<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1997
REGISTRATION NO. 33-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED OFFER TO EXCHANGE AND CONSENT
SOLICITATION:
As soon as practicable after this Registration Statement becomes effective
and all other conditions to the exchange offer (the "Exchange Offer")
described in the enclosed Prospectus and Consent Solicitation have been
satisfied or waived.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXI-
TITLE OF CLASS OF PROPOSED MAXIMUM MUM AGGREGATE
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SECURITY(2) PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7 1/2% Senior Notes due
2006.................. $150,000,000 100% $150,000,000 $45,455
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Represents the approximate maximum principal amount of New MCHS Senior
Notes to be offered in exchange for Old Senior Notes in the Exchange
Offer, which aggregate principal amount corresponds to the aggregate
principal amount of Old Senior Notes outstanding as of October , 1997.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(2) under the Securities Act of 1933.
---------------
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 OCTOBER 16, 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 5:00 P.M., NEW YORK CITY TIME, ON
, 1997, 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 , 1997. 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 12 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 Manager 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 Manager for the Exchange Offer and Solicitation is:
CHASE SECURITIES INC.
, 1997
<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. and In Home Health,
Inc., 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"). 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 sole 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 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 are expected to have a lower debt rating than
that of (x) the Old Senior Notes prior to the Distribution (the Old Senior
Notes are currently rated Baa2 by Moody's Investors Services, Inc. and BBB by
Standard & Poor's Corporation) 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
i
<PAGE>
limited, which may adversely affect the market price of such Old Senior Notes.
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 Manager. 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.
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.
ii
<PAGE>
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 , 1997.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...................................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ ii
SUMMARY.................................................................... 1
RISK FACTORS............................................................... 12
DESCRIPTION OF THE TRANSACTIONS............................................ 32
THE EXCHANGE OFFER......................................................... 34
Introduction............................................................. 34
Terms of the Exchange Offer.............................................. 34
The Solicitation......................................................... 35
Expiration Date; Extensions; Termination; Amendments..................... 35
Effect of Tender......................................................... 36
Acceptance of Old Senior Notes Tendered for Exchange; Delivery of New
MCHS Senior Notes....................................................... 36
Procedures for Tendering Old Senior Notes and Giving Consents............ 36
Conditions to the Exchange Offer......................................... 38
Withdrawal Rights........................................................ 39
Exchange Agent........................................................... 40
Information Agent........................................................ 40
Dealer Manager........................................................... 40
Other Fees and Expenses.................................................. 40
THE PROPOSED AMENDMENTS.................................................... 41
DESCRIPTION OF NEW MCHS SENIOR NOTES....................................... 42
BUSINESS OF MANOR CARE REALTY AFTER THE DISTRIBUTION....................... 51
MANOR CARE REALTY PRO FORMA FINANCIAL DATA................................. 62
MANAGEMENT OF MANOR CARE REALTY AFTER THE DISTRIBUTION..................... 67
DESCRIPTION OF CERTAIN INDEBTEDNESS OF MANOR CARE REALTY................... 69
BUSINESS OF MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION............... 71
MANORCARE HEALTH SERVICES PRO FORMA FINANCIAL DATA......................... 89
MANORCARE HEALTH SERVICES SELECTED HISTORICAL FINANCIAL DATA............... 94
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MANORCARE HEALTH SERVICES' RESULTS
OF OPERATIONS AND FINANCIAL CONDITION..................................... 95
DESCRIPTION OF CERTAIN INDEBTEDNESS OF MANORCARE HEALTH SERVICES........... 99
MANAGEMENT OF MANORCARE HEALTH SERVICES.................................... 100
THE BOARD OF DIRECTORS OF MANORCARE HEALTH SERVICES........................ 106
CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... 108
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS............................ 109
BENEFICIAL OWNERSHIP OF MANAGEMENT......................................... 111
RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES AFTER
THE DISTRIBUTION.......................................................... 113
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.................................. 120
LEGAL MATTERS.............................................................. 122
EXPERTS.................................................................... 122
INDEX TO COMBINED FINANCIAL STATEMENTS OF NEW MANORCARE HEALTH SERVICES,
INC. ..................................................................... F-1
</TABLE>
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 and "Pro Forma Basis" means after
giving pro forma effect to the Debt Offering and the use of proceeds therefrom,
the Distribution and related borrowings including the Manor Care Notes, the
Realty Note and assuming that all holders of outstanding Old Senior Notes
accept the Exchange Offer. 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 and (iii) own all of Manor
Care's stock in Vitalink Pharmacy Services, Inc. ("Vitalink") and In Home
Health, Inc. ("In Home Health") See "The Distribution."
MANOR CARE REALTY
Manor Care Realty will own 168 skilled nursing facilities in 28 states (the
"Skilled Nursing Facilities") and 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 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.
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
<PAGE>
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 Skilled Nursing Facilities, (iii) own joint venture
interests in, operate and manage three additional skilled nursing facilities,
(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.
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; and (iii) the shares of Common and
Preferred Stock of In Home Health owned by Manor Care (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) $250 million of
senior notes (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 2007
(the "Manor Care Notes") pursuant to a separate prospectus (the "Debt
Offering"). The Manor Care Notes will be fully and unconditionally guaranteed
on a senior unsecured and joint and several basis (the "Guarantees") by Manor
Care Realty and substantially all of Manor Care Realty's present and future
subsidiaries, other than Unrestricted Subsidiaries (as defined herein)
2
<PAGE>
(collectively, the "Guarantors"). Concurrently with the consummation of the
Exchange Offer made hereby, Manor Care Real Estate anticipates entering into
new credit facilities to be provided by a group of banks (the "Credit
Facilities"). Manor Care is currently negotiating a commitment letter relating
to the Credit Facilities. Manor Care Real Estate anticipates that the Credit
Facilities will consist of a $300 million revolving credit facility and a $150
million term loan facility. Manor Care Real Estate expects that the Credit
Facilities will be secured by substantially all of the assets of Manor Care
Realty and its subsidiaries and will be available for general corporate
purposes and working capital purposes, including acquisitions. For a
description of the Manor Care Notes and the Credit Facilities, see "Description
of Certain Indebtedness of Manor Care Realty."
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 sole 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."
3
<PAGE>
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. 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 5:00 p.m., New
York City time, on , 1997 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
Exchange Offer............. Holders of Old Senior Notes who participate in
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
4
<PAGE>
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 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."
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 are
expected to have a lower debt rating than the Old
Senior Notes prior to the Distribution (which are
currently rated Baa2 by Moody's Investors
Service, Inc. and BBB by Standard & Poor's
Corporation) 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. 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 prior to
5:00 p.m., 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
5
<PAGE>
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
MANAGER.
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 5:00 p.m., 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. , 1997. 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 will 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 should not recognize gain or
loss because the constructive exchange should
qualify as a tax-free recapitalization. See
"Certain Federal Income Tax Considerations."
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.
6
<PAGE>
Aggregate Principal Amount
of Old Senior Notes........ As of October , 1997, there were $150,000,000
aggregate principal amount of Old Senior Notes
outstanding.
Exchange Agent..............
Dealer Manager.............. Chase Securities Inc. (the "Dealer Manager"). The
address and phone numbers of the Dealer Manager
are set forth on the back cover page of this
Prospectus.
Information Agent........... (the "Information Agent"). The
address and phone number of the Information Agent
are set forth on the back cover page of this
Prospectus.
Toll Free Information
Numbers..................... Questions concerning the terms of the Exchange
Offer should be directed to the Dealer Manager at
1-800-523-9736.
Questions concerning tender procedures and
requests for additional copies of this Prospectus
should be directed to the Information Agent at 1-
800-XXX-XXXX.
7
<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.
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>
New MCHS Senior Notes....... June 15, 2006 7 1/2% payable semi-annually on
June 15 and December 15
each year, commencing
, 1997
</TABLE>
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."
8
<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, independent company during the periods shown nor
necessarily indicative of Manor Care Realty's future performance as an
independent company. The historical statements of income data for the fiscal
years ended May 31, 1995, 1996 and 1997 and the historical balance sheet data
for the fiscal years ended May 31, 1995, 1996 and 1997 are derived from the
audited consolidated financial statements of Manor Care. The historical
statements of income data for the three month periods ended August 31, 1996 and
1997 and the historical balance sheet data for the three month periods ended
August 31, 1996 and 1997 are derived from the unaudited 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 Prospectus.
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 statement of income, as if the
Distribution and related transactions (including the Exchange Offer) had
occurred on May 31, 1997 and August 31, 1997, respectively for purposes of the
pro forma balance sheet, and on June 1, 1996 and June 1, 1997, respectively for
purposes of the pro forma statement 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,
independent company during such period. The pro forma adjustments reflect the
impact of the Distribution and related borrowings, including the Credit
Facilities and the Realty Note, Lease Agreements, 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 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>
THREE MONTHS ENDED
FISCAL YEARS ENDED MAY 31, AUGUST 31,
------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
--------- --------- ---------- --------- --------- --------- ---------
(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 $ 40,394
Expenses:
Operating.............. 670,987 735,671 789,074 59,013 191,539 208,247 4,317
Depreciation and
amortization.......... 48,284 56,503 60,243 60,608 14,586 15,985 15,985
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 20,302
--------- --------- ---------- --------- --------- --------- ---------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 113,960 104,749 146,601 97,511 29,938 38,557 20,092
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) (66,299) (5,302) (6,829) (14,945)
Other income
(expenses), net....... 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 58,833 31,368 36,924 10,343
Income taxes............ 46,101 44,563 60,783 24,842 12,327 14,100 4,093
--------- --------- ---------- --------- --------- --------- ---------
Income from continuing
operations............. 70,851 64,360 88,925 33,991 19,041 22,824 6,250
Income from discontinued
assisted living,
pharmacy and home
health operations...... 6,824 1,111 36,188 -- 1,225 (2,964) 0
Income from discontinued
lodging operations..... 16,811 20,436 11,829 11,829 3,419 0 0
--------- --------- ---------- --------- --------- --------- ---------
Net income.............. $ 94,486 $ 85,907 $ 136,942 $ 45,820 $ 23,685 $ 19,860 $ 6,250
========= ========= ========== ========= ========= ========= =========
Other Financial and Op-
erating Data:
EBITDA(1)............... 162,244 186,352 206,844 158,119 44,524 54,542 36,077
EBITDA margin........... 18.16% 18.92% 19.59% 72.82% 17.79% 19.90% 89.31%
Average number of
operating beds......... 22,252 23,227 23,865 23,506 23,724 23,724 23,724
Ratio of EBITDA to
interest expense....... 8.60x 9.83x 8.44x 2.38x 8.40x 7.99x 2.41x
Ratio of earnings to
fixed charges(2)....... 6.43x 5.62x 6.03x 1.78x 5.71x 5.46x 1.59x
Balance Sheet Data:
Working capital......... 51,053 (33,357) 33,718 (12,845) (29,933) 200,813 107,323
Total assets............ 1,247,241 1,593,193 1,547,578 1,228,530 1,640,087 1,638,292 1,229,395
Long-term debt.......... 315,271 490,575 491,190 806,530 512,784 551,507 796,547
Total equity............ 624,873 707,769 690,431 5,406 737,124 710,677 8,231
</TABLE>
- -------
(1) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and certain other special charges, including the addition of
$25.1 million in fiscal year 1996 relating to the impairment of assets.
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. 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.
