materials charges, as specified in the Corporate Services
Agreement. The Corporate Services Agreement will remain in effect for one year
from the Effective Date, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Corporate Services
Agreement.
TRADEMARK AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Trademark
Agreement (the "Trademark Agreement") pursuant to which Manor Care Realty will
assign to ManorCare Health Services approximately 40 U.S. trademarks and
service marks registered and pending (and all federal, state and foreign
registrations and all other rights and privileges related thereto) these
registrations and applications represent all of the trademarks necessary for
the operations of the business of ManorCare Health Services. Pursuant to the
Trademark Agreement, ManorCare Health Services will assume all obligations
related to such trademarks and trademark applications.
LICENSE AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a License
Agreement (the "License Agreement") pursuant to which ManorCare Health
Services will license to Manor Care Realty the right to use approximately 20
U.S. trademarks and service marks; and certain other marks, trade names,
copyrights, designs and trade dress in connection with the operation of Manor
Care Realty's business. The license granted under the License Agreement
relating to Manor Care Realty's skilled nursing facilities will terminate
within 45 days of the termination of all the Lease Agreements. The license
granted under the License Agreement relating to Manor Care Realty's assisted
living facilities will terminate within a reasonable time after the
termination of the Development Agreement and all the Assisted Living Facility
Management Agreements.
DESIGN SERVICES AGREEMENT
Manor Care and ManorCare Health Services will enter into a Design Services
Agreement (the "Design Services Agreement") pursuant to which Manor Care
Realty will provide certain interior design and architectural services in
connection with capitalized renovation projects. The fee for these services
will be $48,000 per month until May 31, 1998, after which the fee will be paid
annually and will be based on the percentage of Manor Care Realty's design
department budget required to provide services to ManorCare Health Services.
Fees under the Design Services Agreement will be credited against the 2.75% of
aggregate annual Project Revenues from all the skilled nursing facilities
leased under Lease Agreements applied toward reasonable repairs, replacements
and renewals to be made in the ordinary course of operations as set forth in
the Lease Agreements. The Design Services Agreement will remain in effect
until May 31, 1999, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Design Services
Agreement.
CASH MANAGEMENT AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a Cash
Management Agreement (the "Cash Management Agreement"), pursuant to which
after the Distribution ManorCare Health Services will perform cash management
services for Manor Care Realty, including but not limited to bank relationship
management, bank account administration, daily cash flow position management
and settlement, bank account analysis review, electronic fund transfers, and
deposits of cash and checks. For these services, Manor Care Realty will pay
ManorCare Health Services a quarterly fee determined by multiplying ManorCare
Health Services' cash
149
<PAGE>
management department expenses by a percentage estimate of time spent
providing services to Manor Care Realty as well as reimbursement for direct
expenses incurred. The Cash Management Agreement will remain in effect for one
year from the Effective Date, after which it will renew automatically for one-
year periods unless terminated pursuant to the terms of the Cash Management
Agreement.
RISK MANAGEMENT CONSULTING SERVICES AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Risk
Management Consulting Services Agreement (the "Risk Management Consulting
Services Agreement"), pursuant to which ManorCare Health Services will provide
to Manor Care Realty risk management consulting services, including but not
limited to insurance renewals, insurance, indemnity and bond contract review,
surety bond procurement, regulatory compliance services, environmental
management, and risk management services. Manor Care Realty will pay ManorCare
Health Services a fixed annual fee for such services as well as reimbursement
for insurance and self-insurance plans. The Risk Management Consulting
Services Agreement will remain in effect for one year from the Effective Date,
after which it will renew automatically for one-year periods unless terminated
pursuant to the terms of the Risk Management Consulting Services Agreement.
REALTY NOTE
In connection with the Distribution and in order to fund ManorCare Health
Services' capital expenditures in connection with the expansion of the
Assisted Living Business, on or prior to the Effective Date, Manor Care will
make or cause to be made the Capital Contribution. As part of the Capital
Contribution, Manor Care will contribute or cause to be contributed to
ManorCare Health Services the Realty Note. See "Description of the
Transactions--The Realty Note."
150
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a discussion of the material federal income tax
consequences to a holder of Old Senior Notes of (i) the exchange of Old Senior
Notes for New MCHS Senior Notes pursuant to the Exchange Offer, (ii) the
ownership of the New MCHS Senior Notes received pursuant to the Exchange
Offer, and (iii) the retention of Old Senior Notes, and the adoption of the
Proposed Amendments. This discussion is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury
regulations promulgated thereunder, judicial authorities and current Internal
Revenue Service ("IRS") rulings and practice, all of which are subject to
change, possibly on a retroactive basis. The tax treatment of a holder of Old
Senior Notes may vary depending upon such holder's particular situation, and
certain holders (including insurance companies, tax-exempt organizations,
financial institutions, brokers, dealers, nonresident aliens, foreign
corporations, foreign partnerships or foreign estates or trusts as to the
United States) might be subject to special rules not discussed below. This
discussion is directed to holders who are United States persons and assumes
that the Old Senior Notes are held as capital assets. No information is
provided herein with respect to foreign, state or local tax laws or estate and
gift tax considerations. No assurance can be given that the federal income tax
consequences described herein of the Proposed Amendments or the Exchange Offer
will be accepted by the IRS or, if challenged, by a court. The Company has
received an opinion from Skadden, Arps, Slate, Meagher & Flom LLP to the
effect that the discussion below, insofar as it relates to the federal income
tax consequences of the Exchange Offer and the adoption of the Proposed
Amendments to holders of Old Senior Notes, is accurate in all material
respects. EACH HOLDER OF OLD SENIOR NOTES SHOULD CONSULT ITS OWN TAX ADVISOR
REGARDING THE STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES OF
EXCHANGING THE OLD SENIOR NOTES FOR NEW MCHS SENIOR NOTES PURSUANT TO THE
EXCHANGE OFFER OR RETAINING THE OLD SENIOR NOTES, AS WELL AS THE FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THE HOLDER'S PARTICULAR CIRCUMSTANCES.
EXCHANGE OF OLD SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER
In general, a holder who exchanges Old Senior Notes for New MCHS Senior
Notes pursuant to the Exchange Offer should recognize gain or loss for federal
income tax purposes equal to the difference between (i) the fair market value
of the New MCHS Senior Notes received in the Exchange Offer and (ii) such
holder's adjusted tax basis in such Old Senior Notes. A holder's adjusted tax
basis for an Old Senior Note generally will be the price such holder paid for
the note, increased by market discount to the extent such market discount was
previously included in income by the holder, and reduced (but not below zero)
by amortized premium and any payments received by the holder other than
interest payments.
Any gain or loss recognized upon the exchange of an Old Senior Note pursuant
to the Exchange Offer should be capital gain or loss and will be long term
capital gain or loss if the holder has held the Old Senior Note for more than
one year at the time of the exchange. A holder who has acquired an Old Senior
Note with market discount generally will be required to treat a portion of any
gain recognized upon the exchange of the Old Senior Note as ordinary income to
the extent of the market discount accrued to the date of the exchange, less
any accrued market discount previously reported as ordinary income.
Alternatively, it is possible that a holder who exchanges Old Senior Notes
for New MCHS Senior Notes pursuant to the Exchange Offer will recognize no
gain or loss for federal income tax purposes and, in such case, such holder's
adjusted tax basis and holding period in the Old Senior Notes would carry over
to the New MCHS Senior Notes.
HOLDERS OF NEW MCHS SENIOR NOTES
In general, the stated interest on a New MCHS Senior Note will be taxable to
a holder of New MCHS Senior Notes as ordinary income at the time it is
received or accrued, depending on the holder's method of accounting for
federal income tax purposes.
151
<PAGE>
To the extent that a New MCHS Senior Note's "stated redemption price at
maturity" exceeds the New MCHS Senior Note's "issue price" by more than a de
minimis amount (i.e., .25% of the New MCHS Senior Note's stated redemption
price at maturity, multiplied the number of complete years to maturity), the
New MCHS Senior Note will be treated as issued with original issue discount
("OID"). The issue price of a New MCHS Senior Note will generally be its fair
market value on the date of exchange and the stated redemption price at
maturity of a New MCHS Senior Note will be its $1,000 principal amount. In the
event a New MCHS Senior Note is treated as issued with OID, a holder will
include OID in income based on the constant yield method, prior to the receipt
of cash relating to such income and generally will have to include in income
increasingly greater amounts of OID over the term of the New MCHS Senior Note;
however, such inclusions of OID would be reduced to the extent that a holder's
adjusted tax basis in the New MCHS Senior Note exceeds the issue price of such
note. Such income will generally be ordinary interest income. In the case of
such a holder whose adjusted tax basis in a New MCHS Senior Note is less than
the issue price of such note by more than a de minimis amount (i.e., .25% of
the New MCHS Senior Note's issue price, multiplied by the number of complete
years to maturity), such difference may be treated as market discount, subject
to the rules discussed below under "Retention of Notes; Adoption of Proposed
Amendments."