9
<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
for the fiscal years ended May 31, 1995, 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 for the three month
periods ended August 31, 1996 and 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 Prospectus. 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 statement of income, as if the Distribution had occurred on
May 31, 1997 and August 31, 1997, respectively for purposes of the pro forma
balance sheet, and on June 1, 1996 and June 1, 1997, respectively for purposes
of the pro forma statement 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
-------- -------- -------- ---------- ------- -------- ---------
(IN THOUSANDS)
<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 $436,798
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 7,199
General corporate and
other.................. 2,957 9,195 8,385 70,592 1,814 3,292 13,994
Provision for asset
impairment............. -- 1,200 -- -- -- -- --
-------- -------- -------- ---------- ------- -------- --------
Total expenses........ 108,058 249,388 442,282 1,593,198 80,065 164,110 424,639
-------- -------- -------- ---------- ------- -------- --------
Income before other income
and (expenses) and income
taxes.................... 17,929 13,659 28,870 88,768 6,188 (5,414) 12,159
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) (5,520)
Other income (expenses),
net.................... (1,152) 276 (1,719) 30,590 150 7,727 16,790
-------- -------- -------- ---------- ------- -------- --------
Income before income
taxes.................... 12,879 2,548 60,105 144,516 2,498 (2,214) 23,429
Income taxes.............. 6,055 1,437 23,917 60,824 1,273 750 10,757
-------- -------- -------- ---------- ------- -------- --------
Net income................ $ 6,824 $ 1,111 $ 36,188 $ 83,692 $ 1,225 $ (2,964) $ 12,672
======== ======== ======== ========== ======= ======== ========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEARS ENDED MAY 31, ENDED AUGUST 31,
---------------------------------------- ------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
-------- -------- -------- ---------- -------- -------- ----------
(IN THOUSANDS)
<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 $ 19,358
EBITDA margin........... 19.06% 10.05% 10.40% 6.93% 11.48% 1.12% 4.43%
Ratio of EBITDA to
interest expense....... 6.16x 2.32x 2.83x 4.64x 2.58x 0.39x 3.51x
Ratio of earnings to
fixed charges(2)....... 3.45x 1.07x 3.64x 5.84x 1.49x 0.54x 4.73x
Cash provided (used) by
operating activities... 16,701 8,043 4,401 N/A 8,793 (11,015) N/A
Investment in property
and equipment.......... 25,020 32,001 39,974 N/A 9,466 5,072 N/A
Total assets............ 134,502 334,880 787,377 1,380,474 345,544 728,767 1,410,474
Long-term debt.......... 1,837 51,387 180,843 330,843 51,070 193,308 313,308
Investments and advances
from Manor Care........ 90,020 193,807 277,066 -- 204,178 277,235 --
Common stock and paid-
in-capital............. -- -- -- 682,026 -- -- 699,446
</TABLE>
- --------
(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 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. See ManorCare Health Services'
consolidated financial statements and the notes thereto appearing elsewhere
in this Registration 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.
11
<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. 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. Immediately after the Distribution,
Manor Care Realty will have approximately $797 million of outstanding
indebtedness. See "--Substantial Leverage; Ability to Service Indebtedness."
It is currently expected that the unexchanged Old Senior Notes will have a
debt rating lower than the Old Senior Notes' current debt rating (the Old
Senior Notes are currently rated Baa2 by Moody's Investors Services, Inc. and
BBB by Standard & Poor's Corporation) and the New MCHS Senior Notes expected
debt rating.
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.
HOLDING COMPANY STRUCTURE; SUBORDINATION
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 is itself a creditor of such subsidiary, in
which case Manor Care Realty'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 Manor Care Realty. 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 be able to incur substantial additional
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indebtedness which will be effectively senior to the Old Senior Notes. See
"Description of Certain Indebtedness of Manor Care Realty--The Manor Care
Notes."
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. 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, (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 (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 independent 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.
OPERATING HISTORY AND 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
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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 very substantial in relation to its stockholders'
equity. On a Pro Forma Basis, as of August 31, 1997, Manor Care Realty's
aggregate outstanding indebtedness would have been $797 million and Manor Care
Realty's stockholders' equity would have been $8.2 million. Manor Care Realty
expects that the Credit Facilities 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. 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 substantially all of the assets of Manor Care
Realty. No assurances can be given as to Manor Care Realty's ability to
refinance other indebtedness or seek additional financing, which ability may
be impaired as a result of such security. 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.
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 are beyond its control. See "--Forward-
Looking Information; Historical and Pro Forma Financial Information" for a
description of 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'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."
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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 is itself a creditor of such subsidiary, in
which case Manor Care Realty'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 Manor Care Realty. 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 be able to incur substantial additional indebtedness
which will be effectively senior to the Old Senior Notes. See "Description of
Certain Indebtedness of Manor Care Realty--The Manor Care Notes."
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. 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 a satisfactory
opinion 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"). 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. 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 as of the
declaration by Manor Care of the distribution of the capital stock of
ManorCare Health Services to Manor
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Care's shareholders and as of the consummation of the Distribution and the
permissibility of the Distribution under Section 170 of DGCL.
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, Manor Care, Manor Care Real Estate or
any of the Guarantors (a) (i) was insolvent, (ii) was rendered insolvent by
reason of the Distribution, (iii) was engaged in a business or transaction for
which its remaining assets, as the case may be, constituted unreasonably small
capital, or (iv) 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 (b) made the Distribution or
guaranteed the Notes 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), the Manor Care Notes and/or the Guarantees
of the Manor Care Notes as fraudulent conveyances. If a court finds that the
Distribution constituted a fraudulent conveyance of assets of Manor Care, and
that noteholders knew or reasonably should have known that the proceeds of the
Manor Care Notes would be used to fund a fraudulent conveyance, 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 would be considered insolvent if the fair value of its
assets were less than the amount of its liabilities or if it incurred debt
beyond its ability to repay such debt as it matures. In determining the debts
of Manor Care 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.
ManorCare Health Services will assume and agree to pay certain liabilities
of Manor Care pursuant to the Assumption of Liabilities. 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, (a)
Manor Care, Manor Care Realty and ManorCare Health Services each (i) will be
solvent (in accordance with the foregoing definitions), (ii) will be able to
repay its debts as they mature, (iii) will have sufficient capital to carry on
its businesses and (b) 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 Service 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 and
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 Guarantor.
The ability of Manor Care Real Estate, Manor Care Realty and the Subisidiary
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 such subsidiaries as lessors 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.
DEPENDENCE UPON SINGLE OPERATOR
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.
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
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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; FAILURE TO
ACHIEVE OCCUPANCY RATES
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 have a two-year option (measured from the time a particular facility
opens) to purchase such facility. In addition, if at any time during this two-
year period occupancy reaches 80% for a period of 30 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. 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." 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 or, if not, that ManorCare Health Services will
exercise its option to purchase any such 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 the Assisted Living Management Agreement
as well as on any proceeds received from the sale of assisted living
facilities to ManorCare Health Services under the Development Agreement;
however, Manor Care 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 80%
occupancy within two years of their opening. Pursuant to the Distribution
Agreement, Manor Care Realty (and not Manor Care Health Services) will remain
liable for certain pre-Distribution liabilities (other than certain tax
liabilities). See "Relationship Between Manor Care Realty and ManorCare Health
Services after the Distribution."
NEED FOR ADDITIONAL FINANCING
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 and operate them
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prior to anticipated sale to ManorCare Health Services is approximately $1.2
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 15.20% 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 other individuals or
entities. In
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addition, Mr. Bainum, Jr. will be a director and Chairman of 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 Manor Care 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.
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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 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 may be
held 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, or in or under such property. Such laws and
regulations often impose liability whether or not the owner or operator knew
of, or was responsible for, the presence of the hazardous or toxic substances.
The costs of any required remediation or removal of these substances could be
substantial and the liability of an owner or operator 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 owner or operator.
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. After the Distribution, Manor Care Realty will retain
liability for certain environmental litigation. See "Business Of Manor Care
Realty After The Distribution--Government Regulation" and "--Legal
Proceedings."
POTENTIAL 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 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 ManorCare 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. Nevertheless, Manor Care believes that there will be sufficient
mutuality of interest between the two companies to result in a mutually
productive relationship. ManorCare
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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. Any such circumstances relating to several
Lease Agreements at 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
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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, 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. 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. 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
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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 Manor Care Health Services) will remain liable for certain pre-
Distribution liabilities (other than certain tax 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.
CERTAIN TAX CONSIDERATIONS
Manor Care has received a 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. Nevertheless, 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.
CERTAIN CONSIDERATIONS RELATING TO THE NEW MCHS SENIOR NOTES
DEBT RATING OF NEW MCHS SENIOR NOTES
It is currently expected that the New MCHS Senior Notes will have an
investment grade rating equal to the current debt rating of the Old Senior
Notes (the Old Senior Notes are currently rated Baa2 by Moody's Investors
Services, Inc. and BBB by Standard & Poor's Corporation). However, no
assurance can be given that the New MCHS Senior Notes will have an investment
grade rating equal to the current rating of the Old Senior Notes.
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 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.
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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
Assisting 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.
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 Agreement.
Pursuant to the Development Agreement, Manor Care Realty will develop assisted
living facilities for ManorCare Health Services and retain ownership of such
facilities for up to two years until occupancy has stabilized at 80% or more
for a period of 30 days or until such earlier date as ManorCare Health
Services opts to purchase such facility. 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. 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 operate and manage all of Manor Care Realty's
current and future skilled nursing facilities; and 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.
ManorCare Health Services' revenues will be dependent on the operations of the
skilled nursing facilities under the Lease Agreements and the Assisted Living
Facility Management Agreement. Manor Care Realty's development strategy will
require substantial capital resources. The inability of Manor Care Realty to
secure all necessary financing for the development and construction of the
assisted living facilities on acceptable terms and conditions could have a
material adverse effect on ManorCare Health Services. In addition, the
potential exists for disagreement in the future as to compliance with the
terms of the contracts between the parties. See "Relationship Between Manor
Care Realty and ManorCare Health Services After the Distribution."
DEPENDENCE ON MANOR CARE REALTY
ManorCare Health Services' core strategy contemplates the acquisition 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. Moreover, Manor Care Realty will be a highly leveraged company which
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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 ManorCare Health Services. See "Relationship Between Manor
Care Realty and ManorCare Health Services After the Distribution."
POTENTIAL 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. Nevertheless, ManorCare Health Services believes that
there will be sufficient mutuality of interest between the two companies to
result in a mutually productive relationship. 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 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 Capital Contribution and the
Distribution under the requirements of Section 170 of the DGCL of Manor Care's
net assets following the Distribution. 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
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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)
were to find that, at the time Manor Care effected the Distribution of
ManorCare Health Services, Manor Care or ManorCare Health Services, as the
case may be, (i) was insolvent, (ii) was rendered insolvent by reason of the
Distribution, (iii) was engaged in a business or transaction for which Manor
Care's or ManorCare Health Services' remaining assets, as the case may be,
constituted unreasonably small capital, or (iv) intended to incur, or believed
it would incur, debts beyond its ability to pay as such debts matured, 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.
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 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
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.
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
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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 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
27
<PAGE>
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. See "Business of ManorCare Health
Services After the Distribution--Government Regulation."
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.
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 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."
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.
28
<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 years ended May 31, 1995, 1996
and 1997, respectively, the Skilled Nursing Facilities to be operated by
ManorCare Health Services and the Assisted Living Business derived
approximately 59%, 59% and 57% of their patient service revenue from private
pay sources, 18%, 18% and 18% from Medicare and 23%, 23% and 25% from various
state Medicaid agencies in each case as they were operated by Manor Care. 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 15.20% 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 other
individuals or entities. 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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<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 Debt
Offering and the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
AUGUST 31, 1997
--------------------
ACTUAL PRO FORMA
---------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Long-Term Debt:
Old Senior Notes......................................... $ 150,000 $ --
Senior Subordinated Notes................................ 140,100 --
Existing Revolving Credit Facility....................... 145,000 --
Promissory Note.......................................... 14,300 --
Revolving Credit Facility................................ -- 20,000
The Notes................................................ -- 350,000
Term Loan................................................ -- 150,000
Mortgage and Capital Leases.............................. 72,107 26,547
Realty Note.............................................. -- 250,000
Other Long-Term Debt..................................... 30,000 --
---------- --------
Total Long-Term Debt................................... 551,507 796,547
Stockholders' Equity:
Total stockholders' equity............................. 710,677 8,231
---------- --------
Total Capitalization....................................... $1,262,184 $804,778
========== ========
</TABLE>
30
<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)
<S> <C> <C> <C>
Long-term debt:
7 1/2% Senior Notes...................... -- $150,000 (1) $ 150,000
Long-term debt........................... $193,308 (30,000) 163,308
-------- -------- ----------
Total long-term debt................... 193,308 120,000 313,308
Equity:
Investments and advances from Manor
Care.................................... 277,235 (277,235) --
Common stock, par value $.01, authorized
160.0 million shares, outstanding 66.8
million shares.......................... -- 668 (2) 668
Additional paid-in capital............... -- 698,778 (2) 698,778
-------- -------- ----------
Total capitalization....................... $470,543 $542,211 $1,012,754
======== ======== ==========
</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.