In any case, if a holder's adjusted tax basis in a New MCHS Senior Note is
greater than its $1,000 principal amount, the holder may elect to treat such
excess as "amortizable bond premium." In such event, the amount a holder will
be required to include in income each year with respect to stated interest on
the New MCHS Senior Note will be reduced by the amount of amortizable bond
premium allocable (based on the New MCHS Senior Note's yield to maturity over
the remaining term of such note) to such taxable year. The amount of
amortizable bond premium will, however, be determined by reference to the
amount payable on an earlier redemption date and over the shorter period to
such redemption date in the event that a smaller amount of amortizable bond
premium, attributable to the period to the earlier redemption date, would
result. If this alternative method applies, the note would be treated as
maturing on the earlier redemption date for the amount then payable and, if
not redeemed on such date, the note would be treated as reissued on such date
for the amount so payable. Any election to amortize bond premium shall apply
to all bonds (other than bonds the interest of which is excludible from gross
income) held by the holder at the beginning of the first taxable year to which
the election applies and thereafter acquired by the holder, and is irrevocable
without the consent of the IRS.
In the case of a New MCHS Senior Note not treated as issued with OID, if the
holder's adjusted tax basis in such note is less than the $1,000 principal
amount of such note by more than a de minimis amount (i.e., .25% of the New
MCHS Senior Note's stated redemption price at maturity, multiplied by the
number of complete years to maturity), such difference may be treated as
market discount, subject to the rules discussed below under "Retention of
Notes; Adoption of Proposed Amendments."
RETENTION OF NOTES; ADOPTION OF PROPOSED AMENDMENTS.
In the case of a holder of Old Senior Notes who does not exchange its Old
Senior Notes for New MCHS Senior Notes pursuant to the Exchange Offer, the
adoption of the Proposed Amendments should not cause a constructive exchange
of the Old Senior Notes for federal income tax purposes because the Proposed
Amendments should not constitute a significant modification (within the
meaning of applicable Treasury regulations promulgated under Section 1001 of
the Code) to the terms of the Old Senior Notes for federal income tax
purposes. Alternatively, if the Proposed Amendments were to cause a
constructive exchange of the Old Senior Notes for federal income tax purposes,
a holder who does not exchange Old Senior Notes for New MCHS Senior Notes
pursuant to the Exchange Offer would be treated as if it constructively
exchanged Old Senior Notes for "new" Old Senior Notes (subject to the Proposed
Amendments). In such event, a Holder would not recognize gain or loss or have
a change in the adjusted tax basis or holding period of its Old Senior Notes
because such constructive exchange would qualify as a tax-free
recapitalization.
If constructive exchange treatment applies and the fair market value of the
"new" Old Senior Notes is equal to or greater than the $1,000 principal amount
of the notes, the "new" Old Senior Notes would be treated as
152
<PAGE>
issued without OID. In such case, for a holder whose adjusted tax basis in the
"new" Old Senior Notes is less than the $1,000 principal amount of the notes
by more than a de minimis amount (i.e., .25% of the "new" Old Senior Notes
stated redemption price at maturity, multiplied by the number of complete
years to maturity), such difference would generally be treated as market
discount. Such a holder would recognize as ordinary interest income the amount
of accrued market discount upon a sale or other disposition of such "new" Old
Senior Notes and could be required to defer the deduction of a portion of
interest on any debt incurred to purchase or carry the "new" Old Senior Notes,
unless the holder elects to accrue market discount in income currently. For a
holder whose adjusted tax basis in the "new" Old Senior Notes is greater than
the $1,000 principal amount of the notes, such holder may be entitled to elect
to treat such excess as amortizable bond premium, subject to the rules
discussed above under "Holders of New MCHS Senior Notes."
If constructive exchange treatment applies and the fair market value of the
"new" Old Senior Notes is less than the $1,000 principal amount of the notes
by more a de minimis amount (as described above under "Holders of New MCHS
Senior Notes"), the "new" Old Senior Notes will be treated as issued with OID,
subject to the rules discussed above under "Holders of New MCHS Senior Notes."
Such OID would be includible in the income of a holder based on the constant
yield method over the remaining life of the "new" Old Senior Notes; however,
such inclusions of OID would be reduced to the extent that a holder's adjusted
tax basis in the "new" Old Senior Notes exceeds the fair market value of the
notes on the date of the constructive exchange. The market discount and
amortizable bond premium rules described above might also apply in this case,
except that the amount of market discount, if any, on the "new" Old Senior
Notes would equal the excess of the fair market value of such "new" Old Senior
Notes on the date of the constructive exchange over the holder's adjusted tax
basis in the "new" Old Senior Notes (rather than the excess of the $1,000
principal amount of such "new" Old Senior Notes over such adjusted tax basis,
as described in the preceding paragraph.)
LEGAL MATTERS
Certain legal matters regarding the New MCHS Senior Notes will be passed
upon for ManorCare Health Services by James H. Rempe, Senior Vice President,
General Counsel and Secretary of Manor Care and Skadden, Arps, Slate, Meagher
& Flom LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedules of Manor Care, Inc. and
subsidiaries incorporated by reference in this Prospectus and Consent
Solicitation and elsewhere in this Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of New ManorCare Health Services, Inc.
and subsidiaries included in this Prospectus and Consent Solicitation and
elsewhere in this Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as set forth in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
153
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
NEW MANORCARE HEALTH SERVICES, INC.
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-2
Combined Balance Sheets as of May 31, 1997 and 1996 and August 31, 1997
(unaudited).............................................................. F-3
Combined Statements of Income for the fiscal years ended May 31, 1997,
1996 and 1995 and the three months ended August 31, 1997 and 1996 (unau-
dited)................................................................... F-4
Combined Statements of Cash Flows for the fiscal years ended May 31, 1997,
1996 and 1995 and the three months ended August 31, 1997 and 1996 (unau-
dited)................................................................... F-5
Notes to Combined Financial Statements.................................... F-6
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDER OF NEW MANORCARE HEALTH SERVICES, INC.:
We have audited the accompanying combined balance sheets of New ManorCare
Health Services, Inc. (a Delaware Corporation) and subsidiaries, as described
under "Basis of Presentation" in the Notes to Combined Financial Statements,
as of May 31, 1997 and 1996, and the related combined statements of income and
cash flows for each of the three years in the period ended May 31, 1997. These
combined 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 combined 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 present fairly,
in all material respects, the financial position of New ManorCare Health
Services, Inc. and subsidiaries as of May 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended May 31, 1997 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule included in the Company's
Registration Statement on Form 10 as Exhibit 99.01 is presented for the
purpose of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
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 financial statements taken as a whole.
/s/ Arthur Andersen LLP
Washington, D.C.
September 14, 1997
F-2
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF AUGUST 31,
----------------- ----------------
1997 1996 1997
-------- -------- ----------------
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................. $ 14,486 $ 23,590 $ 23,631
Receivables (net of allowances for doubt-
ful accounts of $6,179, $3,141 and
$8,108).................................. 89,148 33,709 93,057
Inventories............................... 26,451 8,211 27,692
Deferred income taxes..................... 9,773 1,182 9,773
Other..................................... 6,567 4,667 2,095
-------- -------- --------
Total current assets.................... 146,425 71,359 156,248
-------- -------- --------
Property and equipment, at cost (net of
accumulated depreciation of $31,953,
$22,410 and $34,868)....................... 221,778 181,169 222,772
-------- -------- --------
Goodwill (net of accumulated amortization of
$5,705, $2,146 and $8,466)................. 346,981 49,348 351,668
-------- -------- --------
Pharmacy contracts (net of accumulated amor-
tization of $4,579, $3,044 and $5,250)..... 39,313 6,187 38,843
-------- -------- --------
Long-term receivables....................... 21,984 19,143 3,881
-------- -------- --------
Other assets................................ 10,896 7,674 9,355
-------- -------- --------
Total assets............................ $787,377 $334,880 $782,767
======== ======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current portion of long-term debt......... $ 5,821 $ 4,294 $ 3,445
Accounts payable.......................... 28,995 12,092 22,644
Accrued expenses.......................... 35,679 17,660 36,756
Income taxes payable...................... -- 725 --
-------- -------- --------
Total current liabilities............... 70,495 34,771 62,845
Due to Manor Care........................... 75,560 49,946 75,560
Long-term debt.............................. 105,283 1,441 117,748
Deferred income taxes....................... 51,799 15,435 49,956
Minority interest........................... 184,729 32,285 177,428
Other long-term liabilities................. 22,445 7,195 21,995
-------- -------- --------
Total liabilities....................... 510,311 141,073 505,532
-------- -------- --------
Investments and advances from Manor Care.... 277,066 193,807 277,235
-------- -------- --------
Total liabilities and equity............ $787,377 $334,880 $782,767
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MAY 31, AUGUST 31,
---------------------------- --------------------
1997 1996 1995 1997 1996
-------- -------- -------- --------- ---------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues.................... $471,152 $263,047 $125,987 $ 158,696 $ 86,253
Expenses:
Operating expenses........ 413,762 227,410 99,011 153,619 74,533
Depreciation and
amortization............. 20,135 11,583 6,090 7,199 3,718
General corporate and
other.................... 8,385 9,195 2,957 3,292 1,814
Provision for asset
impairment............... -- 1,200 -- -- --
-------- -------- -------- --------- --------
Total expenses.......... 442,282 249,388 108,058 164,110 80,065
-------- -------- -------- --------- --------
Income before other income
and (expenses) and income
taxes...................... 28,870 13,659 17,929 (5,414) 6,188
-------- -------- -------- --------- --------
Other income and (expenses)
Gain on issuance of
Vitalink stock........... 50,271 -- -- -- --
Interest income and
other.................... 2,162 1,827 895 426 394
Minority interest
expense.................. (3,881) (1,551) (2,047) 7,301 (244)
Interest expense.......... (6,126) (2,966) (117) (1,415) (1,042)
Intercompany interest
expense.................. (11,191) (8,421) (3,781) (3,112) (2,798)
-------- -------- -------- --------- --------
Total other income and
(expenses), net........ 31,235 (11,111) (5,050) 3,200 (3,690)
-------- -------- -------- --------- --------
Income before income taxes.. 60,105 2,548 12,879 (2,214) 2,498
Income taxes................ 23,917 1,437 6,055 750 1,273
-------- -------- -------- --------- --------
Net income.................. $ 36,188 $ 1,111 $ 6,824 $ (2,964) $ 1,225
======== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-4
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MAY 31, AUGUST 31,
----------------------------- -------------------
1997 1996 1995 1997 1996
--------- -------- -------- --------- ---------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income............... $ 36,188 $ 1,111 $ 6,824 $ (2,964) $ 1,225
Reconciliation of net
income to net cash
provided (utilized) by
operating activities:
Gain on issuance of
Vitalink stock........ (50,271) -- -- -- --
Minority interest ex-
pense................. 3,881 1,551 2,047 (7,301) 244
Depreciation and amor-
tization.............. 20,135 11,583 6,090 7,199 3,718
Provision for bad
debts................. 4,899 2,414 1,864 2,851 1,022
Increase in deferred
taxes................. 24,662 1,656 721 (1,843) 60
Provision for asset im-
pairment.............. -- 1,200 -- -- --
Changes in assets and
liabilities (excluding
sold facilities and
acquisitions):
Change in receivables.. (17,543) (12,534) (1,845) (6,746) 4,625
Change in inventories
and other current
assets................ (4,157) (4,318) (997) 3,642 644
Change in current lia-
bilities.............. (6,306) 4,561 2,349 (5,403) (892)
Change in income taxes
payable............... (725) 1,677 (83) -- --
Change in other liabil-
ities................. (6,362) (858) (269) (450) (1,853)
--------- -------- -------- -------- ---------
Net cash provided
(utilized) by operating
activities................ 4,401 8,043 16,701 (11,015) 8,793
--------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Investment in property
and equipment........... (39,974) (32,001) (25,020) (4,246) (9,527)
Acquisition of assisted
living facilities....... -- (19,050) (30,185) -- --
Acquisition of pharma-
cies.................... (5,291) (6,270) (2,451) (5,590) (5,291)
Purchase of home health
business................ -- (22,950) -- -- --
Acquisition of pharmacy
business................ (97,400) -- -- -- --
Acquisition of Vitalink
stock................... (30,000) -- -- -- --
Other items, net......... (12,937) (6,332) (1,527) 16,774 (5,265)
--------- -------- -------- -------- ---------
Net cash (utilized) pro-
vided by investing activi-
ties...................... (185,602) (86,603) (59,183) 6,938 (20,083)
--------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowing of long-term
debt.................... 127,981 -- 1,810 10,391 --
Principal payments of
debt.................... (5,393) (3,149) (38) (302) (483)
Cash transfers from Manor
Care, net............... 49,509 105,057 40,300 3,133 9,146
--------- -------- -------- -------- ---------
Net cash provided by fi-
nancing activities........ 172,097 101,908 42,072 13,222 8,663
--------- -------- -------- -------- ---------
Net change in cash and cash
equivalents............... (9,104) 23,348 (410) 9,145 (2,627)
Cash and cash equivalents,
at beginning of year...... 23,590 242 652 14,486 23,590
--------- -------- -------- -------- ---------
Cash and cash equivalents,
at end of year............ $ 14,486 $ 23,590 $ 242 $ 23,631 $ 20,963
========= ======== ======== ======== =========
NON-CASH ACTIVITIES:
Liabilities assumed in
connection with acquisi-
tion of properties...... $ 172,778 $ 55,250 $ -- $ -- $ --
========= ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-5
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On September 15, 1997, Manor Care, Inc., ("Manor Care") announced its
intention to proceed with the separation of its assisted living, pharmacy and
home health businesses (collectively, the "Business") from its skilled
nursing, real estate and health care facility development business via a spin-
off of the Business (the "Distribution"). Manor Care's Board of Directors
voted to approve, in principle, the Distribution subject to the receipt of
other approvals and consents and satisfactory implementation of the
arrangements for the Distribution. Manor Care anticipates consummating the
Distribution by the end of the third fiscal quarter of 1998 through a special
dividend to its shareholders of one share of common stock of New ManorCare
Health Services, Inc. (the "Company") for each share of Manor Care common
stock. The Distribution is conditional upon certain matters, including the
receipt of a solvency opinion and the declaration of the special dividend by
Manor Care's Board of Directors. Following the Distribution, the Company will
lease the skilled nursing facilities from Manor Care, to be renamed Manor Care
Realty, Inc. ("Manor Care Realty"). Additionally, Manor Care Realty will
develop assisted living facilities for the Company, which will be renamed
ManorCare Health Services, Inc. ("ManorCare Health Services").
The Company was formed on August 29, 1997 to facilitate the proposed
Distribution of the Business. The operations of the Company will consist
principally of the pharmacy operations, assisted living operations and home
health operations formerly conducted by Manor Care directly or through Manor
Care's subsidiaries. The Company has assisted living operations under the
brand names "Springhouse" and "Arden Courts." The Company owns and manages 34
assisted living facilities in 12 states. The Company operates pharmacy
activities under its approximately 51% owned subsidiary, Vitalink Pharmacy
Services, Inc. ("Vitalink"), and home health operations under In Home Health,
Inc. ("IHHI"), a separate public company of which Manor Care owns
approximately 64% of the voting stock.
The combined financial statements present the financial position, results of
operations and cash flows of the Company as if it were formed as a separate
entity of Manor Care which conducted the Business for all periods presented.
Manor Care's historical basis in the assets and liabilities of the Company has
been carried over to the combined financial statements. All material
intercompany transactions and balances between the Company and its
subsidiaries have been eliminated. Changes in the investments and advances
from Manor Care represent the net income of the Company plus the net advances
to the Company from Manor Care.