(2) Reflects the contribution of the net assets from Manor Care in connection
with the Distribution Agreement.
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<PAGE>
DESCRIPTION OF THE TRANSACTIONS
THE DISTRIBUTION
Pursuant to the Distribution Agreement (as defined herein), 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; and (iii) the shares of Common and Preferred Stock of In Home Health
owned by Manor Care (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, including: (i) liabilities arising after the Effective Date
relating to (x) the ownership, operation and management of the assisted living
facilities and (y) the operation and management of the Skilled Nursing
Facilities; (ii) liabilities arising out of the ownership of the stock of
Vitalink and In Home Health, 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 Manor Care
with the Commission in connection with the Distribution; (iii) liabilities set
forth in the ManorCare Health Services balance sheet or the notes thereto
contained in the Form 10; (iv) liabilities arising out of information
contained in or omitted from the information contained in the Registration
Statement on Form S-4 filed by ManorCare Health Services in connection with
the Exchange Offer; (v) liabilities relating to the Assisted Living Business
arising under any officer and director indemnification agreements in effect at
the Effective Date; (vi) 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 ManorCare in effect immediately prior to the
Effective Date and are of the type set forth on a schedule to the Distribution
Agreement); and (vii) certain environmental liabilities.
Pursuant to the Distribution Agreement, Manor Care Realty will retain, and
indemnify and hold ManorCare Health Services harmless against, certain
liabilities, including: (i) any liabilities of Manor Care for money borrowed;
(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
are of the type set forth on a schedule to the Distribution Agreement); (iii)
(x) certain pending environmental claims, including 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; and (iv) certain environmental liabilities.
In addition, the Distribution Agreement provides that ManorCare Health
Services will use its best efforts to obtain the releases of Manor Care's
guarantees of certain ManorCare Health Service obligations and if unsuccessful
in this regard will pay certain fees to Manor Care Realty.
In addition, on or prior to the Effective Date, 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) $250 million of Senior Notes of Manor Care Real Estate (the "Realty
Note"). 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 contribution to ManorCare Health Services may be
reduced. See "--The Realty Note."
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
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<PAGE>
will make or cause to be made the Capital Contribution (as herein defined). As
part of the Capital Contribution, Manor Care will contribute or cause to be
contributed to ManorCare Health Services the Realty Note (as herein defined).
ManorCare Health Services expects that the Realty Note will have the same
general terms (including interest rate and maturity, and parent and subsidiary
guarantees) as the 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 third anniversary of
issuance thereof and, after such date, transfer shall be subject to Manor Care
Realty's right to so redeem the Realty Note. On or after such third
anniversary, if ManorCare Health Services gives notice to Manor Care Realty
requesting Manor Care Realty to 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. The principal amount of the Realty Note may be
decreased to the extent Old Senior Notes remain outstanding upon consummation
of the Exchange Offer.
THE CREDIT FACILITIES
Concurrently with the sale of the Manor Care Notes, Manor Care Real Estate
anticipates entering into new credit facilities to be provided by a group of
banks (the "Credit Facilities"). Manor Care is currently negotiating a
commitment letter relating to the Credit Facilities. Manor Care Real Estate
anticipates that the Credit Facilities will consist of a $300 million
revolving credit facility and a $150 million term loan facility. Manor Care
Real Estate expects that the Credit Facilities will be secured by
substantially all of the assets of Manor Care Realty and its subsidiaries and
will be available for general corporate purposes and working capital purposes,
including acquisitions. See "Description of Certain Indebtedness of Manor Care
Realty--The Credit Facilities."
33
<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 sole
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.
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 sole 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.
34
<PAGE>
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 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 , 1997. 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 5:00 p.m., New York City time on ,
1997 (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.
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
35
<PAGE>
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 , 1997. 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 Manager. 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.
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
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<PAGE>
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 5:00
p.m., 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 5:00 p.m., 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 MANAGER.
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 Manager 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 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.
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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 sole 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 sole 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 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
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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.
ManorCare Health Services may amend the Exchange Offer at any time prior to
5:00 p.m., 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 sole 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 , 1997. 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.
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.
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EXCHANGE AGENT
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.
INFORMATION AGENT
has been appointed as Information Agent for the Exchange Offer.
Requests for assistance or additional copies of this Prospectus and Consent
Solicitation, the Letter of Transmittal or the Notice of Guaranteed Delivery
may be directed to the Information Agent at the address and telephone numbers
set forth on the back cover page of this Prospectus and Consent Solicitation.
Holders of Old Senior Notes may also contact their broker, dealer, commercial
bank or trust company for assistance concerning the Exchange Offer.
DEALER MANAGER
ManorCare Health Services has engaged Chase Securities Inc. to act as Dealer
Manager 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 Manager at the address 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 Manager pre-
determined compensation for the Dealer Manager's financial advisory services
and ManorCare Health Services has agreed to indemnify the Dealer Manager
against certain liabilities, including certain liabilities under the federal
securities laws.
The Dealer Manager is an underwriter 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 Manager in its capacity as underwriter of
the Debt Offering, for certain liabilities, including liabilities under the
Securities Act in connection with the Debt Offering. The Dealer Manager 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. The Dealer Manager has 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 paid by ManorCare Health Services.
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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 , 1997, as amended and supplemented from time to time (the "New
Indenture"), between ManorCare Health Services and , 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 December 15, 1997, 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 , 1997, the New MCHS Senior Notes would have been
effectively subordinated to approximately $ 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 , 1997 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
, 1997 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 , 1997
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 , 1997
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 , 1997 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
, 1997 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
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, to perform certain financial services.
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BUSINESS OF MANOR CARE REALTY AFTER THE DISTRIBUTION
Manor Care Realty will own 168 skilled nursing facilities in 28 states and
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. On a Pro
Forma Basis for the fiscal year ended May 31, 1997, Manor Care Realty would
have had approximately $217 million in revenue and $158 million in EBITDA.
Manor Care Realty's geographically diversified portfolio of properties will
include:
. 168 Skilled Nursing Facilities in 28 states containing approximately
23,691 beds.
. 25 assisted living facilities in 12 states.
. 64 sites 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 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 approximately 60% of Manor Care's skilled
nursing and assisted
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living revenues in fiscal 1997 compared to a 1996 industry average of
approximately 30% for for-profit nursing care providers. Application will be
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 at any time during the two-year period
following the time a particular facility opens occupancy reaches 80%
for a period of 30 days, ManorCare Health Services will be obligated to
purchase the facility. The purchase price for each facility will be at
a 15-35% premium to total approved development costs of Manor Care
Realty, based on the number of months elapsed since the opening of the
facility. 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 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
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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. 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.
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. 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, as one of the premier owners and developers in the long-
term care industry, is 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. 38 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 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 approximately
60% of revenues in
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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 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 141 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 22
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,
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,
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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 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.
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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. 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.
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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 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
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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. 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.
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 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.
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
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on the business and financial condition of ManorCare Health Services and,
indirectly, Manor Care Realty's results of operations and financial condition.
Environmental Regulation
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held 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 or
operator knew of, or was responsible for, the presence of the hazardous of
toxic substances. The costs of any required remediation or removal of these
substances could be substantial and the liability of an owner or operator 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 owner or
operator. 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. Under these
laws and regulations, an owner, operator or an entity that arranges for the
disposal of hazardous or toxic substances at a disposal site may also be
liable for the costs of any required remediation or removal of the hazardous
or toxic substances at the disposal site. 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."
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 these Actions 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. Manor Care Realty believes it will ultimately be
successful in settling the claims 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 court approved 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, the Actions could have an adverse effect on
its financial condition or results of operations.
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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 estimate
the ultimate legal and financial liability of Manor Care Realty in respect to
the Actions. Manor Care Realty believes, however, that any such action will
not be material. See "Relationship Between Manor Care Realty and ManorCare
Health Services After the Distribution--The Distribution Agreement."
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 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 it has meritorious defenses to these pending claims
and proceedings and 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 48 to 278 beds and have
an aggregate bed capacity of 23,691 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.
61
<PAGE>
MANOR CARE REALTY PRO FORMA FINANCIAL DATA
The unaudited pro forma consolidated condensed statement of income of Manor
Care Realty for the fiscal year ended May 31, 1997 and the three month period
ended August 31, 1997 gives effect to the Distribution and related
transactions (including the Exchange Offer, the Lease Agreements, the
Development Agreement, the Debt Offering and the use of proceeds thereof and
the Assisted Living Facility Management Agreement) as if such transactions
occurred on June 1, 1996 and June 1, 1997, respectively. The pro forma
statement of income for the fiscal year ended May 31, 1997 and the three month
period ended August 31, 1997 has been prepared by adjusting the historical
consolidated statement 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 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. See "Risk Factors" for other information relating to the Pro Forma
Financial Data.
62
<PAGE>
MANOR CARE REALTY
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------
YEAR ENDED MAY 31
-----------------------------------------------------------------
PRO
LEASE MANAGEMENT FORMA
1997 DISTRIBUTION AGREEMENT AGREEMENT 1997
---------- ------------ ----------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<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
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) (30,594)(f) (66,299)
(11,191)(g)
---------- --------- ----------- ------ --------
Total other income and 3,107 (41,785) -- -- (38,678)
(expenses), net........ ---------- --------- ----------- ------ --------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES........... 149,708 (43,043) (47,430) (402) 58,833
INCOME TAXES............ 60,783 (17,023)(h) (18,759)(h) (159)(h) 24,842
---------- --------- ----------- ------ --------
INCOME FROM CONTINUING
OPERATIONS............. 88,925 (26,020) (28,671) (243) 33,991
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 $ (62,208) $ (28,671) $ (243) $ 45,820
---------- --------- ----------- ------ -------- ---
WEIGHTED AVERAGE SHARES
OF COMMON STOCK........ 63,257 63,257
---------- -------- ---
INCOME PER SHARE OF
COMMON STOCK
Income from continuing
operations............. $ 1.40 $ 0.53
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 $ 0.72
========== ========
</TABLE>
The accompanying notes are an integral part of this consolidated condensed
statement of income.
63
<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
HISTORICAL DISTRIBUTION AGREEMENT PRO FORMA
------------ -------------- -------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C>
REVENUES................ $ 274,054 $ (278,102)(c) $ 40,394
44,442 (d)
EXPENSES
Operating expenses..... 219,512 85 (b) (205,385)(c) 4,317
(9,895)(b)
Depreciation and
amortization.......... 15,985 15,985
------------ ----------- -------------- -----------
Total expenses......... 235,497 85 (215,280) 20,302
------------ ----------- -------------- -----------
INCOME BEFORE OTHER
INCOME AND (EXPENSES)
AND INCOME TAXES....... 38,557 (85) (18,380) 20,092
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) (6,296)(f) (14,945)
(1,820)(g)
------------ ----------- -------------- -----------
INCOME BEFORE INCOME
TAXES.................. 36,924 (8,201) (18,380) 10,343
INCOME TAXES............ (14,100) 3,087 (h) 6,920 (h) (4,093)
Income from
discontinued assisted
living, pharmacy and
home health
operations............ (2,964) 2,964 (i)
------------ ----------- -------------- -----------
NET INCOME.............. $ 19,860 $ (2,150) $ (11,460) $ 6,250
============ =========== ============== ===========
WEIGHTED AVERAGE SHARES
OF COMMON STOCK........ 63,708 63,708
-----------
INCOME PER SHARE OF
COMMON STOCK
Income from continuing
operations............ $ 0.36 $ 0.10
Income from
discontinued assisted
living, pharmacy and
home health
operations............ (0.05) --
------------ -----------
Net income per share of
common stock.......... $ 0.31 $ 0.10
============ ===========
</TABLE>
The accompanying notes are an integral part of this consolidated condensed
statement of income.
64
<PAGE>
MANOR CARE REALTY
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
AUGUST 31, 1997 ADJUSTMENTS PRO FORMA
--------------- ---------------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.. $ 30,063 $ 500,000 (a) $ 663
(220,000)(a)
(309,400)(e)
Advances to discontinued
lodging segment........... 115,723 0 115,723
Other current assets....... 224,612 (2,625)(b) 209,031
(12,956)(d)
---------- ---------- ----------
Total current assets....... 370,398 (44,981) 325,417
Property and equipment,
net....................... 830,457 (14,605)(a) 815,852
Due from discontinued as-
sisted living, pharmacy
and home health segments.. 75,560 (75,560)(b) 0
Net investment in
discontinued assisted
living, pharmacy and home
health segments........... 277,235 (277,235)(a) 0
Other assets............... 84,642 (11,016)(a) 88,126
14,500 (f)
---------- ---------- ----------
Total assets............... $1,638,292 $ (408,897) $1,229,395
========== ========== ==========
Total current liabilities.. $ 169,585 $ (2,625)(b) $ 218,094
51,134 (d)
Long-term debt............. 551,507 (150,000)(c) 546,547
(75,560)(b)
220,600 (e)
Realty Note................ 0 250,000 (a) 250,000
Other long-term liabili- 206,523 0 206,523
ties...................... ---------- ---------- ----------
Total liabilities.......... 927,615 293,549 1,221,164
Total shareholders' equity. 710,677 (638,356)(a) 8,231
(64,090)(d)
---------- ---------- ----------
Total liabilities and $1,638,292 $ (408,897) $1,229,395
shareholders' equity...... ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this consolidated condensed
balance sheet.
65
<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 80%
occupancy.
b) Reflects net additional costs associated with staffing of human resources,
finance, legal, information technology, cash management, accounting
personnel and directors costs and the transfer of expenses to ManorCare
Health Services.
c) Reflects revenues and operating expenses of skilled nursing facilities
owned by the Company 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
Agreement.
f) Reflects interest expense associated with the incurrence of indebtedness
under the Credit Facilities at an assumed interest rate of 8.25% and the
incurrence of the Notes at an assumed interest rate of 8.75%, and assumes
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 contribution to ManorCare Health Services may be
reduced. Also reflects the redemption of the Senior Subordinated Notes.
g) Reflects adjustments to intercompany interest allocated to ManorCare Health
Services. These adjustments relate to interest on the Developed Properties
and Investment and Advances 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.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
a) Reflects cash of $250.0 million, the Realty Note, the net working capital
of the skilled nursing facilities 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 to
ManorCare Health Services on the Effective Date.
c) Reflects consummation of the Exchange Offer, 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 contribution to ManorCare Health Services may be reduced. Also
reflects the redemption of the Senior Subordinated Notes.
d) Reflects the working capital transfer related to the skilled nursing
facilities under the terms of the Distribution Agreement.
e) Reflects the additional $150 million of Term Loan indebtedness and $350
million of Manor Care Notes and $20 million of borrowings on the Revolving
Credit Facility 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.
f) Reflects capitalized deferred financing fees.
66
<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
Leigh C. Comas 31 Chief Financial Officer
Larry Godla 40 Vice President--Construction and Development
Donald Feltman 42 Vice President--Development
Stewart Bainum 78 Director
Kennett L. Simmons 55 Director
Ann Torre Grant 38 Director
William Jews 45 Director
</TABLE>
Stewart Bainum, Jr. 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; Chairman of the
Board of Choice since November 1996; 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.
Larry 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.
Donald 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.
67
<PAGE>
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 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.
68
<PAGE>
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 $250 million Realty Note of Manor Care Real
Estate. See "Description of the Transactions--The Realty Note."
THE CREDIT FACILITIES
Concurrently with the sale of the Notes offered hereby, Manor Care Real
Estate anticipates entering into new credit facilities to be provided by a
group of banks (the "Credit Facilities"). Manor Care Real Estate anticipates
that the Credit Facilities will consist of a $300 million revolving credit
facility and a $150 million term loan facility. Manor Care Real Estate expects
that the Credit Facilities will be secured by substantially all of the assets
of Manor Care Realty and its subsidiaries and will be available for general
corporate and working capital purposes, including acquisitions.
Term Loan Facility. Manor Care expects that the Term Loan Facility will be
subject to nominal amortization on a quarterly basis for the four years after
the consummation of the Distribution and substantial amortization on a
quarterly basis beginning in the fifth year with the final payment due on the
date five years after the consummation of the Distribution; provided that the
Term Loan Facility will be automatically extended for up to three years if a
certain portion of the ManorCare Health Services' Skilled Nursing Facility
leases are renewed. If the Term Loan is extended it will provide for
substantial quarterly amortization payments in years six through eight with
the final payment due on the date eight years after consummation of the
Distribution.
Revolving Credit Facility. Manor Care expects that the Revolving Credit
Facility will have a maturity of five years, and that the ability of Manor
Care Real Estate to draw amounts there under will be dependent upon applicable
conditions to borrowing to be agreed upon by Manor Care and the lenders. Manor
Care expects that a portion of the Revolving Credit Facility will be available
in the form of letters of credit which will expire no later than the earlier
of one year after the issuance of such letters of credit and five days prior
to the final maturity of the Revolving Credit Facility.
Restrictive Covenants under the Credit Facilities. Manor Care expects that
the Credit Facilities will contain certain customary affirmative and negative
covenants, including, without limitation, covenants that will restrict,
subject to certain exceptions, (i) incurrence of additional indebtedness, (ii)
certain mergers and consolidations, (iii) non-ordinary course asset sales,
(iv) granting of liens to secure indebtedness and entering into sale-leaseback
transactions, (v) prepayment or modification of the terms of other
indebtedness, (vi) transactions with affiliates, (vii) declaration or payment
of dividends or distributions on Manor Care Real Estate's capital stock and
(viii) granting of negative pledges. Manor Care also expects that Manor Care
Real Estate will be required to satisfy certain financial ratios and tests
under the Credit Facilities.
Notwithstanding clause (iii) above, Manor Care expects that the Credit
Facilities will provide that Manor Care may dispose of assets in non-ordinary
course asset sales; provided that, subject to certain exceptions, Manor Care
Real Estate will use 100% of the net proceeds therefrom to prepay amounts
outstanding under the Term Loan Facility.
69
<PAGE>
Security. Manor Care expects that amounts outstanding under the Credit
Facilities will be secured by substantially all of the assets of Manor Care
Realty and its subsidiaries, including a pledge of all of Manor Care Realty's
subsidiaries' capital stock and an assignment of Manor Care Realty's rights
under the Lease Agreements and Development Agreements.
Events of Default. Manor Care expects that the Credit Facilities will
contain various events of default customary for such type of agreement,
including the occurrence of a change of control of Manor Care Realty or Manor
Care Real Estate.
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 guaranteed on a senior unsecured and joint
and several basis (the "Guarantees") by Manor Care Realty (the "Parent
Guarantor") and substantially all of the Parent Guarantor's present and future
subsidiaries, other than Unrestricted Subsidiaries (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 , 2007. Interest on the Manor Care
Notes will accrue at % per annum and will be payable semi-annually in
arrears.
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 , 2002, initially at
% and at decreasing prices thereafter to and including , 2007 together
with accrued and unpaid interest. In addition, at any time and from time to
time on or prior to , 2000, 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 % aggregate principal amount of the Manor Care Notes
originally issued remains outstanding after each such redemption.
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, (iv) sales of
assets and Restricted Subsidiary stock, (v) transactions with affiliates and
(vi) 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.
70
<PAGE>
BUSINESS OF MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION
OVERVIEW
ManorCare Health Services 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 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 and owns joint venture interests in,
operates and manages three additional skilled nursing facilities. Such 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 141 Arcadia special-care units which provide care to
individuals in the middle to late stages of Alzheimer's disease and 22
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 3,755 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 32 states, serving
approximately 174,000 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. Manor Care has no present commitments or agreements with
respect to any such transaction and there can be no assurance that Manor Care
(or Manor Care 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.
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.
71
<PAGE>
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;
. 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.
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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 80% for a
period of 30 days during the two-year stabilization period. In addition,
ManorCare Health Services will make acquisitions of other assisted living
properties on an opportunistic basis. 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, Heritage and Arcadia 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 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
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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
provide "best in class" services to its residents and 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 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.
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. 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 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 Company's 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 141 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 22 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
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rehabilitation facilities range in bed capacity from 48 to 278 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 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 80% for a period of 30 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 35.5%, based on the number of months elapsed since the opening of
the relevant facility. 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."
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
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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 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.
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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 174,000
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 32 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 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 has no present commitments or agreements with
respect to any such transaction and there can be no assurance that Manor Care
(or Manor Care 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.
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.
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 has received
Medicare certification to offer hospice services in 15 new markets. ManorCare
Health Services also expects to broaden the
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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.
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 3 and
4 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 5 and 6 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 1 to 3 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 48 to 278 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.
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The table below summarizes certain information regarding ManorCare Health
Services' facilities as of the Effective Date:
ASSISTED LIVING SERVICES--SPRINGHOUSE
<TABLE>
<CAPTION>
FACILITY LOCATION STATE UNITS STATUS
----------------- ----- ----- -------
<S> <C> <C> <C>
Dunedin.................................................. FL 110 owned
Sarasota................................................. FL 106 owned
Boynton Beach--Village................................... FL 104 owned
Boynton Beach............................................ FL 127 owned
Bethesda................................................. MD 92 owned
Silver Spring............................................ MD 118 owned
Brea..................................................... CA 92 owned
Whittier................................................. CA 73 owned
Bethesda................................................. MD 62 leased
Westlake................................................. OH 97 owned
Southfield............................................... MI 101 owned
Naples................................................... FL 210 owned
Laguna................................................... CA 190 owned
Peoria................................................... IL 249 owned
Carmel................................................... IN 205 owned
Fairfield................................................ OH 200 owned
Port Charlotte........................................... FL 84 owned
Kensington............................................... MD 201 managed
Tucson................................................... AZ 107 owned
West Reading Residential................................. PA 55 owned
Pottstown Residential.................................... PA 55 owned
Total Springhouse Facilities........................... 21
-----
Total Springhouse Units................................ 2,998
=====
All of the Springhouse facilities are owned with the exception of the leased
62-unit Bethesda facility and the managed Kensington facility.