An analysis of the activity in the "Investments and advances from Manor
Care" account for the three years ended May 31, 1997 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS
OF DOLLARS)
-------------
<S> <C>
Balance, May 31, 1994.......................................... $ 43,345
Advances from Manor Care, net.................................. 53,499
Net income..................................................... (6,824)
--------
Balance, May 31, 1995.......................................... 90,020
Advances from Manor Care, net.................................. 104,898
Net income..................................................... (1,111)
--------
Balance, May 31, 1996.......................................... 193,807
Advances from Manor Care, net.................................. 119,447
Net income..................................................... (36,188)
--------
Balance, May 31, 1997.......................................... $277,066
========
</TABLE>
F-6
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Included in Investments and Advances from Manor Care is the Company's
portion of equity in its combined majority-owned subsidiaries, Vitalink and
IHHI, of approximately $200.0 million at May 31, 1997. Interest has been
charged based on annual rates of 11.1%, 9.0% and 12.3% for fiscal years ended
1997, 1996, and 1995, respectively, applied to these balances net of the
Company's equity in Vitalink and IHHI.
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:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Land..................................................... $ 21,439 $ 17,915
Building and improvements................................ 156,000 127,911
Furniture, fixtures and equipment........................ 66,246 47,968
Facilities in progress................................... 10,046 9,785
-------- --------
253,731 203,579
Less: Accumulated depreciation and amortization.......... (31,953) (22,410)
-------- --------
$221,778 $181,169
======== ========
</TABLE>
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:
<TABLE>
<S> <C>
Building and improvements........................................ 10-40 years
Furniture, fixtures and equipment................................ 3-20 years
</TABLE>
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.
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 being amortized over 40 years. Such amortization amounted to $4.3 million,
$0.9 million and $0.6 million in each of the years ended May 31, 1997, 1996
and 1995, respectively.
PHARMACY CONTRACTS
Pharmacy contracts, principally representing the estimated value of acquired
contracts to service customers, are amortized over their estimated useful
lives, not to exceed 20 years. The recoverability of these assets is evaluated
annually. Amortization expense charged to operations for pharmacy contracts
was $1.5 million in 1997, $0.9 million in 1996 and $0.9 million in 1995.
F-7
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 equity in these entities.
SELF-INSURANCE PROGRAMS
Prior to the Distribution, the Company participated in Manor Care's self-
insurance program for certain levels of general and professional liability,
automobile liability and workers' compensation coverage. The estimated costs
of these programs are accrued at present values based on actuarial projections
for known and anticipated claims. All accrued self-insurance costs have been
treated as paid to Manor Care, and as such, amounts paid to Manor Care have
been charged directly to investments and advances from Manor Care. The costs
relating to these programs totaled $0.4 million, $4.0 million and $5.1 million
in fiscal years 1995, 1996, and 1997, respectively. Subsequent to the
Distribution, the Company will establish and maintain its own insurance
program.
PRO FORMA INFORMATION (UNAUDITED)
After giving effect to the Distribution and related transactions (see "Basis
of Presentation"), pro forma revenues, net income and net equity for the three
months ended August 31, 1997 would have been $436.9 million, $11.8 million,
and $681.5 million.
Per share data is not presented on a historical basis because the Company
was not a publicly-held company during the periods presented. Pro forma income
per share for the three months ended August 31, 1997, after giving effect to
the transaction described in the pro forma combined financial statements,
would have been $0.18. Pro forma income per common share is computed by
dividing pro forma net income by the pro forma weighted average number of
outstanding common shares, aggregating 63.7 million at August 31, 1997. The
pro forma weighted average number of outstanding common shares is based on
Manor Care's weighted average number of outstanding common shares.
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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying combined balance sheet as of August 31, 1997 and the
combined statements of income and cash flows for the three month periods ended
August 31, 1997 and August 31, 1996 have been prepared by the Company without
audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been omitted. The Company believes the disclosures
made are adequate to make the information presented not misleading. In the
opinion of the Company, the accompanying unaudited combined financial
statements reflect all adjustments, including only normal recurring
adjustments, necessary to present fairly the financial position of the Company
at August 31, 1997 and the results of operations and cash flows for the three
months ended August 31, 1997 and August 31, 1996. Interim results are not
necessarily indicative of fiscal year performance because of the impact of
seasonal variations.
F-8
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
REVENUE RECOGNITION
Revenues are recognized at the time the service is provided to the patient.
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 "Commitments and Contingencies" footnote for additional
information.
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 estimated useful
lives of the related systems of not more than five years.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" ("SFAS
128"), which is effective for fiscal years ending after December 15, 1997,
including interim periods. Earlier adoption is not permitted. However, an
entity is permitted to disclose pro forma earnings per share amounts computed
under SFAS 128 in the notes to the financial statements in periods prior to
adoption. The statement requires restatement of all prior-period earnings per
share data presented after the effective date. The Company plans to adopt SFAS
128 in 1998 and the impact is not expected to be significant.
In June 1997, the Financial Accounting Standards Board 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 plans to adopt SFAS 130 in fiscal year 1999 and has not determined the
impact of adoption.
In June 1997, the Financial Accounting Standards Board 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.
LONG-TERM RECEIVABLES
Long-term receivables of $21,984 and $19,143 at May 31, 1997 and 1996,
respectively, represent accounts receivable from Medicare at IHHI, relating
primarily to the reimbursement of disputed costs from prior years.
Approximately 55% of IHHI'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. IHHI 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
F-9
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
that are contrary to IHHI's interpretation or on what IHHI believes is the
misapplication of specific reimbursement principles.
As of May 31, 1997, IHHI has received reports challenging $18.9 million of
these costs. An additional $18.8 million of costs similar to the costs which
have been challenged have been incurred through May 31, 1997 related to open
cost reporting years. Of this $37.7 million, approximately $22.5 million
relates to the treatment of certain community liaison personnel costs, which
Medicare alleges are unreimbursable sales costs. Other significant disputed
costs relate to physical therapists employed by IHHI and certain other branch
and corporate expenses.
As of May 31, 1997 total IHHI accounts receivable due from Medicare were
approximately $40.5 million including the disputed costs of $37.7 million. On a
consolidated basis, the Company had established reserves against these disputed
costs of $9.8 million. The Company does not believe that the resolutions of
these disputed costs will be accomplished in the next year. Therefore, they
have been classified as a non-current asset. Additionally, as of May 31, 1997,
IHHI had received approximately $12.5 million in payments from Medicare for
disputed costs. Because Medicare may seek repayment of these amounts, the
potential liability is recorded in Accrued Liabilities. In August 1997, IHHI
received three court decisions relating to certain of these amounts. IHHI has,
on a preliminary basis, evaluated these decisions on its recorded accounts
receivable and, accordingly, recorded a reserve of $13.6 million in the quarter
ended August 31, 1997. The net impact to the Company after taxes and minority
interest was approximately $3 million.
INCOME TAXES
Because of the relative ownership percentages, the Company files separate
income tax returns for Vitalink (effective February 1, 1997) and IHHI. An
agreement exists whereby the Company (with the exception of Vitalink and IHHI)
joins with Manor Care in the filing of a consolidated Federal tax return. The
consolidated provision of Manor Care is allocated among its subsidiaries on a
separate company basis. Accordingly, the Company accrues taxes payable to or
benefits receivable from Manor Care in the investments and advances from Manor
Care account, based on the statutory rate applied to income before taxes after
considering appropriate tax credits. Deferred taxes are recorded for the tax
effect of temporary differences between book and tax income. The Company does
not record deferred income taxes on the undistributed earnings of Vitalink and
IHHI.
The allocation of the consolidated provisions for income taxes follows for
the years ended May 31.
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ ------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Current tax expense:
Federal........................................... $ (1,170) $ (236) $4,303
State............................................. 425 17 1,031
Deferred tax expense:
Federal........................................... 20,229 1,361 593
State............................................. 4,433 295 128
-------- ------ ------
$ 23,917 $1,437 $6,055
======== ====== ======
</TABLE>
F-10
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets (liabilities) are comprised of the following at May 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Depreciation and amortization................. $ (8,442) $ (5,870) $ (2,483)
Purchased intangibles......................... (18,235) (723) (269)
Gain on stock issuance........................ (37,187) (11,896) (11,896)
Other......................................... (777) (949) (75)
-------- -------- --------
Gross deferred tax liabilities................ (64,641) (19,438) (14,723)
-------- -------- --------
Reserve for doubtful accounts................. 8,208 1,418 748
Reimbursement reserve......................... 5,161 -- 68
Acquisition costs............................. 3,864 -- --
Deferred revenue.............................. 227 391 --
Vacation payments............................. 1,609 929 138
Self-insurance................................ 1,443 2,140 332
Deferred compensation......................... 1,063 -- 67
Other......................................... 1,040 307 8
-------- -------- --------
Gross deferred tax assets..................... 22,615 5,185 1,361
-------- -------- --------
Net deferred tax liabilities.................. $(42,026) $(14,253) $(13,362)
======== ======== ========
</TABLE>
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the combined statements of income follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Federal income tax rate............................. 35% 35% 35%
======= ====== ======
Federal taxes at statutory rate..................... $21,037 $ 892 $4,508
State income taxes, net of Federal tax benefit...... 3,158 203 753
Minority interest................................... 1,358 543 716
Tax credits......................................... -- -- (15)
Other............................................... (1,636) (201) 93
------- ------ ------
Income tax expense.................................. $23,917 $1,437 $6,055
======= ====== ======
</TABLE>
Income taxes paid on a combined basis for the years ended May 31, 1997, 1996
and 1995 were $6.5 million, $1.2 million and $1.1 million, respectively.
ACCRUED EXPENSES
Accrued expenses at May 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS
OF DOLLARS)
<S> <C> <C>
Payroll..................................................... $13,460 $ 6,878
Taxes, other than income.................................... 1,615 734
Insurance................................................... 8,439 8,231
Interest.................................................... 1,172 629
Acquisition related accruals................................ 6,251 243
Other....................................................... 4,742 945
------- -------
$35,679 $17,660
======= =======
</TABLE>
F-11
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT
Maturities of long-term debt at May 31, 1997 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS
FISCAL YEAR OF DOLLARS)
- ----------- -------------
<S> <C>
1998.............................................................. $ 5,821
1999.............................................................. 5,523
2000.............................................................. 4,593
2001.............................................................. 4,076
2002.............................................................. 3,870
2003 and thereafter............................................... 162,781
--------
$186,664
========
</TABLE>
Long-term debt consisting of amounts due to Manor Care for mortgages on
assisted living facilities and for amounts drawn on Manor Care's credit
facility related to the Vitalink tender offer was $75.6 million and $49.9
million at May 31, 1997 and 1996, respectively. During fiscal year 1997
interest rates on mortgages ranged from 2.475% to 10.75%. The weighted average
interest rate in fiscal year 1997 was 6.4%. Interest paid was $1.5 million in
fiscal year 1997, $0.1 million in fiscal year 1996 and $0.1 million in fiscal
year 1995.
Mortgages on assisted living facilities are held by Manor Care and will be
transferred to ManorCare Health Services on the Distribution Date. Certain
covenants in the loan documents will be modified as a result of this transfer.
The Company does not expect changes in loan covenants to be significant.
During fiscal year 1997, Vitalink entered into a $200 million revolving
credit facility (the "Credit Facility"), which expires February 12, 2002 with
Chase Manhattan Bank. Amounts totaling $97.4 million were drawn under the
Credit Facility to redeem $98.2 million of GranCare, Inc.'s ("GranCare")
$100.0 million Senior Subordinated Notes (see "Acquisitions and
Divestitures"). Borrowings under the Credit Facility are at an interest rate
of LIBOR plus 25 basis points. Vitalink is subject to a 0.15% facility fee for
the total amount of the Credit Facility payable on a quarterly basis. The
weighted average interest rate of the Credit Facility during fiscal year 1997
was 6.05%. The terms of the Credit Facility contain, among other provisions,
requirements for maintaining defined levels of net worth, annual capital
expenditures, and interest coverage and consolidated leverage ratios. Vitalink
was in compliance with the terms of the Credit Facility for the fiscal year
ended May 31, 1997. In conjunction with Vitalink's merger with TeamCare,
Vitalink assumed $1.8 million of GranCare's 9 3/8% Senior Subordinated Notes
due September 15, 2005. The notes require semi-annual interest payments. A
$0.6 million premium has been recorded on the Senior Subordinated Notes to
reflect the fair market value as of the merger date of February 12, 1997.
F-12
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
LEASES
The Company operates certain property and equipment under leases, some with
purchase options that expire at various dates through 2023. The Company is
also obligated under several non-cancelable operating leases for office space
and equipment. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
1998................................................... $ 8,335 $1,589
1999................................................... 6,808 764
2000................................................... 5,351 515
2001................................................... 4,355 395
2002................................................... 2,922 84
Thereafter............................................. 9,498 --
------- ------
Total minimum lease payments........................... $37,269 $3,347
=======
Less: Amount representing interest..................... 549
------
Present value of lease payments........................ 2,798
Less: Current portion.................................. 1,346
------
Lease obligations included in long-term debt........... $1,452
======
</TABLE>
Rental expense under noncancelable operating leases was $8.0 million in
1997, $3.5 million in 1996 and $1.3 million in 1995.
ACQUISITIONS AND DIVESTITURES
On February 12, 1997, Vitalink completed a merger with TeamCare, the
pharmacy subsidiary of GranCare. Vitalink issued 11.4 million shares in
exchange for all of the outstanding shares of GranCare. In addition, Vitalink
funded the redemption of $98.2 million of GranCare's 9 3/8% Senior
Subordinated Notes and assumed approximately $10.0 million of additional
GranCare indebtedness. As a result of the excess of fair value of Vitalink
shares over the book value of TeamCare, Vitalink recorded approximately $292.5
million of goodwill. As a result of the merger, the Company's ownership
interest in Vitalink decreased to 45%. On May 21, 1997, the Company increased
its interest in Vitalink to approximately 51% through the successful
completion of its tender offer for 1.5 million shares of Vitalink common
stock. As a result of the tender offer, the Company's interest in Vitalink was
increased to approximately 51%. The Company's net pretax gain resulting from
these transactions was $50.3 million.
During fiscal year 1997, Vitalink purchased a pharmacy in California which
services 5,100 institutional beds for a total of $5.3 million. Through new
construction, the Company opened six assisted living facilities.
During fiscal year 1996, the Company acquired six assisted living facilities
with five attached skilled nursing units 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 IHHI, and invested another $20.0 million for 100% of its outstanding voting
convertible preferred stock and for warrants to purchase an additional 6.0
million shares of common stock. As a result of this transaction, the Company
currently has effective control of approximately 64% of the voting stock of
IHHI. Vitalink purchased a pharmacy servicing 2,200 institutional beds and an
infusion therapy business for a total of $6.3 million.
F-13
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
During fiscal year 1995, the Company purchased six assisted living
facilities for approximately $30.2 million. Vitalink purchased a pharmacy
servicing 1,300 institutional beds for $2.5 million.
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.
The following unaudited pro forma statement of operations information gives
effect to the TeamCare merger transactions described above as though they had
occurred on June 1, 1995, after giving effect to certain adjustments,
including amortization of goodwill, additional depreciation and amortization
expense, increased interest expense on debt related to the merger and related
income tax effects. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the merger
occurred at the beginning of the respective years.
PRO FORMA STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------
1997 1996
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Total net revenues................................. $ 663,516 $ 495,409
Income before income taxes......................... 62,083 5,485
Net income......................................... 33,991 (1,979)
Net income per share............................... $ 0.54 $ (0.03)
=========== ===========
</TABLE>
PROVISION FOR ASSET IMPAIRMENT
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.
In fiscal year 1996, the Company incurred costs in excess of the original
amount expected to be incurred for the development of Arden Courts billing and
receivables systems. The Company compared the estimated net realizable value
of the systems development costs, based on the fair value of similar assets,
to the carrying amounts of these costs. 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. As a result, the Company recorded a
provision of $1.2 million in fiscal year 1996 related to the impairment of
system development costs. The provision for asset impairment in fiscal year
1996 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."
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 (see
"Revenue Recognition" footnote disclosure). For fiscal years
F-14
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1997, 1996 and 1995, these revenues amounted to $188.0 million, $108.5 million
and $39.9 million, respectively. In the opinion of management, any difference
between revenues recorded and final determination will not be significant. The
increase in revenues subject to audit adjustment is due, in large part, to
acquisitions made by Vitalink and, in FY 1996, to the investment in In Home
Health, Inc. 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.