ASSISTED LIVING SERVICES--ARDEN COURTS
<CAPTION>
FACILITY LOCATION STATE UNITS STATUS
----------------- ----- ----- -------
<S> <C> <C> <C>
Potomac.................................................. MD 48 owned
Silver Spring............................................ MD 49 owned
Yardley.................................................. PA 52 owned
King of Prussia.......................................... PA 54 owned
Allentown................................................ PA 56 owned
Elk Grove................................................ IL 55 owned
West Palm Beach.......................................... FL 56 owned
Sterling Heights......................................... MI 54 owned
Cherry Hill.............................................. NJ 53 owned
North Hills.............................................. PA 56 owned
Westlake................................................. OH 56 owned
South Holland............................................ IL 56 owned
Fair Oaks................................................ VA 56 owned
Farmington............................................... CT 56 owned
Total Arden Courts Facilities.......................... 14
-----
Total Arden Courts Units............................... 757
=====
</TABLE>
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SKILLED NURSING SERVICES
<TABLE>
<CAPTION>
FACILITY LOCATION BEDS FACILITY LOCATION BEDS
----------------- ---- ----------------- ----
<S> <C> <C> <C>
ARIZONA
Tucson........................................... 116
Total.............. 116
=====
CALIFORNIA
Citrus Heights................................... 146 Fountain Valley.... 147
Sunnyvale........................................ 139 Hemet.............. 176
Walnut Creek..................................... 154 Palm Desert........ 178
Encinitas........................................ 98 Rancho Bernardo.... 94
Rossmoor......................................... 129
-----
Total.............. 1,261
=====
COLORADO
Denver........................................... 155 Boulder............ 149
-----
Total.............. 304
=====
DELAWARE
Pike Creek....................................... 151 Wilmington......... 138
-----
Total.............. 289
=====
FLORIDA
Palm Harbor...................................... 179 Naples............. 118
Carrollwood...................................... 117 Dunedin............ 120
Sarasota......................................... 179 Boca Raton......... 180
Boynton Beach.................................... 179 Plantation......... 119
Winter Park...................................... 132 Jacksonville....... 113
West Palm Beach.................................. 119 Venice............. 129
-----
Total.............. 1,684
=====
GEORGIA
Decatur.......................................... 128 Marietta........... 116
-----
244
Total.............. =====
ILLINOIS
South Holland.................................... 176 Orchard Manor...... 53
Naperville....................................... 112 Libertyville....... 150
Palos Heights.................................... 176 Elgin.............. 79
Hinsdale......................................... 191 Oak Lawn........... 179
Elk Grove........................................ 178 Rolling Meadows.... 156
Normal........................................... 96 Peoria............. 122
Decatur.......................................... 93 Kankakee........... 103
Urbana........................................... 98 Champaign.......... 99
Wilmette......................................... 74 Palos Heights West. 120
Arlington Heights................................ 151 Oak Lawn Americana. 141
Westmont......................................... 115
-----
Total.............. 2,662
=====
INDIANA
Anderson......................................... 225 Kokomo............. 99
Indianapolis North............................... 184 Indianapolis South. 117
-----
Total.............. 625
=====
IOWA
Waterloo......................................... 95 Cedar Rapids....... 104
Davenport........................................ 101 Dubuque............ 94
-----
Total.............. 394
=====
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
FACILITY LOCATION BEDS FACILITY LOCATION BEDS
----------------- ---- ----------------- ----
<S> <C> <C> <C>
KANSAS
Topeka........................................... 119 Overland Park..... 173
Wichita.......................................... 123
-----
Total............. 415
=====
MARYLAND
Silver Spring.................................... 118 Towson............ 126
Ruxton........................................... 222 Largo............. 128
Potomac.......................................... 136 Chevy Chase....... 92
Bethesda......................................... 151 Wheaton........... 98
Baltimore........................................ 176 Roland Park....... 71
-----
Total............. 1,318
=====
MISSOURI
Fremont.......................................... 222 Florissant........ 97
-----
Total............. 319
=====
MICHIGAN
Kingsford........................................ 105 Michigan.......... 188
-----
Total............. 293
=====
NEVADA
Reno............................................. 151
-----
Total............. 151
=====
NEW JERSEY
Cherry Hill...................................... 105 West Deptford..... 136
Mountainside..................................... 148
-----
Total............. 389
=====
NEW MEXICO
Camino Vista..................................... 133 Northeast Heights. 138
Sandia........................................... 176
-----
Total............. 447
=====
NORTH CAROLINA
Pinehurst........................................ 115
-----
Total............. 115
=====
NORTH DAKOTA
Minot............................................ 105 Fargo............. 108
-----
Total............. 213
=====
OHIO
Woodside......................................... 143 Cincinnati........ 150
Barberton........................................ 117 Lake Shore........ 199
Rocky River...................................... 208 Oregon............ 108
Westerville...................................... 179 Willoughby........ 154
Akron............................................ 102 Belden Village.... 143
North Olmstead................................... 178 Mayfield Heights.. 149
Centreville...................................... 139 Sycamore Glen..... 97
-----
Total............. 2,066
=====
OKLAHOMA
Northwest Oklahoma City.......................... 111 Warr Acres........ 100
Midwest City..................................... 108 Norman............ 110
Windsor Hills.................................... 98 Tulsa............. 107
Southwest Oklahoma City.......................... 110
Total............. 744
=====
</TABLE>
82
<PAGE>
<TABLE>
<S> <C> <C> <C>
FACILITY LOCATION BEDS FACILITY LOCATION BEDS
----------------- ---- ----------------- ----
PENNSYLVANIA
North Hill................................ 200 Carlisle.................. 160
McMurray.................................. 150 Bethel Park............... 170
Chambersburg.............................. 210 Harrisburg................ 250
Camp Hill................................. 130 Allentown................. 164
Bethlehem-I............................... 221 Laureldale................ 185
Bethlehem-II.............................. 217 Easton.................... 222
Sinking Spring............................ 211 West Reading.............. 175
Jersey Shore.............................. 118 Kingston East............. 175
Pottsville................................ 175 Sunbury................... 121
Williamsport North........................ 151 Williamsport South........ 125
King of Prussia........................... 145 Yardley................... 139
Lansdale.................................. 169 Yeadon.................... 195
Dallastown................................ 200 Lebanon................... 157
Pottstown Nursing......................... 157 Whitehall................. 169
Manor Care North.......................... 160 Manor Care South.......... 121
Elizabethtown............................. 95 Manor Care Kingston Court. 125
Pittsburgh................................ 146 Huntingdon Valley......... 118
Devon Manor............................... 261 Monroeville............... 116
-----
Fitzgerald Mercy.......................... 119
Total..................... 6,122
=====
SOUTH CAROLINA
Columbia.................................. 116 Lexington................. 130
Charleston................................ 117
-----
Total..................... 363
=====
SOUTH DAKOTA
Aberdeen.................................. 98
-----
Total..................... 98
=====
TEXAS
Dallas.................................... 201 Fort Worth NRH............ 159
Forth Worth NW............................ 104 San Antonio-Babcock....... 208
San Antonio-North......................... 92 San Antonio-Northwest..... 144
San Antonio-Windcrest..................... 185 Temple.................... 101
Webster................................... 110 Temple Care............... 140
Sharpview................................. 129
-----
Total..................... 1,573
=====
UTAH
Ogden..................................... 134
-----
Total..................... 134
=====
VIRGINIA
Stratford Hall............................ 231 Arlington................. 191
Fair Oaks................................. 116 Imperial.................. 127
-----
Total..................... 665
=====
WASHINGTON
Lynwood................................... 112 Spokane................... 124
Meadow Park............................... 125 Gig Harbor................ 120
-----
Total..................... 481
=====
</TABLE>
83
<PAGE>
<TABLE>
<S> <C> <C> <C>
FACILITY LOCATION BEDS FACILITY LOCATION BEDS
----------------- ---- ----------------- ----
WISCONSIN
Green Bay-East...................................... 78 Green Bay-West... 105
Fond du Lac......................................... 107 Madison.......... 171
Appleton............................................ 100
----
<CAPTION>
561
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 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. ManorCare Health Services owns 50% of each of the
Centreville, Ohio facility, the Sycamore Glen, Ohio facility and the
Fitzgerald Mercy, Pennsylvania facility.
Other Properties. Vitalink, with corporate offices in Naperville, Illinois,
operates 57 pharmacies in 32 states, and In Home Health, with corporate
offices in Minnetonka, Minnesota, leases 42 offices and 11 pharmacies.
ManorCare Health Services' corporate headquarters are located at 11555
Darnestown Road, Gaithersburg, Maryland, 20878.
COMPETITION
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.
84
<PAGE>
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 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.
85
<PAGE>
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 certain
information concerning occupancy and revenues of ManorCare Health Services'
businesses as they were operated by Manor Care during fiscal year 1997:
SKILLED NURSING AND ASSISTED LIVING FACILITIES
<TABLE>
<CAPTION>
% OF % OF
OCCUPANCY REVENUES
--------- --------
<S> <C> <C>
Private Patients........................................ 56% 57%
Medicare Patients....................................... 10% 18%
Medicaid Patients....................................... 34% 25%
--- ---
Total................................................. 100% 100%
=== ===
</TABLE>
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
operates 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.
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
86
<PAGE>
participation in (i.e., furnishing covered items or services to beneficiaries
of) the Medicare and Medicaid programs.
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.
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 statues. 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
87
<PAGE>
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.
Environmental Regulation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be held 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 or operator knew of, or was responsible for, the
presence of the hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator 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 owner or operator. 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. Under these laws and regulations, an owner, operator or an
entity that arranges for the disposal of hazardous or toxic substances at a
disposal site may also be liable for the costs of any required remediation or
removal of the hazardous or toxic substances at the disposal site. In
connection with the ownership or operation of its properties, ManorCare Health
Services 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 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 it has meritorious defenses to the
claims pending against it in such proceedings and 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.
88
<PAGE>
MANORCARE HEALTH SERVICES PRO FORMA FINANCIAL DATA
ManorCare Health Services has been 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 an independent, public company during such periods.
The unaudited pro forma combined condensed statement of income for the
fiscal year ended May 31, 1997 and the three month period ended August 31,
1997 gives 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 and
June 1, 1997, respectively. The condensed statement of income for the fiscal
year ended May 31, 1997 and the three month period ended August 31, 1997 has
been prepared by adjusting the historical combined statement 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 an
independent, public company during such periods.
89
<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)
<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)
Other expenses, net.... 2,162 127 (h) 2,289 36,250 (g) 38,539
-------- -------- -------- -------- ---------- ------ ----------
Income before income
taxes.................. 60,105 1,978 62,083 34,601 47,430 402 144,516
Provision for income
taxes.................. 23,917 4,175 (h) 28,092 13,840 (i) 18,684(i) 208(i) 60,824
-------- -------- -------- -------- ---------- ------ ----------
Net income (loss)....... $ 36,188 $ (2,197) $ 33,991 $ 20,761 $ 28,746 $ 194 $ 83,692
======== ======== ======== ======== ========== ====== ==========
Outstanding shares of
common stock........... 63,257
Earnings per share...... $ 1.32
==========
</TABLE>
The accompanying notes are an integral part of this combined pro forma income
statement.
90
<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)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-------------------------
LEASE
HISTORICAL DISTRIBUTION AGREEMENTS PRO FORMA
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Revenues................. $ 158,696 $ 278,102 (c) $ 436,798
Operating expenses....... (153,619) (205,385)(c) (403,446)
(44,442)(d)
Depreciation and
amortization............ (7,199) (7,199)
General corporate and
other................... (3,292) (807)(b) (9,895)(b) (13,994)
--------- ------- --------- ---------
Total expenses.......... (164,110) (807) (259,722) (424,639)
--------- ------- --------- ---------
Income before other
income and (expenses)
and income taxes........ (5,414) (807) 18,380 12,159
Interest income and
other................... 426 9,063 (g) 9,489
Minority interest
expense................. 7,301 7,301
Interest expense......... (4,527) 1,820 (a) (5,520)
(2,813)(f)
--------- ------- --------- ---------
Income before income
taxes................... (2,214) 7,263 18,380 23,429
Provision for income
taxes................... (750) (3,087)(i) (6,920)(i) (10,757)
--------- ------- --------- ---------
Net income (loss)........ $ (2,964) $ 4,176 $ 11,460 $ 12,672
========= ======= ========= =========
Outstanding shares of
common stock............ 63,708
Earnings per share....... $ 0.20
=========
</TABLE>
The accompanying notes are an integral part of this combined pro forma income
statement.
91
<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AUGUST 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 23,631 $220,000 (a) $ 226,131
(17,500)(b)
Other current assets.................... 132,617 119,586 (d) 252,203
-------- -------- ----------
Total current assets.................... 156,248 322,086 478,334
Property and Equipment.................... 222,772 14,605 (a) 237,377
Goodwill, net............................. 351,668 351,668
Realty Note............................... 250,000 (a) 250,000
Other assets.............................. 52,079 11,016 (a) 63,095
-------- -------- ----------
Total assets.............................. 782,767 597,707 1,380,474
======== ======== ==========
LIABILITIES AND EQUITY
Current liabilities....................... 62,845 55,496 (d) 118,341
Long-term debt............................ 117,748 150,000 (c) 267,748
Due to ManorCare.......................... 75,560 (75,560)(c) --
Mortgage Notes............................ -- 45,560 (c) 45,560
Other noncurrent liabilities.............. 71,951 0 71,951
Minority interest......................... 177,428 0 177,428
-------- -------- ----------
Total liabilities......................... 505,532 175,496 681,028
Total equity.............................. 277,235 508,121 (a) 699,446
(150,000)(c)
64,090 (d)
-------- -------- ----------
Total liabilities and equity.............. $782,767 $597,707 $1,380,474
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of this combined condensed balance
sheet.
92
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(a) Reflects the elimination of 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 80% occupancy.
(b) Reflects net additional costs associated with staffing of human resources,
finance, legal, information technology, cash management, accounting
personnel and directors costs.
(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.
(f) Reflects interest expense associated with the assumption of $150.0 million
of 7 1/2% Senior Notes due 2006.
(g) Reflects interest income earned on cash of $250.0 million at 5.75% and the
Realty Note at 8.75% contributed to ManorCare Health Services on the
Effective Date.
(h) Reflects TeamCare operations from June 1, 1996 to January 31, 1997, the
portion of the fiscal year which represents the time period prior to the
TeamCare Merger.
(i) Reflects tax effect of adjustments made pursuant to notes (a) through (h).
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.
(b) Reflects the payment of transaction fees.
(c) Reflects the assumption of $150.0 million of 7 1/2% Senior Notes due 2006
and of mortgages associated with certain ManorCare Health Services
properties.
(d) Reflects the working capital of the management of skilled nursing
facilities under the terms of the Lease Agreements.
93
<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 for the 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, 1996 and 1997 and the balance sheet data as of August 31, 1996 and 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
Results of Operations and Financial Condition of ManorCare Health Services."
Earnings per share data are presented elsewhere in this Registration Statement
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
--------- --------- -------- -------- -------- -------- -------
(IN THOUSANDS) (UNAUDITED)
<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
========= ======== ======== ======== ======== ======== =======
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)....... 0.54x 1.49x 3.64x 1.07x 3.45x 6.72x 6.10x
Cash provided by
operating activities... $ (11,015) $ 8,793 $ 4,401 $ 8,043 $ 16,701 n/a n/a
Investment in property
and equipment.......... 5,072 9,466 39,974 32,001 25,020 n/a n/a
Total assets............ 728,767 345,544 787,377 334,880 134,502 $ 80,850 $64,380
Long-term debt.......... 193,308 51,070 180,843 51,387 1,837 106 134
Investments and advances
from Manor Care........ 277,235 204,178 277,066 193,807 90,020 43,345 31,343
</TABLE>
- --------
(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 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. See Manor Care Health Services'
consolidated financial statements and the notes thereto appearing
elsewhere in this Registration 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
Manor Care 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 Manor Care Health Services' share of fixed charges of 50%-owned
companies carried at equity.
94
<PAGE>
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. This discussion should be read in conjunction with the
Combined Financial Statements of ManorCare Health Services and notes thereto
for such fiscal years included elsewhere in this Registration Statement.
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
ManorCare Health Services or what the results of operations would have been if
ManorCare Health Services had been an independent, public company during those
periods.
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 174,000 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.
RESULTS OF OPERATIONS
Comparison of Three Months Ended August 31, 1997 vs. Three Months Ended
August 31, 1996
Net income showed $3.0 million loss for the three months ended August 31,
1997 as compared to $1.2 million profit reported for the same period last
year. This decrease was due primarily to unusual items at In Home Health and
Vitalink. Vitalink announced on August 4, 1997 a non-recurring, after-tax
charge of approximately $1.9 million for the quarter ended August 31, 1997 for
severance and related expenses in connection with the resignation of
Vitalink's Chief Executive Officer and the consolidation of all corporate
functions in Naperville, Illinois. In Home Health, Inc. announced on August
14, 1997 that it added $13 million to its Medicare receivables reserves in
connection with recently received Medicare reimbursement decisions. The impact
of these unusual items on net income for the quarter ended August 31, 1997 is
$3.7 million, or $0.06 per share.
Revenues increased $72.4 million (84%) to $158.7 million for the three month
period ended August 31, 1997 from the same period last year, while operating
expenses increased $79.1 million (106%) to $153.6 million.
Revenue increase for the three months ended August 31, 1997 from the same
period in the prior year reflects the impact of Vitalink's merger with
TeamCare ($70.3 million). Operating margin compression in the first quarter of
fiscal year 1998 was principally due to lower margin operations at In Home
Health and Vitalink.
General corporate and other expense of $3.3 million and $1.8 million
reported in the first quarter of fiscal years 1998 and 1997, respectively,
represented 2.1% of revenues. General corporate and other expense includes all
indirect operating expenses as well as risk management, information systems,
treasury, accounting, legal and other administrative support for ManorCare
Health Services and its subsidiaries.
95
<PAGE>
Interest expense increased $0.7 million (18%) to $4.5 million for the three
months ended August 31, 1997 when compared to the same period last year
primarily as a result of the assumption of $106.4 million of TeamCare debt in
February 1997.
Comparison of Fiscal Year Results
Net income was $36.2 million for fiscal year 1997, an increase of $35.1
million compared to fiscal year 1996. Excluding the impact of the gain on the
issuance of Vitalink stock, fiscal year 1997 net income increased by $4.7
million. Fiscal year 1996 net income decreased by $5.7 million to $1.1
million, a decrease from fiscal year 1995 net income of $6.8 million. This
decrease resulted primarily from start-up losses and depreciation and
amortization related to the five new assisted living facilities opened during
fiscal year 1996.
Revenues increased $208.1 million (79%) to $471.2 million in fiscal year
1997, while operating expenses increased $186.4 million (82%) to $413.8
million. This compares to an increase in revenues of $137.1 million (109%) and
an increase in operating expenses of $128.4 million (130%) in fiscal year
1996. Operating margin compression in fiscal year 1997 was principally due to
lower margin operations at TeamCare and In Home Health, as well as new
assisted living development. Operating margin compression in 1996 was
principally due to the inclusion of home health operations relating to
ManorCare Health Services' investment in In Home Health as well as a
significant level of new assisted living development.
Revenue increases in fiscal year 1997 reflect the impact of Vitalink's
merger with TeamCare ($94.6 million), the reflection of a full year's revenues
for In Home Health ($50.2 million), capacity increases ($37.8 million),
increases in rates ($11.5 million) at existing assisted living facilities,
Vitalink's acquisition of a pharmacy ($12.4 million) and occupancy increases
($3.6 million). Fiscal year 1996 revenue growth was driven by ManorCare Health
Services' entry into the home health market through the acquisition of a
majority interest in In Home Health ($74.2 million, which represents the
period of ownership from October 1995 to May 1996), capacity growth ($31.1
million), occupancy increases ($3.8 million), rate increases ($10.4 million),
and an acquired pharmacy and infusion business and pharmacy by Vitalink ($5.1
million). ManorCare Health Services acquired six assisted living facilities
and opened five Arden Courts in fiscal year 1996.
The fiscal year 1997 operating expense increase of $186.4 million reflects
Vitalink's Merger with TeamCare ($82.4 million), the impact of a full year of
expenses from In Home Health ($53.3 million), increases in patient acuity as
well as operating expenses relating to the five assisted living facilities
opened in fiscal year 1997 and the increases in occupancy and capacity at
existing facilities. Fiscal year 1996 operating expense growth was driven by
the consolidation of In Home Health ($73.9 million), an acquired pharmacy and
infusion business and pharmacy by Vitalink ($4.1 million) as well as increases
in occupancy and capacity.
General corporate and other expense of $8.4 million, $9.2 million and $3.0
million in fiscal years 1997, 1996 and 1995, respectively, represented 1.8% of
revenues in fiscal year 1997, 3.5% of revenues in fiscal year 1996, and 2.3%
of revenues in fiscal year 1995. General corporate and other 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 subsidiaries. The decline in general corporate and other
expense in fiscal year 1997 is directly related to a reduction in the level of
support services provided to In Home Health ($2.0 million). Exclusive of the
impact of this reduction, general corporate and other expense represented 2.2%
of revenues in fiscal year 1997. The decline in general corporate and other
expense as a percentage of revenues in fiscal year 1997 is directly related to
improving economies of scale resulting from the addition of new and acquired
assisted living facilities, pharmacies, and the home health business.
Interest expense increased $3.2 million (107%) to $6.1 million in fiscal
year 1997 primarily as a result of the assumption of $106.4 million of
TeamCare debt in February 1997 as well as additional borrowings in connection
with newly developed facilities as discussed above. The interest expense
increase of $2.8 million in fiscal year 1996 as compared to fiscal year 1995
was primarily attributable to additional borrowings in connection with newly
developed properties and acquisitions.
96
<PAGE>
ManorCare Health Services recorded a provision of $1.2 million in fiscal
year 1996 related to the impairment of certain capitalized systems development
costs.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Distribution, ManorCare Health Services will receive
cash of approximately $250 million and the Realty Note of $250.0 million,
which will be used primarily to finance the acquisition of assisted living
facilities developed by Manor Care Realty. See "The Distribution--Manner of
Effecting the Distribution."
Historically, all cash received by the assisted living and pharmacy
facilities 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 expects to have access to a revolving credit facility.
ManorCare Health Services' working capital ratio at August 31, 1997 and 1996
was 2 to 1. ManorCare Health Services attempts to minimize its investment in
net current assets.
Total long term debt totaled $193.3 million at August 31, 1997 and $51.1
million at August 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 assisted living properties, and obligations under
capitalized leases. The current portion of debt at August 31, 1997 amounted to
$3.4 million.
ManorCare Health Services' working capital ratio at May 31, 1997, and 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 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.
On a short-term and long-term basis, ManorCare Health Services believes that
its cash flows from operations, together with the proceeds of the Capital
Contribution and available borrowings under the ManorCare Health Services
Credit Facility (as defined herein) will provide it with sufficient resources
to meet its working capital needs, to finance projected capital expenditures
and to meet its foreseeable liquidity requirements.
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. 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 $9.6 million, respectively.
Investment in property and equipment includes routine capital expenditures
and specialty product conversions. During fiscal years 1997 and 1996,
investment in property and equipment amounted to $40.0
97
<PAGE>
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 Vitalink purchased two pharmacies for $6.3
million. 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.
ManorCare Health Services' five-year strategic plan includes the acquisition
of 170 Arden Courts and 38 Springhouse facilities. ManorCare Health Services
expects the majority of these acquisitions will be newly developed facilities
open less than two years. ManorCare Health Services estimates capital
expenditures to acquire Arden Courts and Springhouse facilities of
approximately $25 million and $160 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.
ManorCare Health Services plans to finance these capital expenditures with
cash flow from operations and the Capital Contribution.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements included in this Registration 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 has not determined the impact of adoption.
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 CREDIT FACILITY
In addition, ManorCare Health Services anticipates entering into a new $100-
200 million revolving credit facility (the "ManorCare Health Services Credit
Facility"). ManorCare Health Services expects that the ManorCare Health
Services Credit Facility will be unsecured and will be available for general
corporate and working capital purposes, including acquisitions. ManorCare
Health Services expects that the ManorCare Health Services Credit Facility
will have a maturity of five years and that interest on the outstanding
balances under the ManorCare Health Services Credit Facility will accrue on a
variable rate basis. ManorCare Health Services expects that the ManorCare
Health Services Credit Facility will contain certain customary affirmative and
negative covenants, including, without limitation, covenants that will
restrict, subject to certain exceptions, (i) incurrence of additional
indebtedness and other obligations, (ii) certain mergers and consolidations,
(iii) asset sales, (iv) a change in control, (v) granting of liens to secure
indebtedness, (vi) prepayment or modification of the terms of other
indebtedness, and (vii) engaging in transactions with affiliates. ManorCare
Health Services also expects that it will be required to satisfy certain
financial ratios and tests under the Credit Facility.