Vitalink has a limited guarantee to Health Retirement Properties Trust
("HRPT") of up to $15.0 million for default mortgage payments of GranCare
facility leases assumed in connection with the TeamCare merger. In return,
Vitalink is the beneficiary of a $15.0 million line of credit from GranCare in
the event that any of the facilities defaults on its mortgage to HRPT.
Pursuant to the Distribution Agreement, the Company will assume the
following environmental liabilities: (i) environmental liabilities arising out
of or in connection with the existing assisted living facilities; (ii)
environmental liabilities to the extent such liabilities arose by reason of
the Company's negligent operation or management of an assisted living facility
or skilled nursing facility; (iii) environmental liabilities arising out of or
in connection with an assisted living facility after it is acquired by the
Company from Manor Care Realty pursuant to the terms of the Development
Agreement and (iv) liabilities arising out of or in connection with the
handling of biomedical waste at the assisted living facilities or the skilled
nursing facilities. The Company currently is not aware of the existence of any
such liabilities.
TRANSACTIONS WITH MANOR CARE
The pharmacy and assisted living facilities participate in a cash
concentration system with Manor Care and as such maintain no significant cash
balances or banking relationships. Substantially all cash received by these
operations has been immediately deposited in and combined with Manor Care's
corporate funds through its cash management system. Similarly, operating
expenses, capital expenditures and other cash requirements of these facilities
have been paid by Manor Care and charged to the Company. The net result of all
these intercompany transactions with the exception of amounts relating to the
acquisition of Company-operated assisted living facilities is reflected in the
combined balance sheets as investments and advances from Manor Care. Interest
expense on investments and advances from Manor Care for the years ended May
31, 1997, 1996 and 1995 was $11.2 million, $8.4 million and $3.8 million based
on annual rates of 11.1%, 9.0%, and 12.3%, respectively. Following the
Distribution, the Company will maintain its own cash balances and will
implement an internal cash management system.
Manor Care has historically provided various services to the Company
including, among others, cash management, payroll and payables processing,
employee benefit plans, legal, accounting, tax, information systems and
certain administrative services, as required. Manor Care charges the Company
fees for general management, staff support and rental of office space on the
basis of such factors as employee time incurred and square footage. This is
essentially the same basis Manor Care utilized to charge its other operating
entities for such services. General corporate and other expenses of $8.4
million, $11.6 million and $3.0 million, respectively, were charged to the
Company's operations for the years ended May 31, 1997, 1996 and 1995.
Management believes that the foregoing charges are reasonable allocations of
the costs incurred by Manor Care on the Company's behalf. The Company has
estimated that after the Distribution annual general corporate and other
expenses will increase by approximately $2.5 million.
For purposes of providing an orderly transition after the Distribution,
Manor Care Realty and the Company will enter into various agreements,
including, among others, Lease Agreements, Development Agreement,
F-15
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Assisted Living Facility Management Agreement, Tax Sharing Agreement, Tax
Administration Agreement, Corporate Services Agreement, Employee Benefits and
Other Employment Matters Allocation Agreement and Employee Benefits
Administration Agreement. Effective at the Distribution Date, these agreements
will provide, among other things, that the Company (i) will perform certain
corporate and support services, such as accounting, risk management and
computer systems support, (ii) will establish or participate in pension,
profit sharing and incentive plans similar to those in place at Manor Care,
(iii) will receive certain miscellaneous administrative services and (iv) will
lease skilled nursing facilities from Manor Care Realty. These agreements will
extend from the Distribution Date until such time as the Company or Manor Care
Realty has arranged to provide such services in-house or through another
unrelated provider of such services.
LEASE AGREEMENTS
On the Distribution Date, Manor Care Realty and the Company will enter into
Lease Agreements, pursuant to which Manor Care Realty will lease to ManorCare
Health Services all of its skilled nursing facilities. Under each Lease
Agreement, ManorCare Health Services' use of the subject facility will be
limited to skilled nursing operations.
Manor Care Realty will be responsible for paying all real property taxes and
insurance costs. ManorCare Health Services will be obligated to pay to Manor
Care Realty under each Lease Agreement an annual amount equal to the Owner's
Priority ("Land Rent"). In addition, each Lease Agreement will provide for
ManorCare Health Services to retain a base fee monthly of 6% of Project
Revenues (as defined in the Lease Agreement) and an incentive fee of up to 23%
of Net Operating Profit (as defined in the Lease Agreement).
Under each Lease Agreement, Manor Care Realty will have the right to
terminate if certain financial results are not achieved or if, due to
ManorCare Health Services' fault, the facility is decertified as a skilled
nursing facility or is disqualified from participation in Medicare or
Medicaid. The Lease Agreements will also provide for termination in the event
of additional defaults such as monetary default, breach of covenant and
bankruptcy defaults. Manor Care Realty will be obligated to pay to ManorCare
Health Services a termination fee in certain situations.
DEVELOPMENT AGREEMENT
On the Effective Date, Manor Care Realty and ManorCare Health Services will
enter into a development agreement (the "Development Agreement") pursuant to
which Manor Care Realty will develop assisted living facilities for sale to
ManorCare Health Services and retain ownership of such facilities until
occupancy has stabilized at 75% or more for a period of 5 days. The purchase
price for each facility will be at a premium to the total development costs,
which will be based upon the time elapsed since the opening of the facility.
ASSISTED LIVING FACILITY MANAGEMENT AGREEMENT
On the Effective Date, Manor Care Realty and ManorCare Health Services will
enter into an assisted living facility management agreement (the "Assisted
Living Facility Management Agreement") pursuant to which during the two-year
stabilization period under the Development Agreement, ManorCare Health
Services will manage the facility for Manor Care Realty. During the management
period, ManorCare Health Services will be reimbursed for all operating costs
and will receive a fixed monthly fee.
F-16
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7 1/2% SENIOR NOTES
In connection with the Exchange Offer, the Company will assume $150 million
of 7 1/2% Senior Notes due 2006 from Manor Care. These notes will be
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.
INTEREST RATE HEDGING
In conjunction with the June 1996 issuance of $150 million of 7 1/2% Senior
Notes, Manor Care entered into a series of interest rate swap and treasury
lock agreements having a total notional principal amount of $150 million.
Agreements with a total notional principal amount of $100 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 million, was terminated on October 23, 1996 with a
$1.4 million cash gain. The gains on the termination of the agreements were
deferred and are being amortized over the life of the 7 1/2% Senior Notes,
effectively reducing the related interest expense by 39 basis points.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
Employees of the Company participate in various retirement and profit
sharing plans. The retirement savings and investment plan and the non-
qualified retirement savings and investment plan are jointly sponsored by the
Company and Manor Care and are thus multiple employer plans. The costs of
these plans are allocated to the Company based on the size of its payroll
relative to the total payroll. Costs allocated to the Company were $1.1
million in 1997, $0.7 million in 1996 and $0.4 million in 1995.
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 balance sheet. The balance
sheet carrying amounts of cash, cash equivalents, receivables, inventories and
other current assets approximate fair value due to the short-term nature of
these items.
F-17
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
BUSINESS SEGMENT INFORMATION
The Company operates principally in three segments: pharmacy services,
assisted living operations and home health services. Intersegment sales for
the pharmacy segment consist of sales to assisted living facilities which are
subsequently eliminated in consolidation.
Income (loss) from operations consists of total revenues less total
operating, depreciation and amortization, and general corporate and other
expenses.
<TABLE>
<CAPTION>
1997 PHARMACY ASSISTED LIVING HOME HEALTH ELIMINATIONS TOTAL
- ---- -------- --------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated
parties................ $273,396 $ 73,402 $124,354 $ -- $471,152
Intersegment sales...... 642 -- -- (642) --
Income (loss) from oper-
ations................. 33,109 (1,237) (3,002) -- 28,870
Identifiable assets..... 515,752 211,218 60,407 -- 787,377
Depreciation and amorti-
zation................. 9,527 7,548 3,060 -- 20,135
Capital expenditures.... 4,648 35,284 42 -- 39,974
1996
- ----
Revenues to unaffiliated
parties................ $140,748 $ 48,146 $ 74,153 $ -- $263,047
Intersegment sales...... 367 -- -- (367) --
Income (loss) from oper-
ations................. 22,301 (5,998)(a) (2,644) -- 13,659
Identifiable assets..... 79,013 183,269 72,598 -- 334,880
Depreciation and amorti-
zation................. 4,363 5,472 1,748 -- 11,583
Capital expenditures.... 3,537 27,902 562 -- 32,001
1995
- ----
Revenues to unaffiliated
parties................ $112,179 $ 13,808 $ -- $ -- $125,987
Intersegment sales...... 78 -- -- (78) --
Income (loss) from oper-
ations................. 18,726 (797) -- -- 17,929
Identifiable assets..... 63,825 70,677 -- -- 134,502
Depreciation and amorti-
zation................. 3,753 2,337 -- -- 6,090
Capital expenditures.... 2,163 22,857 -- -- 25,020
</TABLE>
- --------
(a) Includes a provision for asset impairment of $1.2 million.
F-18
<PAGE>
THE DEALER MANAGERS FOR THE EXCHANGE OFFER ARE:
CHASE SECURITIES INC.
1-800-523-9736
SBC WARBURG DILLON READ INC.
[ ]
Any questions concerning the terms of the Exchange Offer may be directed to the
Dealer Managers.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE WILMINGTON TRUST COMPANY
Any questions concerning tender procedures, please call
( ) - (call collect)
TRUSTEE: The Wilmington Trust Company
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to authority conferred by Delaware General Corporation Law Section
102, the Registrant's Certificate of Incorporation (the "Charter") provides
that no director of the Registrant will be liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director
except for breach of the director's duty of loyalty to the Registrant or the
stockholders, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for unlawful payment of
dividends, unlawful stock redemptions or repurchases and for any transaction
from which the director derived an improper personal benefit. The Charter also
provides that if Delaware law is amended to further limit the liability of
directors, then the liability of a director of the Registrant will be further
limited to the fullest extent permitted by Delaware law as so amended.
Delaware General Corporation Law Section 145 contains provisions permitting
and, in some situations, requiring Delaware corporations, such as the
Registrant, to provide indemnification to their officers and directors for
losses and litigation expense incurred in connection with their service to the
corporation in those capacities. The Charter contains provisions requiring
indemnification by the Registrant of its directors and officers to the fullest
extent permitted by law. Among other things, the Charter provides
indemnification for officers and directors against liabilities for judgments
in and settlement of lawsuits and other proceedings and for the advance of any
payment of fees and expenses reasonably incurred by the director or officer in
defense of any such lawsuit or proceeding.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
The following exhibits are filed pursuant to Item 601 of Regulation S-
K.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Dealer Manager Agreement by and between Manor Care, the
Registrant and Chase Securities Inc., dated as of , 1998.*
2.1 Form of Distribution Agreement, dated as of , 1998, between Manor
Care and Registrant.*
3.1 Restated Certificate of Incorporation of Registrant.*
3.2 Amended Bylaws of Registrant.*
3.3 Amended Certificate of Incorporation of Manor Care, incorporated by
reference to Exhibit 3.1 to Manor Care's Annual report on Form 10-K
for the fiscal year ended May 31, 1997.
3.4 Amended Bylaws of Manor Care, incorporated by reference to Exhibit 3.2
to Manor Care's Annual report on Form 10-K for the fiscal year ended
May 31, 1997.
4.1 Indenture, dated as of June 4, 1996, between Manor Care and Wilmington
Trust Company, Trustee, relating to Manor Care's 7 1/2% Senior Notes
due 2006, incorporated by reference to Exhibit 4.1 to Manor Care's
Form 8-K dated June 4, 1996.
4.2 Supplemental Indentures, dated as of June 4, 1996, between Manor Care
and Wilmington Trust Company, Trustee, relating to Manor Care's 7 1/2%
Senior Notes due 2006, incorporated by reference to Exhibit 4.2 to
Manor Care's Form 8-K dated June 4, 1996.
4.3 Form of Second Supplemental Indenture between Manor Care and
Wilmington Trust Company, Trustee, relating to Manor Care's 7 1/2%
Senior Notes due 2006.*
4.4 Form of Indenture between Registrant and The Wilmington Trust Company,
as Trustee, relating to the Registrant's 7 1/2% Senior Notes due
2006.*
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.5 Form of Indenture among Manor Care Real Estate Corp., the Guarantors
and , as Trustee, relating to Manor Care Real Estate's % Senior
Notes due 2008.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom, LLP (including the
consent of such counsel) regarding the legality of securities being
offered.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom, LLP (including the
consent of such counsel) as to certain tax matters*
10.1 Form of Tax Sharing Agreement, dated as of , 1998, between Manor
Care and Registrant.*
10.2 Form of Tax Administration Agreement, dated as of , 1998, between
Manor Care and Registrant.*
10.3 Form of Corporate Services Agreement, dated as of , 1998, between
Manor Care and Registrant.*
10.4 Credit Agreement, dated as of , 1998, among Manor Care, Manor Care
Real Estate, The Chase Manhattan Bank and Chase Securities Inc.*
10.5 Commitment Letter, dated , 1998, among the Registrant, Manor
Care, The Chase Manhattan Bank and Chase Securities, Inc.*
10.6 Form of Assisted Living Facility Management Agreement, dated as of
, 1998, between Manor Care and Registrant.*
10.7 Form of Master Development Agreement, dated as of , 1998, between
Manor Care and Registrant.*
10.8 Form of Master Lease Agreement, dated as of , 1998, between
Manor Care and Registrant.*
10.9 Form of Non-Competition Agreement, dated as of , 1998, between
Manor Care and Registrant.*
10.10 Form of Employee Benefits and Other Employment Matters Allocation
Agreement, dated as of , 1998, between Manor Care and
Registrant.*
10.11 Form of Employee Benefits Administration Agreement, dated as of ,
1998, between Manor Care and Registrant.*
10.12 Form of Office Lease Agreement, dated as of , 1998, between Manor
Care and Registrant.*
10.13 Form of Trademark Agreement, dated as of , 1998, between Manor
Care and Registrant.*
10.14 Form of Cash Management Agreement, dated as of , 1998, between
Manor Care and Registrant.*
10.15 Form of Risk Management Consulting Services Agreement, dated as of
, 1998, between Manor Care and Registrant.*
10.16 Form of Employment Agreement, dated as of , 1998, between Stewart
Bainum, Jr. and Manor Care.*
10.21 Form of Employment Agreement, dated as of , 1998, between Scott J.
Van Hove and the Registrant.*
10.22 Form of License Agreement, dated , 1998, between Manor Care Realty
and the Registrant.*
10.23 Form of % Senior Note due 2008 of Manor Care Realty (Realty Note).*
10.24 Form of Vehicle Lease Agreement, dated , 1998, between Manor Care
and the Registrant.*
12.1 Statement re Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of Registrant.*
23.1 Consents of Independent Public Accountants.
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom, LLP (included as part
of opinion filed pursuant to Exhibit 5 hereof).*
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom, LLP (included in
Exhibit 8.1).*
24.1 Powers of Attorney (See Signature Page).
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of
The Wilmington Trust Company, as Trustee.*
27.1 Financial Data Schedule.
99.1 Valuation and Qualifying Accounts.
99.2 Form of Letter of Transmittal.*
</TABLE>
- --------
* To be filed by amendment.
II-2
<PAGE>
(B) FINANCIAL SCHEDULES
Not applicable
(C) OPINIONS OF FINANCIAL ADVISORS
Not applicable
ITEM 22. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
Registration Statement is on Form S-4 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed with or furnished to the Commission
by the Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
The Registrant hereby undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act, and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an
II-3
<PAGE>
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in Gaithersburg, Maryland on
December , 1997.
New ManorCare Health Services, Inc.
By: /s/ James H. Rempe
_________________________________
NAME: JAMES H. REMPE
TITLE: SECRETARY
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the Registration Statement has been signed by the following persons in their
capacities on December , 1997:
SIGNATURES TITLE
Chairman of the Board, President,
* and Chief Executive Officer
- ------------------------------------ (Principal Executive Officer)
STEWART BAINUM, JR.
President
*
- ------------------------------------
DONALD C. TOMASSO
Vice President-Finance, Treasurer
* and Director (Principal Financial
- ------------------------------------ Officer)
LEIGH C. COMAS
Vice President and Controller
* (Principal Accounting Officer)
- ------------------------------------
MARGARITA A. SCHOENDORFER
Senior Vice President, General
* Counsel, Secretary and Director
- ------------------------------------
JAMES H. REMPE
/s/ James H. Rempe
*By ___________________________
AS ATTORNEY IN FACT
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NO.