NEW MCHS SENIOR NOTES
For a description of the New MCHS Senior Notes, see "Description of New MCHS
Senior Notes."
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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
H. David Lundgren....... 46 Senior Vice President, Human Resources
James H. Rempe.......... 67 Senior Vice President, General Counsel and Secretary
Scott J. Van Hove....... 40 Executive Vice President, Operations
Wolfgang von Maack...... 57 President and Chief Executive Officer of In Home Health
</TABLE>
Stewart Bainum, Jr. 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; Chairman of the
Board of Choice since November 1996; 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.
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.
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 September 1994; Senior Vice President and a Director of Vitalink from
January 1983 to September 1991; 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.
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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.
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....... 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. 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%
101
<PAGE>
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 announced its intention to separate its franchising
business and its lodging business through a special dividend to its
shareholders (the "Sunburst Spin-off"). After the Sunburst Spin-off,
Choice's franchising business will be conducted by a separate public
company which will be named Choice Hotels International, Inc. ("Choice
Hotels") and Choice's lodging business will be conducted by a separate
public company which will be named Sunburst Hospitality Corporation
("Sunburst"). 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
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.
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>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS 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 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)... MNI 22,108 1.47%(7) $25.0505 7/1/06 $ 348,285 $ 882,623
CHI 0
-------
Total 22,108
</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.
102
<PAGE>
(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.
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.
103
<PAGE>
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.
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.
104
<PAGE>
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.
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 [ ] 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 of 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 $258,443.25 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.
105
<PAGE>
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. 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; Chairman of the Board of Choice since November, 1996;
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.
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
106
<PAGE>
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.
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.
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
107
<PAGE>
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.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
For a description of certain contracts to be executed between ManorCare
Health Services and Manor Care Realty in connection with the Distribution, 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. See "Relationship Between Manor Care Realty and ManorCare Health
Services After The Distribution--Employee Benefits and Other Employment
Matters Allocation Agreement."
108
<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(1)
---------------- ---------------- -----------------
<S> <C> <C>
Stewart Bainum(2)......................... 10,140,743 15.20%
Stewart Bainum, Jr.(3).................... 15,269,851 22.86%
Barbara Bainum(4)......................... 5,485,815 8.22%
Bruce Bainum(5)........................... 5,482,302 8.21%
Ronald Baron(6)........................... 7,976,459 11.96%
</TABLE>
- --------
(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 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 direct 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; and 40,305 shares held by the Commonweal Foundation of which
Mr. Bainum is Chairman of the Board of Directors and 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 and
the Commonweal Foundation in which Mr. Bainum has a beneficial interest.
Also does not include shares held by his other three adult children.
(3) Includes 20,598 shares held directly by Mr. Bainum, Jr.; also 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).
(4) 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.
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(5) 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, all of which Mr. Bainum has shared
voting authority in.
(6) 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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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 20,598 shares held directly by Mr. Bainum, Jr.; also 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
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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.
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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
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) 10% of a value of the
subject facility agreed upon by ManorCare Health Services and Manor Care
Realty (the "Priority Basis"); 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 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 seventy seven percent of the Net Operating
Profit for the Lease Year to date is greater than 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. 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.
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In the event that the Net Operating Profit for the Lease Year to date is
less than the Priority Sum allocable to the Lease Year to date, a portion of
the next succeeding payment of Monthly Premises Rent in an amount equal to
such deficiency (the aggregate of all such amounts, the "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.
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 is 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. In addition, ManorCare Health Services will have the right to use 3% of
aggregate Project Revenues (aggregated across all facilities under all Lease
Agreements) for capital expenditures at the facilities. 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. If Manor Care Realty withholds its approval and ManorCare Health
Services believes that the proposed revenue generating items are 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 its interest in each facility to the extent of 75% of the value
agreed to by Manor Care Realty and ManorCare Health Services with respect to
the facility. 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-five 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 (A) either (i) actual Net Operating Profit is less than 90% of
budgeted Net Operating Profit for two consecutive twelve month Lease Years or
(ii) 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 105% of the amount by which budgeted Net Operating Profit or
the Priority Sum, as applicable, exceeds actual Net Operating Profit, (B) 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 (C)
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
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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. In addition to the above-described termination
rights, if (i) Manor Care Realty withholds its approval of a proposed revenue
generating expenditure and (ii) ManorCare Health Services believes that such
expenditure is reasonably necessary to the maintenance of the subject facility
as a competitive, efficient and economical operation, ManorCare Health
Services shall have the right to terminate the Lease Agreement (subject to
Manor Care Realty's right to have ManorCare Health Services' belief
arbitrated). Finally, ManorCare Health Services will have the right to
terminate a Lease Agreement in the event a facility is damaged and either (y)
the insurance proceeds are insufficient to cover the restoration costs or (z)
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 (iii) to an
affiliate succeeding to ManorCare Health Services' business operations.
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. Notwithstanding anything to the contrary
in the Lease Agreements, ManorCare Health Services will not have any liability
in connection with performing its obligations under the Lease Agreements,
except to the extent of (i) Project Revenues and (ii) insurance proceeds and
condemnation awards actually received by ManorCare Health Services.
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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 80% or
more is achieved within two years of commencing operations, ManorCare Health
Services will be obligated to purchase the facility. If stabilized occupancy
is not achieved within two years of commencing operations, ManorCare Health
Services may, but will be not obligated to, purchase the facility. The
purchase price for each facility (regardless of whether or not ManorCare
Health Services is obligated to purchase) 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 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. 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 thru the ninth full
calendar month thereafter............................................. 15.0%
Tenth calendar month................................................... 16.5%
Eleventh calendar month................................................ 17.8%
Twelfth calendar month................................................. 18.8%
Thirteenth calendar month.............................................. 20.4%
Fourteenth calendar month.............................................. 21.5%
Fifteenth calendar month............................................... 22.9%
Sixteenth calendar month............................................... 24.5%
Seventeenth calendar month............................................. 25.7%
Eighteenth calendar month.............................................. 26.9%
Nineteenth calendar month.............................................. 28.1%
Twentieth calendar month............................................... 29.9%
Twenty first calendar month............................................ 31.0%
Twenty second calendar month........................................... 32.5%
Twenty third calendar month............................................ 34.0%
Twenty fourth calendar month........................................... 35.5%
</TABLE>
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
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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.
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 for an indefinite term.
Restrictions on Manor Care Realty. Subject to certain exceptions, Manor Care
Realty may not enter into management agreements with third parties with
respect to its acquired or developed skilled nursing properties unless
ManorCare Health Services has declined to manage such facility. Manor Care
Realty may not, subject to certain exceptions, enter, or make a significant
investment in any entity engaged in, the institutional pharmacy or home health
care business. Subject to certain exceptions, Manor Care Realty will be
prohibited from making assisted living acquisitions and will not be allowed to
compete in the business of managing either skilled nursing or assisted living
facilities, except in cases in which it is managing a facility that it owns
and which ManorCare Health Services has declined to manage. Manor Care Realty
will only be permitted to develop new assisted living facilities for anyone
other than ManorCare Health Services insofar as ManorCare Health Services has
previously declined to pursue such opportunities and such facilities are not
within a five-mile radius of an assisted living facility owned by or being
developed for ManorCare Health Services.
Restrictions on ManorCare Health Services. ManorCare Health Services will be
prohibited from developing or acquiring skilled nursing facilities and,
subject to certain exceptions, will be prohibited from entering the hospital
management business. ManorCare Health Services will only be permitted to
develop new assisted living facilities insofar as Manor Care Realty has
previously declined to pursue such opportunities and such facilities are not
within a five-mile radius of an assisted living facility owned or being
constructed by Manor Care Realty. ManorCare Health Services will not without
Manor Care Realty's consent (which consent will not be unreasonably withheld)
be permitted to manage skilled nursing facilities owned by anyone but Manor
Care Realty (other than certain skilled nursing facilities held by joint
ventures in which ManorCare Health Services holds an interest) within a five-
mile radius of any Manor Care Realty-affiliated/ManorCare Health Services-
operated skilled nursing facility. ManorCare Health Services will be free to
manage any assisted living facility without regard to the identity of its
ownership.
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 will also provide for the
adjustment of outstanding stock options of Manor Care. In connection with the
Distribution, it is contemplated that options to purchase Manor Care common
stock will be converted to options to purchase a combination of ManorCare
Health Services common stock and Manor Care Realty common stock. In all cases,
however, the exercise prices of the options will be adjusted to maintain the
same financial value to the option holder immediately before and after the
Distribution.
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
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Services will administer the employee benefits plans and programs of Manor
Care Realty following the Distribution on a time and materials and/or fixed
fee basis as specified in the Employee Benefits Administration Agreement.
OFFICE LEASE AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a lease
agreement with respect to the building complex in Gaithersburg, Maryland at
which the principal executive offices of both ManorCare Health Services and
Manor Care Realty are located (the "Office Lease Agreement").
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 take certain
specified actions or neither party taking or failing to take such actions,
then the parties will each be responsible for one-half of any taxes and other
damages resulting from such failure to qualify.
118
<PAGE>
TAX ADMINISTRATION AGREEMENT
Manor Care Realty and ManorCare Health Services will enter 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.
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 on a time and materials and/or fixed fee basis as specified
in the Corporate Services Agreement. The Corporate Services Agreement will
expire on .
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 approximately fifty (50) registrations and applications to ManorCare
Health Services representing all of the trade marks necessary for the
operations of the business of ManorCare Health Services. ManorCare Health
Services, under a separate agreement, will license to Manor Care Realty the
right to use certain marks in the business of Manor Care Realty.
CASH MANAGEMENT AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a Cash
Management Agreement (the "Cash Management Agreement"), pursuant to which
ManorCare Health Services will perform cash management services for Manor Care
Realty after the Distribution for a fee, payable quarterly, based on the time
incurred by ManorCare Health Services to perform such services. The Cash
Management Agreement will expire on .
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 services for a fee. The Risk Management
Consulting Services Agreement will expire on .
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."
119
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a general summary of the principal 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 summary 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. EACH HOLDER OF OLD
SENIOR NOTES SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE FEDERAL, 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, ESPECIALLY 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 will 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.
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.
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
120
<PAGE>
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. Such income will generally be ordinary
interest income.
Alternatively, if the issue price (i.e., fair market value) of a New MCHS
Senior Note is greater than its $1,000 principal amount, a 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) to such taxable year. 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.
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 should 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 should 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 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 would 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 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.)
121
<PAGE>
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 incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said reports.
122
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
OF 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 ....................... F-3
Combined Statements of Income for the fiscal years ended May 31, 1997, 1996
and 1995.................................................................. F-4
Combined Statements of Cash Flows for the fiscal years ended May 31, 1997,
1996 and 1995 ............................................................ 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 this
Registration Statement as Exhibit 99.1 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
AS OF MAY 31 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
doubtful 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 $7,272)........... 346,981 49,348 351,668
------------ ------------ --------
Pharmacy Contracts (net of accumulated
amortization 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>
YEARS ENDED MAY 31
THREE MONTHS ENDED ----------------------------
AUGUST 31, 1997 1997 1996 1995
------------------ -------- -------- --------
(UNAUDITED) (IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues...................... $158,696 $471,152 $263,047 $125,987
-------- -------- -------- --------
Expenses
Operating expenses.......... 153,619 413,762 227,410 99,011
Depreciation and amortiza-
tion....................... 7,199 20,135 11,583 6,090
General corporate and oth-
er......................... 3,292 8,385 9,195 2,957
Provision for asset impair-
ment....................... -- -- 1,200 --
-------- -------- -------- --------
Total expenses............ 164,110 442,282 249,388 108,058
-------- -------- -------- --------
Income before other income and
(expenses) and income taxes.. (5,414) 28,870 13,659 17,929
-------- -------- -------- --------
Other income and (expenses)
Gain on issuance of Vitalink
stock...................... -- 50,271 -- --
Interest income and other... 426 2,162 1,827 895
Minority interest expense... 7,301 (3,881) (1,551) (2,047)
Interest expense............ (2,707) (6,126) (2,966) (117)
Intercompany interest ex-
pense...................... (1,820) (11,191) (8,421) (3,781)
-------- -------- -------- --------
Total other income and
(expenses), net.......... 3,200 31,235 (11,111) (5,050)
-------- -------- -------- --------
Income before income taxes.... (2,214) 60,105 2,548 12,879
Income taxes.................. 750 23,917 1,437 6,055
-------- -------- -------- --------
Net income.................... $ (2,964) $ 36,188 $ 1,111 $ 6,824
======== ======== ======== ========
</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 AUGUST 31, YEARS ENDED MAY 31
---------------- -----------------------------
1997 1997 1996 1995
---------------- --------- -------- --------
(UNAUDITED) (IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING AC-
TIVITIES:
Net income................... $(2,964) $ 36,188 $ 1,111 $ 6,824
Reconciliation of net income
to net cash provided by
operating activities:
Gain on issuance of
Vitalink stock............ -- (50,271) -- --
Minority interest expense.. (7,301) 3,881 1,551 2,047
Depreciation and amortiza-
tion...................... 7,199 20,135 11,583 6,090
Provision for bad debts.... 2,851 4,899 2,414 1,864
Change in deferred taxes... (1,843) 24,662 1,656 721
Provision for asset impair-
ment...................... -- -- 1,200 --
Changes in assets and
liabilities (excluding sold
facilities and
acquisitions):
Change in receivables...... (6,746) (17,543) (12,534) (1,845)
Change in inventories and
other current assets...... 3,642 (4,157) (4,318) (997)
Change in current liabili-
ties...................... (5,403) (6,306) 4,561 2,349
Change in income taxes pay-
able...................... -- (725) 1,677 (83)
Change in other liabili-
ties...................... (450) (6,362) (858) (269)
------- --------- -------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.................... (11,015) 4,401 8,043 16,701
------- --------- -------- --------
CASH FLOWS FROM INVESTING AC-
TIVITIES:
Investment in property and
equipment................... (4,246) (39,974) (32,001) (25,020)
Acquisition of assisted liv-
ing facilities.............. -- -- (19,050) (30,185)
Acquisition of pharmacies.... (5,590) (5,291) (6,270) (2,451)
Purchase of home health busi-
ness........................ -- -- (22,950) --
Acquisition of pharmacy busi-
ness........................ -- (97,400) -- --
Acquisition of Vitalink
stock....................... -- (30,000) -- --
Other items, net............. 16,774 (12,937) (6,332) (1,527)
------- --------- -------- --------
Net cash utilized by investing
activities.................... 6,938 (185,602) (86,603) (59,183)
------- --------- -------- --------
CASH FLOWS FROM FINANCING AC-
TIVITIES:
Borrowing of long-term debt.. 10,391 127,981 -- 1,810
Principal payments of debt... (302) (5,393) (3,149) (38)
Cash transfers from Manor
Care, net................... 3,133 49,509 105,057 40,300
------- --------- -------- --------
Net cash provided by financing
activities.................... 13,222 172,097 101,908 42,072
------- --------- -------- --------
Net change in cash and cash
equivalents................... 9,145 (9,104) 23,348 (410)
Cash and cash equivalents, at
beginning of year............. 14,486 23,590 242 652
------- --------- -------- --------
Cash and cash equivalents, at
end of year................... $23,631 $ 14,486 $ 23,590 $ 242
======= ========= ======== ========
NON-CASH ACTIVITIES:
Liabilities assumed in
connection with acquisition
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 1997 calendar year 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 receipt of a
ruling from the Internal Revenue Service that the spin-off will be tax-free
and 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. 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 fiscal
year 1997 would have been $1.7 billion, $83.7 million, and $682.0 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 1997, after giving effect to the transaction described in the
pro forma combined financial statements, would have been $1.32. 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
63.3 million in 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.
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.
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
F-8
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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. 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, will record a reserve of $13.0
million in the first quarter of fiscal year 1998. The net impact to the
Company is expected to be 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-9
<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-10
<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 have a significant
impact.
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.
Borrowings under the Credit Facility are classified as long-term as Vitalink
has the ability and intention to refinance the amount drawn. 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-11
<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
successfully completed its tender offer to purchase 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-12
<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 and makes adjustments accordingly. The Company recorded a provision of
$1.2 million in fiscal year 1996 related to the impairment of certain
capitalized systems development costs. The impairment of the property and
equipment 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 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.
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.
F-13
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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,
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, 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. These agreements are attached as exhibits
to the Company's Registration Statement on Form 10.
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).
F-14
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Under each Lease Agreement, Manor Care Realty will have the right to
terminate if certain financial results are not achieved or 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 ManorCare
Health Services and retain ownership of such facilities until occupancy has
stabilized at 80% or more for a period of 30 days or until such earlier date
as ManorCare Health Services determines to purchase such facility. 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. If stabilized occupancy is not achieved within two years of
commencing operations, ManorCare Health Services may, but will be not
obligated to, purchase 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.
7 1/2% SENIOR NOTES
In connection with the Exchange Offer, the Company will assume $150.0
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 $150.0 million of 7 1/2%
Senior Notes, Manor Care also entered into a series of interest rate swap and
treasury lock agreements having a total notional principal amount of $150.0
million. Agreements with a total notional principal amount of $100.0 million
were terminated concurrent with the pricing of the notes offering on May 30,
1996 with a $2.7 million cash gain. The remaining agreement, with a total
notional principal amount of $50.0 million was terminated on October 23, 1996
with a $1.4 million cash gain. The gains on the termination of the agreements
were deferred and are being amortized against interest expense over the life
of the 7 1/2% Senior Notes.
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.
F-15
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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-16
<PAGE>
THE DEALER MANAGER FOR THE EXCHANGE OFFER IS:
CHASE SECURITIES INC.
1-800-523-9736
Any questions concerning the terms of the Exchange Offer may be directed to the
Dealer Manager.
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
Any questions concerning tender procedures or requests for additional copies of
this Prospectus may be directed to the Information Agent.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
Any questions concerning tender procedures, please call
( ) - (call collect)
TRUSTEE:
<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 , 1997.*
2.1 Form of Distribution Agreement, dated as of , 1997, between Manor
Care and Registrant.*
3.1 Amended and Restated Certificate of Incorporation of Registrant.*
3.2 Amended and Restated 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 , 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 2007.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom, LLP (including the
consent of such counsel) regarding the legality of securities being
offered.*
10.1 Form of Tax Sharing Agreement, dated as of , 1997, between Manor
Care and Registrant.*
10.2 Form of Tax Administration Agreement, dated as of , 1997, between
Manor Care and Registrant.*
10.3 Form of Corporate Services Agreement, dated as of , 1997, between
Manor Care and Registrant.*
10.4 Credit Agreement, dated as of , 1997, among Manor Care and
.*
10.5 Form of Assisted Living Facility Management Agreement, dated as of
, 1997, between Manor Care and Registrant.*
10.6 Form of Master Development Agreement, dated as of , 1997, between
Manor Care and Registrant.*
10.7 Form of Master Lease Agreement, dated as of , 1997, between
Manor Care and Registrant.*
10.8 Form of Non-Competition Agreement, dated as of , 1997, between
Manor Care and Registrant.*
10.9 Form of Employee Benefits and Other Employment Matters Allocation
Agreement, dated as of , 1997, between Manor Care and
Registrant.*
10.10 Form of Employee Benefits Administration Agreement, dated as of ,
1997, between Manor Care and Registrant.*
10.11 Form of Office Lease Agreement, dated as of , 1997, between Manor
Care and Registrant.*
10.12 Form of Trademark Agreement, dated as of , 1997, between Manor
Care and Registrant.*
10.13 Form of Cash Management Agreement, dated as of , 1997, between
Manor Care and Registrant.*
10.14 Form of Risk Management Consulting Services Agreement, dated as of
, 1997, between Manor Care and Registrant.*
10.15 Form of Employment Agreement, dated as of , 1997, between Stewart
Bainum, Jr. and Manor Care.*
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).*
24.1 Powers of Attorney (See Signature Page).
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of
, 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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Gaithersburg, Maryland on October
16, 1997.
New ManorCare Health Services, Inc.
By: /s/ James H. Rempe
_________________________________
NAME: JAMES H. REMPE
TITLE: SECRETARY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stewart Bainum, Jr. and James H. Rempe and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement and to sign any
registration statement for the same offering covered by this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, and all post-effective amendments
thereto, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in their capacities and on
the dates indicated:
SIGNATURES TITLE DATE
/s/ Stewart Bainum, Jr. Chairman of the October 16,
- ------------------------------------ Board, President, 1997
STEWART BAINUM, JR. and Chief
Executive Officer
(Principal
Executive Officer)
/s/ Donald C. Tomasso President October 16,
- ------------------------------------ 1997
DONALD C. TOMASSO
/s/ Leigh C. Comas Vice President- October 16,
- ------------------------------------ Finance, Treasurer 1997
LEIGH C. COMAS and Director
(Principal
Financial Officer)
/s/ Margarita A. Schoendorfer Vice President and October 16,
- ------------------------------------ Controller 1997
MARGARITA A. SCHOENDORFER (Principal
Accounting
Officer)
/s/ James H. Rempe Senior Vice October 16,
- ------------------------------------ President, General 1997
JAMES H. REMPE Counsel, Secretary
and Director
II-5
<PAGE>
EXHIBIT 12.1
NEW MANORCARE HEALTH SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCOME FROM CONTINUING
OPERATIONS BEFORE
TAXES.................. $10,019 $12,968 $12,879 $ 2,548 $60,105 $144,516
PLUS: FIXED CHARGES (NET
OF CAPITALIZED
INTEREST).............. 1,684 1,698 3,898 11,387 17,317 25,113
------- ------- ------- ------- ------- --------
EARNINGS (AS DEFINED)... $11,703 $14,666 $16,777 $13,935 $77,422 $169,629
======= ======= ======= ======= ======= ========
INTEREST EXPENSE &
AMORTIZATION OF DEBT
DISCOUNT............... $ 1,684 $ 1,698 $ 3,898 $11,387 $17,317 $ 25,113
RENT EXPENSE (INTEREST
PORTION)............... 233 335 419 1,155 2,640 2,640
------- ------- ------- ------- ------- --------
TOTAL FIXED CHARGES
NET OF CAPITALIZED
INTEREST............. 1,917 2,033 4,317 12,542 19,957 27,753
CAPITALIZED INTEREST.... 3 149 552 533 1,284 1,284
------- ------- ------- ------- ------- --------
TOTAL FIXED CHARGES... $ 1,920 $ 2,182 $ 4,869 $13,075 $21,241 $ 29,037
======= ======= ======= ======= ======= ========
"EARNINGS" DIVIDED BY
FIXED CHARGES.......... 6.10x 6.72x 3.45x 1.07x 3.64x 5.84x
======= ======= ======= ======= ======= ========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report 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 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 of
our reports dated June 27, 1997, included and incorporated by reference in
Manor Care, Inc.'s Form 10-K for the year ended May 31, 1997 and to all
references to our Firm included in this registration statement.
Washington, D.C.,
October 14, 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>
<PAGE>
Exhibit 99.1
------------
NEW MANORCARE HEALTH SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Profit End
Description of Period and Loss Other Write-off of Period
- --------------------------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1997
Allowance for doubtful
accounts $3,141 $4,899 $0 ($1,861) $6,179
Year ended May 31, 1996
Allowance for doubtful
accounts $1,379 $2,414 $1,030* ($1,682) $3,141
Year ended May 31, 1995
Allowance for doubtful
accounts $1,181 $1,864 $0 ($1,666) $1,379
</TABLE>
* Represents reserves of acquired companies.