------- ---------------------- ----
<C> <S> <C>
1.1 Form of Dealer Manager Agreement by and between Manor Care, the
Registrant and Chase Securities Inc., dated as of , 1998.*
2.1 Form of Distribution Agreement, dated as of , 1998, between
Manor Care and Registrant.*
3.1 Restated Certificate of Incorporation of Registrant.*
3.2 Amended Bylaws of Registrant.*
3.3 Amended Certificate of Incorporation of Manor Care,
incorporated by reference to Exhibit 3.1 to Manor Care's Annual
report on Form 10-K for the fiscal year ended May 31, 1997.
3.4 Amended Bylaws of Manor Care, incorporated by reference to
Exhibit 3.2 to Manor Care's Annual report on Form 10-K for the
fiscal year ended May 31, 1997.
4.1 Indenture, dated as of June 4, 1996, between Manor Care and
Wilmington Trust Company, Trustee, relating to Manor Care's 7
1/2% Senior Notes due 2006, incorporated by reference to
Exhibit 4.1 to Manor Care's Form 8-K dated June 4, 1996.
4.2 Supplemental Indentures, dated as of June 4, 1996, between
Manor Care and Wilmington Trust Company, Trustee, relating to
Manor Care's 7 1/2% Senior Notes due 2006, incorporated by
reference to Exhibit 4.2 to Manor Care's Form 8-K dated June 4,
1996.
4.3 Form of Second Supplemental Indenture between Manor Care and
Wilmington Trust Company, Trustee, relating to Manor Care's 7
1/2% Senior Notes due 2006.*
4.4 Form of Indenture between Registrant and The Wilmington Trust
Company, as Trustee, relating to the Registrant's 7 1/2% Senior
Notes due 2006.*
4.5 Form of Indenture among Manor Care Real Estate Corp., the
Guarantors and , as Trustee, relating to Manor Care Real
Estate's % Senior Notes due 2008.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom, LLP (including
the consent of such counsel) regarding the legality of
securities being offered.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom, LLP (including
the consent of such counsel) as to certain tax matters*
10.1 Form of Tax Sharing Agreement, dated as of , 1998, between
Manor Care and Registrant.*
10.2 Form of Tax Administration Agreement, dated as of , 1998,
between Manor Care and Registrant.*
10.3 Form of Corporate Services Agreement, dated as of , 1998,
between Manor Care and Registrant.*
10.4 Credit Agreement, dated as of , 1998, among Manor Care,
Manor Care Real Estate, The Chase Manhattan Bank and Chase
Securities Inc.*
10.5 Commitment Letter, dated , 1998, among the Registrant,
Manor Care, The Chase Manhattan Bank and Chase Securities,
Inc.*
10.6 Form of Assisted Living Facility Management Agreement, dated as
of , 1998, between Manor Care and Registrant.*
10.7 Form of Master Development Agreement, dated as of , 1998,
between Manor Care and Registrant.*
10.8 Form of Master Lease Agreement, dated as of , 1998,
between Manor Care and Registrant.*
10.9 Form of Non-Competition Agreement, dated as of , 1998,
between Manor Care and Registrant.*
10.10 Form of Employee Benefits and Other Employment Matters
Allocation Agreement, dated as of , 1998, between Manor
Care and Registrant.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NO.
------- ---------------------- ----
<C> <S> <C>
10.11 Form of Employee Benefits Administration Agreement, dated as of
, 1998, between Manor Care and Registrant.*
10.12 Form of Office Lease Agreement, dated as of , 1998, between
Manor Care and Registrant.*
10.13 Form of Trademark Agreement, dated as of , 1998, between
Manor Care and Registrant.*
10.14 Form of Cash Management Agreement, dated as of , 1998,
between Manor Care and Registrant.*
10.15 Form of Risk Management Consulting Services Agreement, dated as
of , 1998, between Manor Care and Registrant.*
10.16 Form of Employment Agreement, dated as of , 1998, between
Stewart Bainum, Jr. and Manor Care.*
10.21 Form of Employment Agreement, dated as of , 1998, between
Scott J. Van Hove and the Registrant.*
10.22 Form of License Agreement, dated , 1998, between Manor Care
Realty and the Registrant.*
10.23 Form of % Senior Note due 2008 of Manor Care Realty (Realty
Note).*
10.24 Form of Vehicle Lease Agreement, dated , 1998, between
Manor Care and the Registrant.*
12.1 Statement re Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of Registrant.*
23.1 Consents of Independent Public Accountants.
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom, LLP (included
as part of opinion filed pursuant to Exhibit 5 hereof).*
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom, LLP (included
in Exhibit 8.1).*
24.1 Powers of Attorney (See Signature Page).
25.1 Statement of Eligibility and Qualification of Trustee on Form
T-1 of The Wilmington Trust Company, as Trustee.*
27.1 Financial Data Schedule.
99.1 Valuation and Qualifying Accounts.
99.2 Form of Letter of Transmittal.*
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 12.1
NEW MANORCARE HEALTH SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEAR ENDED MAY 31, AUGUST 31,
------------------------------------------------------ -------------------
PRO FORMA PRO FORMA
1993 1994 1995 1996 1997 1997 1997 1997
------- ------- ------- ------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME FROM CONTINUING
OPERATIONS BEFORE
TAXES.................. $10,019 $12,968 $12,879 $ 2,548 $60,105 $130,141 $ (2,214) $ 21,594
PLUS: FIXED CHARGES (NET
OF CAPITALIZED
INTEREST).............. 1,917 2,033 4,317 12,542 19,957 27,753 5,329 5,030
------- ------- ------- ------- ------- -------- -------- --------
EARNINGS (AS DEFINED)... $11,936 $15,001 $17,196 $15,090 $80,062 $157,894 $ 3,115 $ 26,624
======= ======= ======= ======= ======= ======== ======== ========
INTEREST EXPENSE &
AMORTIZATION OF DEBT
DISCOUNT............... $ 1,684 $ 1,698 $ 3,898 $11,387 $17,317 $ 25,113 $ 4,527 $ 4,228
RENT EXPENSE (INTEREST
PORTION)............... 233 335 419 1,155 2,640 2,640 802 802
------- ------- ------- ------- ------- -------- -------- --------
TOTAL FIXED CHARGES
NET OF CAPITALIZED
INTEREST............. 1,917 2,033 4,317 12,542 19,957 27,753 5,329 5,030
CAPITALIZED INTEREST.... 3 149 552 533 1,284 1,284 184 184
------- ------- ------- ------- ------- -------- -------- --------
TOTAL FIXED CHARGES... $ 1,920 $ 2,182 $ 4,869 $13,075 $21,241 $ 29,037 $ 5,513 $ 5,214
======= ======= ======= ======= ======= ======== ======== ========
"EARNINGS" DIVIDED BY
FIXED CHARGES.......... 6.22x 6.88x 3.53x 1.15x 3.77x 5.44x 0.57x 5.11x
======= ======= ======= ======= ======= ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on New ManorCare Health Services, Inc. dated September 14, 1997
included in or made a part of this registration statement, and the
incorporation by reference in this registration statement of our report on
Manor Care, Inc. dated June 27, 1997 (except for the transaction as discussed
in the footnote entitled "Discontinued Assisted Living, Pharmacy and Home
Health Operations" which is dated September 14, 1997) included in Manor Care,
Inc.'s Form 8-K dated September 15, 1997, and included in or made a part of
this registration statement, and to all references to our Firm included in
this registration statement.
Washington, D.C.,
December 15, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF INCOME AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 14,486
<SECURITIES> 0
<RECEIVABLES> 95,327
<ALLOWANCES> 6,179
<INVENTORY> 26,451
<CURRENT-ASSETS> 146,425
<PP&E> 253,731
<DEPRECIATION> 31,953
<TOTAL-ASSETS> 787,377
<CURRENT-LIABILITIES> 70,495
<BONDS> 180,843
0
0
<COMMON> 0
<OTHER-SE> 277,066
<TOTAL-LIABILITY-AND-EQUITY> 787,377
<SALES> 0
<TOTAL-REVENUES> 471,152
<CGS> 0
<TOTAL-COSTS> 408,863
<OTHER-EXPENSES> 20,135
<LOSS-PROVISION> 4,899
<INTEREST-EXPENSE> 17,317
<INCOME-PRETAX> 60,105
<INCOME-TAX> 23,917
<INCOME-CONTINUING> 36,188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,188
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
